Islamic investing has been growing in popularity for years although many have little or no
understanding of the true benefits that this form of investing can have for the individual and on
society as a whole.
From centers such as London and Kuala Lumpur, the industry has grown to now stand at over
USD 3.5 trillion. COCOA is a leading Islamic robo-advisor and below we give you our 5 reasons
why everyone should consider the ethical benefits of Islamic investing.
Promotes financial inclusion
The World Bank estimates that over one-third of the world (1.7 billion people) remains unbanked;
this means they can not access useful or affordable financial products such as money transfers,
savings, investments or insurance. Traditional banking products are built on the concept of interest payments for deposits of money. As this is prohibited under Shariah Law, therefore those of the Muslim faith have been
restricted from accessing even basic bank accounts. The offering of Islamic banking products to
a wider market will increase financial inclusion, which in itself is a very good thing, and increase
the pool of savings joining the local and global economy.
Reducing investment in harmful products and practices
Sharia investment practices forbid investments into certain industries and activities that are
considered harmful to society. These include gambling, tobacco, firearms, and speculation for
example. This means investment will only be directed only to those companies that are
considered to be positive for society.
The sharing of risk
Conventional financial products typically look to profit through interest payments from a
borrower who is solely liable for any risk. Islamic finance takes a different approach and views
transactions more of a partnership and therefore presents a fairer system of proportionate
sharing of profit and loss between the lender and the beneficiary.
Encouraging stability
The process of careful assessment and considered decision making present in Islamic finance
means that it is not just the pursuit of profits that are the basis of a transaction. Many
companies would be considered too risky or unethically sound to be considered for investment,
and by regularly performing audits and analysis; Islamic finance helps to reduce the risk in the
market by only investing in stable and ethical companies. This practice also encourages
companies to act ethically if they wish to access new investment from the Islamic financial
industry.
Accelerating economic development
Islamic investing is still very much about creating profit and growth just with a strict framework
of ethics that guide decisions. Companies are selected to receive investment due to their
potential for success, but also based on their governance. Islamic investment managers are also
competitive and aim to out-perform their peers in order to attract more depositors who directly
benefit from positive performance. If an investment manager performs well by selecting the
right investments they will have more money to invest in the future and hence be more
profitable. In contrast, a conventional bank offers only a set interest rate to their depositors and
therefore it is far more likely this money will be withdrawn, as there is no other upside present, or
easily moved to a slightly more attractive rate if presented.