by Dr. Farha Iman
The Islamic faith encompasses all aspects of a life of a Muslim. It does not only determine the relationship between human beings and God and with each other but also provides the moral and behavioral framework to their daily activities such as what to eat, what to wear, whom to marry, what and how to sell and buy and where to invest. All these daily life engagements have certain rules or laws. Those laws sometimes seem harsh when they are seen individually but in larger picture they make sense. The underlying concept is – the laws made by God are inclusively beneficial for all human beings as God loves all. Thus, if one person follows the rule it will automatically serve the others also. For example: If one person will follow the traffic rule, it will not only protect him/her from accidents but other people on the road also.
Introduction of Islamic Finance
Following the Islamic faith strongly influences the economic aspect of life as well. In this article, we will delve into the increasing influence of Islamic Finance (IF) and its contribution in social impact and faith-based developments.
IF is based on the Islamic economic model which follows the principles of Shariah laid down by Quran and Hadith. Shariah literary means ‘a path leading to the water source’. Water symbolizes rejuvenation, calmness, fluidity, purity, knowledge and clarity. The fundamental concept in Islamic finance is – money has no intrinsic value in itself. It does not increase or decrease its value unless backed by any real assets. It is only a method to measure the worth of products and services. It is not valuable in itself thus no charge should be made for its use.
The main features of IF are the:
- Prohibition of Riba (interest)
- Prohibition of Gharar (speculation and chance)
- Prohibition of Maysir (extreme uncertainty) and
- Avoidance of Haram (unlawful activities and products)
- Loss and risks should also be shared just like profit between both financier and client.
- Explicit Contractual Terms
- Compulsory Zakat (Charity)
- Investment should have social and ethical benefits for the larger society.
The major difference between Islamic finance and conventional financing is loss and risk sharing:
“In conventional banking, the banker-customer relationship is that of a creditor-debtor. In Islamic banking, the financier acts as a partner/investor. The fundamental difference between conventional and Islamic finance is that of a debt contract as opposed to an equity contract. Conventional banking emphasizes profit maximisation, based on the assumption that individual self-interest will deliver overall societal well-being. Islamic banking, on the other hand, is based on the ethical and moral framework of the Shariah, and Islamic banks must incorporate both profits and social responsibility into their decision-making process.”¹
According to the Business Research Company, IF market size is expected to see swift growth to $12.45 billion in 2028 at a Compound Annual Growth Rate (CAGR) of 11.7%. Expansion of the Islamic finance industry, increase in the Muslim population, ethical and socially responsible investing, government support and regulation, and globalization of Islamic finance are some of the forecasted reasons for the rapid growth.² Apart from Muslim countries like gulf countries, Turkey, Iran and Malaysia, London is the first non-Muslim Islamic financial and cultural centre in the Western world.³ In Canada the federal budget
has introduced halal mortgages in 2024 however, it is still not yet a common form of mortgaging.
Social Impact Investment
The above-mentioned features make IF as a social enterprise and harbinger of creating an inclusive, ethical, more certain, explicit economy and socially more responsible. Impact investments are ‘investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial profit’.⁴ There is a wide spectrum between charity and business investments. “Impact investing is focused on those investors and businesses on the spectrum—those that are neither purely profit-maximizing nor those purely donating funds to charitable causes.”⁵ It varies from conventional business investors to CSR activities, socially responsible investors, social ventures, value-driven enterprises, non-profit organisations and conventional charities.
The objective of Social Impact Investment explicitly designed to achieve defined social goals while generating financial returns, with focus on measuring progress in both areas. Social Impact Investment is aligned within Islamic Finance. Islamic finance offers an ethical approach to public-private partnerships, creating an effective funding mechanism that benefits all stakeholders. It is a morally acceptable investment model within Islam because it generates wealth with fair means and fairly distributes the wealth in society. For example: In Malaysia, the Malaysia Building Society has utilized Islamic financing to deliver affordable housing to thousands of low-income families, fostering stable living environments and stimulating local economies. Meanwhile, the Islamic Corporation for the Development of the Private Sector (ICD) has spearheaded community development projects, financing hospitals, schools, and water treatment facilities, which have significantly improved health and education outcomes in underserved areas.⁶
It is to be noted that even for Islamic banks Sharia complaint experts are rare to find. Institutions in England being hubs for Islamic research and education centres are serving extensively in this field. However, as faith influenced philosophy and values Consulus does provide similar expertise. For example, Bank Islam Brunei Darussalam (BIBD), Brunei’s largest bank and flagship Islamic financial institution, engaged in the services of Consulus to help them transform its organisational culture and take faith-based experts to achieve their objectives of providing holistic Islamic solutions to spread its wings.
Largely, what Social Impact Investment desires to achieve is to some degree achieved by IF. IF goes beyond financial returns, nurtures justice, and fair distribution of wealth, creates resilient economies, uplifts the communities and lays the foundation of inclusive, ethical and sustainable economies. Both IF and Social Impact Investments are value-based investments as they share a set of values and philosophies with the company they fund. There are three areas of value-based investments where IF and Social Impact Investments overlap to some extent.⁷ According to UNDP-IICPSD:
Environmental, Social, and Governance (ESG): ESG principles are neutral across geography, culture, and religion, emphasizing human rights, environmental sustainability, and social welfare. Unlike Islamic finance, ESG does not exclude interest-charging financial institutions.
Socially Responsible Investing (SRI), on the other hand, actively filters out industries involved in extractive resources, unfair labour practices, and environmental harm. SRI takes a proactive approach, aiming to go beyond “do no harm” by intentionally eliminating industries or practices that conflict with its values. Similarly, Islamic finance excludes socially harmful industries such as gambling, arms manufacturing, alcohol, and pornography.
Faith-Based Investments: These are a subset of impact investing that aligns investments with the principles of faith-based organizations or individuals who prioritize their faith in their investment strategies. While this approach can be applied to any faith tradition, it is most commonly associated with Christian, Jewish, and Islamic investors. Notably, all Islamic investing falls under the umbrella of faith-based investments.
Zakat’s Contribution to World Peace
Other forms of faith-based financial support which is relevant in all major faiths are Sadqa (voluntary charities), donations, Zakat (annual compulsory almsgiving to purify wealth), Waqf (endowments), etc. The objective of these financial giving is to quickly alleviate the hardships of people by giving them quick cash. For any investments whether Islamic or conventional, there is an explicit expectation of financial gains however, charity, Zakat, grants, etc., do not have any such expectations. Charities, Zakat, and grants play important role in creating a positive impact on societies, but they do not return any benefits. Charities and donations operate in different frameworks from Social Impact Investments although the majority of charities and donations are faith-based and faith-influenced activities.
The annual Zakat pool is estimated to fall between US$200 billion and US$1 trillion, as reported by studies from the World Bank and IDBG (2016). Accurately assessing the total amount of Zakat distributed is difficult, as much of it occurs informally, with donors giving directly to recipients, as highlighted by the UNDP and BAZNAS. Additionally, Zakat is frequently provided with goods rather than cash. Participation in Zakat far exceeds that of commercial Islamic finance. For example, 98% of Muslims in Indonesia observe Zakat, according to the Pew Research Center, while Islamic banking holds only about 6% of the market share, as reported by the IFSB. Similar patterns are evident in other countries. With an estimated annual funding gap of US$2.5 trillion for achieving the Sustainable Development Goals (SDGs), as noted by the World Economic Forum, a potential funding source of up to US$1 trillion per year merits serious attention.⁸ This data indicates that if the amount raised by Zakat and other charities is properly organised it has a great potential to contribute to world peace. When the world is facing poly-crises in the name of religion and culture in 2022, the economic repercussions of violence on the global economy reached a staggering $20 trillion, representing 13% of the world’s GDP. This amounts to approximately $2,380 for every individual.⁹
Contribution in Faith-Based Dialogue and Peace
The 2023 Global Peace Index further revealed that global peace has declined for the 13th time in the last 15 years, with the average peacefulness of countries deteriorating by 0.42% over the past year.¹⁰ Alarmingly, investments in peace initiatives by organizations such as the UN have remained below $800 million from 2020 to 2024. Peacebuilding needs only “less than 1% of the money that the world is already spending on wars…”¹¹ This situation highlights the urgent need for an organised response to bridge the gap between faith-based organizations and the financial sector. Faith-based and faith-influenced financial resources remain largely untapped and difficult to access. Thus, there is a need to tap and organise these resources to tackle global polycrises.
In the field of humanitarian aid, the financial and operational support from the Gulf is leading in both regional and global conflicts. It is a point to be noted that humanitarian aid is a post-conflict engagement. While on conflict prevention engagements such as dialogue, peace activities, relationship building and mediation etc. Gulf still needs to push forward its boundaries. Investment and engagement in global interfaith and intercultural dialogue activities need special focus from the Gulf world.
In conclusion, the interconnected challenges of global peace, economic instability, and the repercussions of violence highlight the urgent need for innovative and collaborative solutions. Faith-based dialogue and financing present a powerful opportunity to bridge divides and foster peace between intersectional pillars of society such as economics, faith, media, society and educational institutions. Islamic Finance is emerging as a growing market with the increase of Muslim population and Muslim wealth. Islamic Finance being a faith-derived financing system also needs to focus on interfaith activities as it is essential for creating peace and also it will help to gain the trust and goodwill of the larger Muslim population and non-Muslim markets which will automatically enlarge the Islamic Finance markets. To lead the world in the mater of faith and finance, Gulf needs to invest more in faith-based dialogue activities. World leaders in Islamic Financing should lead the world market into faith-based financing to eliminate world poverty as they have been successful in doing in the Gulf region. At this historical global juncture when humanity is entering into the new age of convergence Gulf should not only generate wealth through Islamic Finance but it should also emerge as a leader of faith-based social impact investing in the world. It will amplify its impact, addressing poverty and fostering economic stability based on ethical and universal values.
¹ Andre Sheng, Islamic Finance and Social Impact Investing, Fung Global Institute, Dec 2013, Issue Brief 2013/08.
² https://www.thebusinessresearchcompany.com/report/islamic-finance-global-market-report#:~:text=Islamic%20Finance%20Market%20Size%202024,(CAGR)%20of%2011.6%25.
³ https://www.asiaglobalinstitute.hku.hk/storage/app/media/pdf/IB-Finance-IslamicFinance_ONLINE.pdf
⁴ NDP, Islamic Finance and Impact Investing, Istanbul International Center for Private Sector in Development, 2014, p. 9.
⁵ Andre Sheng, Islamic Finance and Social Impact Investing, Fung Global Institute, Dec 2013, Issue Brief 2013/08.
⁶ https://www.hejazfs.com.au/the-impact-of-islamic-finance-to-the-society/
⁷ UNDP, Islamic Finance and Impact Investing, Istanbul International Center for Private Sector in Development, 2014,P. 30-32.
⁸ Aamir A. Rehman, Francine Pickup, Zakat for the SDGs, UNDP, 2018 https://www.undp.org/blog/zakat-sdgs
⁹ IBID.
¹⁰ UN Peace Building “Why Peace Matters” https://www.un.org/en/peace-and-security/why-peacebuilding-matters#:~:text=According%20to%20the%20independent%20Global,income%20per%20capita%20in%20Africa.
¹¹ IBID.
Dr. Farha Iman
Global Head, DialogueCORE at Consulus
Dr. Farha Iman is the Global Head of DialogueCORE at Consulus, holding a doctorate in ‘Philosophical and Theological Foundations of Dialogue’ from Sophia University Institute, Florence. With a Master’s in ‘Conflict Analysis and Peace Building’ and a background in Social Work, she has over a decade of experience in faith and cultural dialogue.
She co-founded and served as General Secretary of Sarva Dharma Samvaad and is a certified dialogue trainer. A recipient of the KAICIID Fellowship (2019), she was also the youngest researcher on a UNESCO-Arigatou project studying interfaith dialogue across 50 Asian and Oceanian countries.
Dr. Iman has presented her work globally, delivering lectures and participating in international peace initiatives across India, Singapore, Thailand, Bangladesh, Sri Lanka, Pakistan, Turkey, Romania, and the USA.