Paper Sample on Islamic Investment: Linking Religion & Secular Practices

Introduction

The Islamic investment policy is always recognized for its deep linkage of religious and secular practices (Colborn, 2019; Ross, 2020). As such, Islamic finance is grounded in the religious beliefs on which Islam is built. The interest in the Islamic investment model began in the aftermath of the great recession. Whereas the economic slump immensely rocked the western world, the Islamic countries appeared to remain shielded from the impacts of the recession. The secular investment sector was thus curious about the considerable stability in the Islamic investment sector as the rest of the world was sinking into the recession. Studies thereby continue to investigate the differences between the Islamic financial models and the secular approaches. In this specific study, the author intends to investigate the grounding of the Islamic investment on Shariah laws and the interpretation of risk. The analyst attempts to identify the various insights that the secular banking and financial sector may acquire from the Islamic economic jurisprudence. It is hypothesized that the unusual yet socially-responsible financial models and risk interpretation in the Islamic culture should be adopted by the rest of the banking world to replace the predatory, self-centered financial practices that created the great recession.

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Review of Literature

Shari'ah's knowledge and the seriousness of financial institutions to the religious values are the critical components of the Shariah-compliant Islamic investment practices (Khan, 2019; Khanam & Ullah, 2014). The banking and general investment sectors must locate shariah compliance as the foundation of their practices. The compliance to responsible financial practices in Islam is founded on the teachings of both the Holy Quran and the Sunnah as established by Muslim theologians and scholars. Corporate institutions that represent the financial interests of Muslim clients must, as such, stay sensitive to the Islamic investment guidelines. These institutions should understand the prohibited investment concept of Gharar in its various forms (Al-Saati, 2003). While the value systems and principles in the Islamic religion are also present in other religious and morality systems (especially the three notable Abrahamic religions), Islam proactively includes the moral values in their client-institution financial relationships. In this review of the literature, the author intends to identify the various notable guiding principles in Islamic finance and their applicability in overall investment. The interpretation of risk and uncertainty in Islam shall also form an essential component in this review and shall be used to question the highly profit-oriented popular investment culture.

Understanding Islamic Investing

Business engagement and the sharing of economic prosperity is ultimately encouraged in Islam (Tahir & Brimble, 2011). The passage below from the Holy Qur'an, for instance, confirms this assertion - And when the prayer is finished, then may you disperse through the land, and seek the bounty of Allah (through trade, business, and lawful professions) and celebrate the praises of Allah so that you may prosper (Surah Al-Juma 62:10).
As such, investments are encouraged by Islamic laws and values (Colborn, 2019). These investments must, however, stay in line with the provisions of these laws. Muslim investment behavior must thereby remain conscious of Islamic culture and teachings. Some of the sources of these teaching in Islam are described in the following section.

Application of Shariah Laws in Investment

Sources of Shariah Laws

There are traditionally two primary sources of Islamic laws; the Holy Qur'an and the Sunnah (Colborn, 2019). The figh is thereby a terminology that denotes Islamic jurisprudence. The Holy Qur'an is taken to pass the word of Allah himself and must, as such, be followed by every Muslim to the best of their ability. Besides, the teachings through the hadiths of the Prophet Muhammad (peace be upon him) in Sunnah also provide guiding principles for living in Islam. In addition to the primary sources of Islamic law and figh, there are a variety of secondary sources of law that guide Muslims with inspiration from the primary sources. Learned Muslim jurists and scholars often provide this set of secondary rules. Ijtihad refers to how the jurists pass the consensual secondary opinions on the figh with considerations to the Qur'an and the Sunnah. Ijtihad is achieved in Islam through Ijma (scholarly interpretation of provisions in the primary sources) and Qiyas (reasoning by analogy).

It is important to note that the secondary sources of law in Islam (Ijtihad) are grounded on informed by the primary sources. They are as such an extension and explanation to the general provisions in the Sunnah and the Qur'an principles. These secondary sources of figh thereby provide clarifications to the unclear provisions of the laws expressed by the religious documents. This combination of the primary and secondary sources of Islamic jurisprudence are, thus essential in assessing the permissibility of various financial transactions (mu'amalat).

Applying Islamic Law to Assess the Permissibility of Investment Decisions

While conducting economic transactions that aim to return profits, the primary Islamic laws, as well as Ijtihad, require the investors to respect the foundational values and ethics of religious morality (Onishi & Kobayashi, 2018). As such, the provisions of the Qur'an and Sunnah around the teachings of peace and care for the neighbors must be respected throughout the transactions. To understand the principles that govern mu'amalat figh, three significant considerations must be made. First, shariah-compliant investments depend significantly on the purpose of the company to which the individual or business invests in. According to the teachings in Islam, Muslims are not permitted to invest in companies whose activities are non-compliant to shariah principles (Azmat et al., 2014). Such prohibition to the companies for non-compliance with the shariah laws extends to the entire supply chain. An engagement by a Muslim in a transaction with a non-complying company amounts to the participation of the individual in a forbidden activity (Khan, 2019).

The second consideration for Islamic investment depends on the interest returns that the individual intends to earn in return for the investments (Ross, 2020). Strictly speaking, Islam does not allow for payment or receipt of interest. As such, a business that attracts interests could be considered as haram (Alam et al., 2017). However, as we shall discuss under the concept of gharar, the interest-earning and reception laws in Muslim-owned businesses have continued to experience a little relaxation (Al-Saati, 2003). Despite the relaxation, though, the business owners must only engage in low-interest risks.

Furthermore, the dividends paid from such interests must not be retained by the investors. Instead, the interest income should be distributed to the population and the people in need. This distribution of interest (also referred to as dividend purification) allows the business to stay in compliance with Islamic principles (Azmat et al., 2014)

Lastly, for an investment to continue respecting mu'amalat figh, the company must also possess illiquid assets as a majority of the company's asset base. Such calls for illiquidity compliance allow the company's long-term existence to be guaranteed and the losses in the organization to be accounted for. In the process of organizational illiquidity agreement, partners in the venture must also agree to the joint profit and loss sharing contract, termed as Musharakah in Islam. In the financial sector, Musharakah allows both participants in the transaction to share equally in the returns and losses according to a predetermined ratio (Onishi & Kobayashi, 2018). As such, none of the sides in the financial relationship becomes shortchanged from the transaction (Moriguchi et al., 2016).

Understanding Gharar in Islamic Investment

Gharar is often applied in modern Islamic lexicon to loosely imply the risks and uncertainties in financial transactions (Al-Saati, 2003). Gharar, however, is a compound term that may be associated with uncertainty, risk, or deception in business or general societal interactions. As an overall rule, excessive uncertainty is strictly forbidden in Islam. Such risky investments, such as gambling (Maysir), short selling, and riba (exploitative gains), are strictly prohibited in the Holy Qur'an. During the transactions, the levels of such risks are evaluated and legitimized depending on the level of misunderstanding between the parties (Alam et al., 2017). In its strict definition, the concept of gharar in Islamic finance runs contrary to the openness and certainty values of the Islamic religion and business dealings.

Conclusion

As observed through the discussion on Islamic investing, we notice the overwhelming concern in the Islamic investment culture on morality in financial transactions (Ross, 2020). For this proposed study, we shall empirically and theoretically investigate how these principles of profits and loss sharing as well as shariah-compliant (Usmani, 1999). In the next section, the author briefly analyzes the unusual approach to gharar and the instances when the gharar could be permitted in Islam.