EMERGENCE OF ISLAMIC INVESTMENT: Issues and Practices

1. EMERGENCE OF ISLAMIC INVESTMENT:Issues and Practices Ausaf Ahmad Presentation at IBF-NET COURSE ON ISLAMIC FINANCE At The Hotel Palm Grove Chennai October 04 2008

2. In the name of Allah, The Most beneficent, The Most Merciful.

3. What is Ethical Investment? To many, expressions like ethical Investment may sound a contradiction in terms. Could there be an “Ethical Investment”? The answer is not easy. Many intricate issues of Economics and Ethics are involved.

4. The Relationship Between Economics and Ethics Economics and Ethics both govern human behavior and provide guiding principles. Modern Economics is ‘amoral’ in nature. Economic man and invisible hands. Positivism i.e. value neutrality and universalism. Efficacy and efficiency of market (No Market Failure)

5. Pareto Optimality and Normative Goals Market solution is optimal i.e. interaction of utility maximizing consumer and profit maximizing producers shall produce an optimal market solution. Definition of Pareto optimality: A solution is Pareto Optimal if it could not be improved without making some one worse off. No mention of equity. It is held that Pareto Optimality shall be able to handle all cases of market failures, social evils, like pollution, pornography etc. The Actual Experience negates these claims

6. Which is a Good Investment? Economic View: The Investment which is brings in Profit is a “good” investment. Dictionary Meaning of Ethics: Moral principles, Value system, Value orientation (the principles of “right” and “wrong”, “good and “bad” as accepted by an individual or a social group. Ethical Question: Is it really a good Investment?

7. Social Consequences of Investment Should Self interest be the only motivating factor for an investment? Should I care for only my profit? What if my investment leads to: Increased Alcoholism Drug Abuse Spread of Pornography Environmental and social degradation such as Crime and violence. Should I remain insensitive to social needs and damage to the society and environment that my investment must have done it. Shouldn’t I channel my investment differently.?

8. A Million Dollar Question If I motivate someone to commit a heinous crime such as a murder, Shall I be held responsible for my action? According to Law According to Morality If there is no direct or indirect evidence against me, I may not be prosecuted by law, but I cannot be absolved of my responsibility by morality. ‘ The biggest court is one’s own conscience The same provides justification for Ethical Investment

9. The Desire of Investors The ethical investors wish to make their contribution, through their investment, to a clean, pollution free environment, ecological balance and towards a more humane and livable society. These desires have reflected in emergence of green investment, Environment friendly investment, Islamic Investment, Dharma investment etc.

10. Green Investment Pollution free cars: It is estimated that by 2030, plug in cars would make up 50% of all cars sold, and by 2010, China will spend over $236 billion each year on Green investment. Pundits claim that ethical investments has doubled in the past seven years.

11. Sources of Investment Morality Secular Morality Human rights Disarmament Social commitments Environmental Impact Opposition to Oppressive Regimes Animal welfare Religious Morality Ave Maria Catholic Values (Excludes investment in Health and Technology) Islamic Investment (Prohibition of Riba, Pork, processed meat, liquor, pornography etc.)

12. Performance of Religious Funds(Grading by Morning Star Managers, 2006 data)

13. Socially Responsible Investment Based on Environment, Social and Governance (ESG) considerations. “Triple Bottom line”: Monetary returns, Social benefits, Environmental sustainability. A company showing good ‘triple bottom line’ is considered to be a ‘socially responsible company’.

14. Islamic Investment An Investment is considered Islamic if it is made in accordance with the Islamic principles. Shari’ah Compatible Investment The companies are screened on the basis of some index to determine their Shari’ah compatibility. According to Nisar, 61% Indian companies are Shari’ah Compatible.

15. Ethical Indices for Screening Screening is carried out on the basis of financial ratios, business performance and corporate governance. Financial Filter= Total Debt/ Trailing 12 months average market capitalization >33% Company is ruled out.

16. Financial Screening FF2= Cash + interest bearing Securities/ 12 months average Capitalization>33% Rule out FF3= Accounts Receivable / 12 months average capitalization >33% Rule out In order to qualify for investment a company has to pass all three tests.