While the US relationship with the Islamic world has suffered from the recent inflammatory anti-Islamic film, values-based finance has emerged as an unlikely, yet significant point of connection. Its potential lies at the intersection of Socially Responsible Investing (SRI) in the West and Islamic Finance in the East. Both are on the rise.
Governed by religious principles, Islamic finance forbids the charging or receiving of interest. Transactions are guided by ethical, moral, and social considerations and the belief that money should be used to create social value, rather than just wealth. To this end, Islamic banks cannot trade money nor can they fund projects involving alcohol, gambling, or weapons.
Islamic banking has grown by 50% since 2006, with assets now totaling $900 billion. The rise stems partially from its relative strength during the economic crisis. According to Tufts University Professor Ibrahim Warde “more people have begun to bank on a system that withstood the global financial crisis of 2008 more robustly than the conventional standard.”
At the same time, Socially Responsible Investing has grown tremendously in the US, outpacing investments in traditional assets. Performance is a factor behind this trend, but more important to this discussion is the role of socially conscious consumers, entrepreneurs and leaders who expect business to play a role in generating social good.
Unlike an earlier generation who separated philanthropy from their daily vocation, the next generation seeks employers who integrate values into their business. In a global business survey conducted by IBM, university students “spoke about a new relationship among societies and business, economies and governments, and the need for a new definition of ‘value’ on what they see as a shared planet.” This finding is significant because Millennials will make up 50% of the global workforce by 2014. This trend supports a projected rise in values-based investing, and since the Muslim population is expected to grow at twice the rate of the non-Muslim population over the next two decades, we can assume that growth of Islamic finance will continue.
Experts affiliated with Harvard University’s Islamic Finance Project have found that values-based investing stretches across Islamic and Western financial systems. An alliance between Islamic finance and Social Responsible Investment is “both necessary and natural,” says Marcy Murninghan, Senior Researcher at Harvard’s Kennedy School, in a recent small report done on the subject.
Harvard’s May 2012 forum report on Islamic Finance and Development takes it one step further. “There is significant scope for expanding the industry, because apart from bridging the gap between East and West, it [Islamic Finance] has also proved to be a veritable point of convergence between the Islamist and the secularist movements in most countries affected by Arab Spring.”
Not only as a way of doing business, but because of its importance as a connection point between the Islamic world and the West and within Islamic societies, values-based investing is poised to be a game changer.