An important development in the last two decades has been the growing emphasis on responsible, inclusive and sustainable finance. The recurring global financial crises provided a dramatic reminder of the basic purpose of financial intermediation as a means to create sustainable value in the real economy. ROSIE KMEID writes.
Being consistent with the long term preservation and development of the global economy, society and environment, sustainable, responsible and impact investing (SRI) and environment, social and governance (ESG) considerations are gaining significant momentum in a number of developed countries.
To meet the world’s expectations of gaining traction towards achieving economic stability and growth, Islamic finance is uniquely positioned to champion this cause, guided by the all-embracing Sharia principles which emphasize the protection of interest of mankind. Islamic finance complies with the Sharia rules which govern economic, social, political and cultural aspects of Islamic societies. In other words, the rules of Islamic finance place emphasis on the ethical restrictions underscored by Islamic values. Under this authority, Islamic finance is not only an alternative financial approach but also addresses the issues surrounding us today such as inequality, financial fragility and environmental hazard.
The value proposition of Islamic finance, one that advocates justice, sustainability, inclusion and fair globalization, has extended out to the global community. It is the inherent qualities of this relatively new finance model that have pulled interest from diverse backgrounds, because at the core of Islamic finance lies virtues that encompass both ethical and moral aspects in driving potential solutions to achieve economic stability and environmental protection.
Crossover with ethics
Ethics in financial services has never caused so much attention. Ethical practices figure today as mainstream considerations in business decisions with regard to competitive advantage and financial performance. In recent times, a number of researches have been increasingly devoted to investigating the advantages of adhering to ethical standards in international finance. This circumstance goes with the fact that the existing standards are to a greater extent disputable. Ethical theories, developed mainly by Western scholars, are the current theoretical framework all financial institutions have at their disposal to ensure compliance with the spirit of the law.
The contemporary steps at introducing ethical principles to the United States’ corporate environment through the adoption and integration of the Sarbanes-Oxley (SOX) Act of 2002 into the US financial system are an example of the global imposition of a particular set of Western values that they believe is equally valid and commendable, noting that other financial markets are facing similar levels of regulations with SOX style compliance.
However, compliance with SOX continues to be resisted mainly because of the substantial costs associated with it. Rather than comply, numerous financial institutions opted to “go dark” to avoid legal penalties, and many have chosen to launch their IPOs on foreign exchanges in lieu of raising capital in the US market. This new regularity environment is burdensome to all financial institutions regardless of geography, as many do not have the infrastructure in place to handle the costs of complying. It is observed that scholars, jurists and analysts from think tanks concorded that governments should revisit the impact of codes of ethics, industry standards and regulations, so that financial institutions, being part of an ‘ecosystem’, can embed ethics in their decision making and operations at minimal cost.
In Islam, ethics is the fundamental principle that shapes the Islamic financial system. The same principle is criteria shared with ethical or impact investing. As such, ethics and SRI are indistinguishable from the system itself. The ethical behavior here stems from a desire to transcribe the religious beliefs into decent financial practices. Yet, there are considerable benefits in terms of greater relevance and scope shared between Islamic and ethical finance. This is a view that has much merit, as does the point made by the World Bank once that Sukuk can serve as a bridge between the worlds of Islamic finance and that of responsible investment.
The rise of fintech and its impact on ethical finance
The growing importance of responsible, inclusive and sustainable finance and the preconditions necessary to sustain a value-based financial system required provision of access to a range of ethical financial products supplied through various delivery channels in a well regulated environment.
Evidence showed considerable disparities in access to ethical financial services between populations. With the technological revolution and digitization, we are witnessing the most significant transformational development of our era, one that is certainly positive and inclusive for these populations. Thus, fintech is increasingly emerging not only as a tool that improves financial performance, it is also emerging as an effective tool to increase efficiency and sustainability. Fintech has demonstrated that it can contribute efficiently to financial inclusion and sustainable development, providing new ways for excluded people to be better integrated and have a superior financial and social status, while ensuring that they have access to a wide range of financial products in line with their values. Rather than looking at the fintech revolution as unwelcoming, we ought to leverage on it to advance economic and social goals and to embrace it as an opportunity, because its potential social impact is significant.
Conclusion
There has never been a better time where a convergence of developments have called for us to transmit the values of Islamic finance in addressing the challenges confronting us today; economic inequality, wealth gap, and environmental damage and degradation. The ideology of purpose that is beginning to dominate our days is one that finds acceptance and participation by society at large in the adoption of ethical behavior. In this game-changing trend creating both disruption and opportunities on a global level, leveraging on technology to accelerate innovation and meet the future needs of Islamic finance of contributing towards a more inclusive and stable global financial system is a growing imperative.
Rosie Kmeid is the vice president global corporate communications & marketing at Path Solutions. She can be contacted at [email protected].