Ethics and Finance: Doing the Right Thing Can Be Profitable

Discontent is on the rise among Western banking customers faced with abuses such as Libor rigging, mis-selling of financial products, hidden trading losses and sloppy anti-money laundering, writes Paul McNamara

As the conventional financial system takes blows to its credibility, the question arises whether there is a better financial system waiting to be found.

Many believe the answer lies in some form of ethical finance with a philosophy that is underpinned by moral tenets or religious beliefs. While Islamic finance scores highest in this area in terms of the number of headlines it secures, other religious groups can find themselves in lockstep with these same views.

Ethical finance encompasses a wide range of issues from sustainability to firearms, exploitation of people and resources to environmental concerns. Investors who require an ethical overlay to their money management want to look after the world they live in and this can mean investing in companies which have business models that are sustainable in an ecological, social, economic and political way.

Islamic finance, through its investment filters, provides one means of doing so. In 2009, the Vatican's official voice piece, the newspaper L'Osservatore Romano, came out in favour of Sharia financing saying: "The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service."

In the UK, there has been a push towards ethical finance. Campaigns, such as Move Your Money, launched last year urging consumers to shift funds from mainstream banks to ethical alternatives.

Graham Burnside, partner and chairman of law firm Tods Murray and a board member of the Islamic Finance Council UK, points to the growth of the Co-operative Bank, which saw primary current accounts increase 8.2 per cent last year, as a sign that things are moving in an ethical direction.

The emergence of Triodos Bank, the self-proclaimed "world's leading sustainable bank", may also hint at what the future holds in store. Triodos posted a 31 per cent rise in 2012 net profits and a 23 per cent rise in its customer base in the year. Such growth may be impressive, but it is coming off a very low base.

Mr Burnside suggests that while there is some "thought and discussion around other faith-based finance initiatives" in the UK - the Church of Scotland has a committee devoted to it, for instance - "it is still some way from turning into an offering in the market".

For ethical finance to take firm root, it must appear to be as competitive as conventional finance.

Customers, after all, may not be willing to pay a premium for their beliefs. However, for investors cynical about the cash value of "doing the right thing", a quick look at the DAXglobal Sarasin Sustainability Germany Index, which tracks German and Swiss companies that meet sustainability criteria, should give pause for thought. The index has been known to outperform the DAX index by 100 per cent over extended periods.

In many markets, Islamic banks are very keen to promote that they are open to non-Muslims and Muslims alike. Indeed, in Malaysia it is not uncommon for an Islamic retail bank to have more Chinese non-Muslim customers than Muslims.

Throughout the Gulf, many Islamic banks focus their promotional message on the fact that their roots are in ethical finance first and foremost. "The ethos of Islamic finance is universal and is really coming to the fore of how people want to conduct business," says Saadat Khan, chief executive of Sharia-compliant firm Ethical Asset Management. "If we take away the Islamic finance label and present it as ethical financing, which is what it is, there is a lot of demand."

This article was originally featured in Raconteur's special report on 'Islamic Finance' which published in The Times newspaper on April 16, 2013.

(Huffpost Business / 17 April 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

How Islamic finance and a more ethical capitalism go hand-in-hand

Though wealth creation is the primary goal taught by top businessmen, social impact is considered to be a more fulfilling outcome for others. Money is not timeless, but what you do with that money can be. The light you instil in the uneducated, the medicine you provide to the ill, or the food and water you provide to the malnourished is far more enduring than the car you drive or the house you buy. Most advocates of social entrepreneurship believe that creating a business with a social impact leaves much more than just a humble footprint behind.

The concept of social entrepreneurship however is not new despite the recent rise in press coverage. It has existed since the 6th century and one particular group was taught the importance of such business: Muslims.

Muslims live their lives in accordance to the teachings of their founder, Muhammad, who led his life as a humble merchant and was the "trustworthy one" by all those who knew him. His teachings and examples of business dealings were strongly linked to humanitarian values where the poor, the sick and orphans took precedence. He acknowledged the suffering of people in surrounding environments and continually created solutions for them while creating a system that would ensure their care long after his passing.

The mention of Muhammad is significant to understand how today's Muslims are encouraged to create wealth; supporting the notion of an existing relationship between Islamic business and social enterprise.

According to Sir Zafrullah Khan, the former Pakistani politician and diplomat, the Holy Qur'an states (59:8), "the object of the Islamic economic system is to secure the widest and most beneficent distribution of wealth through institutions set up by it and through moral exhortation. Wealth must remain in constant circulation among all sections of the community and should not become the monopoly of the right."

In Islamic law, the principal economic obligation is the payment of the capital levy called the zakat (Holy Qur'an, 22:79), which is "a levy imposed upon the well-to-do which is returned to the poorer sections of people". This law applies to both individual and business wealth. In the wealth that is produced, three parties are entitled to share: the working man, the person supplying the capital, and the community as representing mankind. According to Khan, "The community's share in produced wealth is called the zakat. After this has been set aside for the benefit of the community, the rest is 'purified' and may be divided between the remaining parties that are entitled to share in it."Though zakat is imposed only as a small percentage on one's actual assets, Islamic teachings encourage the injection of wealth into communities where support is small or absent. Wealth is encouraged to be in constant circulation, either into the business, or into local communities to ensure the poor and sick are consistently attended to.

Comparatively, a social enterprise is an organisation, which focuses on environmental, social and economical well-being with a profit-making business model. The primary aim of a commercial business is to maximise shareholder wealth whereas the primary aim of a social enterprise is to maximise social value. Simply put, it is the bridge between non-profit organisations and commercial businesses.

Many examples can be found when exploring the Muslim world of social entrepreneurs who have values rooted in Islamic teachings. One notable organisation is the Grameen Foundation, which provides financial services, life-changing information and unique income-generating opportunities to improve the lives of the poor. In the last 15 years, the foundation and its partners have helped 9.4 million of the world's poor.

Similarly, Net Impact Saudi Arabia (NISA) strives to make a positive impact in society by assisting social entrepreneurs with the provision of education, equipment and inspiration to aid with the growth of their business. NISA has successfully supported 10,000 business owners.

In relation to the business model followed by Muslims, equity holders and communities share both Islamic wealth and social enterprise-related wealth.

These two types of businesses have community interests in common and are also faced with similar issues, a major one being reduced assets as money is constantly being circulated either for the purpose of business expansion or for community support. Some would argue that this makes sustaining a social enterprise business model much more difficult in comparison to other enterprises purely because their products and services focus on something more than just increasing profits: social value.

Consumer trends have shifted towards investment in products that come attached with an individual and social benefit, which is why the successes shared by many social enterprises have been profound. Muslims and social enterprise owners pursuing businesses based on either of the two models discussed are keen to accept the challenges ahead of them as they find solace in making a difference on a social level. To them and the consumer, this holds far greater value than the accumulated wealth itself.

Sheeza Ahmad is the founder of social enterprise HelpingB through which users build communities around a patient's recovery to keep them close to their loved ones; encouraging them to BWellsoon. Profits go on to fund educational projects in developing countries throughBEducational – creating the social entrepreneurs of tomorrow.

(The Guardian / 24 Jan 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com