Mansor H. Ibrahim

Risk Sharing and Social Impact Partnerships

Shari’ah scholars and Muslim economists who participated in the Second Strategic Roundtable Discussion (September 20, 2012, Kuala Lumpur) sponsored by the International Shari’ah Research Academy for Islamic Finance (ISRA), the Islamic Research and Training Institute of the Islamic Development Bank Group (IRTI), and Durham University adopted a final statement known as the Kuala Lumpur Declaration. The statement argued that risk sharing is the essence of Islamic finance. It recommended that (i) governments must endeavor to enhance risk-sharing systems by levelling the playing field between equity and debt;1 (ii) design fiscal and monetary policies based on risk sharing; (iii) issue macro-market instruments that are of low denominations, sold on the retail market and supported by strong governance oversight; and (iv) broaden the organizational structures beyond traditional banking models to formats such as venture capital and waqf to meet the social goals and risk sharing features of Islamic finance.

The Fountain of Social Capital: Love of the Creator and Oneness of Humanity

The concept of social capital is multidisciplinary and not easily understood. It has been used to explain phenomena from the growth tragedy in Africa associated with high ethnic fragmentation (Easterly and Levine, 1997), group-based programs for environmental improvements including microfinance (Pretty and Ward, 2001) to the role of trust in underdevelopment (Banfield, 1958; Guiso et al., 2004) and the limited stock market participation puzzle (Guiso et al., 2008). Since the 1990s, social capital has received considerable attention among philosophers, sociologists, economists, and political scientists. Among the reasons attributed to the proliferation of the social capital literature lies in the “limits of the ‘standard’ approaches to the problems of economic development and political order” (Ostrom and Ahn, 2009, p. 17). Standard approaches are unable to explain economic and political performance across countries as they do not account for “the omitted factors: trust and norms of reciprocity, networks and forms of civic engagement, and both formal and informal institutions” (Ostrom and Ahn, 2009, p. 18). In terms of policy development, countries such as the United Kingdom, Ireland, and Canada have considered the impact of policy on a community’s social capital. The World Bank has developed a Social Capital Implementation Framework, and the Organization for Economic Co-operation and Development has included social capital in developing its policy on well-being. These efforts signal the importance with which social capital is accorded particularly by policy and development practitioners (Illingworth, 2012).

The Social Capital Fountain: Solidarity, Empathy, Trust, and Property Rights

The Islamic conception of development places great emphasis on the need to focus human energy on achieving social solidarity and unity.1 In turn, that unity is firmly grounded on the purposiveness of the Creation, the Walayah of the Creator for and over the humanity that invested high dignity in the human state and the responsibilities implied by that state. The Khalifah (trusteeship/agency) responsibility provides every human the means by which the Walayah of the Cherisher-Lord is cognized through service to other demonstrated through His Walayah. This is returned through Ihsan: Walayah of each human for others in the rest of the creation. This reciprocation of Walayah by Ihsan (deeds of love, justice, goodness, compassion and mercy), in response to the injunction of the Qur’an, “is goodness reciprocated by anything but goodness?” (Q 55:60) can only take place in a societal setting. The Khalifah functions of each human can only be meaningful in collectivity with other humans. The intensity of Islam’s emphasis on the social dimension is so great that there is not one act of adoration and worship that is devoid of societal implication. Moreover, every interaction among humans, from the most intimate to the most public, is sanctified when engaged in with cognizance and full awareness of Allah (swt).

Social and Moral Capital in Market Exchange

The 2007/2008 global financial crisis, according to Shoshana Zuboff in a Businessweek piece “Wall Street’s Economic Crimes Against Humanity,” was driven by a sense of “remoteness and thoughtlessness, compounded by a widespread abrogation of individual moral judgment.” The “self-centered business model” allowed those who perpetrated the financial crimes to operate “without the usual feelings of empathy that alerts us to the pain of others and define us as humans” (Zuboff, 2009). The absence of “moral compunction” of those who engaged in practices that led to the financial crisis speaks volume of a “moral bankruptcy” (Stiglitz, 2010). There is now a sense of moral panic concerning systemic assault upon human dignity, trust, contracts, and property, of which all are the fundamental institutional pillars of societies.

The Power of Social Capital in Reducing Financial Inequality

In Capital in the 21st Century, Thomas Piketty (2014) reveals the growing divergence in per capita GDP between Europe-America and Asia-Africa from 1700 to the 1990s when both regions began to converge. While there was gradual reduction in inequality between the richest and poorest regions in the past 20 years, the gap between the two has actually widened from about 50 percent of the world average per capita GDP in 1700 to more than threefold in 2012. Based on Piketty’s estimates, the highest global wealth holders have experienced an average real growth rate of 6.4 percent to 6.8 percent per year compared to 2.1 percent for the average world wealth per adult from 1987 to 2013. The world capital/income ratio has been rising since 1950 and is projected to reach 700 percent by the end of the twenty-first century. In its September 13, 2014, issue, The Economist highlights the aberration of “the glorious fifteen” years (2000–2014) of remarkable pace of catch-up by developing economies. Since 2008, growth rates in emerging economies have slipped back toward those in developed economies, and convergence with rich-economy incomes would only be possible in another 115 years (excluding China) or 300 years according to growth projections of the World Bank and the International Monetary Fund respectively.1

Risk Sharing and Crowdfunding

In 2002, Blender, a three-dimensional animation software company based in Amsterdam, was suffering from disappointing sales as a result of the ongoing dot.com crisis. The Blender Foundation was then established to keep the company afloat. Recognizing the support that crowds can offer, the Foundation launched a crowdfunding campaign and raised a hundred thousand euros within seven weeks. Today, Blender is a community-based open source 3D animation suite being made by hundreds of active volunteers ranging from studios and individual artists, professionals and hobbyists, scientists, students, and animators from around the world. Similar funding was raised in Seedmatch, a profit-sharing crowdfunding initiative, within a few days by a handful of 80–160 individual investors (Belleflamme et al., 2014). In 2012, a record-breaking amount of US

Significance of Social Capital and Risk Sharing

10.3 million was raised within 28 hours through crowdfunding by Pebble Technology for its Pebble smart watch.1 Larger amounts ranging from a few hundred million to more than a billion euros were raised through crowdfunding in Europe in 2013 (CFA Institute, 2014).

Trust, Ethics, Stock Market, and Economic Growth

Commerce in the Middle Ages (737–1478) was characterized by extensive and intensive cross-border trade flows financed by risk-sharing partnerships.1 In Europe, trade was facilitated by commenda, an equity-based partnership that became the most popular organizational form of maritime ventures, particularly in Pisa and Venice.2 There is consensus among medieval historians that commenda was of the highest importance and contributed immensely to the rapid growth of trade and investment leading to economic change and development in Europe.3 Commenda’s contributions to industrial development of Ruhr Valley in Germany and in building railroads in Europe were particularly pronounced. While the origin of commenda has been a subject of debate, the preponderance of evidence traces the adoption of commenda back to Islamic sources (Udovitch, 1970; Al-Hassani and Mirakhor, 1989). Research has shown that Islamic partnership (mudarabah) was brought from Jerusalem to France during the late twelfth century and was incorporated into the Lex Mercatoria—the medieval European law of commerce.4

Issues in Islamic banking and finance: Islamic banks, Shari’ah-compliant investment and sukuk

By 2007, more than US

Islamic finance: An overview

15 trillion was held by over 91 million individual investors in stocks and corporate bonds, either directly or through mutual and pension funds (Stout, 2010). These massive investments and financial markets could not have conceivably reached such a size had it not been for most people having trust in their investments and the common belief in others’ trustworthiness (Guiso et al., 2008). However, scandals associated with the 2007/2008 financial crisis have eroded trust in the financial system. As a result, the need to understand forces contributing to financial market development and instability has been placed at the center stage of global policy and academic discussions. A sound and stable financial system underpinned by strong institutional quality and social capital has become an object of search.