Islamic Finance and Sustainable Finance

Islamic Finance and Sustainable Finance

Islamic finance and sustainable finance may seem to be unrelated concepts at first glance, but upon closer examination, it becomes apparent that there is significant synergy between the two. Both Islamic finance and sustainable finance share common principles and values that promote financial inclusion, social equity, and environmental stewardship.

Islamic finance is based on principles derived from Islamic law (Shariah) that prohibit practices such as interest (riba) and speculation (gharar). Instead, Islamic finance promotes risk-sharing, asset-backing, and ethical investment. These principles align closely with the core tenets of sustainable finance, which seeks to integrate environmental, social, and governance (ESG) factors into investment decisions.

One of the key principles of Islamic finance is the concept of ethical investing, which requires investments to be made in a manner that is socially responsible and beneficial to society. Similarly, sustainable finance promotes investments that have a positive impact on society and the environment. By incorporating ESG factors into their investment decisions, Islamic financial institutions can ensure that their investments are aligned with sustainable development goals and contribute to the well-being of communities and the planet.

Moreover, both Islamic finance and sustainable finance place a strong emphasis on financial inclusion and social equity. Islamic finance promotes financial inclusion by providing accessible and affordable financial services to underserved populations, while sustainable finance seeks to address social inequality and promote inclusive economic growth. By working together, Islamic and sustainable finance can collectively advance financial inclusion and promote economic empowerment among marginalized communities.

In addition, Islamic finance and sustainable finance both prioritize environmental stewardship and the promotion of sustainable development. Islamic finance prohibits investments in industries that are harmful to the environment or society, such as gambling, alcohol, and tobacco. Similarly, sustainable finance encourages investments in renewable energy, clean technology, and other environmentally friendly industries. By aligning their investment portfolios with sustainable development goals, Islamic financial institutions can help contribute to a more sustainable and environmentally conscious future.


Islamic Finance and the UN SDGs:

Islamic finance can promote sustainable development and align with the United Nations Sustainable Development Goals (SDGs) in several key ways:

  • Ethical investing: Islamic finance prohibits investments in sectors that are considered socially harmful, such as gambling, alcohol, and tobacco. By adhering to Shariah principles, Islamic financial institutions can ensure that their investments are in line with ethical and social values, contributing to sustainable development by promoting responsible and ethical business practices.
  • Social inclusion: Islamic finance emphasizes financial inclusion and provides accessible and affordable financial services to underserved populations. By focusing on the needs of marginalized communities and promoting financial literacy and education, Islamic finance can help reduce poverty, promote social equity, and support inclusive economic growth, all of which are key goals of the UN SDGs.
  • Environmental stewardship: Islamic finance principles encourage investments in environmentally friendly industries and projects. By avoiding investments in industries that harm the environment and promoting sustainable development practices, Islamic financial institutions can support the SDG goal of environmental sustainability and contribute to efforts to combat climate change and preserve natural resources.
  • Impact investing: Islamic finance is well-suited to support impact investing, which seeks to generate positive social and environmental impacts alongside financial returns. By integrating Environmental, Social, and Governance (ESG) factors into their investment decisions, Islamic financial institutions can allocate capital to projects that address key development challenges and contribute to the achievement of the UN SDGs.
  • Zakat and charitable giving: Zakat, the Islamic concept of giving a portion of one's wealth to those in need, is a fundamental pillar of Islamic finance. By encouraging charitable giving and philanthropy, Islamic financial institutions can support a wide range of social, environmental, and development initiatives that align with the UN SDGs, including poverty alleviation, education, healthcare, and environmental conservation.

Overall, Islamic finance has the potential to play a significant role in promoting sustainable development and aligning with the UN SDGs through its emphasis on ethical investing, social inclusion, environmental stewardship, impact investing, and charitable giving. By leveraging the principles and values of Islamic finance, financial institutions can contribute to a more sustainable and equitable future for all.


Examples of Islamic Finance Projects

There are numerous examples of Islamic finance projects that support the United Nations Sustainable Development Goals (SDGs) across various sectors. Some examples include:

  • Renewable energy projects: Islamic financial institutions have financed a number of renewable energy projects, such as solar and wind farms, that promote clean energy production and contribute to the goal of sustainable energy (SDG 7). By investing in these projects, Islamic finance supports the transition to a low-carbon economy and helps combat climate change (SDG 13).
  • Microfinance initiatives: Islamic financial institutions provide microfinance services to underserved populations, including small business owners and entrepreneurs, enabling financial inclusion and economic empowerment (SDG 1 and SDG 8). By offering access to affordable and ethical financial services, these projects help reduce poverty and support sustainable economic growth.
  • Affordable housing developments: Islamic finance has been used to fund affordable housing projects in various countries, providing access to safe and affordable housing for low-income families (SDG 11). By investing in these projects, Islamic finance promotes sustainable urbanization, inclusive cities, and resilient communities.
  • Education and healthcare facilities: Islamic finance supports the development of education and healthcare infrastructure through funding for schools, hospitals, and healthcare centers. These projects contribute to the goals of quality education (SDG 4) and good health and well-being (SDG 3) by improving access to essential services and promoting human capital development.
  • Sustainable agriculture initiatives: Islamic finance can be used to finance sustainable agriculture projects that promote food security, poverty alleviation, and rural development (SDG 2 and SDG 15). By investing in agricultural practices that are environmentally sustainable and socially responsible, Islamic financial institutions support sustainable food production and rural livelihoods.

These examples demonstrate how Islamic finance projects can align with and support the United Nations Sustainable Development Goals across a range of sectors, including renewable energy, microfinance, affordable housing, education, healthcare, and agriculture. By investing in projects that promote social, environmental, and economic development, Islamic financial institutions play a crucial role in advancing the global agenda for sustainable development and contributing to a more inclusive and sustainable future for all.


Sustainable Sukuk (Bonds):

Sustainable sukuk, also known as green sukuk or social sukuk, are Islamic bonds that are issued to finance projects or initiatives that have a positive environmental or social impact. Similar to traditional sukuk, sustainable sukuk represent ownership in an underlying asset or project, and investors receive periodic returns based on the performance of the underlying assets.

The key difference between sustainable sukuk and conventional sukuk is that the proceeds from sustainable sukuk are earmarked for projects that promote sustainability, environmental conservation, or social development. These projects typically align with the objectives of sustainable finance and support the United Nations Sustainable Development Goals.

Sustainable sukuk can be used to finance a wide range of projects, including renewable energy infrastructure, energy efficiency projects, sustainable agriculture initiatives, affordable housing developments, clean water and sanitation projects, and social impact programs. By issuing sustainable sukuk, governments, corporations, and financial institutions can raise funds for projects that contribute to sustainable development and environmental stewardship.

Investors in sustainable sukuk benefit from both financial returns and the satisfaction of knowing that their investments are making a positive impact on society and the environment. Sustainable sukuk offer a unique opportunity for Islamic investors to support projects that align with their values and principles, while also contributing to global efforts to address climate change, promote social equity, and achieve sustainable development.

Overall, sustainable sukuk play an important role in the growing field of sustainable finance by providing a Shariah-compliant financing mechanism for projects that have a positive impact on people and the planet. As awareness of environmental and social issues continues to grow, sustainable sukuk are becoming an increasingly popular instrument for mobilizing capital towards sustainable development goals and building a more sustainable and inclusive financial system.

As of Q1 2024, the global issuance of sustainable bonds reached a total of $235.4 billion, according to data from LSEG. The total issuance of sustainable sukuk in Q1 2024 amounted to $4.0 billion, representing an increase of 17.2% from the same period in 2023.

In 2023, sustainable sukuk issuance reached a total of $13.4 billion, exceeding the full-year total of $9.4 billion for 2022. This marked the seventh consecutive record year of issuance since the market’s inception in 2017. This compares to overall sukuk issuance of $212.5 billion in 2023, which grew by 8.7% compared to 2022. Over the period 2017-2024 Q1, a cumulative value of $42.7 billion of sustainable sukuk was issued. By year-end 2023, sustainable sukuk constituted 1.6% of the total sustainable bond issuance and 6.2% of the total sukuk issuance.

Conclusion

In conclusion, the synergy between Islamic finance and sustainable finance offers a powerful opportunity to create positive social, environmental, and economic impacts. By incorporating ESG factors into their investment decisions and promoting ethical investing practices, Islamic financial institutions can play a key role in advancing sustainable development and promoting financial inclusion. Together, Islamic and sustainable finance can collaborate to build a more inclusive, equitable, and sustainable financial system that benefits society as a whole.

Rehan Anwar

Branch Manager | Investment Strategies, Wealth Management @ Dubai Islamic Bank Pakistan

6 个月

Very informative

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Damian Stoyanov, DipArch.

Building envelope addict and innovator ◆ BILDA Rain-screen Fixing SuperSystem inventor, developer and producer

6 个月

Sustainability effort is everybody’s duty!

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Lorean Rushiti

Digital Learning Consultant @ LEORON Institute | Skillsoft & EdXEnterprise

6 个月

Interesting viewpoint

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Zia Mustafa

Top 50 CFO KSA 2024 | Strategic Finance Leader | Results Driven CFO | Leading Finance Transformation

6 个月

Absolutely true that Islamic and sustainable finance can collaborate to build a more inclusive, equitable, and sustainable financial system that benefits society as a whole Dr. Mohammed Al-Surf.

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