FINC3301 Islamic Equities AND Social Investment PDF

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FINC3301 Islamic Equities AND Social Investment...

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KULLIYYAH OF ECONOMICS AND MANAGEMENT SCIENCES SEMESTER 1, 21/22 FINC 3301 ISLAMIC CAPITAL MARKETS GROUP ASSIGNMENT (FIRST DRAFT) ISLAMIC EQUITIES AND SOCIALLY RESPONSIBLE INVESTING (SRI)/ESG/SDGs PREPARED BY: GROUP 2, SECTION 1 STUDENT’S NAME

MATRIC NUMBER

Mohamad Khairul Amar Bin Zainudin

1714829

Muhamad Harith Akmal Bin Muhamad Azan

1723081

Nurul Aida Amanie binti Ismail

1724382

Puteri Nur Nadhirah binti Maharami

1728166

Tengku Haziq Aqwa bin Tengku Mohd Anuar

1919565

SUBMITTED TO: DR. NAZROL KAMIL BIN MUSTAFFA KAMIL

DATE OF SUBMISSION: 22nd NOVEMBER 2021

TABLE OF CONTENT

INTRODUCTION Every economy needs money, and stock exchanges provide it for companies.For a Muslim, the main benefit of investing in Islamic equities is the assurance that the funds would only be utilised to acquire Islamic assets. Non-muslim are interested in Islamic companies, demonstrating that the benefits of investing in Islamic businesses go beyond religious reasons. Investing in Islamic stock funds has the following advantages

Transparency is the first. Investors in Islamic equities funds want the highest level of openness. For instance, in order to adhere to Islamic ideals, the administration of a fund must be completely transparent about the businesses and organisations in which it invests. Second, there is a benefit to financial screening. The financial health of a firm, especially its debt burden, is critical for assessing whether stocks are sharia-compliant. Islamic equity funds steer clear of businesses with a high debt load. As a result, Islamic funds may be seen as more cautious and risk-averse than some conventional equities funds.

Then there's the matter of diversity. Investing in a diversified fund, whether Islamic or conventional, decreases the danger of losing money in the event of a tragedy, such as a company bankruptcy or closure. Finally, there is liquidity. For the Islamic investor, liquidity is an advantage of investing in a fund versus a fixed-term investment. When circumstances change, it is significantly simpler to liquidate an investment in a fund than than an individual. Bear in mind, however, that Islamic assets (such as Islamic funds) are sometimes less liquid than conventional assets. The first concern is Mudaraba's property. A financier lends money to an entrepreneur who is in charge of an economic activity such as real estate development, company management, or joint venture management. When both parties to an economic transaction profit, the financier loses money. When a loss happens, just one party suffers a financial loss. As a result, the entrepreneur squanders his or her time and effort. However, the entrepreneur is responsible for the financial consequences of his or her own negligence. Both parties agree to invest in a joint venture project or property under the terms of a musharakah contract. Both parties are engaged regardless of whether the activity is lucrative. In the United States, sukuk are often referred to as "Islamic bonds." However, unlike conventional bonds, sukuk benefit one party at the expense of another, and so cannot achieve social justice. Sukuk are certificates that indicate an investor's ownership in a physical asset, service, project, company, or joint venture. They are issued by financial institutions to

investors. The assets of a sukuk must conform to Islamic law.

Socially responsible investing (SRI) is an investment that is regarded as socially responsible due to the demands of the sector. Socially conscious investing is a common issue. Socially responsible investments may be made directly in companies or via mutual funds or exchangetraded funds (ETFs) (ETF).Investing in firms that manufacture or sell addictive drugs (including alcohol, gambling, and cigarettes) is not considered socially responsible.

ESG investors go beyond the statistics to identify significant risks and development opportunities. ESG data should be included in yearly or independent sustainability reports. The Sustainable Development Goals (SDGs) promote peace and prosperity while simultaneously calling for global action to eradicate poverty. The Sustainable Development Goals (SDGs) emphasise social, economic, and environmental sustainability. Countries have chosen to assist the poorest. The SDGs seek to eradicate poverty, hunger, AIDS, and gender inequity by 2030. Their social and economic requirements are diverse. Poverty eradication is a vital human endeavour. There has been no drop in severe poverty.

Typically, socially conscious investments reflect the times. An investment in a social purpose may suffer if the cause loses investor favour. Energy consumption, waste, pollution, resource conservation, and animal welfare are all environmental issues. Business is interdependent on societal aspects. Accounting for a business should be exact and transparent, and shareholders should have the ability to vote on significant problems. Accounting for a business should be exact and transparent, and shareholders should have the ability to vote on significant problems.

Nonetheless, the SDGs The primary objectives are to enhance social, environmental, and economic conditions. To achieve optimal health, poverty and hunger must be eradicated. Access to essential services such as clean water and electricity. To support progress, promote inclusive education and decent jobs. Develop communities and cities that are sustainable. Reduce gender inequality and global inequity. Providing protection for the marine and terrestrial ecosystems. Collaboratively build a serene and sustainable atmosphere.

CONTENT

Differences between Islamic Investment and Social Investment.

There are few differences between Islamic investment and socially responsible investment (SRI) which can be seen through three major elements which are core values, screening criteria and practice of interest. In the aspect of core value, SRI emphasizes human beings, environmental and social values. While Islamic investment is based on Islamic principles that includes all values covered in SRI. Other than that,, in the aspect of screening process, SRI employs a screening method to guarantee that the companies in which they invest are ethically sound. The screening will eliminate organisations that are perceived to be negative, allowing investors to focus on "positive" businesses. According to the Australian Ethical Investment Association, ethical investing involves avoiding certain sorts of investments, such as gambling enterprises and weapons manufacturers. It places a greater emphasis on future-oriented industries like renewable energy and health care. In contrast, Islamic investment screening methods are more specific. It consists of two types of screening which are qualitative and quantitative. Companies will be classified as Shariah non-compliant securities under the qualitative approach if they engage in core activities such as interest-based financial services, gambling and gaming, manufacture or sale of non-halal products or related products, conventional insurance, entertainment activities that are prohibited by Shariah, manufacture or sale of tobacco-based products, stockbroking or share trading in Shariah non-compliant securities. In addition, the Securities Commission Malaysia began releasing a new activity-based benchmark for the quantitative approach in November 2013. The Securities Commission (SC) adopted a two-tier quantitative approach, measuring the business activity benchmark, which cannot exceed 5% or 20% of a company's exposure to certain businesses and the financial ratio benchmark, which cannot exceed 33% of total assets not in Islamic accounts and financing. Lastly, in the aspect of practice of interest, SRI consists of the element of interest, uncertainty and gambling in their core business transaction while Islamic investment prohibits all of these elements. This prohibition is to protect social justice, equality and property rights. Islam prohibits the earning of money through unfair trading practices and other socially harmful activities. Islam seeks to build up an economic environment based on fairness and justice through the prohibition of interest.

The issues arise in Socially Responsible Investment. Investors who have interest in investing in a company that have ethical business operations are more likely to invest in SRI. As we know, socially responsible investing funds avoid companies that have controversy such as gambling, firearms, tobacco, alcohol and even oil. For example, if you think alcohol is bad for the world, you may avoid investing in companies that produce alcohol products. Usually, investors that invest in SRI are more likely to invest in companies that focus more on delivering something good to locals or can give benefits to the people. But, there are some issues that arise when you limit your investment options and willingly pay more for companies that practice social and ethical responsibility, the investor may end up losing their return on investment. This is because you will be more focused on the ethical part rather than the company’s performance. In another situation, if the company has a good history of creating innovative products and services that will improve lives and generate more jobs but their performance regarding social responsibility are below average, at the end the investors also may lose the opportunity on this attractive investment. Nowadays, many companies claim to be socially responsible but actually they are not. In this case, Volkswagen is a good example that we can learn from. According to the article in the Forbes, the company tried to save their embarrassing low market shares by creating a “cleandiesel” market push in the US to compete with Toyota and Honda as a Green Vehicles that use hybrid technologies. This led to a scandal, which began to unravel Volkswagen’s image of being an ethical company and this case was successfully investigated and revealed that Volkswagen cars emit far more poisonous nitrogen oxide than allowed by law. It can be seen that, just because a company says it's socially or ethically responsible, does not mean it is.

Is Shariah Investing a Viable Alternative? All the investors are freely choosing their investment systems without hesitation whether it is Shariah investing or investing with ethics. However, the volatilities of the asset returns are the major consideration that should be taken by investors which complements for them to take the risk. According to Nurul Syakirah (n.d), Shariah investing is doing good in term performance compared to SRI during the crisis of major markets which shows that Shariah investing can be seen as a viable alternative in terms of ethical investment. Relevancy of Shariah investing can be seen in several aspects which are performance, volatility in the systematic risk and Sukuk. 1. performance The return is said to not be affected by the Shariah screening process (Hussein, 2005) as Islamic mutual funds are financially viable which can compete on commercial risk and return basis (Wilson & Ahmad, 2001). In other words, Shariah investing is a strong alternative for every credit crisis. Based on the study made by Nurul Syakirah (n. d), during the bull and bear period, it indicates Shariah investing managed by HSBC in Saudi Arabia tends to underperform compared to SRI investing during full and bullish periods. However, during bearish and financial crisis periods, Shariah investing tends to outperform SRI investing. It can be seen that Shariah investing offers lower volatility than some of the SRI investing because it completes the protection against future consequences. 2. Systematic risk Systematic risk is the risk inherent to the entire market or an entire market segment which is unpredictable and unavoidable which only can be mitigated through the right asset allocation strategy. Shariah investing is less volatile to the systematic risk compared to the SRI investing (Saeed & Kabir, 2013). Shariah investing is less sensitive to market volatility as it has less exposure to systematic risk compared to the SRI investing. According to Albaity & Ahmad (2008), Kuala Lumpur Syariah Index (KLSI) indicates less risk associated with Kuala Lumpur Composite Index (KLCI). 3. Sukuk Sukuk is the Shariah compliant products that are similar to bonds in which it is

financing a specific sustainable development project. It differs from conventional bonds as it is designed to involve the rigorous process of structuring. Sukuk are backed by real assets which can be divided into two: Asset- Based and Asset-Backed. In every transaction and ownership of the asset there will always be an underlying asset transferred to the investors which they can enjoy all the rights to that ownership (Kamso, 2013). According to Michael and Zamir (2013), Sukuk are appropriate for SRI investors because Sukuk promises a high degree of certainty that their money will be used for a beneficial purpose. The transactions must be free from the element of uncertainty while the terms and conditions must be clearly defined.

CONCLUSION AND RECOMMENDATION Volkswagen's ethical problem was prompted by allegations that the automaker cheated on air quality tests conducted in the United States. Alternative techniques for dealing with the incident may have been utilised by the company. Firstly, Volkswagen should not have acknowledged lying during emission testing. The fundamental motivation for doing so is to protect their public image, reputation, and goodwill. Secondly, they might have claimed ignorance of the problem, but then offered to recall all of the vehicles and made the necessary adjustments. This may have aided in persuading the public that they were not self-centered or unconcerned about their clients' well-being. This reaction would most likely have saved the firm a significant amount of money in fines and goodwill from their consumers. Other than that, Volkswagen may have responded by claiming that the American authorities' testing procedure was faulty. Given that all of their automobiles had the same fault, this would have supplied them with solid evidence to argue their case. However, would have major financial consequences because the test would have to be repeated, in addition to the company's expenditure of re-engineering all of the recalled vehicles. Riba is strictly prohibited in Islamic beliefs. There is no such thing as value for money in Islam's view. Money is not a commodity that can grow in value without being put to use in constructive activities. As a result of this restriction, there is no interest (riba) or additional money in the Islamic financial system. As a result, Islamic banks make use of the principle of sharing. The Qur'an, as well as Muslim principles, are at the heart of the Islamic financial system. In a Islamic bank, a shariah supervisory board exists, however in a conventional bank, there is no such board. The shariah supervisory board's role is to oversee the operations of Islamic banks. The determinants of products or services produced by Islamic bank must pass the shariah supervisory board's selection process. The shariah supervisory board is in charge of deciding what goods or services a shariah bank would offer. The Islamic economic system has been able to endure the global economic crisis in today's economic boom. Apart from having positive characteristics, a sharia-based economic system has positive characteristics that emphasise aspects of fairness and honesty in transactions, as well as ethical investment, prioritising the values of togetherness and brotherhood in production, and avoiding speculative financial transactions. The basic aims of islamic equities and socially responsible investing are similar in that they both attempt to achieve a "better economic system," however the definition of "better" differs. While the phrase refers to sustainability, social situations, and governance

standards in the case of SRI funds, the goal of Islamic finance is to create a world that is consistent with Shariah, the Islamic religious and temporal law. But islamic equities are significantly and negatively correlated in both the long run and short run period. Investors in islamic equitiess who are restricted from investing entirely in islamic investment (no riba) should look at other options for diversification. This is also true for ethical fund investors, who are obligated to invest exclusively in ethical funds. Other than that, about the return from investment where islamic investment seems to prioritise shariah compliance of eligible assets over financial performance, which is still significant but looks to be secondary. SRI funds, on the other hand, place equal focus on sustainability, the environment, and financial rewards. This is to ensure that Muslim investors are aligned with the shariah principles' fundamental social and ethical concerns, which are not well reflected by today's shariah investment screening procedure. As a result of these distinctions, Sharia investment screening processes comparable to SRI may be developed further.

REFERENCES Toto, Toto & Herlina, Elin & Darna, Nana. (2020). ADVANTAGES AND RISKS OF ISLAMIC INVESTMENT. Nurani: Jurnal Kajian Syari'ah dan Masyarakat. 20. 265-276. 10.19109/nurani.v20i2.6882.

Forte, G., & Miglietta, F. (2011). A Comparison of Socially Responsible and Islamic Equity Investments. https://boa.unimib.it/retrieve/handle/10281/38629/55556/JMIB_21_11.pdf

Masih, D. M. (2015). Socially responsible investment and Shariah-compliant investment compared: Can investors benefit from diversification? An ARDL approach. https://mpra.ub.uni-muenchen.de/id/eprint/65828...