This article first appeared in Forum, The Edge Malaysia Weekly on September 16, 2024 - September 22, 2024

With wars raging in Gaza, in Ukraine and elsewhere, with forced displacement and civilian casualties on the rise across the globe, with the gap between the richest and the poorest widening rapidly, it seems as though we are witnessing nothing less than humanity itself in a state of crisis. We must urgently direct all our efforts, all our expertise and skills, towards making our global community kinder and more humane.

We now turn our attention to what may be deemed the root of these crises — the lack of humanity in the world’s financial systems — and to the role of finance, and of Islamic finance in particular, in restoring it.

We all, I suspect, have some sense of what it means that humanity is lacking within the world’s financial systems; and, likewise, we all have some sense of the necessary steps to restore it.

Equally, I suspect that we also all understand the dire consequences of a failure to take those necessary steps. To speak of an absence of humanity in finance is, perhaps, to use language which is more evocative than economic. However, what we evoke with that phrase can be understood in starkly economic terms. The financial implications of environmental degradation and the climate crisis are increasingly apparent. By considering global challenges in terms of finance, moreover, we are not, as some might claim, elevating economics above the well-being of humanity and our finite planetary home. For the study of economics is, I believe, at its root, nothing other than the study of human well-being.

The accelerating environmental crisis, the pandemic and the subsequent upsurge in social distress, and geopolitical tensions are among the many elements of what has come to be termed the contemporary “polycrisis”. In exploring how to restore humanity in finance, then, we are, in effect, seeking a reformed conception of finance which can speak to this polycrisis.

At its heart, restoring humanity in finance means that the previously paramount goal of economic growth must now be balanced far more carefully with the goals of environmental stewardship and social inclusion. It means that the pursuit of profits must be tempered by a recognition of our collective responsibility to protect our environment, and better serve society at large. Businesses must become part of the solution to our various global challenges. They must take responsibility for their broader impacts on the world around them, on their stakeholders as well as shareholders — no longer able to dismiss these as being outside their primary profit-making functions.

And the good news, I think, is that there is now widespread recognition that the time for unfettered capitalism is over. Businesses are no longer able to disregard their broader impacts. Instead, they are expected to avoid and minimise harm, and also, increasingly, to compensate for any harm they have caused. Mining companies must clean up when they leave a site. Agricultural companies must allocate land for protective buffers around waterways. The chemicals they use are now carefully monitored, and the workers applying these must have protective gear.

Ever more detailed and stringent regulations are being put in place to ensure that these external consequences are taken on board, and that stakeholders are better served. Rather than being voluntary or “nice to have”, as they have been in the past, environmental and social responsibilities are increasingly being integrated into regulatory frameworks, at national, regional and even international levels. They now exist alongside other corporate governance requirements, as expressions of a business sector that is beginning to comprehend its responsibility towards humanity. Hence the birth of ESG, short for Environmental, Social and Governance — which is a set of standards measuring a business’ impact on society, the environment, and how transparent and accountable it is.

Nevertheless, there is continued pushback from the business and financial worlds in this regard — and quite naturally so, given the costs involved in adjusting to the burgeoning regulations. Claims that the ESG approach is ultimately good for shareholders as well as stakeholders have been called into question by these realities, as well as by the recent disappointing performance of ESG funds. Scepticism of the so-called business case for a more responsible approach may well be warranted, as there are undeniably higher costs involved.

Yet despite this expected resistance, the “ecosystem” of ESG requirements and regulations continues to evolve. ESG norms are now spreading across multiple jurisdictions and sectors of the real economy. Hiring patterns attest to this trend, with ESG expertise increasingly required on company boards. There has also been a rapid proliferation of all kinds of ESG-related education and training. With companies increasingly seeking these skills, a wave of upskilling in the area has begun, with an ever-growing provision of these services in response.

This emphasis on ESG is really another way of framing or articulating the need to restore humanity in finance. ESG compliance is helping to strengthen accountability, not only to shareholders but to stakeholders more broadly. This includes improving transparency through disclosure and data requirements. I truly believe the need to demonstrate compliance with ESG frameworks is a catalyst for change. At the same time, it is also helping to reign in some of the more damaging consequences of unfettered profit-seeking. In Southeast Asia, for example, deforestation rates have been brought under much better control by certification schemes, while textile and other workers’ employment conditions have improved due to the greater attention being paid to labour issues. In both cases, improvements have taken place incrementally, with commitments first, followed by the development of implementation “ecosystems”, and finally, today, a movement towards regulation.

We are, then, seeing real progress towards environmental and social goals, as ESG gradually rolls out. To this extent, we can perhaps speak of the first glimmerings of a re-humanisation of our financial systems. But for the business and financial worlds to play their full role in addressing our multifaceted global crisis, we must move beyond compliance and the fulfilment of negative obligations, towards making a positive contribution. In fact, the single overarching principle of Islamic law enshrined in a famous legal maxim (dar’ al-mafasid wa-jalb al-manafi’) is to “avert harm and to promote benefit”.  And it is here, with its unwavering faith-based commitment to avoiding harmful activities and striving towards social good, that Islamic finance can set an example for the conventional finance and business worlds.

Efforts in the sphere of Islamic finance are increasingly focused on moving beyond shariah compliance alone, towards the fulfilment of the higher social and humane objectives captured by the concept of Maqasid al-Shariah. This refers to the spirit, rather than the letter, of Islamic law and ethics. The approach of taking account of broader impacts, and avoiding those deemed negative, is thus intrinsic to Islamic finance.

I do not wish to overstate the ethical credentials of Islamic finance as opposed to conventional finance. In both spheres, we are seeing efforts to progress from avoiding harm towards actively seeking to do good. In both spheres, socially responsible investment is growing. There has, for example, been steady growth in issuances of both conventional green bonds and green sukuk — asset classes with explicit environmental goals. These goals may include the restoration of areas that have suffered harm, and investment into carbon sinks and offsets, as well as into the vital areas of green technology and innovation. Malaysia and her region have been at the forefront of this growth. But despite its very welcome expansion, this market segment remains a tiny proportion of overall capital investment. The amounts being raised fall woefully short of what is estimated as necessary to give humanity a fighting chance of addressing some of the severe environmental challenges we face.

And then we have impact investment with positive social goals — often formulated in relation to the 15 Sustainable Development Goals (SDGs) — as well as Islamic finance waqf and other instruments, with similar social equity and inclusion objectives. But, as with financing with environmental goals, financing with explicit social goals remains a tiny proportion of total investment. And, again, it falls far short of what is required, with ever higher calculations being made of the funding gap for meeting the SDGs, even as needs rise in direct proportion to environmental and other crises.

While it is by no means the case that efforts to humanise finance are confined to the Islamic sphere, I do believe that global players in the economy can look to Islamic finance as a thought leader in a number of specific areas. One of these is the area of risk-sharing and equity-based financing. Islamic finance has always espoused risk-sharing instead of risk-transfer, because it promotes fairness through proportionate gains and liability. Increasingly, financial theorists are arguing that risk-sharing is a better fit for the economy as a whole, and when we look at recent economic history, we can understand why. During the global financial crash at the end of the first decade of the new millennium, Islamic financial institutions fared better than mainstream institutions, according to the International Monetary Fund, proving themselves more stable and less susceptible to shocks. Large, unpayable debts lie behind these kinds of crises, and Islamic finance offers an alternative model: one that is not only more humane, but makes more fiscal sense as well.

I also want to highlight the role that large-scale multilateral Islamic financial institutions play in generating and coordinating social finance. Over the past five decades since its establishment, for example, the Islamic Development Bank (IDB) has approved an accumulated US$182 billion in financing, with US$12 billion approved in 2023 alone. The IDB is at the forefront of ethical finance, funding projects, businesses and communities in a responsible, sustainable way. It is a model for long-term, holistic value creation for all, as opposed to profit for the institution only.

The iTEKAD programme, established by Bank Negara Malaysia, is another example of financial institutions playing an active role in social finance. Multiple Islamic banks participate in this programme, which uses social finance instruments including zakat and waqf to fund business assets, and also to provide structured financial and business training. As at 2023, the iTEKAD programme had disbursed around 

US$16 million in social finance funding, financing and investment, benefiting 6,019 micro-entrepreneurs from various marginalised groups, including people on lower incomes, people with disabilities, army veterans and eligible zakat recipients — the asnaf.

Islamic finance has grown remarkably, at around 10% year on year between 2013 and 2023. That growth is expected to continue, with the industry projected to be worth a staggering US$6.67 trillion by 2027.

And yet, in spite of that impressive growth, and its increasing presence in mainstream global finance, I believe that Islamic finance has a still larger role to play on the world stage. What it offers is moral leadership: an approach to finance which is guided by principles of care for humanity and care for the planet.

Global finance could learn much from Islamic finance, because values like responsibility, sustainability and generosity transcend the boundaries of religion. While I hope that Islamic financial institutions themselves continue to grow and thrive, my greater hope is that all financial institutions will absorb something of the spirit of Islamic finance, on the path to restoring humanity in the sector.

At the present moment, the richest 1% on the planet own almost half of global wealth; while close to one in 10 people in our world are living in extreme poverty. Let us seek ways to address that imbalance, restoring humanity in finance, for a fairer and more prosperous future for all.

This is an excerpt of the special address by Sultan Nazrin Muizzuddin Shah, the Sultan of Perak, at the 15th Securities Commission-Oxford Centre for Islamic Studies Roundtable on Sept 7 at the Oxford Centre For Islamic Studies, UK.

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