building social business

SEMINER: INTERNATIONAL DEVELOPMENT I: BUILDING SOCIAL BUSINESS

ATLANTIC INTERNATIONAL UNIVERSITY

ABDI ADAN OSMAN

ID: UM39717HDE48392

ADMINISTRATIVE DEVELOPMENT: BUILDING SOCIAL BUSINESS. M

ABDI ADAN OSMAN

UM39717HDE48392

ELIMINATING POVERTY AND JOBLESSNESS

By: Abdi Adan Osman

ADMINISTRATIVE DEVELOPMENT II: BUILDING SOCIAL BUSINESS II M.

ATLANTIC INTERNATIONAL UNIVERSITY 2 ABDI ADAN OSMAN

IDNo: UM39717HDE48392

Introduction………………………………………………………………3

The theories of investment and the principles Of Islamic banking

investment opportunities…………………………………………………..4

Beal Goyen and Philips theory of Rational Investment (2005)………….4

Sharpe Theory of Consumption…………………………………………..4

The Integration theory……………………………………………………..5

The Islamic Principles of Investment Opportunities…………………..5

The constructive effect …………………………………………………..6

THE GOVERNMENT AS AN AGENT OF SOCIAL BUSINESS BUILDER……..6

APPROACH TO BUSINESS INVESTMENT……………………………………….7

The World Bank and IMF as Comparative Bank of Social Business Building..9

General Conclusion………………………………………………………10

Recommendations…………………………………………………………11

References………………………………………………………………………………..12




Introduction

Broadly speaking, the administrative development and the role of building social business, this has

always been the situation on the ground for many countries and had always focused on this subject matter

as government and lager business role in the society. Historically in the early centuries and or years all man

of all over the world struggled for development and being independent socially, politically and economically.

For instance, at this time the whole world was a world of industry of production. No country rendered any

service of industry. Some continents had succeeded and managed to become the well industrialized countries

or the developed countries in other words. These countries mostly offer services and sell it to the other

countries in need. For example. They offer internet services, telecommunication services, banking,

investment opportunities, and shipments and so on through the satellite gateways. This process has taken

long until the 20th to the 21st centuries as we find that many countries are developing while others decline.

In this paper we shall discuss much the theories of investment and the principles of Islamic

Banking investment opportunities in terms of building social business. The comparative role of the other

banks other than the Islamic banking investment as building social business. The principles and role of the

government’s fiscal control system towards administrative development and building social business. The

nature and the scope of building social business and the effect of political crises to the subject matter as

administrative development and building social business.

The establishment of the concept of the practice of the Islamic banking system has become

widespread in this 21st century. In accordance with the BBC world service, the CNN news, Aljazera news

and other international media reported that Islamic banking establishment and its practice has risen the

British economy in the past one decade. In the same way Malasia’s use of the Islamic banking and

investment opportunities by these banks has reduced the larger extent of joblessness and has created the

opportunities for small business appraisal by offering investment opportunities. This system of private

banking is highly growing into many parts of the world. One of the most important Islamic bank tangible

which has encapsulated a rigid investment opportunities to the Somali society and played a great role in

the eradication of poverty in the country is ‘Salaam Somali Bank’ which was established in the year 2010

and has become the leading bank in Somalia. This bank has expertised in formulating social business

model through Murabah (investment partnership) Ijarah (Islamic leasing) and other ways.

This new business model innovation has created profit equations, new value propositions and

constellations. ‘’The story behind each of these ventures is of the gradual emergence of the social business

concept: a self-sustaining company that sells goods or services and repays its owners’ investments, but

whose primary purpose is to serve society and improve the lot of the poor. Building on these recent Grameen

experiments, our goal in this article is to delineate the lessons learned so as to provide detailed guidance for

companies wishing to create social businesses.’’

(Muhammad Yunus, Bertrand Moingeon and Laurence Lehmann-Ortega) Building Social Business

Models: Lessons from the Grameen Experience (2010)




THE THEORIES OF INVESTMENT AND THE PRINCIPLES

OF ISLAMIC BANKING INVESTMENT OPPORTUNITIES

What is the theory of investment as social business building? The term investment has a very historical

background in business and economic. It has been regarded as an element of business development after

market research which has to be made or carried out in business. After a company has made its business

market research, the first next step to be taken is ‘investment’. It is a tool required in all kinds of business.

For a business to start, to develop or expand, it has to have an investment. The concepts and theories

hereby described is that, in the early histories Barclays Bank being one of the earliest banks established in

Europe and the World Bank/IMF which was purposefully established in the World War II to raise fund for

the countries fighting against the Nazis who never wanted the leftist to come to power on the European

soil. And later on used to monitor the international fiscal policies and building social business by giving

loans to the countries of world equally (that can reach the terms and conditions of the IMF). The granting

of loans to governments or countries helps them fight poverty and increase the public services i.e highly

quality education, better health care services and excellent transportation services and build infrastructures

and this is part of the administration development.

Beal Goyen and Philips theory of Rational Investment (2005).

"Rational investors" apply sustainability-related criteria in the investment process to benefit from the

opportunities associated with corporate sustainability. Because social or environmental violations often

strongly affect equity prices (an effect recently seen with British Petroleum), rational investors also use

criteria such as those recommended by the CFA Institute [2008] to screen their portfolios for social,

environmental, and reputational risks. (The scheme proposed by Beal, Goyen, and Phillips [2005] )

Sharpe Theory of Consumption

Investors of the second type, who prevail in the retail segment, are defined as "consumption investors."

They regard sustainability as part of a modern lifestyle and adjust their investments accordingly. In

accordance with Sharpe [1963, 1964], critics often contend that the application of SRI screens in the

process of asset selection hinders risk diversification, which is possible to its full extent only in the market

portfolio. While this stands true on its own, Markowitz himself [2005] demonstrated that the market

portfolio is a mere theoretical entity. Therefore, even index investors cannot achieve the full extent of

diversification, because an index captures only part of the complete market.




The Integration theory

This third, and most homogeneous, alternative is the integration of sustainability as an additional criterion

in a new three-dimensional portfolio optimization. In this integrated approach, corporate sustainability is

treated as optimization criterion Z^ in Equation (3), whereupon the portfolio sustainability Sp is defined as

a linearly weighted combination of the SRI ratings of its individual stocks. So, the third target of portfolio

optimization is defined as:

The Islamic Principles of Investment Opportunities

Islamic religion is a complete code of life that provides thorough guidelines regarding every aspect of

human life, unlike all other religions practiced such as Christianity, Buddhism, Judaism and others which

merely focuses very narrowly aspects of human life such as spiritual aspect or ethical issues, but Islam is

as integrated way of life combining all spheres of human life whether spiritual, cultural, social, economic,

political and the like. Similar to othe socio-political and economic aspects, Islamic religion provides a

very succinct guidelines regarding business aspect of human behavior. Based on that, a Muslim should not

undertake any business transaction without observing Islamic guidelines of business activities. That is

why the Islamic banking system gives rights to its debtors and interest is not allowed as it causes business

to decline.

The prophet says ‘ Nine-tenth of the livelihood lies in business activities……’’

This emphasizes that the importance of business in Islam and it encourages trade and commerce (Arrif,

1991)

In this regard Islam demands a certain type of business behavior from the economic agents such as the

consumers and the producers. An Islamic business market is characterized by certain business norms that

take care of the interest of both the buyers and sellers. There are a number of rules and regulation of moral

discipline in business transaction without which business contracts would be regarded as imperfect in

terms of morality, decency and ethical excellence. Islam places a great emphasis on the lawful and

unlawful business practice and legitimate (Halal) earning. In this way the Islamic banking system uses

these emphasis by the Quran to have a good observation and control of the rights of their debtors (those

that they give loans). Following these good practices they use the concepts of direct (rational) theory to

invest in directly in their own business and indirectly (consumption) or the integrated theories by

providing or granting loans by selling or goods or services to buyers using the Islamic principles.

In the early 21st century the Islamic banking system has been spreading widely to the world and even

became active in some parts of Europe and Asia where there is quite a larger number of Islamic ethnic

group. Such as UK, Malasia and other countries. This has become a model of social business. These banks

use Islamic principles of investment i.e




1: Murabaha; a concept based on the consent contract where the demanded item is bought for the buyer

and then pays 30% - 20% of the total price of the item and 10% profit is placed on. This can be investing

in business a person willing to start a small business or willing to buy luxury goods such as automobiles,

houses, land, farms etc on loan terms paying the balance in as installment.

2- Musharaka; in this principle the person is required to either to come with a business idea to sell and

become a shareholder in the business created through that ideas. The bank holds 51% of the shares in that

particular business invested in where the innovator holds 49%.

3- Ijarah; rental or hiring for goods and services to the debtor,

4- Istisna and Mudaraba which are all credential business venture. These banks work without interest

knows as ‘’ribah’ in Islam which is unlawful. Interest is prohibited in Islam. The whole banking system

functions as partner. For instance, X requires to start a business, but doesn’t have the capital. X presents

his idea and innovation to bank. The bank carries out research on the X’s business idea. If X’s business

idea will be a successful business. the bank gives two options for X to choose for investment. 1-

Musharaka (partnership) the bank hold 51% of the total share of the investment of that particular business

while X is given 49% share for his innovation.

2- Mudaraba; an Islamic investment; X pays 30% of the total amount of the investment. The bank invests

wholly X’s business. Then X signs to pay the balance plus 10% profit in 11 months.

In this way X starts his business. And deposits the agreed amount of to be paid in monthly bases.

The constructive effect

As a result of the rise of the Islamic banking business, a very significant growth of socio-economic has

been experienced in the country (Somalia) and many other countries or parts of the world as well. This is

may be because of the lawful practice characterized which henceforth created trustworthy between the

customers (buyers) and the banks (sellers) of goods and services. The Salaam Somali bank, Dahabshil

Bank International, the International Bank of Somalia, the Premier Bank currently function in capital

Mogadishu and serve the people with all their banking needs. The leading bank among all being Salaam

Somali bank has helped a lot of people start small business as they granted loans to many people theough

the Murabaha, Mudaraba, Istisna and or Ijarah principles.

Now you can see a lot of people of different age mainly the youth between 20 – 40 years of age driving a

kind of a motorbike with three wheel call ‘Bajaj’ working as public transportation as taxi. They have all

bought this kind of taxi through Murabaha by Salaam Somali Bank as they pay in an installment.

THE GOVERNMENT AS AN AGENT OF SOCIAL BUSINESS BUILDER

The most prevailing example of government as an agent of social builder is that, the Republic of Rwanda.

This country has a long historical background of violence, tribal clashes, political crises which has always

resulted greater genocides both after and the precolonial period.




In 1899 German invaded the territory of Rwanda and Rwanda became German colony. 92 years later after

the defeat of the Germans during the World War I, Rwanda became the territory of the League of Nations

under the Belgium administration.

After prolonged period of political crises, violence, tribal clashes and massacre of different years and ages,

many generation belonging to Hutu and Tutsi ethnic groups have never experience any convenience until

April 1994 when the capital of Rwanda fell into the hand of the National Patriotic Army who came into

power and formed a government of national unity. This government has then formulated rules for recovery

which include

The Genocide Survivor Fund; meant for providing free education, health and income generating

activities to the most vulnerable survivors of the genocide,

Human rights commission which has protected the tights of the all citizens

The first rule of the two rules can be recognized as social business building and as

governmental role in socio-economic and business development.

Similarly, after the collapse of the central government of Somalia, the country has hosted continuous

violence and clashes of the ethnic groups as civil war. The public services had all been washed away, the

peace and stability had been forced away as destruction of the hard won wealth, abuse of social behavior,

robbery, killing of the innocents and all other negative aspects and acts have into power. Until late in the

years 1999 -2013 when private entities have gradually became into action and rigidly engaged in business

investment and the practice of the banking system and express money transfer agencies and or companies

which have later started undertaking social responsibilities. In this ways they started investing in agriculture

and launched granting loans to the people to start small business. This has changed the lives of many Somalis,

as it has given ways for hope and recovery.

APPROACH TO BUSINESS INVESTMENT

Business investment behavior is one of the areas of modern economic research that is being studied most

intensively; empirical studies are accumulating rapidly,' and at the same time important developments in the

economic theory of investment behavior are taking place.

As yet, there is very little common ground between the empirical and theoretical approaches to this subject.

From a certain point of view this is a desirable state of affairs. Econometric studies of investment behavior

date back no more than thirty years.

Only recently have data on investment expenditures suitable for analysis by econometric methods become

available. If empirical studies are forced prematurely into a theoretical straitjacket, attention may be diverted

from historical and institutional considerations that are essential to a complete understanding of investment

behavior. On the other hand, if theoretical work is made to conform to "realistic" assumptions at too early a

stage in the development of empirical work, the door may be closed to theoretical innovations that could

lead to improvements in empirical work at a later stage. While there is some surface plausibility in the view

that empirical and theoretical research are best carried out in isolation from each other, this view is seriously

incomplete. Econometric work is always based on highly simplified models. The number of possible

explanations of investment behavior, which is limited only by the imagination of the investigator, is so large




that, in any empirical investigation, all but a very few must be ruled out in advance. Insofar as the necessary

simplifications restrict the possible explanations of investment behavior, these simplifications constitute, at

least implicitly, a theory of investment behavior. Such theories can be compared with each other most

expeditiously by reducing each to its basic underlying assumptions, after which empirical tests to

discriminate among alternative theories can be designed. Far from forcing empirical studies into a theoretical

straitjacket, judicious use of a theoretical framework is essential to the proper direction of empirical work.

The view that theoretical and empirical research should be carried out in isolation is incomplete in a second

respect. The use of economic theory as a source of possible explanations for investment behavior frees

econometric work from reliance on empirical generalizations that have not been subjected to rigorous

econometric tests. There is a very real danger that econometric models of investment behavior may be made

to conform prematurely to assumptions that are "realistic" by the standards of empirical work not based on

econometric methods. Just as premature reliance on "realistic" assumptions may be stultifying to the

development of economic theory, so reliance on historical and institutional generalizations may restrict the

development of econometric models unduly.

The paramount test for "realism" of an econometric model is its performance in econometric work. If a

model does not perform satisfactorily by the standards of econometrics, it must be rejected, however closely

it parallels historical and institutional accounts of the same economic behavior. The point of departure for

this paper is that progress in the study of investment behavior can best be made by comparing econometric

models of such behavior within a theoretical framework. Ideally, each model should be derived from a

common set of assumptions about the objectives of the business firm. Differences among alternative models

should be accounted for by alternative assumptions about the behavior of business firms in pursuing these

objectives. It will undoubtedly be surprising to some that a theoretical framework is implicit in the

econometric models of investment behavior currently under study. The objective of this paper is to make

this framework explicit in order to provide a basis to evaluate evidence on the determinants of investment

behavior. This objective can only be attained by a thoroughgoing reconstruction of the theory of investment.

Once the theory of investment is placed in a proper setting, the arguments advanced for pessimism about

combining theoretical and empirical work largely evaporate. In providing a framework for the theory of

investment behavior, the first problem is to choose an appropriate basis for the theory.

Two alternative possibilities may be suggested. First, the theory of investment could be based on the

neoclassical theory of optimal capital accumulation. There are three basic objections to this possibility, the

first of which is that a substantial body of non-econometric work on the motivation of business firms,

mainly surveys of businessmen, suggests that "margin list" considerations are largely irrelevant to the

making of business decisions. This evidence has been subjected to careful scrutiny by White, who concludes

that the data accumulated by the surveys are so defective, even by the standards of non-econometric

empirical work, that no reliance can be placed on conclusions based on them. A second objection is that

previous attempts to base the study of investment on neoclassical economic theory have been unsuccessful,°

but this argument will not withstand critical scrutiny.

First, none of the tests of the neo-classical theory reported in the early literature was based on a fully rigorous

statement of the theory. Secondly, the assumptions made about the lag between changes in the demand for




capital services and actual investment expenditures were highly restrictive. Frequently, the lag was assumed

to be concentrated at a particular point or to be distributed over time in a very simple manner. Tests of the

neoclassical theory were carried out prior to the important contribution of Koyck to the analysis of

distributed lags and investment behavior. Despite these deficiencies, the pioneering tests of the neoclassical

theory reported by Tinbergen reveal substantial effects for the price of investment goods, the change in this

price, and the rate of interest. Similarly, tests reported by Roos reveal substantial effects for the price of

investment goods and rate of interest. Klein's studies of investment in the railroad and electric power

industries reveal substantial effects for the rate of interest. A third and more fundamental objection has

recently been restated by Haavelmo, who argues that a demand schedule for investment goods cannot be

derived from neoclassical theory: (theory of investment behavior by DALE W. JORGENSON UNIVERSITY OF CALIFORNIA AT

BERKELEY) Chapter URL: http://www.nber.org/chapters/c1235 Chapter pages in book: (p. 129 – 1 75

The World Bank and IMF as Comparative Bank of Social Business Building

‘’The World Bank and International Monetary Fund (IMF) were created at the end of World War II by the

U.S. and British governments. During the war the business classes of Europe were either supporting the

Nazis, getting their banks and factories bombed into oblivion or they fled Europe with all the money they

could carry. On the other hand, socialists, communists and anarchists had high credibility because they were

the leaders of the Resistance to Nazi occupation. In order to prevent leftists from coming to power in western

Europe, it was crucial to U.S. and British elites to get the business classes back into power. This required

international institutions that would promote capitalist policies and strengthen the power of the corporate

sector.

The World Bank focused on making loans to governments in order to rebuild railroads, highways, bridges,

ports and other "infrastructure", i.e., the parts of the economy that are not profitable for private companies

to build so they are left to the public sector (the taxpayers). After an initial focus on western Europe the

World Bank shifted its lending toward the third world.

The IMF was established to smooth world commerce by reducing foreign exchange restrictions and using

its reserve of funds to lend to countries experiencing temporary balance of payments problems so they could

continue trading without interruption. This pump-priming of the world market would benefit all trading

nations, especially the biggest traders, the U.S. and England.

The unwritten goal of the IMF and World Bank was to integrate the elites of all countries into the capitalist

world system of rewards and punishments. The billions of dollars controlled by the IMF and World Bank

have helped to create greater allegiance of national elites to the elites of other countries than they have to

their own national majorities. When the World Bank and IMF lend money to debtor countries the money

comes with strings attached. The policy prescriptions are usually referred to as "structural adjustment" and

they require that debtor governments open their economies up to penetration by foreign corporations,

allowing them access to the workers and natural resources of the country at bargain basement prices.. Other

policies imposed under structural adjustment include: allowing foreign corporations to repatriate profits,

balancing the government budget (often by cutting social spending), selling off publicly owned assets

("privatization") and devaluing the currency.

http://www.nber.org/chapters/c1235




Many grassroots groups in the Third World talk about the recolonization of their countries as they steadily

lose control over their own land, factories and services.’’

From the introduction to the book 50 Years Is Enough, edited by Kevin Danaher.

General Conclusion

Generally the concepts, the theories and the principles of investment as an element of building social

business has existed ever since the idea of banking business has come up. In accordance with theories

mentioned in Yunus’s book about the Grameen Bank in Bangaladesh ‘Grameen experiments, our goal in

this article is to delineate the lessons learned so as to provide detailed guidance for companies wishing to

create social businesses.’’ (Muhammad Yunus, Bertrand Moingeon and Laurence Lehmann-Ortega) Building Social Business Models:

Lessons from the Grameen Experience (2010)

Together with the Islamic principles and approaches to building social business and the other comparative

banks such as the World Bank, Barclays, Equity Bank and most others, all share common goals and

objectives in building social business. The three theories of ‘rational, consumption and integrated.’ By beal

Goyes, Philips and Sharpe determine and integrated methods of investment which are very comparative as

each one of them focuses on specific significant aspect which very advantageous to beneficiaries and the

business. The paper also determines the Islamic way of life and the practice of business in Islam as well as

the Islamic principles of investment opportunities and the lawful and unlawful practice of business as well

as the Islamic banking system and how legitimate it might be in investing in business directly or indirectly

(intrinsic/extrinsic) and the role this business plays in establishing social business model, how they create

job opportunities and their participation in establishing both small and large business by granting loans to

all level of business.

The paper also provides a clear understanding of Islamic business practice. The history of the world bank

and IMF and its major goals and objectives of establishment and the changes of trends it had passed and

how it functions currently.

Recommendations

This study hereby recommends the following points to be taken into measurs

1- Both the government and the private entities should take the responsibility of building social

business to eliminate poverty and joblessness in the society.

2- The practice of Islamic banking system be practiced, as this system can enhance and appraise the

life of the community by applying the Islamic principles of investment.

3- The three theories mentioned in this paper be given greater consideration to bring changes to the

world of business investment.




4- Generally the local and international banks are expected to take the responsibility of building

social business by providing support to the small business to general income to participate in the

socio-economic appraisal.

References

Yunus, M., & Weber, K. (2010). Building Social Business : The New Kind of Capitalism That

Serves Humanity's Most Pressing Needs. New York: PublicAffairs.

Schwartz, R. (2010). BUILDING SOCIAL BUSINESS: The New Kind of Capitalism that Serves

Humanity's Most Pressing Needs. (Undetermined). Stanford Social Innovation Review, 8(4), 18-

20.

Psacharopoulos, G. (2006). The Value of Investment in Education: Theory, Evidence, and Policy.

Journal Of Education Finance, 32(2), 113-136.

Rahman, M. (1997). Investment opportunities and multinationality: evidence from capital structure

changes. Journal Of Financial Research, 20423-434.

Venardos, A. M. (2010). Current Issues in Islamic Banking and Finance : Resilience and Stability in the Present

System. Singapore: World Scientific Publishing Company.

Bonin, H., & Brambilla, C. (2014). Investment Banking History : National and Comparative Issues (19th-21st

Centuries). Brussel: Peter Lang AG.

WetFeet.com, (. (Firm). (2003). Killer Investment Banking Resumes! : The WetFeet Insider Guide. San Francisco, CA: WetFeet.

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