Social Finance and Islamic Finance - Two Sides of the Same Coin?
Having developed a keen interest in Islamic Finance while I was at the Cass Business School in the UK, I returned to Toronto only to be disappointed with the lack of activity in this area. Given that Toronto is the third-largest financial services centre in North America and that Canada has a larger Muslim population as a share of the total population than any of its North American counterparts, I was surprised to see that more was not being done to position ourselves as a Western hub for attracting Islamic investments. In my quest to learn more about the industry here, I stumbled upon the work being done within the Social Finance sector, and I could not help but notice parallels between the two.
So what's the connection between Social Finance and Islamic Finance? Well, if you read through the purpose of Islamic banks as stated in 1990 by the International Association of Islamic Banks (IAIB), you might be able to see it. An excerpt taken from the statement reads:
"Profitability--despite its importance and priority--is not the sole criterion or the prime element in evaluating the performance of Islamic banks. They have to match both between the material and the social objectives that would serve the interests of the community as a whole and help achieve their role in the sphere of social mutual guarantee."
If many Islamic Finance innovations today can focus on deriving the most sophisticated Shariah (Islamic religious law) compliant versions of conventional financial instruments for corporations, then why can't we see that same level of innovation to finance small-businesses and social entrepreneurs? The Canadian Social Finance sector has been attempting to define itself and structure innovative financial products and social capital markets to meet the growing demand from today's businesses engaging in social and environmental pursuits. It is my belief that this sector can learn alot from how the Islamic Finance industry has structured and positioned itself globally. Furthermore, by partnering with organizations such as Ittihad Capital, players in the Social Finance markets stand not only to gain from creative financial engineering knowledge, but can also potentially access a highly lucrative source of funding that has until now remained untapped by them.
One of the biggest setbacks in making a case for Islamic Finance in Canada, and for that matter largely in the Western world, has been its embeddedness in religious principles. The stigmatization of Islam and the negative symbolism of words like 'jihad', 'fatwa' and 'Shariah' have played a large role in impeding the progress of this blended-value system of finance. However, if one looks carefully at the principles underlying Islamic Finance, one will uncover a great deal of similarities between it and the objectives of Social Finance. Therefore, it is no surprise that even though Ittihad Capital uses Shariah based financial instruments, none of its marketing messages mention 'Islamic Finance'. With 'Trust, Integrity, and Value' as its motto, the organization describes itself as a "Canadian leader in ethical socially responsible financial solutions".
For further reading, I recommend exploring the following:
- The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)
- Islamic Finance Advisory Board (IFAB)
- The Islamic Financial Services Board (IFSB)
- Islamic Finance in North America 2009
- An Introduction to Islamic Finance - Theory and Practice. 2007. Ed.: Iqbal, Z. and Mirakhor, A.