An Analysis of Social Responsibility Dimension in Islamic Investment Funds: Evidence from Malaysian Investors

Abstract

In view of the ‘divergence dilemma’ between the aspirations of Islamic economics and the commercially oriented nature of Islamic finance, this research explores the prospect of incorporating social responsibility dimension in the practice of Islamic investment, in line with the normative goals of Islamic economics. The significance of the study is further emphasised in the face of the rapidly growing Socially Responsible Investment (SRI) movement, which uses various social, ethical, and environmental issues in investment to promote socially responsible behaviours among corporations. The conceptual discussion and empirical analysis of the study aims to explore and examine four important areas relevant to the research: the Islamic perspective of social responsibility and its normative foundations; the investment strategies that can be used to address social responsibility dimension; the investors’ perspective on the importance of social responsibility dimension and its various issues; and the investors’ level of commitment to incorporate these criteria into actual investment.
In the light of the SRI experience, the conceptual discussion focuses on delineating the Islamic perspective of social responsibility, resulting in a unified behavioural framework of social responsibility issues and commitment. The theoretical model is based on the ethical values embedded in the Shari’ah and its underlying objectives (Maqasid al-Shari’ah), the precepts of justice (‘adl) and beneficence (ihsan), and the notion of ultimate happiness (falah). The discussion further evaluates the present practices of Islamic investment in relation to social responsibility dimension and explores the potential of applying various SRI strategies in the Islamic investment sector.
The empirical component of the study aims to explore and examine the perceptions, attitudes and behaviours of the investors of Islamic funds in Malaysia in relation to the prospect of incorporating social responsibility dimension and its various issues in investment. Overall, social responsibility dimension is recognised by the respondents as part of an essential component in Shari’ah based investments. Nevertheless, there seemed to be a hierarchy in the component they perceived as important, with social responsibility dimension came third in the list after the fiqh injunction and economic dimensions. Additionally, the examination on the perceived importance of various social responsibility issues revealed that the underlying factor that influenced this perception is shaped by the nature of the criteria, particularly the distinction between harm prevention and the promotion of good, and the differentiation between internal business practice and external stakeholders. The study also found encouraging results on the willingness of the respondents to incorporate social responsibility criteria in their actual investment.
The findings suggest that important factors influencing investors’ perceptions and commitment to incorporate social responsibility dimension in Islamic investment include participation in individually oriented behaviour, socio-demographic variables such as ethnicity, religion, age, income, education, types of occupation and organisation, as well as the level of SRI awareness. Additionally, while individual’s investment decision is shown to be highly influenced by normative consideration, favourable financial expectation remains a strong driving factor in all of the behaviours examined; obedient, altruistic and sacrificial behaviours. In view of the prominent influence of financial motive in the decisions of individuals, the interpretive discussion explores the potential of a strategic framework of social responsibility as a complement to the normative foundations in creating additional incentive and enabling environment towards goal realisation in an Islamic economy.