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Convergence of Islamic and Ethical finance

Stuart Hutton - February, 2016

As we move through the early days of 2016, a key summit is readily placed to play an important role in further developing the relationship between Islamic Finance and the broader market of ethical and socially responsible finance.

Many have seen the opportunities for the development between these areas, in particular the recently formed Responsible Finance Institute. Their summit, taking place in Kuala Lumpur later this month, will address four main objectives and look to build on a series of pillars to create a sustainable foundation to build on.

My view is that this year is a turning point in the convergence of these key areas. I conclude this based on number of evidential facts that demonstrate a need for demand and supply. Included in this is the growth of financial technology and the opportunity it offers to deliver.

Over the next few weeks leading up to the summit, I will cover these key objectives and provide some insight and thought. However, before delving into the detail, a broad brush review is a useful starting point.

For many years, there has been a global shift towards investors taking a more serious view into responsible finance. This is part due to change in attitude that many organisations took towards corporate governance following the credit crisis of almost ten years ago. There was no doubt that the failure of many banks and lack of liquidity in the market set the investors panicking, and looking at recent markets, they have not yet settled back down. Fear is a dramatic market driver and whether a true reflection of what is happening, has the ability to weaken corporates and their credibility.

Those businesses that have begun to build stronger corporate governance and also consider the environmental and social governance impacts their companies have, are witnessing a new kind of investor coming forward.  This is the investor who cares not just about their returns on their investment, but also the greater impact their money is having on social welfare, the natural world and the true economy. This naturally aligns with the core principles of Islamic Finance, but what do these truly reflect in the changing world of banking.

One very noticeable area is that of financial inclusion and the impact this would have across the emerging markets. Much of this is driven by advance in technology, but even this can further isolate those most in need. The convergence of banking with communication, the smart phone as one example, and the collaborative culture of working together means that this is fast outstripping the necessity and creating a new paradigm in the management of money.

These actions of social responsibility are leaking slowly into how much is invested. If this can then be evolved through education, we start to see a shift in how responsible investing become more core to the businesses impact and less about just for the investors focus.

When considering what negative screens were originally employed with socially responsible investments, it is more noticeable how the balance towards positive impacts is becoming more relevant. For many, the excluded industries are agreed. However, it is the human rights and business ethics that are now being tested. Those companies that offer transparent views on their lack of engagement in areas like tax avoidance and corruption are no doubt winning the hearts and minds of long term investors. Not only because they like this, but also the positive impact some of these have.

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