Islamic Fintech and ESG goals: Key considerations for fulfilling Maqasid principles
Introduction
The global financial crisis catalyzed a major re-evaluation of the relationship between society and the financial sector. Besides the immediate economic impacts from the crisis, it led to a breakdown of trust in institutions, including financial institutions that have been slow to rebuild. Many within the financial sector, including those who have joined the Principles for Responsible Investment (‘PRI’) (United Nations Global Compact 2015), recognize the challenges that confront shared humanity especially around climate change and inequality and are trying to find a solution by focusing on enviromnental, social and governance (‘ESG’) data. The rising share of asset managers and asset owners using ESG in their investment decision-making has contributed to a growth in responsible investment. Beyond the societal demand for alternatives, prolonged quantitative easing, low or negative interest rates and the thirst for higher yields have flooded investments into technology start-ups including Fintech companies to drive a new paradigm in financial services globally. With a greater faith in technology to disrupt old ways of working, Fintech is seen as more capable of delivering customercentric solutions that democratize the incumbents’ domination of how wealth is generated and ultimately invested.
Emerging trends in Fintech-enabled alternative finance, which includes channels and instruments emerging outside the traditional financial system, delivers an unprecedented opportunity to improve financial intermediation and increase access to finance. With widespread criticism of the mainstream Islamic banking and finance sector as either mimicking the conventional system, failing to achieve inclusive growth or both, industry stakeholders are turning to technology to show that finance can be done differently.
After justifying the overlap between responsible finance and Maqasid al-Sha-ria, we argue that the mainstream practice of Islamic banking and finance has been too one-eyed on formal compliance at the expense of substantive ethical outcomes. However, Islamic Fintech, despite considerable hype, cannot guarantee the realization of higher Sharia ethics without a clearly defined positive intention via an objective theory of change, strong long-term commitment from industry and regulatory leadership and ensuring objective measurement of its activities to validate realization of said intention. Taking lessons from Islamic Fintech case studies, we provide a theoretical framework for considerations that are a priori essential for Islamic Fintech, as purveyors of alternative Islamic Finance, to achieve Maqasid outcomes. We further propose recommendations for Islamic financial institutions, Fintech companies, regulators and other stakeholders who are integrating or who are considering introducing Islamic Fintech-enabled alternative finance solutions. The methodology deployed to form our argument and conclusions is an evaluation of theoretical and empirical literature and case study analysis.
Conceptual and contextual background
Responsible finance and investment
While arguably responsible forms of finance and investment have existed since the advent of economic activity, it is only in the 2000s that it has received focused attention and widespread support. While impact investing, or the targeted use of investment resources for sustainable outcomes, is a core aspect of responsible finance, consumer protection, financial systems regulation and financial education have also been recognized as essential, taking on lessons from the excesses that led to the global financial crisis. According to the United Nations Principles for Responsible Investment (‘UNPRI’) (2016), responsible investment is an approach to investment that explicitly acknowledges ESG factors and the long-term health and stability of the market as a whole. The central premise is that investment activities steered by the financial sector can help reduce harm from the excesses of our current post-industrialized (e.g. divestment from fossil fuels) and direct positive economic activity (e.g. investing into renewable technologies). The Global Impact Investment Network (‘GUN’) estimates that the market for impact investment is currently $502 billion (Global Impact Investing Network 2019b). The development of impact investment emerged from a recognition that not all investors are focused on achieving market-based returns. Some investors are exploring what leverage they have to sacrifice in financial returns in exchange for tangible social and environmental impacts.
Some fund managers are focusing in part or exclusively on impact investments, which differs from responsible investment by focusing on creating both a social or environmental impact alongside financial returns. Responsible investment is an approach that is most at home in the institutional markets. Institutional investors have a greater advantage to scale because they can more efficiently integrate ESG data into investment decision-making. Therefore, although it emerged from those concerned by the ‘niche’ appeal of socially responsible investment, responsible investment gained its foothold in the investment market on the strength of its positive financial impact (Clark, Feiner & Viehs 2015; Friede, Busch & Bassen 2015). The PRI, which were launched in April 2006, became a de facto metric for the size of the responsible investment industry. From 63 signatories managing $6.5 trillion in 2006, the PRI had reached 523 signatories managing $18 trillion by April 2009 and currently has 2,372 signatories managing a collective $86.3 trillion in assets (UNPRI 2019).
