"Progress and Perseverance: The Journey Towards Alternative Student Finance in the UK"

 

The current student finance system provides financial support to eligible students pursuing higher education in England. This support primarily covers tuition fees, maintenance loans for living expenses, and additional grants or loans for specific circumstances.

The system operates on the principle of income-contingent repayment, where students only start repaying their loans once they earn above a certain income threshold. Interest rates are applied based on the RPI inflation rate and vary depending on the student's income levels after studies. The repayment threshold is periodically adjusted based on changes in average earnings. The current system however has caused financial exclusion for students (mostly Muslims) who believe obtaining an interest-based loan for higher education is against their values. It is on this basis that the journey to introduce Alternative Student Finance (ASF) began.

ASF is designed to provide a Sharia-compliant alternative to traditional interest-bearing student loans. It is open to all eligible students regardless of faith, instead of charging interest, it uses a model based on Islamic finance principles, with repayment amounts tied to inflation rather than interest rates. It is intended to cover tuition fees and living costs for eligible higher education courses, much like conventional student loans. The system aims to ensure that students using ASF are in an equivalent financial position to those using traditional loans, with similar repayment terms starting once the graduate's income reaches a certain threshold.

The Islamic Finance Council UK (UKIFC) has been at the forefront of ASF in the United Kingdom. This blog post outlines the key milestones in this journey, highlighting the progress made and the challenges faced in developing a Sharia-compliant student finance option.

Here's a comprehensive look at the ASF milestones achieved on this journey.

The Early Stages (2010-2013)

In 2010, the need for an ASF system was identified, leading to initial discussions and proposals for changes in the existing student loan system. The following year Baroness Verma announced that the government was investigating the possibility of introducing an ASF, working with key organisations such as the Federation of Student Islamic Societies and the National Union of Students.

The Government’s higher education reforms introduced changes to interest rates on student loans and increased the tuition fee cap to £9000 per year, posing significant challenges for many in the Muslim community in 2012. This led to a coordinated campaign by Muslim organisations and the NUS to raise awareness of the negative impact of interest-bearing loans.

At the World Islamic Finance Forum in 2013, Prime Minister David Cameron promised to introduce a student finance system compatible with Islamic principles, ensuring that no Muslim student would be deterred from pursuing higher education due to financial constraints.

Consultation and Legislative Steps (2014-2017)

The government launched a ten-week consultation to gather opinions on a Sharia-compliant alternative finance product in 2014. 19,886 formal responses and 68 comments (via a designated email address) were received. The overwhelming support led to the decision to adopt a ‘Takaful’ model for ASF.

The publication of the Green Paper "Fulfilling Our Potential" in 2015 and the White Paper "Success as a Knowledge Economy" in 2016 provided further justification for the creation and adoption of an alternative student finance solution. The initial bill was accompanied by an Impact Assessment which highlighted the benefits of having an ASF.

The Higher Education and Research Act gained royal assent, securing the powers to introduce ASF. Despite a narrow loss of an amendment for quarterly progress reports, the Act marked a significant legislative milestone. To enable the government to implement an extra student financing model called "alternative payments" that would not include interest,  Sections 86 and 87 of the Higher Education and Research Act were passed in 2017. As part of the legislative process, Lord Sharkey submitted an amendment that would hold the government to quarterly reports on ASF development. This was pressed to a vote but lost narrowly, by 227-225.

Development and Advocacy (2017-2021)

The Department for Education (DfE) commissioned a study to support ASF development and appointed the UKIFC in October 2017 to help design an ASF model. Theresa May commissioned a review of post-18 education and funding in February 2018, while the DfE published an ASF research report in May 2019 highlighting positive perspectives on ASF from current and future students. In the same month, the Augar review further highlighted reasons to have the ASF. There was a debate in July 2019 at the House of Lords where the late Lord Sheikh who had also been the Co-Chair of the All-Party Parliamentary Group on Islamic Finance emphasised the need to fulfil the commitment made by David Cameron.

The collaborative advocacy efforts from the Muslim community and NUS reignited due to the inexplicable delays. The Muslim Census released the results of its online survey in October 2021 which revealed that over 12,000 students annually were negatively impacted by the lack of ASF. Before then, Ibrahim Khan of Islamic Finance Guru in 2015 had shared his views on the impact of not having ASF and the debates around whether attending the university was a need or want due to lack of ASF. ASF Campaign was also revived as a not-for-profit campaign which was initiated by a coalition of Muslim charities and community organisations to advocate for ASF.  They made a call to the subsisting Prime Minister Boris Johnson to ensure ASF was rolled out by September 2022, this followed an earlier letter in June 2021.

In February 2022, the Government gave a conclusion to the Augar Review and confirmed that it will consider if and how ASF can be delivered as part of the Lifelong Loan Entitlement (LLE). The LLE consultation was launched the same month. An opportunity in an accountability hearing in June 2022 of the universities minister to a public commitment in June 2022 to introduce ASF alongside the LLE in the 2025/26 academic year pending consultation results.

Recent Developments (2023-2024)

The government published the outcome of the LLE consultation in March 2023 and confirmed that ASF will be delivered as soon as possible after the introduction of the LLE and emphasised its commitment to ensuring the availability of the ASF, although it would not be delivered at the launch of the LLE in 2025/26.

A government policy paper and blog post announced plans for ASF in partnership with UKIFC. The Student Loans Company (SLC) began work on the ASF project pre-discovery in August 2023, signaling the start of concrete development efforts. Baroness Barran provided an update in September 2023 stating that she met with legislators, leaders of the Islamic community, the Student Loans Company, and the UKIFC quarterly to discuss the measures the government is taking to provide alternative student financing as soon as feasible. She provided another update in a letter to the House of Lords in December 2023.

The discovery phase of the ASF project ended in March 2024, marking a crucial step towards the implementation of ASF.

Looking Ahead

The journey towards establishing ASF has been long and eventful, marked by significant milestones and persistent advocacy. Overall, it represents a significant step towards ensuring that higher education in the UK is inclusive and accessible to all, respecting the diverse beliefs and needs of its student population.

The ASF discovery phase, which concluded in March 2024, marks another step towards making this long-awaited finance option a reality. It is hoped that the new government will continue the journey, spanning over a decade. We believe that ASF will not only benefit Muslim students but also contribute to greater financial inclusion in higher education across England. UKIFC remains committed to ensuring that no student is left behind due to financial constraints.


Pioneering Islamic Sustainable Finance: Insights from London Climate Action Week Round Table

The Islamic Finance Council UK (UKIFC), in partnership with PwC, brought together key industry leaders, Islamic finance experts, and sustainability professionals on Tuesday 25th June in London for an exclusive Unlocking Islamic Sustainable Finance round table. The event, which explored the burgeoning intersection of Islamic finance and sustainability, formed part of the London Climate Action Week (LCAW) programme.

LCAW is an annual event that began in 2019, organised by E3G. It gathers global leaders, organisations, and communities to address climate change challenges. LCAW features diverse activities such as forums, workshops, and showcases, playing a crucial role in advancing climate solutions and fostering collaboration among policymakers, businesses, and the public. The week highlights London’s commitment to sustainability and climate action, reinforcing its role as a global leader in addressing environmental issues.

The Unlocking Islamic Sustainable Finance round table was the first Islamic finance event to feature on the LCAW programme, thereby marking a significant milestone in the industry’s engagement with global climate action efforts.

Key areas of discussion are summarised below:

Market Opportunity and Growth for Islamic Sustainable Finance

According to new data from the Al Huda Center of Islamic Banking and Economics, global Islamic banking assets could hit $5 trillion by 2025, while S&P projects that the Islamic finance sector could experience an annual growth rate of 10 per cent in 2024. The round table discussions highlighted the substantial role Islamic sustainable finance can play in achieving the transition to net zero and achieving the UN Sustainable Development Goals (SDGs).

During the round table, it was also highlighted that adherence to Shariah-compliant finance reinforces consumer trust in the institutions that uphold these principles, particularly in Organization of Islamic Cooperation member states, many of whom are impacted by climate change and in need of finance and investment. Islamic finance also plays a pivotal role in enhancing financial inclusion by offering alternative mechanisms that cater to underserved populations.

With an increasing recognition that Islamic finance can help deploy capital to where it is most needed, according to the Financing a Sustainable Future report, green and sustainability sukuk has emerged as an innovative instrument which is attracting strong market demand.

Green Sukuk Guidance

The discussion moved on to what might be the most significant recent development in relation to Islamic finance in recent years. The publication of Guidance on Green, Social, and Sustainability Sukuk was a key output of the High-Level Working Group on Green and Sustainable Sukuk (HLWG) that was developed by the London Stock Exchange Group, Islamic Development Bank and International Capital Market Association. The guidance aims to promote sustainable finance instruments within the global sukuk market, providing clarity on issuing sukuk aligned with principles of sustainability, facilitating investments in projects that benefit the environment and society.

Sukuk has grown to become a significant asset class in the global bond markets with around US$220 billion issuances last year. In the sukuk market, there are roughly US$1 trillion worth of outstanding shares. This year, US$5 trillion worth of bonds have been issued, indicating a 50–60% increase in the market. Meanwhile, Green and sustainable sukuk issuances accounted for less than US$500 million in 2017 and increased to US$10.8 billion last year. In comparison, the market for green social sustainability bonds was valued at US$50 billion in 2014, when the Green Bond Principles were established and Global ESG bond issuance reached $621.8 billion in the first nine months of 2023. As a result, the guidance would also benefit issuers and individuals who are new to the sukuk market, especially green investors. It also takes a practical view especially in terms of developing economies particularly in the Middle East where a substantial portion is driven by sectors which need to transition. Chief financial officers of companies, sovereign teams, asset managers, and Shariah boards are anticipated stakeholders of the guidance.

Regulatory Developments

A key focus of the discussion was the evolving regulatory landscape, particularly in the Gulf region. The UAE Central Bank’s recent mandate requiring Islamic financial institutions to develop climate action plans through its Guiding Principles Regarding Islamic Sustainable Finance signals a significant shift in regulatory approaches to sustainability. This development aligns with UKIFC’s advocacy for greater integration of sustainability principles within Islamic finance regulatory frameworks.

It was highlighted that Islamic banks, while making efforts to align with the guidance, should measure changes to track progress. There was a consensus that they should also be given some flexibility during the transition process.

Tayyib Inspired – Islamic Sustainable Investing Platform (ISIP)

The round table also provided an opportunity for UKIFC to introduce its Islamic Sustainable Investing Platform (ISIP) to the UK audience having been showcased recently in Dubai, Kuala Lumpur and Istanbul. The ISIP is inspired and framed by the Islamic concept of “Tayyib” (pure, wholesome, and impactful). It complements the existing “halal” paradigm successfully built by the early Islamic finance pioneers and supports the development of the Islamic asset management sector. It reflects an aspiration for excellence which has been applied to Islamic investment sector.

ISIP serves as a showcase for independently assessed Islamic investment products that align with sustainability goals. The launch of the platform is a significant step forward in making Islamic sustainable finance more accessible and visible to a global audience. It presents an opportunity for Islamic finance to contribute unique perspectives to global sustainability efforts.

Challenges, Opportunities and Updates

Participants engaged in discussions about the challenges facing the Islamic sustainable finance sector. A key issue that emerged was the need to broaden the investor base, particularly among pension funds and institutional investors. Overcoming this challenge highlighted the importance of education and awareness-raising.

The Accounting and Auditing Organisation for Islamic Financial Institution (AAOIFI) Standard 62 on Sukuk was mentioned as a challenge facing the industry. It was noted that the standard now gives a narrower definition of Sukuk and a higher entry level into the market. This will impact green and non-green sukuk issuances, thereby becoming a key consideration for all market players.

On a more positive note, some UKIFC-led research was shared during the round table which, encouragingly, showed that 80% of Islamic finance customers want products aligned with SDGs. This consumer demand presents a clear opportunity for the industry to develop products that meet both religious and sustainability criteria.

Looking Ahead

The round table concluded with a sense of optimism about the future of Islamic sustainable finance. Key areas for future focus include:

  1. Continued collaboration between Islamic finance institutions, regulators, and mainstream sustainable finance players
  2. Further development of standards and guidelines to facilitate market growth
  3. Enhanced efforts to educate investors and consumers about Islamic sustainable finance products
  4. Exploration of how Islamic finance principles can contribute to addressing global sustainability challenges
  5. Exploration whether there was appetite for shariah compliant pensions from Islamic banking customers

As a pioneer in this field, UKIFC remains committed to driving forward the Islamic sustainable finance agenda. By combining the ethical principles of Islamic finance with contemporary sustainability frameworks, a new suite of financial solutions can be made available that benefit both people and planet.


Unlocking Islamic Sustainable Finance Round Table in Dubai

The Unlocking Islamic Sustainable Finance round table took place at the PwC Middle East office in Dubai on Thursday 23rd May 2024.

At the event, the Islamic Sustainable Investing Platform (ISIP) Application Guidelines were released and discussions with the UAE Central Bank were held on the implementation of the Central Bank’s Guiding Principles Regarding Islamic Sustainable Finance released just before COP28.

Participants included senior representatives of financial institutions and market makers such as the Mashreq Bank, Dubai Islamic Bank, S&P Group, Abu Dhabi Islamic Bank, London Stock Exchange Group, National Bank of Fujairah Islamic, Mashreq Bank, Ajman Bank, Dubai Islamic Bank, Emirates Islamic Bank, Standard Chartered Bank, Commercial Bank of Dubai, Abu Dhabi Islamic Bank, Emirates Islamic Bank, HSBC, PRI, and Emirates NBD.

Key discussion points from the session are summarised below:

Overview of Islamic Sustainable Finance

The opening remarks noted the growth of Islamic finance assets and the increasing issuance of green sukuk. Headline figures include:

  • Green and sustainable sukuk issuances have surged, crossing $10 billion last year
  • Islamic Finance Development report by ICD ELSEC, noted that the Islamic finance market is rapidly growing, with assets predicted to reach $6.7 trillion by 2027

Islamic finance and sustainability are critical areas that present challenges and immense opportunities at their intersection.

Global Ethical Finance Initiative (GEFI) and the Islamic Finance, Council, UK (UKIFC) highlighted their activities at the forefront of developing Islamic sustainable finance and mainstream sustainable finance ecosystems. Through collaborative efforts, they have launched several initiatives, such as the Global Task Force on Islamic Finance and UN Sustainable Development Goals (SDGs) and High-level Working Groups on Green and Sustainable Sukuk. These initiatives, alongside thought leadership, advocacy, and capacity building, aim to promote Islamic sustainable finance on a global scale.

Regulating Islamic Sustainable Finance – UAE Central Bank Approach

Discussions noted that despite being perceived as a natural leader in sustainability, Islamic finance initially did not take the forefront in this area globally. Historically, there was a misconception and a disconnect between the expectations of Islamic finance and the principles of sustainability. While Islamic finance inherently aligns with sustainability through its emphasis on ethical investments and social responsibility, it lacks a structured approach and clear guidelines. Recent developments, including the establishment of guiding principles and taxonomies, aim to bridge this gap. The UAE Central Bank recognised this gap and issued guiding principles in 2023 to encourage Islamic financial institutions to incorporate sustainability into their Sharia decision-making.

The guidelines are designed to prompt action and frame the concept of sustainability within shari’ah by reference to principles of socially responsible and ethical ownership and utilisation of wealth/resources (trusteeship, justice, equity, ihsan and adl). They utilise a framework derived from Sharia injunctions on permissible, recommended, obligatory, discouraged, and prohibited activities to evaluate investments through a sustainability lens.

Implementation considerations discussed include:

  • lack of a taxonomy at present
  • integrating this new layer into existing Sharia decision making processes without disrupting business flows and guiding the scholars through the process
  • banks are exploring how best to develop internal processes and controls to comply with the principles

A financial institution shared its experience of using a two-screen process in implementing the guidelines. There is one Shariah screening process and then a second green or sustainability screening process. It was emphasised that this was not a combined process but rather two separate perspectives, the Islamic and the sustainability. Banks also shared how they internally score their clients and assess how they can help them on that journey toward net zero. Other examples from the banking industry highlighted the role of giving incentives to clients who reduce their water consumption or add renewable energy sources to their operations. Where targets are met discounts are applied on their financing rate.

It was suggested that the Central Bank should allow implementation of the guidelines in phases considering the current system has been operating for over 50 years. Other discussion points included the importance of giving incentives to banks and other ecosystem actors to adopt enhanced sustainability approaches. A point was also raised about further regulation that will guide banks on how to support Shariah scholars in the process of implementing the guidelines.

Introduction of the Islamic Sustainable Investing Platform (ISIP)

The ISIP was initially announced at COP28 and the platform application guidelines formally revealed at the roundtable. ISIP provides a listing of independently assessed, validated and showcased Islamic investment products that are directly aligned to sustainability goals. The platform draws inspiration from the concept of “Tayyib,” (meaning pure, wholesome, and impactful) and aims to encourage the development of Islamic sustainable finance.

Rather than add another burden, the ISIP approach leverages existing market frameworks like the Principles for Responsible Investment (PRI) that major Islamic investors have already adopted. Islamic financial institutions can apply to have their Sharia-compliant products across asset classes like equities, sukuk, real estate, and private equity assessed for sustainability criteria by independent third parties.

Summary

The roundtable facilitated an excellent set of engaging and insightful discussions amongst financial institutions in the UAE to explore how the Central Bank’s Guiding Principles Regarding Islamic Sustainable Finance can be effectively implemented. GEFI/UKIFC plans to host a larger Islamic Sustainable Finance event in Dubai in Q4 2024. Organisations interested in partnering are invited to get in touch.


Shaping a Sustainable Future: UKIFC's Impactful Journey at COP28 and Beyond

The Islamic Finance Council UK (UKIFC) was a strategic partner for the Global Ethical Finance Initiative (GEFI)’s #PATHTOCOP28 Programme – the first and largest finance-focused campaign for COP28.

The programme had seven high–profile events which included the Evening Lectures 'Adam Smith & Ibn Khaldun at #PATHTOCOP28, the COP28 Climate Finance Summit: Financing Survival which Scotland’s First Minister – Humza Yousaf; Unlocking Islamic Finance at COP28, and the SDG Hive.

The Unlocking Islamic Finance Summit was the largest Islamic finance event at COP28. The event which had in attendance global experts and scholars in the industry, delved into discussions on Green and Sustainable Sukuk, transitioning from Halal to Tayyib by enhancing consideration of ESG factors, and the pivotal role of Shariah scholars in promoting sustainability.

The UKIFC has been at the forefront of advancing the intersection of Islamic finance and sustainable development over the years, we are therefore delighted to share some remarkable achievements and announcements that underscore our commitment to shaping a sustainable future through Islamic finance.

  1. PRE-COP28

Unlocking Islamic Finance Insight Series – LAUNCHED BEFORE COP

The UKIFC has released an Unlocking Islamic Finance Insight Series, a collection of blogs and articles that discuss key issues and opportunities in Islamic finance. This ongoing initiative aims to deepen understanding and awareness of Islamic finance through engaging discussions, webinars, and expert opinions. It includes articles about ESG Frameworks and the Imperative of Inclusivity, Challenges of Islamic Financial Institutions Engaging with Net Zero Frameworks and Other Initiatives, and Green Sukuk for Nature and Biodiversity Conservation: the Next Frontier.

Other Islamic Finance News

We are also happy with the launch of the annual report on the Islamic finance industry, titled “Navigating Uncertainty” by our partner London Stock Exchange Group (LSEG) and the Islamic Corporation for the Development of the Private Sector (ICD) during the 18th AAOIFI-IsDB Annual Islamic Banking and Finance Conference.

The Islamic Finance Development Report 2023 states that the assets of the global Islamic finance sector grew by 11% to US$4.5 trillion in 2022, with 72% of the industry's total assets coming from Islamic banking. It is anticipated that the industry will expand by US$6.7 trillion by 2027, having grown by 163% since 2012.

  1. BLUE ZONE ANNOUNCEMENT

ICMA, IsDB, and LSEG Partnership for Green Sukuk Guidelines – LAUNCHED IN BLUE ZONE

UKIFC welcomed the collaboration between the High-Level Working Group on Green Sukuk (HLWG) with ICMA through its partners IsDB, and LSEG to produce a Green Sukuk practitioners’ guide which will be in line with the Green Bond Principles. This collaboration aims to support the growth of the green sukuk market, mobilizing climate finance from global capital markets. The guide will enhance investor awareness of the sukuk asset class, furthering our collective efforts toward climate and sustainability goals. The UKIFC continues to support the work of the HLWG as its Secretariat.

  1. UNLOCKING ISLAMIC FINANCE SUMMIT

Launch of Global Islamic Finance and UN SDGs Taskforce Key Outputs Report – LAUNCHED AT SUMMIT

With the close of the Global Islamic Finance and UN SDGs Taskforce(Taskforce) we released its final report - Global Islamic Finance and UN SDGs Taskforce Key Outputs Report which delves into all the activities and achievements of the Taskforce. It also highlights the integral role Islamic finance plays in contributing to the United Nations Sustainable Development Goals, offering insights and recommendations for a positive global impact.

Through advocacy efforts at major global forums and the production of technical resources, the Taskforce successfully engaged with four working groups, focusing on Disclosures and Reporting, Education and Awareness, Pakistan, and the High-Level Working Group on Green Sukuk (HLWG).

The UKIFC looks forward to working with partners who are eager to take the recommendations from the report forward.

Green Sukuk Updated Report 2023 – LAUNCHED AT SUMMIT

The HLWG remains the only workstream that continues after the successful tenure of the Taskforce. Its commitment to sustainable finance is further emphasized in the Financing a Sustainable Future Green and Sustainability Sukuk Updated Report 2023. This report which is an update to the 2022 report provides a comprehensive analysis of the latest developments and trends in the green sukuk market, showcasing Islamic finance's pivotal role in driving environmentally conscious initiatives. The report shows global green and sustainability sukuk issuances exceeding $10 billion in the first three quarters of 2023 as the instrument gains momentum for financing environmental projects.

According to the report, global Green and Sustainability Sukuk issuance has surpassed $10 billion in the third quarter of 2023 compared to $9.4 billion in 2022. Indonesia, Malaysia, and Saudi Arabia also collectively contributed 77% of the total cumulative issuance by Q3 2023, underscoring the key role played by these nations in driving sustainability within the Islamic finance sector.

Tayyib Secretariat Launch – LAUNCHED AT SUMMIT

This global initiative, unveiled at GEFI's Unlocking Islamic Finance Summit in Dubai, developed following a year-long market assessment by UKIFC and GEFI. The Tayyib approach leverages the Shariah-compliant model of Islamic finance to cultivate an enhanced ESG and sustainability framework. Positioned as a potential best practice approach to responsible investing, the Tayyib Inspired Secretariat, a collaborative effort involving Malaysia, the UAE, and the UK, aims to develop Tayyib-inspired investment principles, foster market expansion, and contribute to the mainstream sustainable finance sector.

Co-managed by UKIFC and ISRA Consulting, with DIFC as the Host Financial Centre and PwC Dubai as the Technical Partner, the Tayyib Secretariat boasts an Advisory Panel representing Shariah scholars, multilateral bodies, and industry developmental stakeholders, along with an Industry Consultation Group to ensure comprehensive support and collaboration.

  1. UKIFC WIDER ENGAGEMENT AT COP28

Our Director and Advisory Board Member, Omar Shaikh attended three equally important events at COP28. He moderated the Fireside Chat titled “Leveraging Islamic Finance for Sustainability: MENA and ASEAN Perspectives” on 3rd December. The event was held at the Malaysia Pavilion. The theme for the Malaysia Pavilion for COP28 was “Going Beyond: Green Growth, Resilient Community, Liveable Planet”.

Experts on Islamic finance and sustainability gathered to discuss leveraging Islamic finance instruments to promote sustainability initiatives in the MENA and ASEAN regions, exploring the latest trends while considering the unique regulatory environments. Panelists addressed the current Islamic finance landscape and sustainability challenges, shared success stories demonstrating Islamic finance's pivotal sustainability role, and offered solutions to specific regulatory and practical obstacles.

On 4th December, he was a panelist at a UNHCR & Greenpeace Session on “Islamic Social Finance for Climate Action” held at the Faith Pavillon (Blue Zone). The discussion centred on how Islamic social finance might help address crises involving displacement, highlighting the innovative ways that the UNHCR has used zakat, sadaqah, and waqf as sustainable finance solutions.

At the Knowledge Hub on the 5th of December, he was one of the key stakeholders who attended the “Empowering society through financial resilience” event which was hosted by Abu Dhabi Islamic Bank (ADIB), in partnership with the London Stock Exchange Group (LSEG). The gathering brought together influential industry participants to explore market insights and trends with a particular emphasis on the role Islamic finance can play in advancing sustainable development goals (SDGs).

  1. CONCLUSION

UKIFC's recent achievements stand as a testament to the collective dedication and expertise of our community. The Unlocking Islamic Finance Summit emerged as a significant highlight of COP28, gathering global experts and scholars to explore themes like Green and Sustainable Sukuk, transitioning from Halal to Tayyib with enhanced consideration of ESG factors, and the crucial role of Shariah scholars in promoting sustainability.

The summit also witnessed the launch of the Global Islamic Finance and UN SDGs Taskforce Key Outputs Report and the Tayyib Secretariat, a transformative global initiative. With Islamic finance assets projected to grow 163% by 2027, the UKIFC remains committed to harnessing the industry's immense potential through strategic partnerships and initiatives promoting sustainable development.

 


UKIFC Signs MOU with Islamic University of Maldives to Advance Islamic Finance

We are excited to announce that the UK Islamic Finance Council (UKIFC) has signed a memorandum of understanding (MOU) with the Islamic University of Maldives (IUM) at COP28 to collaborate on several key initiatives to promote Islamic finance in the Maldives.

The collaboration is set to unfold through four dynamic programs aimed at empowering Maldivian bankers, advancing academic programs, promoting community awareness of Islamic finance, and fostering sustainability in the financial sector. This strategic partnership underscores UKIFC’s commitment to fostering the growth of Islamic finance globally.

 


Collaboration with ICMA announced

The HLWG, represented by the Islamic Development Bank (IsDB) and London Stock Exchange Group (LSEG), announced at COP28 in Dubai, a collaboration with ICMA to produce green sukuk guidance in line with the Green Bond Principles. The pioneering initiative will support the growth of the green sukuk market for mobilizing climate finance from global capital markets.

IsDB, LSEG and ICMA will work together to develop the guidance for global capital market practitioners. It is expected that the guidance will enhance investor awareness of the sukuk asset class.

Learn more about the High-Level Working Group

Countdown to COP28

 

The countdown to the 28th UN Climate Change Conference of the Parties (COP28) has begun. As the world gears up to address the cross-cutting themes of finance, technology, innovation, and inclusion, here are key reasons you should keep an eye on COP28:

  1. Learn about the latest trends:

Islamic finance principles of social responsibility naturally align with sustainability objectives. With COP28 being hosted in Dubai, there will be more of a focus on Islamic Finance than ever before, offering an opportunity to understand how Islamic finance instruments like green sukuk can support climate mitigation and adaptation projects. The Global Ethical Finance Initiative (GEFI) in partnership with the Islamic Finance Council, UK (UKIFC) is putting together the largest Islamic Finance focused event at COP, set to share insights on how Islamic finance offers an ethical model for financing sustainability.

  1. Ethical Investments:

, aligning well with the goals of COP28. There will be opportunities to explore ethical investments that adhere to both Islamic finance principles and environmental sustainability. Companies like NuQi Wealth which provides opportunities for ethical investment will be at COP.

  1. Contribute to shaping policy:

With sustainability a growing priority worldwide, policymakers are looking for solutions. COP28 will negotiate policies like emissions reductions, adaptation goals, and climate funding mechanisms. With key policymakers from all over the world attending, participants will have the opportunity to share their perspectives on how Islamic finance can be furthered through policies, regulations, and tax frameworks to drive sustainable development.

  1. Join the global community:

COP events are global in scope, with participation from governments, businesses, and organizations from around the world which offers the chance for attendees to network and collaborate with international stakeholders who are shaping the future of finance and sustainability.

Islamic banks like Gatehouse Bank, takaful providers, law firms, fintechs, consultants, and other professionals will be in attendance. Also, DDCAP Group, a company that offers the Islamic financial sector ethical, sustainable intermediary services, will be at COP28.

  1. Innovative Solutions:

The conference is a hub for innovation and solutions. Discover the latest advancements in green technology, climate mitigation, and adaptation strategies.

The UKIFC will be launching the Tayyib Project at the Unlocking Islamic Finance Summit at COP28 on Tuesday, 5th December 2023. This innovative kitemark unites best practices of ESG and Shariah compliant finance, aimed at facilitating the development of sustainable financial products that are both Islamic and conventional finance approved.

The "Unlocking Islamic Finance at COP 28" event is where the intersection of Islamic finance and climate action will take centre stage. Learn more about it here!

#IslamicFinance #COP28 #Sustainability #EthicalFinance

 

 

 

 


GREEN SUKUK FOR NATURE AND BIODIVERSITY CONSERVATION: THE NEXT FRONTIER

Nature is facing a crisis that hampers humanity's ability to combat climate change.

Unsustainable economic activities have led to the destruction of nearly 70% of Earth’s biodiversity since 1970 (NPR, 2022), diminishing the capacity of these ecosystems to provide climate change mitigation and adaptation benefits. Neglecting nature and biodiversity conservation amidst worsening climate change could result in a detrimental cycle of escalating effects, considering the interconnectedness of biodiversity loss and climate change (IFC, 2022). However, conservation efforts cannot be accomplished without adequate funding from all sources. 

In support of global discussions aimed at addressing the funding gap of $598-824 billion per year (NC and others, 2020) and recognising the sustainable development opportunities in Islamic finance products, this article will explore the use and flexibility of Green Sukuk as a finance tool to expand and diversify funding sources for nature and biodiversity. 

Green Sukuk is an Islamic Shari’ah-compliant finance instrument for eco-friendly projects, offering investor non-interest based financial returns. Islamic (Shari’ah) finance law completely prohibits the presence of Riba (interest/unjustified gain), Gharar (risk and uncertainty), Maysir (gambling and speculation) and involvement with Haram (forbidden) activities or industries in financial transactions (Uddin, 2015). By contrast, traditional bonds are issued with a fixed interest rate, or coupon rate, which determines the amount of interest payments the bondholder will receive at maturity date (Uddin, 2015).  

Finance and Nature and Biodiversity Loss

Financial institutions currently view nature and biodiversity loss as a calculable material risk in terms of physical flows, corporate reputation, or other broader impacts (Richard and Nowella, 2022). However, with financiers treating nature as ‘natural capital’, the value of biodiversity remains embedded in its accounting prices (Dagpusta, 2021). 

The need to enhance the financial attractiveness of ecosystem conservation practices is an important issue to be addressed. Global discussions emphasise attaching commercial value to nature and biodiversity preservation to attract private sector investment, as public sector funding alone cannot bridge the funding gap (NC and others, 2020). Placing a monetary value on nature and biodiversity is essential for long-term sustainable development, as it not only attracts investors and innovative sustainable financial products, but it also encourages systemic change across value chains where businesses would be compelled to account for nature and biodiversity in their products and processes to attract funding. This is particularly crucial for economies that have been built on unsustainable practices due to various geographical and political factors, such as the fossil-fuel dependent GCC countries. It is also important when considering a shift away from interest-dominant green financial products (Edana, 2019) to expand the green finance pool and include Islamic finance products.  

In a comprehensive catalogue of finance solutions to address nature and biodiversity loss, BIOFIN has identified Green Sukuk as one of the financing solutions for sustainable development (BIOFIN, 2022). It is estimated that $30-$50 billion of capital dedicated to the UN Social Development Goals (SDGs) could be raised through green and sustainable Sukuk by 2025 (UKIFC, 2022). Green Sukuk presents a unique opportunity to attract investors mandated to comply with Shari’ah principles and offers an alternative fixed-income investment channel for ESG-focused investors, while also contributing to bridging the funding gap. Notably, reported subscription data indicates that green and sustainable Sukuk were oversubscribed 4.4 times compared to 3.3 times for traditional Sukuk  (Refinitiv, 2022). This demand is driven by both non-Shari’ah-related ESG-centric investment mandates (42%) and Shari’ah compliance-focused investors (38%), signifying growing interest in Green Sukuk beyond its religious significance. 

Another distinct feature lies in the Shari’ah law that govern Green Sukuk, which have the ability to address some of the limitations of the current green bond framework by promoting enhanced governance and accountability. One of the core Shari’ah principles require funds raised through Sukuk to be specifically allocated to an identifiable asset, typically through a special purpose vehicle established and owned by the issuer seeking to finance the asset (Pegah, 2017). This differs from green bonds, which are generally issued directly from a company’s balance sheet. Consequently, a sukuk structured to fund a designated green project is less likely to be diverted for non-green purposes, thereby enhancing legal accountability (Hussain et al., 2017). 

Furthermore, there is potential for stronger governance regarding the environmental aspect under Islamic principles. The Shari’ah board, a committee of Islamic scholars within an Islamic bank responsible for determining the compliance (halal) and theological purity (tayyib) of transactions, has authority to establish the specific Islamic principles that a Green Sukuk must adhere to. This means that the environmental and sustainability principles would be integrated into the underlying asset itself, rather than merely being reflected in the structure of the Sukuk. Such characteristics demonstrate an effective mitigation tool against greenwashing risks commonly present in traditional green bonds. 

Where Does the Nature and Biodiversity Green Sukuk Market Stand?

Previous Green Sukuk issuances and the accompanying frameworks in the GCC, Indonesia, and Malaysia, which currently hold a significant share of the Green Sukuk market, have primarily concentrated on renewable energy, energy efficiency, sustainable transportation, sustainable water and wastewater management, and achieving carbon neutrality (UKIFC, 2022). Nevertheless, it’s noteworthy that the Malaysian federal government has revealed plans to introduce a RM1 billion (US$209.87 million) biodiversity Sukuk facility. This announcement came during the presentation of the 2024 national budget in October 2023 (Marlena, 2023). 

Although the market is at a nascent stage, a lack of innovative development in biodiversity-related Islamic finance products risks an interest-dominated market of biodiversity investment instruments (World Bank, 2020) inaccessible to Shariah-compliant investors. The development of innovative and Shari’ah-compliant investment instruments focused on nature and biodiversity would reflect and internalise the Islamic concepts of Maṣlaha (public good), Qawa’īd (ethics) and the Maqāsīd al-Sharī’ah (the broader goals of Islamic law) into contemporary Islamic finance practices. This would not only address the existing gap but also underline the fundamental compatibility between Islamic finance and sustainable investment in nature and biodiversity.    

To draw the attention of innovative Islamic finance products to direct investment in nature and biodiversity, the following section will highlight how existing and potential (Green) Sukuk contracts can be used for the purpose of directing private finance to ecosystem conservation efforts. 

Green Sukuk Contractual Models for Nature and Biodiversity

The structuring of a Green Sukuk is similar to a traditional Sukuk with the only difference being greener assets used to support the Sukuk or an environmentally friendly project (Norhayati and Masri, 2020).  

Existing contractual arrangements for Green Sukuk have been structured around the following Shari’ah arrangements (Edana, 2021):  

  • Commodity Murabaha (sales agreement):most common and was used for the UAE’s MAF Green Sukuk- which was an international issuance, and the Malaysian Sarawak Green Hydro Sukuk 
  • Ijarah (leasing), Istisna (manufacturing sale):used for SRI Green Sukuk Tadau (Solar photovoltaic construction) 
  • Wakalah (agency- share of expertise and management for a fee):used for the BEWG (M) Sdn. Bhd. (Solar photovoltaic) Green Sukuk 

 Reflecting on IFC’s biodiversity finance reference guide (IFC, 2022), these contractual arrangements can prove effective and straight forward in one of the biodiversity finance streams: the investment into business operations and production practices that seek to address the key drivers of nature/biodiversity loss. However, it can prove challenging for the other IFC-identified streams: the investments in nature-based solutions to conserve, enhance, and restore ecosystems and biodiversity; and the direct financing of conservation and restoration of terrestrial and marine ecosystems. 

The returns provided to investors under the listed contracts depend on profit from sale or lease, fees for managerial and know-how sharing benefits, or a combination. Such returns under the 1st stream of biodiversity finance can be enabled through investment projects themed around productive agriculture and land use; replacement of biodiversity-adverse infrastructure, processes, and equipment; ecotourism services; freshwater/marine sustainable production; waste and plastic management for pollution control; transport and logistics innovation to avoid the transport of invasive species, etc. 

At face-value, it may seem that the non-revenue-based characteristics of conservation projects and nature-based solutions risk their exclusion from the biodiversity Islamic finance agenda, especially since these non-revenue projects have traditionally relied on interest-based funding. However, with the emergence of carbon markets and carbon credits, Islamic finance has the opportunity to play a pivotal role in advancing and establishing the regulatory and market infrastructure for carbon markets to address this challenge, particularly as conservation practices generate tradable carbon credits. Expanding financial offerings through innovative product development can optimise investment in ecosystems and create more opportunities for risk-sharing among Shari’ah-compliant investors. 

Applying Innovative Green Sukuk Models for Nature and Biodiversity

The 2 series SRI Malaysian Sukuk Ihsan by Khazanah Nasional Bhd, which involved Wakalah, commodity Murabaha and Istithmar (Islamic investment agency) arrangements, were innovative in addressing gaps in community investments as it linked returns to specific performance targets (Edana, 2019). Since their issuance, Securities Commission of Malaysia has introduced the Sustainable and Responsible Investment linked (SRI-linked) Sukuk Framework, tax incentives, and grant schemes to promote funding into the Sustainable Development Goals (CM, 2023).  A replication of SRI Sukuk Ihsan contractual structuring would be effective in a nature and biodiversity context as it complies with Shari’ah mandates and also fosters a performance-centric approach.   

 

An additional innovative Islamic finance model worth considering is the Cash Waqf-linked Sukuk (CWLS). In this model, assets from Waqf, which are Islamic charitable donations or endowments, serve as the underlying support for issuing Sukuk (Rozaq, 2021). The CWLS model, initiated by the Ministry of Finance of the Republic of Indonesia, is a pioneering effort that utilises non-profit instruments overseen by the government to finance social projects on a large scale (Eko, 2022). This approach, available to public and private sectors, promotes the integration of Islamic social and commercial finance and enriches the diversity of the Islamic capital markets. The success of this model is evident in the recent issuance of the 2023 “Sukuk Al-Salam” by the Central Bank of Bahrain, which was oversubscribed by 197% and its recent award of the Islamic Development Bank Prize for Impactful Achievement in Islamic Economics (1444H, 2023) (Zawya, 2023) 

To further strengthen and broaden the impact of CWLS, UNDP, in collaboration with Badan Wakaf Indonesia (BWI), Waqf Centre for Indonesian Development and Studies (WaCIDS), and the Green Waqf Movement Team published the “Green Waqf Framework” (UNDP and BWI, 2022). By integrating green development initiatives, Cash Waqf-linked Sukuk has the potential to create a more robust, extensive, and sustainable influence on the environment and society.

Conclusion

As discussions on climate change and the role of nature continue, Green Sukuk emerges as a promising finance tool for nature and biodiversity, particularly considering the crossover between Shari’ah mandates and ESG. However, while it was noted that existing Green Sukuk contracts offer flexibility, they may fall short in addressing nature-based and conservation solutions. It is crucial for issuers to develop innovative products that effectively tackle the challenges of nature and biodiversity preservation. 

The Malaysian Sukuk Ihsan issuance serves as a notable example of innovation in this field, highlighting the potential for linking returns to specific performance targets. Additionally, exploring the use of Cash Waqf-linked Sukuk, which utilises Islamic charitable donations or endowments, can further enhance the integration of social and commercial finance for impactful projects on a larger scale. Continuously expanding the range of inventive Islamic financial products is vital to maximise investment opportunities, promote risk-sharing, and ultimately create substantial positive environmental and societal impacts. 


Reflections from the SDG Hive Islamic Finance and ESG Session

In a rapidly evolving world where the concept of sustainability has gained paramount importance, the intersection of Islamic finance (IF) and Environmental, Social, and Governance (ESG) principles has emerged as a topic of great significance. I recently had the privilege of attending a thought-provoking session at the Global Ethical Finance Initiative (GEFI) SDG Hive, where experts like Dr. Hayat Sindi, Tan Sri Azman Mokthar, and Dr. Akram Laldin discussed the integration of IF with SDGs. Here, I'd like to reflect on the key takeaways from this enlightening session titled – “How Islamic finance and its approach can be integrated with the wider ESG movement; what can each discipline learn from the other?”

Understanding Halal and Tayyib: Tan Sri Azman set the stage by elucidating the Islamic concepts of "halal" (permissible) and "tayyib" (pure and wholesome). While "halal" addresses what is allowed, "tayyib" goes further by encompassing the idea of doing no harm. This holistic perspective, deeply rooted in Islamic values, resonates with the principles of responsible and impact investing. It emphasizes the importance of not just complying with religious guidelines but also considering the broader societal and environmental impact of financial decisions.

The Historical Evolution of Islamic Finance: A historical overview by Tan Sri Azman revealed that Islamic finance traces its roots back to the 13th century but gained prominence in the 20th century, particularly in post-colonial economies like Malaysia. Malaysia's journey from a halal-based economy to one with trillions of Islamic assets underscores the substantial growth in this sector. However, it also raises questions about whether this growth adequately addresses issues of substance, sustainability, and inclusivity.

Shariah Principles and Innovation: Dr. Akram elaborated on the core principles of Shariah in financial transactions, emphasizing that innovations are allowed as long as they do not contradict the Quran and Sunnah. This flexibility allows for creative financial solutions. However, the focus shouldn't merely be on whether a transaction is "halal." We must delve deeper and assess its environmental and social impact.

ESG and Shariah Compliance: Dr. Akram highlighted the commonalities between ESG criteria and Shariah principles, noting that both aim to promote ethical and responsible behaviour. While ESG criteria are generally considered compliant with Islamic finance, the challenge lies in implementing them consistently across different jurisdictions. Achieving standardization in this regard remains an ongoing effort.

Language and Inclusivity: A crucial point raised during the Q&A session was about language and inclusivity. Ms Modupe Ladipo noted that using Arabic terminology often excludes people and suggested the use of more inclusive language. Dr. Akram's response emphasized the adaptability of Islamic finance terminologies to local contexts. Rachel A. Aron stressed the importance of outreach programs to promote understanding, understanding the existing framework, and engaging the regulators in those countries was important.

Shared Values and Positive Impact: The discussion also touched on shared values and positive impact. It was intriguing to learn how different faiths are shifting their perspectives on financial matters, moving from a focus on avoiding harm to actively seeking positive impacts. This shift is reflected in various initiatives, including investment in small businesses and the issuance of ESG-compliant bonds by churches.

Project Tayyib: Omar Shaikh highlighted that Project Tayyib was set to launch at COP28. The goal is to launch the first Islamic asset management kitemark, which asset managers can aim for and achieve provided they adhere to ESG investment best practises while remaining Shariah compliant and would cover four asset classes.

Responsible Banking: Andy Homer of Gatehouse Bank spoke about its Woodland account. He explained that for every such account opened, the bank plants a tree in the customer’s name. I found this really interesting especially when he said customers often drove to different locations within the UK to visit their trees.

The SDG Hive session on Islamic Finance and ESG provided valuable insights into the evolving landscape of responsible and sustainable finance. It reinforced for me the tremendous opportunity at the intersection of faith and finance.  It underscored the need for Islamic finance to go beyond mere compliance and focus on the broader impact of financial decisions. Additionally, the session highlighted the potential for collaboration and the need for faith voices to be present in sustainability conversations. It is evident that the convergence of Islamic finance and ESG principles holds great promise for creating a more inclusive, sustainable, and ethically responsible financial ecosystem.


Islamic Finance and UN SDGs: A Customer Perspective

Two key publications highlight the nexus between Islamic Finance and the UN Sustainable Development Goals (UN SDGs). In these papers, about 2000 respondents were surveyed from different Islamic financial institutions around the world, including those in Pakistan, Malaysia, the UK, Australia, and Nigeria.

These reports were among the outputs of the Global Islamic Finance and UN SDGs Taskforce, an innovative public-private partnership that examines the potential contribution of the Islamic finance sector to closing this funding gap as well as the potential business opportunities the SDGs offer the sector.

In this blog, we discuss the main highlights of the Islamic Finance and the UN SDGs Retail Banking Customer Perspectives Global Survey 2023 and the Attitudes of banking customers towards the UN SDGs Global Survey 2023.

The first report found the following:

  • Ethical Commitment: 96% of respondents emphasized the importance of their financial products aligning with their personal values and ethics emphasizing that customers are committed to ethical banking.
  • Demand for SDG Products: A significant 90% of respondents highlighted the importance of their banks offering products that aligned with the UN SDGs, indicating a demand for sustainable financial offerings.
  • Poverty Alleviation: Social responsibility proved to be a high priority as 95% of respondents rated reducing poverty to be of high importance.
  • Sustainability Encouragement: A notable 71% stated that the alignment of financial products with sustainability would motivate them to use their bank's products more actively, hinting at the potential of sustainable finance to engage customers.
  • Premium for Alignment: An impressive 87% of respondents expressed their willingness to pay a premium for UN SDG-aligned products, demonstrating a strong commitment to values-driven banking.

The second survey categorized the 17 SDGs into four core areas: Reducing poverty and hunger, Injustice and equality, Environment and climate change, and Sustainable economic development. These categories were further divided into the Global North and Global South. Global South consisted of banks in Pakistan, Nigeria, and Malaysia while the institutions in Australia and UK made up the Global North.

The key findings include:

  • Regional Disparities and Priorities: While the Global North exhibited a higher response rate, it was in the areas of "Injustice and equality" and "Environment and climate change" where significant differences emerged. This suggests that economic SDGs tend to hold greater importance in the Global South, whereas social and environmental issues are relatively more critical in the Global North concerning the SDGs as a whole.
  • Alignment with Core SDG Areas: Survey participants overwhelmingly endorsed the alignment of Islamic finance with the four core SDG areas (reducing poverty and hunger, equality, environment, and economic development), with over 90% considering this alignment vital.
  • Terminology and Awareness: There were disparities in terms of terminologies. For instance, "Net Zero" displayed significant awareness disparities between the Global North and Global South. “Impact investing" was more recognized in the Global South, while "ethical finance" garnered higher awareness in the Global North. This indicates that respondents in the Global North may possess a somewhat higher awareness of certain trends, especially those related to sustainability.
  • Alignment with Core SDG Areas: Survey participants overwhelmingly endorsed the alignment of Islamic finance with the four core SDG areas (reducing poverty and hunger, equality, environment, and economic development), with over 90% considering this alignment vital.
  • Seeking Information: Finally, the survey explored how respondents accessed information, with social media and website news emerging as the primary sources in both the Global North and Global South. Facebook was the preferred platform in the Global South, while LinkedIn took precedence in the Global North.

Overall, the surveys revealed respondents across regions showed keenness for aligning financial products with the SDGs once they understood the SDGs, moderate overall awareness of the SDGs, and a substantial willingness to pay for SDG-related financial products.

The SDGs represent an opportunity for Islamic finance institutions to drive sustainability and positive change. By utilising the SDGs in communications with customers about issues of social and responsibility, Islamic finance institutions have an opportunity to increase brand value and customer engagement.

By harnessing financial innovation to expand access to values-driven products, improve financial inclusion, support renewable energy investments, and finance projects alleviating poverty, Islamic banks and financial institutions can fulfill their purpose of bringing shared prosperity in an ethical manner.

Join us this Thursday for a lunchtime chat, 1:30 - 2 pm, where we explore these findings and learn more with Sultan Choudhury OBE.