Islamic investing, a growing segment of the broader investment universe, is poised to benefit from strengthened connections to the responsible investing community. This is among the conclusions of a report by Schroders and the Maybank Islamic Centre of Excellence.
Islamic investing adheres to Shari’a law, which is Islamic law as defined by the Quran. Shari’a-compliant investments designed for Muslim investors share some similarities with impact investments. Just as some impact investors use negative screening to filter out investments that are at odds with their nonfinancial goals, Shariʽa-compliant investments generally avoid businesses related to weapons, tobacco, alcohol, and gambling. Much like traditional impact investments, these investments also strive for a sense of social equity, including directing investors to share gains with charities through the practice of zakat, or charitable giving. Prohibitions on interest-bearing or purely speculative securities are a distinctive feature of Shariʽa-compliant investments.
Some have suggested that boosting Islamic investing could help achieve global sustainability goals, while others—including Schroders and Maybank—see embracing sustainable investing trends as a way to innovate and expand Islamic investing.
A Growing Investment Approach
As of 2018, assets invested in Islamic banking, capital markets, and takāful (the Islamic insurance market) totaled $2.19 trillion worldwide, a 6.9% increase over 2017 levels, according to the Islamic Financial Services Board (IFSB).
Although Global Finance reports that the majority of Islamic finance assets are concentrated in the Middle East and Asia, a handful of US-based mutual fund companies comply with Shariʽa laws. Recently, the North American exchange-traded fund industry has also stepped into Shariʽa-compliant investing, sometimes also known as halal investing.
Separately, sukuk have evolved as a key source of capital for governments of Muslim countries and corporations developing projects in those regions. Sukuk resemble conventional bonds but are Shariʽa-compliant because they represent an ownership share in the underlying asset, meaning investors earn profit, not interest. Sukuk issuance was expected to increase by 6% to reach $130 billion in 2019.
Improving Ties with Responsible Investing
At mid-2019, Shariʽa-compliant equity funds held just $3 billion in assets worldwide, a fraction of the $1.5 trillion global equities market, according to the Schroders-Maybank report. The asset management market opportunity remains significant, however, as the world’s population includes 1.8 billion Muslims.
Given the alignment between Islamic investing and impact investing, Schroders and Maybank suggest that the two disciplines could benefit from closer ties, including:
- The development of Shariʽa-compliant investments that also incorporate sustainability factors
- Tapping Islamic financial markets for funding for renewable energy projects and community and economic development initiatives
- Increased awareness of the advantages of Shariʽa-compliant investment, such as aversion to leverage
The emergence of green and blue sukuk in recent years has begun to highlight the potential for Islamic investing products to support sustainable initiatives. “The prospect of Islamic green finance is unprecedented,” write the authors of a recent World Bank report.
With the implementation of the measures outlined by Schroders and Maybank, demand for sukuk and other Shari’a-compliant investments could see considerable growth among Muslim investors and non-Muslim communities alike.