Jamal Arif Jamaludin
As the tenth anniversary of the 2008 global financial crisis dawns upon us, central banks the world over are pressing forward with increasing interest rates, gradually tightening each idiosyncratic monetary policy.
The decade’s old crisis has led to many economists to advocate for a more sustainable method of investing. Consequently, there is an increasing number of guidance and frameworks that outline the process of investing sustainably. The emergence of Halal Investing is notably one of them. Similar to Sustainable Responsible Investing (SRI) or Green Investing, Halal Investing entails a sense of responsibility on the impact generated by investments, guided by Shariah ethics and values.
Proponents of Halal investing postulate that it encourages people to invest in a socially responsible manner and avoid industries that produce products which are potentially detrimental to society at large. Moreover, it is also advocated as a means of pushing the agenda of environmental preservation forward. However, there are those investors that believe Halal Investing is exclusively for Muslims or inferior to its conventional counterpart due to the industry’s tender age. Thus, this article heeds a moment to shed light onto the Halal Industry and explore its potential benefits to Muslim and non-Muslim investors in order to make a humble contribution towards alleviating this predisposition.
In hindsight, it is widely accepted that overleveraged fiscal conditions had destabilized the markets in 2008, driven by the search for higher yields and short-term returns through the creation of exotic financial derivatives such as Mortgage Backed Securities, Collateralized Debt Obligations, and Credit Default Swaps. Eventually, the debt bubble that formed had burst causing a financial meltdown. How the mechanisms had faltered is outside of the scope of this article. However, the inconvenient truth is that not much has changed in terms of the market practices 10 years on.
The level of global debt has skyrocketed during the period of accommodative monetary policy. America leads with $21 trillion worth of debt and is contemplating raising its debt ceiling due to further tax cuts in its fiscal policy. The coherence between the real and financial economy has deteriorated, further blurring the prognoses on the global economic conditions. At the time of this writing, the longest bull run in history has perched the commonly benchmarked index S&P 500 at 2816.3 bps, which provided a euphoric 22% return in 2017. However, signs of bearish conditions have emerged in 2018, with the S&P returns only at 5.23%, thus far. Despite the data, there is an incoherent consensus towards market conditions amongst investors with some insisting that the bull run will continue. Regardless, a wise investor should be prepared for the potentially steep correction by diversifying their financial portfolios.
Islamic scholars and industry participants have long strived to highlight the benefits of Islamic finance and Halal Investing as an alternative investment strategy. The conservative nature of investments and strict compliance to Shariah law has been posited as a source of resilience towards financial meltdowns. The rise of ethical and sustainable investing has also increased its relevance amongst green investors as the issue of climate change grows ever more serious. Thus, we will here attempt to shed light on the benefits of Halal Investing as it comes to the fore amidst the growing interest amongst Muslims and non-Muslims alike. This is supported by the World Islamic Economic Forum’s projection that the global Halal Economy will grow to $6.4 trillion by the end of 2018.
The Benefits of Halal Investment
Although the pool of Halal Investing might be smaller than its conventional counterpart’s due to the aversion to non-Shariah compliant industries, there are a wide range of halal products and services that exhibit promising growth. According to Reuters, the halal food industry alone will be worth $1.6 trillion by the end of 2018 and is anticipated to reach $2.1 trillion in 2030. There is a similar increasing demand for halal alternatives that traverse sectors, particularly in parts of the world with a rapidly growing Muslim population. Intuitively, it is apparent that an increasing number of companies are tapping into the Muslim market, further spurring new opportunities for investors to unlock its inherent value. In the financial markets, there has been rampant innovation in Shariah Compliant Financial Derivatives. The Halal Industry has its fair share of ETFs and Cryptocurrencies that operate within Shariah parameters so as to safeguard the interests of the investors and stability of the wider market.
In 2017, the global Islamic ETF market size stood at $300 mil and is expected to see growth as countries such as Malaysia and the UK strive to meet its growing demand. There is vast opportunity for Muslims and Non-Muslims alike to invest in Halal Industries and ultimately contribute towards establishing global links towards fostering the development of a more sustainable global economy.
As a diversification tool, the coexistence of Islamic Finance and Conventional Finance in the age of globalisation mean that both are inevitably correlated, as posited by studies such as those of Obiyathulla I. Bacha, Buerhan Saiti, and Mansur Masih. However, the two are not congruent. Advocates of Halal Investment argue that Islamic financial products are better insulated from a market upheaval due to their rigorous compliance prerequisites such as the exclusion of highly leveraged firms, limits on interest based leverage, exclusion of financially complex and intensively structured products, and ethical and ratio screenings. Despite the fact that Islamic and Conventional Financial markets are not mutually exclusive of each other, diversification via Islamic products have the advantage of risk reduction as they are less exposed to leverage effects. Scholars found that the inclusion of Islamic investments would decrease the portfolios sensitivity to international contagion crisis during turbulent economic periods as there is limited exposure to volatility and leveraging.
Moreover, Halal Investing promotes a disciplined investment process that ensures in-depth security research and monitoring. Thus, it attempts to mitigate the underlying factors that induce financial malpractice. Moreover, the emphasis on low debts by Islamic screens facilitate risk mitigation. Consequently, it dissuades short-term speculation and encourages longer planned holding periods and close scrutiny of company financials. The induced longer holding periods translates into lower stock turnover, which also minimizes portfolio trading expenses, such as broker commissions, while increasing tax efficiency by avoiding rapid buying and selling of securities that can generate taxable capital gains.
In addition to the inherent characteristic mentioned above of Halal Investments, it has also garnered the attention of ethical investors in the wake of increasingly pressing climate change issues, as it is in line with the aim of ensuring the longevity of the environment rather than short term profit. Concurrently, there is a growing movement that looks towards harnessing the power of financial markets as a driving force of good practice and social betterment. Hence an emphasis on the creation of value that benefits companies, communities, as well as the environment.
Halal Investments avoid investing in industries that potentially cause harm to the topography of the ecosystem, whilst reducing the propensity of exuberant wealth concentration through encouraging the efficient use of resources, value creation, and wealth distribution. The values so propagated is coherent with non-Muslim standards and guidance such as the UN Global Compact’s Sustainable Development Goals. The congruity between Islamic and Conventional initiatives further proves their interoperability regarding value based investing. It supports the notion that non-Muslims stand to benefit from the positive ripple effects, whilst creating opportunities to work in synergistic harmony towards social and environmental betterment.
It is evident that the values that guide Halal Investing appeals to all investors regardless of religion. This article reiterates that Halal Investing is a readily available means of diversifying investment portfolios to mitigate the effects of a financial downturn. It is also evident the momentum in growth supports the notion that the industry is able to provide investors with the same returns as its conventional counterpart in the long run.
Moreover, the merits of Halal Investment go beyond the financial realm as it is in line with other sustainability initiatives that strive towards building a sustainable future- financially and environmentally. It promotes viable means of enriching the lives of the wider community whilst delivering financial profitability. As the global economy steams past a decade of financial recovery, Muslim and non-Muslim investors must realign themselves to ensure a collective move towards a financially stable and sustainable future, in which Halal Investments is poised to play a pivotal role