What can we learn from Shari’ah? Ethical investing and Islamic finance


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What can we learn from Shari’ah? Ethical investing and Islamic finance

We’re currently in the month of Ramadan – a time for prayer and good deeds, where many Muslims fast between dawn and sunset. Ramadan remembers the month that the Qur’an was first revealed to the Prophet Muhammad, and is based on the cycles of the moon.

This time looks a little different for every Muslim – but overall, the idea is to practice self-discipline, recognise the suffering of the poor and help those in need.

Ramadan seems like an opportune time to address how Muslim ethics and practices intersect with investing and personal finance in the UK, especially given the current emphasis on sustainable investing. Could we learn a little more on this topic from Islamic financial practices – known as Shari’ah?

A boom in sustainable investing

Over the past few years, it’s no secret that the convergence of tech and financial services has sped up innovation. One of the offshoots of this is that investors now have a much more personalised experience, and better oversight into where their money is going. Currently, 90% of investors aged 24-39 want to invest in stocks and funds that have a positive impact on society and the planet.

Close to home, the ideal of “sustainable investing” has become a lot more accessible with fintechs like CIRCA5000 launching thematic, ESG-compliant portfolios. But elsewhere, innovation is continually redefining the purpose of investing and proving that we can meet our investment goals while contributing to positive causes and looking out for future generations.

As a young Muslim, I am thrilled to see ethical investing play such an important role in the wealth management space – and I’m particularly interested in those areas where ESG meets another branch of ethical finance: Shari’ah.

What is Shari’ah?

Shari’ah is Islamic law based on the teachings of the Qur’an (the Islamic Holy book) and traditions of the Prophet Muhammad (PBUH). Islamic finance is a segment of Shari’ah.

Shari’ah finance does not focus wholly on monetary benefit. Instead, it also advocates for social responsibility for both individuals and businesses, and the welfare of the planet.

The rules are as follows:

  • Ban on interest (Riba): Money should be treated as a measure of value, not an asset. To earn money from lending or lose money from borrowing would not be considered a halal, shariah-compliant transaction.
  • Ban on uncertainty (Gharar): Maintaining transparency and openness ensures the parties involved are treated fairly. Short-selling, derivatives and unclear contracts would be considered haram (prohibited).
  • Ban of speculation and gambling (Maysir): An example of gharar, gambling is haram in Islam, as it’s not considered a responsible use of money.
  • Ethical investments should enhance society: Investment in industries that are prohibited by the Qur’an (such as alcohol, weapons and gambling) are discouraged, while ethical investments that enhance the planet or society are encouraged
  • Financial products must be asset-backed and tangible: Investments should not be made in companies operating in significant debt

In addition to this, many Muslims must pay Zakat – a 2.5% tax on wealth that goes to a charitable cause. The concept of charity is fundamental in Islam, as ‘purifying’ your wealth through wealth distribution is an important part of Islamic wealth management.

A rising demand for Shari’ah investments

Approximately 90% of Muslims would like to invest in a halal, Shari’ah compliant way, according to a study by D2C Shari’ah-compliant money management app, Kestrl.

However, most investment firms are currently unable to meet this rising demand, meaning the 4 million+ Muslims in the UK are having to compromise their religious beliefs if they choose to invest.

The good news is, in the current “golden age of fintech,” where innovation is rife and it’s easier more affordable than ever to launch, the barriers to entry for Shari’ah compliant propositions have never been lower.

For starters:

  • Ethical and sustainable investing is one of the key principles of Shari’ah finance, and we’re seeing a huge push in this direction
  • Better financial education means people are being encouraged to invest for longer periods of time and build up gradual wealth, instead of relying on risky day-trading. This ties in with Gharar, the belief that uncertainty is haram, and Maysir, the ban on gambling
  • Social good and community are at the forefront of ESG investing. In Islam, the concept of stewardship is incredibly important – with environmental responsibility being at the forefront.
  • ESG scoring is similar to Shari’ah screening, facilitating more ethical investments. According to Refinitiv, financial companies that are Shari’ah compliant have ESG scores that are 6% higher than those that aren’t.

What does the future hold?

Technology really is revolutionising the market, and there is more money than ever being invested in UK fintechs. Like many other industries, financial services have had to come up with more innovative and mobile ways to service customers post-pandemic, which has led to better personalisation and a more diverse customer reach.

I believe the current trend of hyper-personalisation means more people are looking for tailored investing solutions to suit their lifestyle, values and goals, which is one of the reasons why ESG investing has slipped into the mainstream. This focus on ethical and “impact” investing brings us a few steps closer to meeting the needs of the Muslims, who currently make up 6.3% of the UK population.

With better innovation comes better education and more diverse investment options – so I’m hopeful we’ll see more Shari’ah compliant propositions enter the wealth market in the coming months and years.