Islamic Finance and Ethical Finance
Islamic Finance and Ethical Finance
Islamic Finance and Ethical Finance
The Origins of Ethical Finance
The concept of ethical finance is not new, it can perhaps be traced back to the 1950s and 1960s where electrical and mine workers began investing pension capital in affordable housing. In 2015, the UN put forward 17 Sustainable Development Goals (SDGs) also known as Global Goals with the call to action to eradicate poverty together with strategies spur economic growth, improve health, education and reduce inequality – all of this to be achieved whilst tackling climate change and preserving oceans and forests. This was further sharpened with the European Commission publishing its action plan on sustainable finance in 2018; since then, the EU has introduced a range of ESG-related regulatory measures which has now shaped how we think about ethical finance.
What Is Islamic Finance & Why Is It Needed?
If we now turn to Islamic Finance, this traces its roots with the birth of Islam itself around 610 AD. There are numerous verses in the Qur’an warning mankind that ultimately our actions in this world will shape how we will be treated in the hereafter. Hence, Muslims are obligated to comply with strict rulings and principles; in the context of finance, there are strict rules covering how Muslims may acquire, generate and spend wealth, what Muslims can trade in and forbidden items; the prohibition of usury and a strong encouragement to give in charity to help the poor and needy. There are also numerous other business principles found in the example and teachings of the Prophet Muhammad (Peace Be Upon Him).
Definition of Islamic Finance
Modern Islamic banking, however, as we currently recognise it was arguably developed in the 60s and 70s in the Middle East and North Africa. The Mit-Ghamr Islamic Saving Associations (MGISA) provided Muslim savers with returns that did not transgress the laws of the Sharia. Since then, there have been a number of banks in the UK and worldwide which have structured their finance to remove interest and ensure the agreements are structured in a way which adhere to the Sharia.
Differences between Islamic Finance vs Ethical Finance And How They Work
Islamic finance is concerned more with ensuring that the financial system confirms to the norms of Islamic ethics and principles in accordance with Sharia, Islamic law. If we review the banks and financial institutions in the UK, it is apparent that on the surface, the primary goal of Islamic finance is to facilitate Muslims to be able to access third party finance to fund a real estate and other assets (or indeed projects) and to simulate other general conventional banking functions but ensuring compliance with sharia.
We can contrast this with ethical finance, as it is currently understood, is more concerned about looking at where and how money will be loaned and invested and looking at three key considerations about when money is loaned to a company: (1) social – what is the attitude of the company towards employees and recruitment policy; what are the firms internal policies; (2) economic – this is about governance and at how the company treats its stakeholders such as customers, suppliers, local community and all partners; an (3) political – the company’s attitude towards nature and looking at sustainability and responsibility.
Can we harmonise Islamic Finance and Ethical Finance?
It is clear that Islamic Finance and Ethical Finance are currently different with different goals. It has often been a criticism of Islamic finance as to why it never addressed substance which ethical finance clearly looks at. Of course, there has also been much criticism also of ethical finance in that there is much “greenwashing” happening on the ground meaning that organisations are simply using the ESG as a label movement without making meaningful impact.
When considering harmonising both, the first question is why Islamic Finance never focussed on ethical finance considerations from the beginning. The main reason for this was Dururah – this concept which can be translated as “necessity”, is arguably the genesis of how Islamic finance arose. The preoccupation for Muslims was the ability to transact without falling into riba (usury/interest). Early Islamic finance therefore was focussed on overcoming this issue and there was little time to consider anything other than that. Given we are now more than 50 years into Islamic Finance, this excuse is perhaps no longer something the Muslim community can hide behind.
If Islamic Finance, however, is to harmonise with ethical finance it needs to demonstrate that it has both substance and form. It needs to move away from just being focussed on making agreements/structures “shariah compliant” to actively contributing towards social justice which is what it was designed to do. Controversially, what many writers and thinkers have said is that the answer to harmonising lies within Islam itself. If we think about one Islamic concept: Akhlaq – this can be loosely translated as “ethics/behaviour/morality/character”; this foundational but broad concept for Muslims is based on numerous ayat (verses) in the Qur’an and ahadeeth (sayings) of the Prophet Muhammad (peace be upon him) which centres around the idea of having Islamic morality in all dealings and interactions. It would be too naïve to give justice to this concept in a single paragraph (given there have been volumes of books dedicated to this); needless to say, a practical and proper understanding and application of Akhlaq would give Islamic finance more substance than it currently has. Arguably, Islamic Finance therefore should have always been promoting and going beyond the key considerations of ethical finance if it simply focuses on Islamic morality in the broadest sense and based upon the sunnah (traditions/example/practices) of the Prophet Muhammad (peace be upon him). The main issues which the UN SDGs and the EU’s ESG policies seek to address are covered within the sunnah of the Prophet Muhammad (peace be upon him) and these need better application in Islamic finance.
Why Is Islamic Finance Important
It is clear that there is a way to harmonise both Islamic finance and ethical finance given Islamic ethics arguably covers and goes beyond the key considerations for ethical finance anyway. The question is therefore if Islamic finance ought to be covering ethical finance, what needs to be done differently. There are three issues I think Islamic finance needs to address: 1) Islamic finance does not do enough to promote its ethical practices in the same way as ethical finance does; 2) there is sometimes a clear disconnect from practices within Islamic finance and what it ought to be doing based on the Qur’an and Sunnah; and 3) Islamic finance needs to codify the practices in the Qur’an and Sunnah which look at substance at a policy level which will aid organisations involved in Islamic finance to truly make a change.
How To Get In Touch With Our Islamic Finance Team
Our Islamic finance team will advise you in relation to your chosen sharia finance structure and identify any potential issues in relation to using the proposed structure for your proposed venture. Where there is an underlying asset involved, our team will carry out the usual due diligence against the property. Our experienced banking team will also help negotiate the terms of any Islamic finance banking document being entered. Get in touch with our team today to find out more about how Hill Dickinson can help you navigate the complexities of Islamic finance.