Risk, piety, and the Islamic investor

Conventional Western finance theory considers two dimensions of investment: risk and return. Ethics are ignored, and a conventional investor will accept any investments that are not actually illegal. Investment may be indirect, i.e. into various kinds of financial asset, or direct, i.e. into real assets or into a business. Conventional Western finance theory analyses these separately: portfolio theory deals with investment in ordinary shares, preference shares and bonds, with little attention to real assets; business finance theory deals with investment in real assets, as carried out by conventional limited liability firms. In contrast to the Western investor, however, the Islamic investor must also take into account the ethical aspects of his investment, and the types of economic activity in which he invests. The insights of conventional finance theory apply to Islamic investment, but the restrictions which apply to the Islamic investor mean that Islamic investment differs from conventional