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How to grow wealth while growing communities

Tuesday, February 7, 2017

Growing your wealth ethically and meaningfully isn’t difficult.

Shariah-based investments can help you to do so. They focus on investing in projects which promotes community and economic growth while ensuring basic universal values are adhered to. This socio-economic aspect appeals to investors of all faiths.  

Shariah investments are those which comply with Islamic law, whose primary references are the Quran and Hadiths (teaching of the prophet Muhammad pbuh). Among other things, it prohibits investments in unlawful activities such as sale and production of alcohol, gambling and adult entertainment.

Transactions that bear interests, excessive speculation and uncertainty are also prohibited as it leads to inequitable contractual relationship. Instead, those that encourage risk and profit sharing in real economic activities are emphasized.

A New Way of Shariah-compliant Investing

Crowdfunding is becoming an increasingly popular avenue for small investors looking for attractive short-term investments.  

As the name suggests, crowdfunding helps to facilitate funding for businesses or projects from a group of people or the crowd. In business funding, the crowd provide funds to with expectations of financial returns or profit from the business. Funding is done online to provide convenience and accessibility to investors globally.

A crowdfunding platform acts as an intermediary. It matches investors with projects and businesses in need of financing. The platform displays funding campaigns, prepares legal funding agreement, and assist in the collection of funds. It helps businesses get funding and investors get profits, hence creating a win-win situation for all parties involved.

Islamic crowdfunding platforms like combine the simplicity of crowdfunding with the ethical benefits of Shariah-compliant investing. Financing to businesses are done on a trade-like structure called Murabaha (cost plus margin). This arrangement involves investors purchasing assets (needed by a business) at cost, and selling it to the business for profit at a future date.

A virtuous cycle which benefits society

Apart from returns, when you participate in Shariah-compliant crowdfunding, you create a virtuous cycle that strengthens communities and promotes ethical activities.

Strengthening communities

When SMEs receive the much needed funding for their business, communities are strengthened. In Southeast Asia, SMEs comprise over 90% of total businesses and is a major source of employment and contributor to economic growth.

Where banks have strict financing requirements that many SMEs are unable to meet, investors with excess cash can step in as an alternative source of funds for these businesses. This is enabled through crowdfunding platforms which allows individuals to collectively pool resources and raise the funding amount needed.

The distribution of wealth from surplus to deficit units allows for wealth to be smoothly circulated and human welfare realised. By unlocking investments from the community to businesses needing financing the most, it allows entrepreneurial activities to prosper while reducing inequality.

SMEs grow through increased business activities, while investors grow through sharing of profits from those activities which they funded. Overall, good is achieved and the entire community prospers.

Promoting ethical activities

Doing good in Islam is not only about enriching oneself but extends to the general society, including the environment. This is manifested in values and ethics such as community development and honest and fair dealings - all of which are espoused by the religion.

For example, a business looking to fund activities that causes environmental pollution would not appeal to the public, and more so in Islam. This resonates well with other mainstream investment screens such as Environmental, Sustainable and Governance (ESG) factors in measuring sustainability and Socially Responsible Investing (SRI).

Repeating to do good

By continuing to invest in different businesses, investors are participating in a virtuous cycle of helping their communities grow in an ethical way.

However as in all investments, one must exercise prudence when assessing investment opportunities. This includes understanding one’s own risk appetite, threshold of loss and short/long term financial goals. Diversifying ones investment too helps to mitigate risk of losing your monies and helps achieve better long term returns.

By continuing to invest in different businesses, investors not only earn consistent returns in the long term, they also protect themselves from default risk by these businesses.

Categories: SME, Society

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