EMERGENCE OF ISLAMIC INVESTMENT: Issues and Practices

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EMERGENCE OF ISLAMIC INVESTMENTIssues and
Practices

• Ausaf Ahmad
• Presentation at
• IBF-NET COURSE ON ISLAMIC FINANCE
• At
• The Hotel Palm Grove
• Chennai
• October 04 2008

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In the name of Allah, The Most beneficent, The
Most Merciful.
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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.

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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)

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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

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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?

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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.
• Shouldnt I channel my investment differently.?

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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 ones own conscience
• The same provides justification for Ethical
  Investment

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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.

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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.

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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.)

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Performance of Religious Funds(Grading by
Morning Star Managers, 2006 data)
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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.

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Islamic Investment

• An Investment is considered Islamic if it is made
  in accordance with the Islamic principles.
• Shariah Compatible Investment
• The companies are screened on the basis of some
  index to determine their Shariah compatibility.
  According to Nisar, 61 Indian companies are
  Shariah Compatible.

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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 gt33 Company is
  ruled out.

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Financial Screening

• FF2 Cash interest bearing Securities/ 12
  months average Capitalizationgt33 Rule out
• FF3 Accounts Receivable / 12 months average
  capitalization gt33 Rule out
• In order to qualify for investment a company has
  to pass all three tests.

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Moral Filters

• The Companies producing prohibited items like
  pork, alcoholic drinks etc. are ruled out.

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Ethical Indices

• Dow Jones Islamic Market Index
• Standard and Poor Large Cap World Shariah
• S P Small Cap World Shariah
• S P UK Shariah
• SBI Resurgent India Opportunity Fund
• UTI Off Shore Shariah Compliant Fund
• Dow Jones Dharma index
• Parsoli Islamic Index (PIE)
• East Wind India Islamic Index

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Parsoli Islamic Equity Index (PIE)

• Shariah Compliance
• Liquidity Actively traded stocks
• Comprehensive coverage across the industry More
  than 5000 Indian companies included.
• Consistent Methodology

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Business Screener
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Mixed Business Screener
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Financial Screener
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Financial Screener (Contd.)
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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.

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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.

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THANK YOU VERY MUCH