iEco | Islamic Economics Journal

The Integration of ESG in Islamic Asset Management – A Practical Approach

Farah A'liyah binti Hj Amer Hishamuddin — 2024-05-29

Islamic finance and sustainable finance (ESG) have many overlaps including asset management activities. In Islamic finance, transactions should promote equality, social justice, inclusion, and economic prosperity while sustainable finance focuses on ethical and responsible financial practices. Investments in certain industries, products, and services are prohibited, whilst ESG investing may apply absolute rules such as the exclusion of harmful products such as alcohol and weapons. As such, the incorporation of ESG in Islamic Finance should be a natural pathway for progression in the growth of the industry. However, the Islamic finance industry is fractionally smaller than the conventional space. Filtering for ESG-labelled securities limits the investible universe further and may limit the ability to form a diversified ESG investment portfolio. This paper outlines a practical approach to incorporating ESG and Islamic finance in the asset management space and explores how fund managers have been incorporating ESG into fund management via case studies and industry practice. We explore the use of a systematic ESG overlay approach, which builds upon the investible sukuk universe to construct a portfolio in line with the asset manager’s strategic positioning. The approach of both Shariah filters and ESG risk ratings act as both blacklists and whitelists for securities, removing non-compliant securities and overweighting quality securities with differentiated and sustainable business models. The approach views ESG investing as a form of risk management and monitors these risks in the same manner as traditional financial risk management. A typical criticism of ESG investing is greenwashing within sustainability-labeled products. In this regard, the proposed approach utilizes the ESG risk scores of the individual issuers and is irrespective of any green or sustainability labels, offering a practical method for ESG investing in the Islamic space.

Achieving Economic Growth through Islamic Social Finance

Nurul Naqibah Izzati Binti Muhammad Faizul — 2024-05-29

Islamic Social Finance is deeply rooted in fulfilling the Maqasid Shariah through alleviating the poverty and suffering of the Ummah. Consequently, Islamic Social Finance holds the key to unlocking the door to economic growth and ensuring sustainability. In the pursuit of realizing all three goals of Brunei Darussalam Vision 2035, Islamic Social Finance has the potential to expedite the process of achieving these goals. However, the potential of Islamic Social Finance remains untapped as challenges and issues occur that hinder its development. In the context of nations and regions with a significant Muslim population, this paper analyzes the significance of Islamic social finance to stimulate economic growth. This study aims to clarify the effect of waqf as one of the Islamic social finance tools on economic growth by studying the key features that are essential to their implementation and effectiveness. To establish the theoretical foundations of Islamic social finance and its potential for driving economic growth, this paper employs an extensive literature analysis and creates a framework to identify the key elements within this area of study. To evaluate and analyze the relevant variables and determine their ability to influence the economy, data is collected from a variety of sources. By case study from Indonesia, it provides some suitable recommendations that focus on maximizing the potential of Islamic social finance to support the development of the economy. Hence, this further provides organizations in seeking ways to employ one of the Islamic social finance tools for sustainable and equitable growth with practical insights.

Brunei's Imperative Role: Catalyzing Islamic Finance Crowdfunding in ASEAN, Revolutionizing P2P, and Unlocking Equity Crowdfunding Potential.

Nurul Amalina Binti Suprem — 2024-05-29

This paper seeks to explore how Brunei Darussalam could emerge as a pivotal hub for Islamic FinTech, regardless of facing various challenges and limitation within the economic sphere locally and abroad. Brunei’s unique positioning within the ASEAN region, notably as the only absolute monarchy and a nation where Islam is the sole religion, offers a distinctive backdrop. Despite a population of only 400,000, which some might view as a limitation for FinTech growth, this paper argues otherwise. Brunei’s small population could be leveraged as a strength, allowing for easier management and effective pilot testing of FinTech initiatives. The recent uptick in both local and international success of Bruneian businesses further bolsters this argument. Financial stability and an increasingly significant role within ASEAN further enhance Brunei’s potential. Additionally, Brunei’s strict adherence to Halal principles and Islamic values, including the absence of clubs and public drinking – practices common in other ASEAN countries – uniquely positions it to lead in the Islamic FinTech sector, for example in the realm of the Halal industry.

Smart Contracts and the Possibility of Gharar

Nur Raqibah Rafaheh — 2024-05-29

Deriving from the rapidly evolving blockchain technology, smart contracts—self-executing contracts with terms and conditions embedded in code—present both opportunities and challenges for the world of finance. While these digital contracts promise efficiency and transparency, the study of their compatibility with the Shariah perspective remains a significant and largely unexplored area. This research was done by understanding the foundations of Islamic Finance and fundamentals of Smart Contracts from articles and other references to explore the potential avenues and challenges of integrating smart contracts within Shariah-compliant financial practices and to ascertain whether the characteristics and mechanics of smart contracts can align with the ethical, transparent, and fair mandates of Islamic finance or if they introduce elements of Gharar (uncertainty/ambiguity), potentially violating these principles. This paper finds that there are 4 common factors between Islamic Finance and Smart Contracts while there are 5 areas where they might be discordant which then may introduce Gharar. This paper also simulates scenarios to analyze possible Gharar introductions and offers ways how to mitigate these.

Optimising Zakat Fund in Empowering Mu’allaf in Brunei Darussalam

Muhammad Zul Hamzi Faiz bin Haji Mohd Zali — 2024-05-29

Within the unique socio-economic setting of Brunei Darussalam, the new Muslim converts which is known as Mu`allaf represent a diverse community with distinct needs ranging from religious education and social integration to economic stability. Mu’allaf individuals often find themselves on a reflective journey, marked by a transition into a new faith and the need for cultural integration. While the conversion is spiritually enriching, there will be challenges which include religious understanding and to assimilation into a diverse and vibrant Muslim community. Furthermore, these individuals may encounter economic difficulty during this transitional period, making it essential to address their socio-economic needs to ensure their sustainability as active members of the Muslim community. Zakat is one of the Islamic social finance instruments that embodies a core principle of social and economic justice in Islamic institutions. This conceptual framework aims to explore the multidimensional role of zakat as an instrumental tool for empowering and supporting the sustainability of mu’allaf community within Brunei Darussalam. The framework describes the specific requirements and nuances of the mu’allaf community. It emphasizes the importance of a needs-based approach that tailors zakat disbursement programs to encompass religious education, cultural integration, vocational training, and socio- economic support. The conceptual framework also underlines the significance of community engagement and support, in recognizing that empowerment extends beyond financial assistance to cultivate the sense of belonging and self-reliance among mu’allaf individuals. In conclusion, this paper’s intention is to the ongoing discourse on zakat’s transformative potential within the context of Brunei Darussalam and thus strengthen their faith, enrich their lives, and assimilation into the broader Muslim community.