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Sharia-compliant investment is the investment approach associated with Islam, Sharia being the set of rules (or  ‘path to headwater’) that governs the lives of Muslims.  It seems to be emerging as one of the key trends in the financial services sector, and indeed one of the few areas of substantial growth in these troubled times.  Some also suggest that the key tenets of Sharia are roughly equivalent to the SRI investment approach.

Within the last week alone there have been news stories about a new Sharia-compliant fund investing in water, the CFA Institute bringing a Sharia investment expert on board in response to market trends and the story of a Sharia-compliant deal gone bad, leaving no Sharia-compliant way out.  But what is Sharia-compliant investment? Why is it suddenly so fashionable? And is it a subset of social/ethical investment?

Sharia compliant investment is an evolving set of rules that are constantly under discussion, both in banks and amongst scholars of Islam.  However, there are a few principles that are universally upheld:

• The payment or receipt of interest is prohibited; interest is considered to be exploitative because all risk is seen to be with the borrower not the lender. Wealth can therefore only be generated through legitimate trade and investment in assets.

Example 1: In an Islamic bank, the bank itself and its customers share any profit or loss on investment.  If you have a savings account in an Islamic bank you will not be earning interest but instead sharing the profit of the investments made on your behalf.  The risks of investments are also shared between bank and customer, but on agreed terms.

Example 2: If you want to buy a car but don’t have the cash, you apply to the bank which, if it approves, buys the car itself and then sells it to you for a marked-up price but in instalments… it looks like interest but it isn’t.

• No financial involvement in alcohol, gambling, pornography, abortion, human cloning, defence, conventional banks or insurers is allowed. Investment in pork-related industries is also prohibited, as are most investments in the entertainment industries.

There are many more rules attached to Sharia which are observed in some institutions (and households) but not in others.  These are too numerous to go into now but there’s an excellent article in an old issue of the London Review of Books that discusses some of them.

So why is it in all the papers now?

The main reason is that financial institutions have realised that the world’s 1.3bn Muslims are under-served by current financial infrastructure.   To put it another way, the global Muslim population represents a huge and relatively untapped commercial opportunity-  in the form of both ‘everyday’ British Muslims who won’t use or would prefer not to use mainstream banking services, and also of representatives of oil-rich Muslim nations.

Another interesting an appealing point is that Sharia banks have emerged relatively unscathed from the recent tumult; the principles list above prohibited their involvement in the financial entanglements that brought down many other banks.
So how is it social investment? Firstly, the screening approach (excluding certain industries according to ethical criteria) is very similar to the traditional SRI approach.  Secondly, the preference for asset-backed deals and an aversion to high levels of debt means that deals seem to be subject to greater due diligence than they otherwise would be, and therefore avoid sub-prime situations.  Lastly, one really does get the sense that this is a ‘thinking investment’; that something other than greed and gambling holds considerable sway over the direction in which money is invested.

I wish that I could write as well as Jeremy Harding of the LRB, but I can’t so I will finish with a quote from him on the subject:
“[The Islamic approach is that ] Money… is an object of caution rather than superstition – and, in spite of its dangers, a useful tool for anyone who wants to build a respectable world, with God’s instructions pinned to the wall above the workbench.”

What do you think?
All the best

Julia

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Having spent a day out and about yesterday I came back to the office to find that two exciting things had been announced in the world of social investment. Read more

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So everyone in the world of social business and enterprise is at the Skoll World Forum, apart from me.  As I sweep the fireplaces/write blog posts I am, nevertheless, feeling very happy.  For today marks the formal launch of the rather beautiful ClearlySo, the new website that replaces socialinvestments.com (more on the name change later on).

ClearlySo is the first marketplace for social business, enterprise and investment, solving practical problems for social entrepreneurs. It is being launched on a panel at Skoll with, among others, the Rockefeller Foundation, which will be speaking about its $30 million commitment to helping to build the infrastructure for social investment worldwide. ClearlySo is a key part of this infrastructure in the UK–with international aspirations.

For those that mourn socialinvestments.com, I would like to offer a few words of comfort.  The new site was built with the same principles in mind: honesty, transparency  and pragmatism.  The only difference is that it is now much more useful and usable (and it’s rebranded). As well as  the investment service we now have a list of professional service vendors, a jobs board, a discussion forum and some really exciting google maps, showing the UK social businesses listed on the site.

Please have a look and let me know what you think… who needs fairy godmothers?

Julia

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As investor interest in social investment has grown and as the sector continues to professionalise, there have been increasing calls for a universal way to measure, communicate and compare social return on investment.

Apples vs. cars

It is relatively easy to state the number of lives that have been saved, cars taken off the road or organic apples sold, but the matter becomes more complicated when someone (an investor, for example) wants to compare the social return of one company with that of another; suddenly it becomes very subjective.  The obvious way to avoid the problem of subjectivity is to somehow calculate the real financial value of a social impact; to monetise it.

SROI

This approach is called SROI, which means Social Return on Investment. It could involve either calculating the financial value of employing someone (=the cost to the state of that person remaining unemployed) or the financial value of avoided carbon emissions (=the cost of accelerated climate change). See this rather long video from London Business School on SROI.

… in practice

I have come across two rather nicely designed tool kits (nef and the Social e-valuator) and a lot of waffle when researching SROI and other kinds of social impact assessment.  But the most interesting and perhaps educational pieces I’ve read have been the real social audit reports of real companies.

Hill Holt Wood: Can only find the 2005 report for this, but it’s a keeper

Good Energy: This the latest annual environment report, published in 2007, for the UK’s only supplier of 100% renewable energy

Vision Spring & Root Capital: Alas, I couldn’t find any full reports on these guys, but did enjoy this article on measuring impact and how these two companies go about it.

…and still in progress

Meanwhile, in June 2008 the Office for the Third Sector announced the launch of a three year programme of work to come up with ‘a standard tool to measure Social Return on Investment (SROI) of third sector organisations’.  More updates in 2011.

Please let me know if I’ve missed out anything important from this post.

Julia

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CEO of socialinvestments.com Rod Schwartz was interviewed last week by iBall, the online video channel for Interactive Investor. Much of the interview is in response to a blog that Rod wrote on Philanthrocapitalism and Davos.

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This is the image that most  people had of social investors (if they had any at all) when I started at Catalyst two years ago- people who invest for social rather than financial return, and make strange decisions about footwear.  Curiously, these are relatively quiet group most of the time- I can find hide nor hair of them on the internet and I’ve certainly never met one at a networking events.  But some CEOs have told me this changes at AGMs… again, I’m yet to see evidence.

If you are true blue socks and sandals investor, who maybe invested in Cafedirect or Traidcraft (or other similar enterprises) from the beginning, I’d love to hear about your experiences, particularly on whether you felt treated like an investor or like a donor… and if you cared?

Julia

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This post is about a group of investors that could be investing socially but are ignored by the investment community- rather than about a group that are currently investing. This post is about young investors. Read more

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Continuing the ‘Who is the social investor?’ series of posts.  Please also have a look at the Introduction and part 1, on High Net Worth Investors.

Charities and family foundations are, in my opinion, a surprisingly reluctant but potentially very powerful group of social investors.

However, there has, in the past, tended to be a disconnect between the charities  and those financial institutions that managecharity endowment funds (as illustrated by September’s furore over Church of England investments and short selling) and sometimes an absolute conflict between an organisation’s charitable activities and its investments (see, for example, this article on the Gates Foundation’s indirect investments in PetroChina). Read more

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In October 2007 ebay launched Microplace, a peer-to-peer (P2P) online lending platform regulated by the Securities Exchange Commission (SEC), the US equivalent to the FSA*.  Unlike at Kiva  (see my last post on Kiva), Microplace lenders can earn interest of between 1% and 4% on each loan… the mantra of the site was (when I first looked at it) ‘earn financial returns while having a positive impact’.  This has been since been distilled down to ‘Invest wisely.  End poverty.’  They make it sound so easy!

Microplace’s model varies from Kiva’s in one other, very significant, way: It securitises the debt before selling it on to the investor, meaning that risk is diversified.  This difference in business model comes across very clearly in the branding; at Kiva you really feel like you are connecting with an entrepreneur, whereas at Microplace you feel like you are making an interesting and innovative investment, but not necessarily a ‘human’ one.  Less of a fuzzy feeling, more of a financial return… will this always be the way?

*P2P lending sites are going through tough times at the moment, with US based companies Prosper and Loanio falling foul of SEC rules.  The problem is that these companies didn’t register as companies that sell investment products, but tried to get away with being unregulated matchmakers.  However, since ‘the intention for lending [on these sites] is to expect a certain rate or return’, the SEC categorises Prosper and Loanio loans as an investment, meaning that both sites must register with the commission before they can resume operations (another US P2P lending site, Lending Club, has done this successfully).  Microplace is already registered with the SEC and Kiva, given that it doesn’t ‘do’ interest, is exempt.  Phew.

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It’s easy.

Well, that’s an exaggeration but it seems easier at the moment to ‘invest’ in Pakistan than in Peckham. Much of this funding innovation is thanks to two parallel trends in two very different parts of the world; the establishment of microfinance as an alternative to aid in the developing world and the rise of the silicon valley entrepreneur in California. And Kiva.org is probably the most successful offspring of these two trends. Read more

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