Moral behavior in stock markets: Islamic finance and socially responsible investment

This paper addresses the puzzle of why the inclusion of non-financial social justice or religious criteria by professional fund managers has been so popular in Malaysia and yet has had to date relatively little influence in the United States stock market.

Drawing from over 125 ethnographic interviews with financial workers in Malaysia, this paper describes the popular social movements in both the United States and Malaysia that partially shaped peoples’ preferences to extend ethical or religious criteria to their investment behavior.

The author then makes two arguments to explain the more powerful influence of morality on investment behavior (and by extension, on corporate behavior) in Malaysia as compared to the United States:

• social investing in the United States is weak because it relies solely on mandates to communicate clients’ ethical desires to their fund managers
• Islamic and Ethical finance in Malaysia is strong because Islamic social movements have reformed the Malaysian stock market’s structure
  

Specifically, a uniform interpretation of Islamic investing was institutionalised with the creation of a nearly unique quasi-governmental body. As a consequence, Islamic principles systematically influence the behavior of corporations listed in Malaysia, at present narrowly, but with the potential for wider influence in future.