Defining Islamic impact investing
Islamic impact investing is a sharia compliant investment that covers a range of financial instruments, in various industries and geographies and with a focus on positive impact (Table 1).
|sharia 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…) 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|
Table 1. Perspectives of impact investing
The “return versus impact” paradigm
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 tails 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 return). In between, there are different combinations of “risk adjusted returns” and “impact” investments (Figure 1).
Fig. 1. Investment spectrum from philanthropy to financial return seeking objectives
Breaking the “return versus impact” paradigm
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 tradeoff between impact and financial return. I personally argue that Islamic finance has the potential to reconcile the impact and return perspectives.
Islamic finance and impact investing: “birds of a feather flock together”
Islamic finance has the legitimacy to play a leading role in impact investing by bringing a fresh perspective to this blossoming industry. First, the ethical perspective is natively built into the DNA of Islamic finance. Second, Islamic finance is inherently embedded into the real economy and can be easily integrated into different sectorial ecosystems. Third, Awqaf and zakat institutions have the necessary levers to channel capital to “below market return” projects through subsidizing or guaranteeing schemes. Fourth, 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 “sharia 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 (Organization of Islamic Cooperation) countries. Taking the Islamic impact industry to the next level requires combined and coordinated efforts from asset owners (Islamic finance institutions, Awqaf & zakat funds, institutional investors…), asset managers (investment advisors, Islamic finance institutions, government investment programs), demand side actors (social enterprises, micro entrepreneurs, Islamic microfinance institutions) and service providers (Research institutions, standards setting bodies, training providers, consultants…). Most importantly, these efforts have to converge towards a clear impact investing vision that the industry still needs to clarify.