The renowned American anthropologist Margaret Mead once famously stated, “Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it's the only thing that ever has.”
The story of modern-day Islamic finance is one that illustrates the possibilities that can be achieved when a group of committed and principled individuals join forces to pursue a noble cause. Visionaries such as His Excellency Saeed Lootah, who founded Dubai Islamic Bank, Dr. Ahmad Mohamed Ali Al-Madani, the founding President of the Islamic Development Bank, and HRH Prince Mohammed bin Faisal Al Saud, the late founder of Dar Al Maal Al Islami Trust (DMI Group), dedicated their lives to create an ethical and faith-based financial services ecosystem that serves communities, not markets.
In the early 1980s, these pioneers and the then nascent Islamic finance industry faced a crossroads – to either prioritise the banking route or venture on the path towards asset management. This C to B (consumer to business) industry eventually focused on the banking route for self-actualisation; an ambitious and farsighted approach that led to the evolution of what is now called the Shari’a compliant banking system.
The market size of assets held under Islamic finance is today estimated at USD 2 trillion; around 80% of which are concentrated in Shari’a compliant banking. Despite the industry-wide double-digit growth rates during the past decade, the Islamic asset management sector remains small, relatively new, and bereft of an enabling institutional framework – but has the potential to act as a potent catalyst for long-term economic development in the Middle East and beyond.
The roots of Islamic investments are in providing Shari’a-compliant alternatives to conventional investments. The modern-day Islamic finance industry has been providing this vitally important service for over forty years and doing so has enabled the industry to take root and grow. But in order to create a truly global demonstration effect, the industry must transition “from compliance to impact” to enhance its relevance, expand its size and scale, and demonstrate its authenticity.
The rise of the impact investing movement, for example, is an exciting and large-scale opportunity for the Islamic investment industry. Impact investing calls for investment into companies, organisations, and funds with the intention to generate social and environmental impact, as well as a financial return. While the precise size of impact investment sector has not been quantified, the Global Impact Investor Network (GIIN), of which Fajr Capital is a member, reports 205 investors committed more than USD 22 billion to impact investments in 2016, and anticipated committing 17% more (USD 25.9 billion) in 2017.
Islamic investment managers begin the impact journey substantially ahead of their conventional counterparts. Expertise in Shari’a screening, the broader values-based outlook, and the existence of Shari’a advisory boards are important enablers that position Islamic managers for impact investing. Building further on these ideals and skills is crucial for managers to make the shift from compliance to impact:
- Taking the lead in transforming corporate and economic culture – from a paradigm of “ownership” to a paradigm of “stewardship”;
- Strengthening corporate governance to focus on fairness, transparency, and accountability, i.e. expanding the scope and remit of Shari’a advisory boards;
- Allocating capital to emerging and frontier markets, where there is a greater ability to create enduring value for local communities alongside generating financial returns;
- Investing to address the world’s most pressing challenges in sectors such as education, renewable energy, healthcare, microfinance, infrastructure, and agriculture;
- Collaborating with other socially responsible investors, multilaterals, and development finance institutions to create what I call an “alliance of goodness”;
- Encouraging investee companies to think and act ethically, whether it’s by creating long-term management incentive plans or the establishment of corporate foundations; and
- Lastly, realising that true success lies in the development of human capital – nurturing talent (through training and development, graduate programmes, academic engagement, and employment opportunities) to become tomorrow’s changemakers.
The practical steps set out above will support the Islamic investment industry to demonstrate a distinctive value proposition to the global marketplace. More importantly, this journey from compliance to impact will allow the wider Islamic finance industry to generate social benefit and create a demonstration effect which brings blessings beyond measure and makes our world a better place for all.
