ABDULLA AL AWAR
For decades, we have witnessed investors from developed countries—collectively referred to as ‘North’ due to their prevalent geographic concentration—playing an integral part in supporting developing countries, also known as ‘South’. However, in recent years, there is an increasing tendency among investors from developing countries to channel their funds into other developing countries, leading to the South-South investment phenomenon.
Today, emerging markets are hungry for new investments—their immense potential for growth is inherent in their definition. However, such investments pose a whole host of challenges for local and foreign investors alike, particularly in terms of regulatory and legislative frameworks that govern cooperation between the public and private sector as well as corporate social responsibility.
The significant gap created by the decline in agriculture and manufacturing in emerging countries and the huge demand for quality agricultural products and manufactured goods in these markets is a matter of common knowledge. However, most investors are doing little to leverage this tremendous opportunity.
According to the World Investment Report 2017, prepared by the United Nations Conference on Trade and Development (UNCTAD), the flow of foreign direct investments (FDIs) to the least developed countries (LDCs) in 2016 fell by 13 per cent. This is primarily due to the investment policies, as well as prevailing investment trends and culture.
In contrast, in 2007—just one year before recession hit—the total volume of FDIs across the globe reached $1.538 trillion—an 18 per cent hike on 2006, when it recorded $1.306 trillion.
Some may argue that investing in emerging economies is too risky. However, modern history says otherwise. In the aftermath of the global financial crisis of 2008, the total value of the world economy plummeted by 45 per cent. The losses that caused this sorry state of affairs did not occur because of investing in emerging countries but due to the lack of a responsible investment culture in developed countries.
A prime example of a responsible investment is investing in agriculture in emerging countries. Amidst rising concerns about future food security, such an investment is a much smarter choice than investing in indiscriminately dispensed consumer loans.
This validates the core premise of the Islamic economy—when it comes to the efficiency of an investment, its purpose is more important than its size.
Therefore, foreign investors must, first and foremost, consider the safety and sustainability of investments. Their objectives should transcend the accumulation of profits and focus more on ensuring a positive impact on the lives of people in the beneficiary countries. Only then can we turn the global economy around.
In 2007, the World Economic Outlook by the International Monetary Fund (IMF) highlighted declining risk rates the previous year and indicated that the global economy would continue to grow. A year later, disaster struck in the form of the biggest financial meltdown since the Great Depression. Given such a high probability of error, it is clear that we must update the benchmarks for evaluating economic performance, and create new assessment tools that are objective and neutral.
The Islamic economy has standards in place to measure the efficiency of investments and ensure balance between the variables of the investment equation. The presence of standards help gauge the social and cultural impact of investments—such as their role in developing infrastructure as well as education and health services in beneficiary countries—and ultimately guarantee their sustainability.
Furthermore, the Islamic economy offers investment vehicles based on the principle of risk sharing rather than pre-defined profit. Islamic financial instruments are not commodities sold to customers with a certain profit margin. Rather, they serve as the means of financing real projects within a specific framework, and profits are the results of successfully executed ventures.
In 2016, global investments in Islamic economy sectors reached $8 trillion, and the number of their beneficiaries is estimated to amount to about a quarter of the world's population. This figure includes both Muslims and non-Muslims seeking a secure future and quality products.
The increasing desire of governments and the wider society for economic stability, in addition to the global efforts to achieve the United Nations’ Sustainable Development Goals (SDGs), has helped the Islamic economy penetrate even non-Islamic markets.
Today, introducing and promoting financial services across the globe is easier than ever before. It is now common for banks worldwide to provide Islamic finance solutions in addition to their regular offerings. New technologies, innovative Islamic finance products, and the commitment of the Islamic finance sector to supporting small and medium enterprises are collectively helping the Islamic economy reach the next stage of growth.