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There are criteria in common, but also differences and these give incentive to improve on
either side.
Different Strength
SRI focuses on environmental, social and governance
issues. The best practices learned in the
SRI experience can certainly enrich the Islamic
finance industry and they can add substantially to
the objectives of Shariah in terms of welfare and
well-being.
Islamic finance tends to be more concerned with
financial and legal criteria, specifically regarding
Riba (increase in money for money) and Gharar
(legal uncertainties resulting in restrictions, e.g. in
derivatives). These are concerns that SRI needs
to explore further, considering the social impact
of housing price bubbles, the mess in the back
office of credit derivative swaps, the asset/liability
mismatches of hedge funds and the unsustainable
debt policies of even highly developed countries. These are but a few of high-risk factors for society caused by the financial industry. If environmental concerns are embedded from
the beginning, a company will be more profitable and will face fewer surprise costs than if it adds
these concerns on at the end under pressure –
adding the smokestack as an afterthought to the
factory. But our Shariah compliance process
often works just in this way; products put forward
to the scholars are not designed to meet the
objectives in the first place but are manoeuvred
to fit within the legal principles in the end.
The objectives in themselves are the responsibility
of all involved parties: client, bank, state and
society. The sustainability approach is a good
starting point. It goes beyond screening out undesirable
elements to screening in those companies
which show outstanding achievements in terms of
environmental issues, social concerns (e.g. poverty
alleviation and work conditions) and governance;
basically, applying a proper code of ethics.
Active Ownership
To move forward, clients need to be educated and financial institutions need to think carefully about their objectives, whether set by the state or not. The voluntary Responsible Investing
Criteria of the UNEP Finance Initiative are
already in line with Islamic thought; the key lies
in being a more active owner, in considering
social and ethical concerns, networking and
going forward with an inclusive set of criteria.
Both Islamic finance and the SRI and Sustainability approaches can do more. They can reach out to the poor, defining them as customers with profitable needs rather than as an indigent and commercially nonexistent market segment.
This concept is called “Bottom of the Pyramid (BOP)” by strategy professor C.K. Prahalad at the University of Michigan. Islamically, this is a true innovation offering greater reward in the here and in the hereafter.
The current focus on the rich will soon result in decreasing margins, which will be seen first in the Saudi market, with all its newly established players this year. Those who do not widen their perspectives and act now will react later – leaving the profits to others.
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Michael Saleh Gassner is managing director of Michael Gassner Consultancy Ltd., and specialises in Islamic finance consulting. He often writes about related issues in leading industry magazines and is the founding editor of the “IslamicFinance.de – Executive News” newsletter. He speaks frequently at Islamic finance conferences and is the head of Islamic Finance of the International Banker’s Forum and organiser of the annual Islamic Wealth Management Event in Geneva. He holds a master’s degree in business administration from the University of Siegen.
The article first appeared in April 2007 issue of Business Islamica Magazine. Reproduced with permission.
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