Sunday, February 11, 2007

Poor Muslim-American Islamic-Investment Strategies

The topic of this posting and a recent khutba is the real "Islamic finance": How to maximize the good that one can do, or in our quasi-materialistic religious rhetoric, how to maximize our wealth of hasanat or good deeds.

In this regard, the Islamic canon clearly preaches a "financial planning" approach: start with your moment of death, and work your way with backward induction to current time. What are your goals? What are the resources and investment tools that you can use to attain those goals? What is the best investment strategy to have a wealth of good deeds in the final account?

Most of our sermons are about how to maximize earning of good deeds (better times to pay to charity, better times and places to pray, etc.). That is good. But then the analogy we seem to have in mind is one of the good deeds going into a checking account and sitting there until we have the accounting. But nobody ever got wealthy putting money in a checking account, no matter how much income that person was earning. So, while we should indeed maximize that income of good deeds, we should also invest it wisely if we are going to generate wealth.

So, let's approach the problem of Islamic financial planning. What does the canon tell us about the resource endowments on which we'll face accounting. Those are the same endowments that we can use to generate income, and then to invest that income to generate wealth. In the Hadith narrated by Mu`adh ibn Jabal, the Prophet (p) said: "No human's will move from his station of accounting until he is asked about four things: (1) his lifetime, how did he consume it, (2) his body, how did he wear it out, (3) his knowledge, how did he use it, and (4) his wealth, how did he earn it and how did he spend it."

So those are our four endowments: time (the most essential and most precious of all), physical existence, knowledge, and material wealth. Another Hadith, narrated by abu Hurayra tells us the three investment vehicles that we can use to make this wealth grow long after our time is up, our bodies are decaying, our knowledge is obsolete, and our wealth belongs to someone else. The Prophet (p) said: "When a person dies, his works stop except for three things: (1) perpetual self-sustaining charity, (2) useful knowledge, and (3) pious children who supplicate for their parents."

A good investment strategy would require three things. The first is that we have to work with what we've got. We shouldn't wait until our income is large in order to start saving and investing. We should start saving and investing with however little resources we have. Now, as American Muslims, we have no wealthy people. None of us can endow a Gates foundation to fight against aids or other epidemics. None of us can endow a Carnegie foundation and sponsor various types of research and information dissemination. On the other hand, we are collectively above average for the society in terms of income and wealth. That means that we have to act collectively in order to reach the critical mass required for the best investments in good deeds.

The second aspect of good investment is that we need to diversify our portfolio of moral investments. For example, if we ignore our children, what good are all the mosques we are building: little more than hollow buildings that are idle 99% of the time today, and likely to be emptier in the future. More importantly, when it comes to beneficial knowledge, why are we not sufficiently encouraging our children to be scientists -- where just one success, say in developing a cure for cancer, can save many more lives than any doctor can, even if the expected income of the doctor is higher than that of someone engaged in basic research? Why are we not encouraging them to be political scientists or historians, whose work educates society and helps to shape public policy in directions that save and improve lives in much more meaningful ways?

Finally, we should seek the highest return on our investments, subject to being sufficiently diversified. In fact, given the current portfolio of Muslim-American investments, we can increase the expected return and reduce risk simultaneously by diversifying away from the current wasteful strategy. Yes, of course, if you build a mosque you should expect to earn some good credits, but it is risky to have nothing but mosques, and the return on that investment is very small compared to other strategies.

I gave an example without naming specific projects. If you are in the process of putting together $3 million to build yet another mosque in Houston (we already have around 80 mosques for a Muslim population estimated to be around 100,000!). Yes, while we do not have wealthy Muslims, we have some rich ones, so 20 or more people can get together and build such a mosque. But think of the opportunity cost: You can use those $3 million to endow six scholarships for Muslim children who get admitted to top universities but cannot afford to pay tuition. In twenty years, you would have helped 30 young members of the community graduate from the best universities to become successful scientists, engineers, etc. Some of them may even get some crucial patents and generate some serious wealth that can be invested to do even more good: sponsor more research that can help humanity, etc. Having enabled that growth of good deeds decade after decade, and century after century, one surely would have invested today's good deeds much more intelligently that just building another structure.