Why Islamic Finance And Impact Investing Should Join Forces
Impact is at the heart of the GCC's strategy, and sustainability is embedded in its values.
The Islamic finance sector is growing, and as the global community responds to the COVID-19 pandemic, key stakeholders are working together to address the considerable challenges the world is currently faced with. As highlighted by the United Nations Development Program (UNDP), “Islamic finance can be part of the COVID-19 response through a range of financing instruments well-suited for each stage.” The effect of our current global pandemic has brought to light the need, more so than ever, to work towards achieving the UN Sustainable Development Goals (SDGs) by 2030. A case in point is UNDP’s recently announced partnership with the Dubai Islamic Economy Development Center in order to align business activities with the UN SDGs.
In 2003, the Islamic finance market value was estimated as US$200 billion, which is further set to grow to over $4 trillion in assets by 2030. Islamic finance will continue to grow over the next decade across asset classes and markets, creating a unique window of opportunity to align components of its investments with the UN SDGs. All permissible Islamic financial products generally share four main features: they are assetbacked, ethical, share risks equitably, and are subject to good governance- all of which give Islamic finance a suitable alignment with achieving the SDGs.
In my previous article on impact investing, I had noted that we need $7 trillion annually, including $4 trillion for emerging markets alone in order to achieve the UN SDGs. We must therefore be innovative in mobilizing private capital. Having spent the last year focused on shaping the narrative of impact investing in the region working with startups, corporate institutions, investors, and family offices, a reoccurring topic of discussion has been how the tenets of Islamic finance coupled with impact investing could have the potential to raise trillions to address the world’s most pressing development needs, allowing us to prevent and mitigate issues ranging from climate change, to delivering the education and health services needed for lasting prosperity.
Impact investing and Islamic finance are complementary and compatible- each sector plays a key role in the value base investment universe, and both share a broader vision of the innate relationship between society and capital at large. According to the Global Islamic Finance and Impact Investing Platform (GIFIIP), there are three key similarities between Islamic Finance and impact investing:
1. Value-based investments
Both Islamic finance and impact investing focus on creating value-based investment structures that allows investors to align their investment mandate with their moral purpose and mission. The notion of “doing good whilst avoiding harm to others” constitutes as the fundamental underlying ethical principle of both Islamic finance and impact investing.
2. The relationship between business and society
Both sectors share a broader understanding and knowledge of the relationship between the business world and the global society that is focused on harnessing human well-being. Investors across Islamic finance and impact investing are, of course, driven by commercial and acceptable returns from the investments made, but it is known that the finance returns only constitute as one dimension of the overall investment. Investors in both sectors are seeking to create a lasting positive social and/or environmental impact alongside the financial return.
3. Building inclusive financial systems
Both Islamic finance and impact investing are driven towards building inclusive financial systems that actively incorporate the global population, which is either indirectly or directly kept out of the formal financial sectors to ensure that everyone is accounted for. As Warren Buffet put it: “If you’re in the luckiest 1% of humanity, you owe it to the rest of humanity to think about the other 99%.”
As noted above, these key similarities between both sectors could potentially create a promising avenue to effectively respond to the growing global challenges. After all, Islamic finance is expected to reach $2.7 trillion in value by 2021, which could add another significant pool of capital and a strong potential source of financing the UN SDGs.
The UAE and the GCC overall are key hubs for Islamic finance, and to date, they have played a significant role in the creation of Islamic financial institutions, but they can now further the growth of the sector across the region by joining forces with the rapid growth of impact investing across the region. Further awareness is needed to make Islamic finance leaders and GCC governments to align in this movement, and to continue to consider how they can most effectively capitalize on impact investing to generate positive returns whilst making the ongoing positive impact on society.
Impact is at the heart of the GCC’s strategy, and sustainability is embedded in its values. In the midst of a global pandemic, it is imperative to join forces where possible, in order to sustain our planet and its people. Islamic finance and impact investing could prove to be the perfect blend.
Zahara Malik is co-founder and CEO of Grosvenor Capital (GroCap), a boutique advisory company headquartered in the UAE which focuses on providing clients with business strategies, capital introduction and advisory services across the GCC, Africa and beyond.
Malik has a track record of working with successful entrepreneurs and prominent figures, including royal dignitaries, heads of state, ministers, UHNWI, family offices and executives. She has built substantial experience of working in emerging and frontier markets as an investment specialist holding senior positions at Access Power, Global Investment Bank, Invest Africa and Sunbird Group.
Furthermore, Malik has worked on key philanthropy and impact campaigns with HRH The Prince of Wales, The Princes Trust and Mosaic International network. She formally chaired The Princes Trust Junior Associated Program, and is currently a trustee of Jaago Foundation, where she opened her first school in Chittagong, as well as Chief of Amplification for Girls Do Good.
Malik was also a finalist for the “Rising Star” category in 2017 for the prestigious British Muslim Awards. Malik holds a MSc in global governance from UCL, and has become a published researcher after earning a distinction in her master’s dissertation on the global issues surrounding water wars and the impact of shale gas production across the US and China.