213495 Islamic cover_dc_Layout 1 3/13/12 5:27 PM Page 1 t has long been said that Islamic Finance Islamic Finance needs its own innovative blueprints to Project follow the pulse of the industry. I BUILDING BRIDGES FINANCIAL ACROSS COMMUNITIES Discussions on Islamic Finance as an alternative to conventional finance or a competitor have BUILDING BRIDGES ACROSS reached a new milestone: recognition of their FINANCIAL COMMUNITIES cooperation. As the field of Islamic Finance expands and diversifies, so does its ability to cross new venues and cultivate partnerships. The Global Financial Crisis, Social Responsibility, and The Ninth Harvard University Forum, enti- tled “Building Bridges Across Financial Faith-Based Finance Communities,” sought to explore these opportunities: What lessons on social respon- sibility can organizations find in Islamic Finance and other faith traditions? What can conventional banks and Islamic Finance insti- tutions learn from each other, particularly after the financial crisis? This volume, a selection of 11 papers presented S. Nazim Ali at the Ninth Forum sponsored by the Islamic Editor Finance Project at Harvard Law School, inves- tigates these questions through original research on best practices across and between industries and faith traditions. Essays consider diverse topics ranging from the influence of religion on corporate social responsibility and individual financial choices to the parameters of hedging and portfolio diversification. As our writers suggest, there is reason to be optimistic about the future of cooperation Islamic Finance Project Islamic Legal Studies Program among financial communities; intellectual Harvard Law School inquiry is just a first step along this bridge. ILSP Harvard BUILDING BRIDGES ACROSS FINANCIAL COMMUNITIES The Global Financial Crisis, Social Responsibility, and Faith-Based Finance Past Publications from Harvard University Forum on Islamic Finance Islamic Finance: Innovation and Authenticity Integrating Islamic Finance into the Mainstream: Regulation Standardiza- tion and Transparency Islamic Finance: Current Legal and Regulatory Issues Islamic Finance: Dynamics and Development: Proceedings of the Fifth Harvard University on Islamic Finance Islamic Finance: The Task Ahead: Proceedings of the Fourth Harvard University Forum on Islamic Finance Islamic Finance: Local Challenges, Global Opportunities: Proceedings of the Third Harvard University Forum on Islamic Finance Islamic Finance into the 21st Century: Proceedings of the Second Harvard University Forum on Islamic Finance BUILDING BRIDGES ACROSS FINANCIAL COMMUNITIES The Global Financial Crisis, Social Responsibility, and Faith-Based Finance S. Nazim Ali Editor Islamic Finance Project Islamic Legal Studies Program Harvard Law School Compiled in 2012 by the ISLAMIC FINANCE PROJECT Copyright © 2012 The President and Fellows of Harvard College All rights reserved Unauthorized reproduction of any part of this volume, by any means, without written permission from the copyright holders, may be prosecuted to the fullest extent permissible under relevant U.S. and international copyright laws. ISBN: 0970283598 Printed in the United States of America Library of Congress Control Number 2011961233 Contents Preface . vii Introduction . 1 Part I: Islamic Finance and Global Economic Meltdown After the Meltdown: New Perspectives on Islamic Finance . 19 Ibrahim Warde Portfolio Diversification during Financial Crisis: Analysis of Islamic Investment Strategies . 31 Jahangir Sultan and Maher Milly Islamic Finance after the Global Financial Crisis . 69 Majid Dawood and Huma Sodher Part II: Shari‘a and Regulatory Framework Adding Social Responsibility and Accountability to the Mandate of Shari‘a Advisory Boards . 83 Aly Khorshid Challenging the Parameters of Permissible Hedging in Islamic Finance: Rationale and Implementation of Recent Shari‘a Rulings . 103 Robert Rilk Part III: Social Responsibility Empowering CSR, SRI and SE in Islamic Finance . 133 Mohamad Akram Laldin Investment Evaluation Framework for Socially Responsible Investing and Islamic Finance . 159 Sajjad H. Shah Money and Morality: Pathways Toward a Civic Stewardship Ethic. 169 Marcy Murningham Part IV: Faith and Finance Is Faith a Luxury for the Rich? Examining the Influence of Religious Beliefs on Individual Financial Choices. 227 Ayesha Khalid Khan Faith and Finance: A Catholic Consideration . 263 Séamus P. Finn Faith and Finance: Value-Guided Pursuit of Interests . 281 Mohammad Nejatullah Siddiqi vi building bridges across financial communities Glossary. 291 References . 297 Guide to Contributors . 313 Index . 321 Preface Islamic Finance has reached a particularly formative stage of its develop- ment. There has been growing interest in Islamic Finance and a sharp growth in its publicity since the recent political developments in the Muslim world and the growing attention to Islamic law. The recent decision of the Qatar Central Bank to shut all Islamic windows of the conventional banks in Qatar and the post-revolution opportunities unleashed for Islamic finance products in Egypt, Libya, and Tunisia have rekindled the need to strengthen the shari‘a and regulatory framework of the industry through research and development. Scores of magazines and academic journals are publishing exclusively on the field. Similarly, educational initiatives around the world, including graduate degree programs in Islamic finance, are increasing at a geometric rate. Of particular significance is the landmark initiative of Thomson Reuters in collaboration with other stakeholders in the launching of the Islamic Interbank Benchmark Rate (IIBR) on Novem- ber 22, 2011. This is a significant milestone in the consolidation of the Islamic money market. In the midst of these exciting developments, the Islamic Finance Project (IFP) at Harvard Law School seeks to critically reflect on traditional notions of Islamic Finance as well as its potential application to new venues. As such, the Ninth Harvard University Forum on Islamic Finance, held in March 2010, focused on the theme of building bridges across financial communi- ties with the goal of answering the following questions: How can organiza- tions use Islamic finance as a framework for becoming more socially responsible?; What are the initiatives other faiths have and can take toward improving business practices?; What does current academic research suggest about the trends and future direction of Islamic finance after the financial crisis? Through this publication of 11 papers presented at the Forum, we invite you to join us in exploring these pertinent issues. The Ninth Forum is the continuation of efforts over the past 15 years to create dialogue between practitioners, regulators, and researchers on the salient issues in the field. As the Islamic finance industry expands, the IFP strives to expand its workshops, seminars, and forums to educate and engage the public in the developments of the field. Since the last conference in 2010, the IFP has held a workshop with the London School of Economics and several seminars here at Harvard Law School. IFP has also held a series vii viii building bridges across financial communities of events highlighting the growing importance of the Islamic finance indus- try in the wake of the financial crisis. These events included an October 12, 2010, roundtable discussion, Impact of Islamic Finance on Economic Devel- opment, with eminent personalities, such as Ahmad Mohamed Ali (the pres- ident of the Islamic Development Bank), M. Umer Chapra, Samuel L. Hayes, and Ibrahim Warde, as panelists. There was a panel discussion enti- tled Islamic Finance: Creating an Enabling Environment on the following day. In 2011, the IFP and LSE co-hosted the fifth annual public lecture Building Bridges Across Financial Communities and the 2011 Harvard-LSE workshop Reappraising the Islamic Financial Sector that focused on the need to better streamline the Islamic finance industry toward achieving the objec- tives of Islamic law (maqasid al-shari‘a). To further our objective of informing the public on the latest develop- ments in the industry, the IFP organized a panel discussion on September 26, 2011, with the theme “Islamic Finance: Bankruptcy, Financial Distress and Debt Restructuring,” led by discussant Ibrahim Warde. The panel dis- cussion focused on the latest cases of insolvency issues in the Islamic finance industry. As part of the ILSP Lecture Series there was another public lecture on November 9, 2011, Dispute Resolution in Islamic Finance: Current Trends and Future Perspectives, delivered by Umar Oseni, ILSP Visiting Fellow. To keep these dialogues accessible to the public at large, the IFP developed an updated databank that contains articles, books, conference papers, disser- tations, and Quranic verses and Ahadith pertaining to Islamic finance. These databases are original in content and make up a unique electronic library that is a helpful tool for both researchers and practitioners. The public can also access the databank free of charge. The Harvard University Islamic Finance Forum remains our most pop- ular event, helping to attain our goal of engendering an advanced and insightful dialogue. Papers for the Ninth Forum were chosen through a rig- orous selection process from a large pool of over 40 submissions in response to a call for papers. The selected authors, as well as other renowned scholars and practitioners around the world, came to the conference to discuss these papers and share their opinions on