Caring side of Islamic finance

There is growing interest among investors looking for Sharia-compliant vehicles that serve to aid health and boost ecological sustainaibilty. While the market is still small, socially responsible and green sukuk are one answer.
A Democratic Republic of Congo (DRC) Ministry of Health employee (right) administers a polio vaccination to a congolese child during the first day of a national polio mass immunisation campaign in Lubumbashi. AFP
A Democratic Republic of Congo (DRC) Ministry of Health employee (right) administers a polio vaccination to a congolese child during the first day of a national polio mass immunisation campaign in Lubumbashi. AFP

In November last year, the International Finance Facility for Immunisation (IFFIm) issued a US$500 million sukuk with a difference – the funds would be used to buy life-saving vaccines.

From an attempt to wipe out polio in the Democratic Republic of Congo, to the deployment in Haiti of a five-in-one vaccine that tackles haemophilus influenza, tetanus, hepatitis B, diphtheria and whooping cough, the funds from the sukuk, structured by a consortium of banks including NBAD, will be used to support a project that is estimated to have already saved more than 6 million lives.

As an added bonus, the sukuk pays, in quarterly coupons, a Sharia-compliant profit rate equivalent to the US 3-month London Interbank Offered Rate plus 0.5 per cent. For Islamic investors interested in putting their money to its best use, products such as these are an obvious choice. “The principles underlying our work are very well aligned with the principles of Islamic finance,” says Rene Karsenti, the chairman of IFFIm. “The sukuk offers a profit, a good rate of return, and the social benefit – use of the proceeds for a very noble cause, which is to save lives.”

IFFIm’s sukuk indicates a growing similarity between two heretofore disparate areas of asset management: Islamic finance, and the largely western socially responsible investment (SRI) tradition,

The IFFIm, which is part of the World Bank, has secured $6.3 billion in funding from nine different countries, to be paid over a period of 20 years – so the organisation has decided to issue debt against these promises to fund current vaccination projects.

This serves two purposes. First, the more vaccines that are provided at once, the more effective a vaccination programme is. If you vaccinate half the population of a given area, disease can still spread rapidly; if 99.9 per cent of a population is vaccinated, there is a good chance that the disease may die out completely.

The second reason is more immediate: hundreds of thousands of people are dying from treatable diseases every day. So why wait?

Mr Karsenti says opting for an Islamic product allows IFFIm to attract Islamic investors. In this, IFFIm has been successful: 68 per cent of total orders originated in the Middle East and Africa.

Mr Karsenti describes the move as “natural” for IFFIm, whose vaccination project has invested more than half of its funds in 33 Organisation of Islamic Countries member states, including Mali, Mozambique, Bangladesh, Niger and Afghanistan.

Last year, SRI funds totalled about $6.57 trillion in assets under management in the US alone, the US Social Investment Forum says, while global Islamic finance assets are estimated to total $1.7tn in 2014, according to Ernst & Young. Both are recording double-digit growth rates.

SRI grew out ofChristian religious institutions that wanted to place their funds in companies that did not violate Biblical teachings.

“SRI means different things to different people, but ultimately, the bottom line, or profit, is not the only consideration. Most funds want to show that they are making an impact on society,” says Joshua Brockwell, the investment communications manager at Azzad Asset Management, an Islamic fund in the US.

SRI funds choose from two non-exclusive approaches. Negative screening means a fund cannot invest in some asset areas regarded as morally impermissible. Positive screening involves searching for investments that return a positive social benefit.

It is positive screening where the commonalities are most evident – an emphasis on delivering clear social benefits, where labour conditions, the environment, standards of governance and fair-dealing are taken into account. “There is a vast overlap between what can be considered socially responsible investing and Islamic finance,” says Farmida Bi, the head of Islamic finance at Norton Rose Fulbright. “The basis of Islamic finance is real economic activity, which must not be based on the oppression of other people. SRI principles are very similar to these ideas,” Ms Bi says.

“Both traditions demand that businesses that are invested in are socially useful and not detrimental to humanity,” she says.

A paper from MIT economists in 2013 argued that the same kinds of financial derivatives many blamed for the financial crisis could be used by pharmaceutical companies to help them to develop cancer drugs.

In “Can financial engineering cure cancer?”, David Fagnan, Jose Fernandez, Andrew Lo and Roger Stein proposed pooling the risk associated with developing a large number of drugs into a single financial asset.

“By combining a large number of drug-development projects within a single portfolio, a ‘megafund’, it becomes possible to reduce the investment risk to such an extent that issuing bonds backed by these projects becomes feasible,” they wrote.

Investors could buy tranches of this megafund, which would expose them to the risk – and reward – of developing a large number of different cancer drugs. If a drug is successful, the investors share in the payout.

Despite the word “derivative”, this concept could be made attractive to Islamic investors. This would see pharmaceutical companies and private investors launch a joint venture under a musharaka contract – with parties taking equity stakes in the venture equivalent to the capital they have committed.

The economic effect would be similar to that of a collateralised debt obligation – but the resulting product would be Sharia-compliant. It could also help to fight cancer.

Green development funds, which specialise in particular kinds of infrastructure assets, could also appeal to Islamic investors, says Lisa Stonestreet, at the UK Sustainable Investmnt and Finance Foundation.

“Sustainability funds, which invest in companies that are involved in waste management or responsible water management, for example, do not have Sharia-compliance as a core purpose,” she says. “But it is technically feasible they could become Sharia-compliant if they were certified by a Sharia board. Some conventional funds may turn out to be Sharia-compliant, despite making no attempts to market themselves as Islamic funds.”

Norton Rose Fulbright’s Ms Bi is optimistic Islamic finance-SRI crossover products will appear if investor demand requires it, although the level of cross over suggests there may not be a need for separate Shariah-compliant SRI products.

“If there is real demand, I’m pretty confident Islamic finance products will be offered.”

abouyamourn@thenational.ae

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Published: January 8, 2015 04:00 AM

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