Transcript Islamic Investments - Indian Centre For Islamic Finance

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
In the name of Allah, The Most
beneficent, The Most Merciful.
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.
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)
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
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?
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.?
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
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.
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.
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.)
Performance of Religious Funds
(Grading by Morning Star Managers, 2006 data)
Fund
Prohibition
Grade
Amanah Mutual Fund
Trust
Banks, Alcohol, porno, gambling
A
Ave Maria Catholic
Values
Abortion, Planned Parenthood,
Porno, partner benefit
C
MMA Praxis Core Stock
(Mennonites)
Defense, alcohol, gambling,
Tobacco, Nuclear
D
New Covenant Growth
(Presbyterian)
Alcohol, gambling, Tobacco,
Firearms etc.
C
Timothy Conservative
(Evangelical)
Abortion, Alocohol, porno,
Tobacco, gambling,
D
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’.
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.
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.
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.
Moral Filters
• The Companies producing
prohibited items like pork,
alcoholic drinks etc. are ruled out.
Ethical Indices
• Dow Jones Islamic Market Index
• Standard and Poor Large Cap World
Shari’ah
• S &P Small Cap World Shari;ah
• S &P UK Shari’ah
• SBI Resurgent India Opportunity Fund
• UTI Off Shore Shari’ah Compliant Fund
• Dow Jones Dharma index
• Parsoli Islamic Index (PIE)
• East Wind India Islamic Index
Parsoli Islamic Equity Index
(PIE)
• Shari’ah Compliance
• Liquidity : Actively traded stocks
• Comprehensive coverage across
the industry [More than 5000 Indian
companies included].
• Consistent Methodology
Business Screener
Mixed Business Screener
Financial Screener
TTMAMC*
Trailing 12-Month Average Market Capitalization
TMAMVE**
12 Months Average Market value of equity
Financial Screener (Contd.)
CRITICAL EVALUATION
• Various Indices differ from each
other in coverage and
comprehensiveness in Business
Screener
• The norms in financial screener
appear to be arbitrary. The arbitrary
nature of these indices must be
recognized.
CONCLUSION
In conclusion, we may say:
Islamic and other Ethical
Investments are in the market
to stay. These trends are
expected to be strengthened
more and more, with time.
THANK YOU VERY MUCH