Islamic impact investing is a Shariah compliant investment that covers a range of financial instruments in various industries and geographies and with a focus on positive impact ( see Table 1).
Table 1: Perspectives of impact investing | |
Perspective | Details |
Shariah compliant investment | Unlike a donation, there is an expectation of a return on capital with a range of possible returns. Expected returns could range from below market rate to market rate, or even to above market rates. |
Financial instrument | An impact investment is made through many asset classes: Sukuk, equity, Islamic bank deposits, investment in an Islamic fund. |
Industry and geography | Impact investing can take place in many industries (health, real estate, green energy, etc) and many countries/regions. |
Positive impact | The intention to generate measureable social or environmental impact puts an explicit focus on positive impact, which distinguishes impact investing from traditional finance. |
Source: Author’s own |
The ‘return versus impact’ paradigm is a dominant view in the impact-investing universe. That is, the higher the economic, social and environmental impact, the lower the risk-adjusted returns. At the tail of the investment spectrum, we portray philanthropy on one side (a loss from a financial perspective) and traditional investment on the other side (a pure focus on financial returns). In between, there are different combinations of ‘risk-adjusted returns’ and ‘impact’ investments (see Figure 1).
Some investors are making the case that ‘impact’ may represent a fundamental insight that the rest of the market does not yet fully value, raising the possibility of achieving or even beating existing market returns. These investors reject the trade-off between impact and financial returns. I personally argue that Islamic finance has the potential to reconcile the impact and return perspectives.
Islamic finance has the legitimacy to play a leading role in impact investing by bringing a fresh perspective to this blossoming industry. Firstly, the ethical perspective is natively built into the DNA of Islamic finance. Secondly, Islamic finance is inherently embedded into the real economy and can be easily integrated into different sectorial ecosystems. Thirdly, Waqf and Zakat institutions have the necessary levers to channel capital to ‘below market return’ projects through subsidizing or guaranteeing schemes. Fourthly, customers are expecting Islamic finance institutions to be very active on the social front and finally, Islamic finance players are still struggling to move beyond a ‘Shariah compliance’ value proposition.
During the last three years, the market witnessed promising initiatives especially in the green and social Sukuk field. Nonetheless, the industry has just scratched the surface of the immense economic, social and environmental challenges faced by OIC countries. Taking the Islamic impact industry to the next level requires combined and coordinated efforts from asset owners (Islamic finance institutions, Waqf and Zakat funds, institutional investors, etc), asset managers (investment advisors, Islamic finance institutions, government investment programs, etc), demand-side players (social enterprises, microentrepreneurs, Islamic microfinance institutions, etc) and service providers (research institutions, standard-setting bodies, training providers, consultants, etc). Most importantly, these efforts have to converge toward a clear impact investing vision that the industry still needs to clarify.
Dr Mohamed Wail Aaminou is the general manager of Al Maali Consulting Group. He can be contacted at [email protected].