Socially responsible investment: insights from Shari'a departments in Islamic financial institutions

Islamic financial institutions (IFIs) are emerging as prominent players in the financial world and are increasingly known for their conservative socially responsible investment (SRI). Being the Shari'a regulators and monitors of IFIs, the Shari'a departments are expected to implement the Islamic perspective of SRI – drawn from Shari'a principles – in their respective institutions. The purpose of this paper is to develop an SRI framework applicable to IFIs and other Shari'a compliant entities and assess its applicability within Shari'a departments of two Islamic banks. This paper involves cross‐case analysis based on interviews with Shari'a department officials in two settings differentiated by their respective independence. The proposed framework consists of required, expected and desired SRI aspects as applicable to IFIs. The findings reveal that the required aspects are uniformly observed by the two cases. There are, however, variations when it comes to observing the expected and desired ethical SRI aspects that may be driven by the independence of the Shari'a boards. This inconsistency and non‐adherence of expected and desired aspects may lead to reputational risks in the long run.