By Prof. Raza Mir
Islam as a religion is characterized by a fierce commitment to social justice. The Quran abounds in verses that extol the virtues of charity, proscribe hoarding, and warn against usurping the rights of the poor and dispossessed. Similarly, there are several hadith traditions ascribed to Prophet Mohammed exhorting Muslims to make the agenda of social justice the cornerstone of all economic and trading activity. It should follow therefrom that all commercial activities that aspire to Islamic standards should focus on reducing inequality and utilizing commerce for social welfare rather than on profiteering.
As the economic principles of capitalism become increasingly hegemonic in the world, they come into conflict with the traditions of Islam. It becomes necessary for Islamic economists and social scientists to offer a way forward for Muslims engaged in commerce. The religion after all, boasts of over a billion followers, and by the year 2030, at least 50 nations of the world will have over 50% of their population who identify as Muslims.
One tradition that has emerged in the world of investing is that of Islamic finance. The broad ideals of Islamic finance are to provide an opportunity for Muslim investors to participate in the global financial system without sacrificing their religious principles. Islamic finance has been a spectacular success in terms of quantity and depth. Despite a relatively recent provenance (the first instruments of Islamic finance emerged mostly in the 1970s), the ideas of integrating investments by Muslims in the global financial system in a religious manner have been extremely successful. Ernst and Young has estimated that global Islamic assets held by commercial banks were valued at around $1.3 trillion in 2011, and are poised to surpass $3.4 trillion in 2018. This represents an average annual growth of 15%, which is stratospheric compared to traditional funds. In a mere matter of four decades, Islamic finance has reached a maturity that would be the envy of any mainstream economic instrument. This phenomenon is not limited to Muslim countries, but also is becoming increasingly visible in the west. We now have Islamic banks, Islamic mutual funds, private equity, and even a variety of indices (the most prominent being the Dow Jones Islamic Index) that aim to provide sharia-compliant investment opportunities to a variety of Muslim investors.
Interestingly, Islamic practices have also seeped into mainstream investment decisions as well. The most prominent instruments of entrepreneurial financing such as venture capital and angel investing have picked some of their practices from the principles enshrined in Islamic finance. In effect, Islamic finance has taught Silicon Valley a few things about responsible risk sharing between inventors and financers!
How can Islamic finance remain compliant with not only the letter, but also the spirit of Islamic guidelines governing commerce? This debate is always ongoing, with critics contending that banks and funds that claim to follow Islamic finance have focused primarily on issues relating to interest (riba), and less on issues relating to equality and social welfare. Moreover, much of the research on Islamic finance has focused on the performance of Islamic funds as bench-marked against the most traditional and capitalist measures of performance (ROE, for example is the dependent variable of choice in most studies that compare Islamic funds against benchmarks such as the S&P 500). While this may satisfy the letter of the law (given that most Islamic funds come with some religious imprimatur of sharia compliance from religious bodies), the question of adherence to the spirit of Islamic finance remains unresolved.
A critical analysis of Islamic finance must rest on two inter-related points. The first, a critical intervention, needs to unpack the over-reliance on procedural concepts like riba in defining Islamic finance. Islamic finance needs to be true to issues of social justice and reduced inequalities. Riba, or any form of interest, is forbidden precisely because it is a tool to produce injustice and inequality. Thus, any attempt to formulate an infrastructure of Islamic finance by focusing on representing investment as non-interest-bearing without addressing unjust practices and economic inequalities is at best missing the broader Islamic point, and at worst, a cynical way to get past Islamic strictures and guidelines. The least we can do is to imagine a conversation where companies that manufacture cluster bombs, have manufacturing facilities on forcibly occupied lands, use child labor (through contractors) or engage in human rights violations, be defined as “unIslamic” for the purposes of investment.
The second, more constructive point, is to visualize a process whereby an Islamic system of finance can address the most dominant contradictions of capitalism, especially the manner in which savage inequalities between the rich and the poor are not only tolerated, but become the cornerstones of corporate strategy and national investment approaches. To the extent that there exist some fundamental incommensurabilities between Islam and capitalism, it behooves us to treat this growth of Islamic finance with some degree of carefulness and evaluate it with integrity. We should use egalitarian Islamic ideals to evaluate all investment practices including mainstream investments, and see how close they reach an Islamic ideal. This practice constitutes “integration in reverse”, whereby the mainstream financial institutions are integrated with Islamic ideals rather than vice versa.