Is there such a thing as an ‘Islamic’ Investment? Look at its Form, Spirit and Outcome. [part 1]
Islamic Finance has developed rapidly over the past 2 decades, mainly in Muslim-majority countries. Islamic Banking, the Islamic Capital Market and Takaful (a form of Insurance) are multi-billion dollar industries today. Its Form in terms of contracts, fatwas (rulings) and guidelines is already very well established. Numerous government, research, scholarly and educational institutes devote substantial resources to the continued development of the form of Islamic Finance. [Read: Islamic Finance Explained: Financing for a Better World]
Islamic Banking, in general, focuses mainly on ensuring no Haraam (forbidden in Islam) elements are present, in order to qualify as being Shariah-compliant. A negative screening approach is typically adopted. The use of the term Islamic however, must definitely mean something wider and more fundamental than being free of forbidden elements.
2 years ago, I invited a small group of Islamic Crowdfunding platform founders from around the world to gather in Kuala Lumpur and discuss setting up an alliance. We were in alignment and agreement on most things, except the matter of terming our group the Islamic Fintech Alliance. Some were understandably concerned about the large responsibility of having our religion in our name, which would, of course, bring with it greater responsibility. Will we do justice to the name of Islam? My view at the time, which I still maintain today, is that instead of shying away from this responsibility, we need to step up and strive to be truly Islamic in all our dealings.
I believe that 3 fundamentals of Form, Spirit and Outcome must come together for an investment to be worthy of being termed Islamic. This article will focus more on the neglected, but fundamentally important Spirit and Outcome of Islamic Investments.
My article is in no way intended to criticise Islamic Banks or their activities. That would be arrogant and reckless of me. I know for a fact that there are many passionate and sincere Muslims in Islamic Banking striving hard to keep things Halal and Islamic, a continuous challenge, given that Islamic Banks function within the fetters the deeply-entrenched interest-based incumbent conventional banking system. I am a newbie in Islamic Finance, only starting to engage with the industry 6 years ago, and without formal education in it. Alhamdulillah (thank God), I have many experts in my team, who have the proper and more complete knowledge for me to turn to and validate what my mind and heart thinks and feels.
[Here’s the most attractive and fundamentally solid Islamic Investment I’ve managed to find after years of research and exploration, made available to everyone through the power of Islamic Crowdfunding.]
I will delve deeper into the Outcome and Spirit of Islamic Finance and Investments through exploring 5 core principles. Here are the first 2, with the remainder in Part 2 to be published next week.
1. You don’t Own Your Wealth
The concept of wealth in Islam is very different from the conventional view. For Muslims, the absolute reality that we must accept is that everything you own is not yours at all. Wealth is entrusted to us (temporarily) as a test (responsibility) from God Almighty. Consequently, wealthy Muslims have a much larger responsibility to do good with their wealth than the have-nots.
In Islam, wealth shouldn’t be left idle or be hoarded – it must be circulated. You have the choice to consume, donate (Sadaqah), lend at no charge or interest (Qard hassan), endow (Waqf) or Invest. If a Muslim keeps ‘too much’ money, a tax (Zakat) is imposed on him, which must be channelled to specific groups of needy peoples. Islam provides clear guidance on all of these, and has gifted us a complete financial system that works on the premise of collective societal benefit and fairness.
Another fundamental difference in mindset is that conventional economics accepts scarcity as a fact. Islam takes the totally opposite view, which is that everything is in abundance, since the source of all creation has no limits. We are also thought to exercise moderation and prudence in our consumption of this abundance. Muslims need to embrace this reality and understand that spending and investing in a responsible way will open up the doors of barakah (blessings), as clearly stated in Quran and Hadith. We should not allow the fear of scarcity make us attached to wealth and possessions. Muslims must equip themselves to be savvy and wise in earning, giving and investing our earnings and profits, to create a healthy circle of cash flow that can uplift entire communities.
Capitalism propagates the individual ownership of wealth. Runaway capitalism devoid of ethics has led to an obsession with the private accumulation of wealth among the elite few, creating the tragedy of extreme income inequality prevalent today. When we shift our understanding of wealth away from individual enrichment, and instead as a means of bringing good to others (for the sake of God), there will automatically be more effective distribution of wealth and resources. Wealthy Muslims will start to think twice about buying frivolous luxuries and refocus their spending on providing value to those in need.
Life is a constant series of tests. Muslims who understand this and are blessed with an abundance of wealth will logically jump at the chance to give and spend in the way of Allah SWT. It is no wonder then that the Prophet (peace be upon him) and the Sahabah gave away huge proportions of their wealth and chose to live in simple conditions, even when Islam rose to become a global superpower. Islamic civilisation had successful periods of perfect economic balance, where wealth was so equitably distributed, that there was zero poverty.
The truly Islamic understanding of wealth is based on the Spirit of giving back and benefiting others, which leads to the Outcome of greater income equality and macroeconomic stability. Islamic Investing is the preferred option for many since it is a sustainable way to circulate wealth for both the individual, as well as society.
2. Connection and Participation
A lot of modern-day investment activity is detached from the real world. Investing in ‘engineered’ financial products such as derivatives, forex and cryptocurrency trading, or repackaged debt can make profits for investors without creating any real value to the economy. Needless to say, society does not benefit from these activities. I will not enter the halal-haram discussion on this, but I have no doubt that most of these profits are essentially created by speculative market forces, not by actual trading or business activity. The long-term wider outcome is inflation and the diminishing value of money.
A truly Islamic Investment should be direct to the real world, to actual communities. The giver makes a conscious decision to provide financial backing to an identified entrepreneur with a specified plan. The human element is key to a sustainable and long-term engagement between the two. By knowing each other and choosing to get in on business together, a trust relationship is created. This bond is necessary to allow for a sincere and open sharing of risk. [Read: Islamic Finance 101: Mudharabah Profit-sharing]
Prayer is the weapon of a believer. When investors are connected to the entrepreneurs and projects they fund, this prayer becomes more sincere and real, and inshAllah (god-willing) more powerful. Investors thus participate at the commercial, personal and even spiritual level.