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.

 


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.

 


Understanding Legal Maxims in Islamic Finance

The phrase ‘legal maxims’ often connotes a ‘well-established legal idea, proposal, or doctrine, generally expressed in Latin’. Legal maxims exist in Islamic law as well and are rooted in the principles of Shariah law. In the world of finance, legal principles and maxims serve as the cornerstone of stability, providing guidance and clarity in a complex and ever-evolving industry. In this blog post, we discuss some of the fundamental legal maxims that underpin Islamic finance.

Qawaid Fiqhiyyah/Islamic legal maxims have retained a distinctive place in jurisprudence for all time and will continue to do so. Legal maxims are typically accepted as the foundation for developing Shariah opinions by jurists from all schools. This is particularly true if these maxims are founded on the Holy Quran and the traditions of the Prophet SAW. These maxims provide an accessible summary of laws that are connected to one another and supported by the Qur'an and the Sunnah while some are direct citations from Hadiths of the Prophet PBUH. For instance, the maxim “There shall be no harm nor any reciprocation of harm.”

Some legal definitions offered for al Qawaid al-Fiqhiyyah include:

  • Al-Suyti for instance defines Qawaid as “a general rule which applies to all its particulars.”
  • Al-Burnu defined it “as a universal legal ruling or proposition from which are understood the particular legal rulings that are derived from it.”
  • Sheikah Mustafa al-Zarqa defines Qawaid as “the root maxim of fiqh dedicated in its concise text with regulatory nature, containing general rules of Law on these issues which transpired under its theme”.
  • Al Hamawi defined it as “the predominant ruling which is applied to the greater part of its particular”.

Islamic finance is governed by Shariah law, which consists of primary sources like the Quran and Sunnah as well as secondary sources like ijma (scholarly consensus), qiyas (analogical reasoning), and legal maxims. Legal maxims play an important role in interpreting and applying Shariah principles to contemporary financial practices. Here are some key legal maxims relevant in Islamic finance:

  1. Matters are determined according to intentions/ Al-'Aqd yata'amal bi 'Umum al-lafz wa khusus al-maqasid - In agreements, emphasis is placed on intent and significance rather than on language and form. The intended meaning should always take precedence over the literal phrase of an expression where there is a contradiction between them. This implies that we should prioritise a transaction's economic above its formal characteristics when assessing its legality.
  2. There shall be no initiation of harm, nor any reciprocation of harm/La zarar wa la dirar – All damaging and destructive acts must not only be avoided in all circumstances, but they must also be prevented. The implication is that in Islam there is an emphasis on ensuring good and avoiding harm. It proves that harm prevention, eradication, and minimization are the goals of the law.
  3. Custom is a basis for judgment/ Al-‘adah muḥakkamahCustoms are established practices of any community over a typically longer period of time. According to this maxim, the shariah acknowledges and respects the social customs of society in terms of their words and deeds in the absence of textual injunctions, provided they don’t violate the Quran or Sunnah or any shariah principle; the custom is applied consistently and is prevalent in the community; was applicable at the time the activity or transaction took place; and the contractual parties have not stipulated a condition that runs counter to custom at the time of the activity or transaction.
  4. The origin of all rules is permissibility/ Al'asl fi al'ashya' al'iibaha – Using this maxim as a general guideline, it can be said that Islamic financial practices are initially permitted unless there is proof that they contain aspects that are forbidden, in which case the original judgment is effectively changed. Also, tand wide room for innovations for different financial tools and instruments for financial transactions. These innovations must however not conflict with the Quran or Sunnah.
  5. Reward begets risk/ Al-Kharaj bi al-daman - According to this maxim, no one can expect to succeed in their endeavours without taking on some level of risk or loss.
  6. Ambiguity cannot coexist with certainty/ La yubaru ma'al-Gharar - According to this maxim, a contract or transaction that includes ambiguity or uncertainty cannot be deemed valid. It highlights the requirement for precision and clarity in contractual provisions in order to promote justice and prevent exploitation.

The legal maxims discussed are just a few that are applicable to Islamic finance, intended to situate the role and impact that they have on modern applications. These legal maxims are still actively guiding the practice and growth of Islamic finance.

The UKIFC will be introducing Project Tayyib at the largest Islamic and ethical finance event at COP28 – Unlocking Islamic Finance Summit.

 


Project Tayyib: Bridging Values and Finance

The Conference of Parties (COP) is the annual United Nations Climate Change Conference that started running in 1995. The purpose of this conference is to assess the progress made by signatories to the United Nations Framework Convention on Climate Change (UNFCCC). The upcoming COP is COP28 which is scheduled between Thursday, 30th November 2023, and Tuesday, 12th December 2023.

COP28 is poised to become a critical milestone for global cooperation, one with a clear aim of aligning climate action with the availability, affordability, and accessibility of finance. In the lead-up to COP28, the COP Presidency has been notably attentive to an array of financial challenges confronting the Global South. Insights from Dr. Al Jaber's discussions with delegates shed light on issues spanning limited access to climate finance and funding insufficiency to capacity limitations, uncertain revenue streams, and the weight of high transaction costs.

Amidst these challenges, the prominence of Islamic finance within the Global South emerges as a beacon of opportunity. This owes to the harmonious alignment of Islamic principles with ethical and socially conscientious values positioning Islamic finance as a significant catalyst for overcoming these financial hurdles.

Despite the inherent alignment of Islamic principles with ESG values, there remains a disconnect between Islamic financiers' investment practices and ESG investments. This can be attributed to their distinct theological foundations, sector focus, and differences in language. While Islamic finance adheres to Shariah principles, guiding permissible (Halal) and forbidden (Haram) activities, ESG investment encompasses a broader range of sustainability factors beyond those explicitly addressed in Islamic finance. Additionally, differing geographical prevalence and evolving awareness contribute to the gap. This was highlighted in the Islamic Finance and the UN SDGs - Retail banking customer perspectives Global Survey 2023 report. However, at the core of these differences lies the absence of specifically tailored guidance for Islamic finance institutions compared to their conventional financial counterparts, which has magnified what is known as the Halal-Tayyib gap in Islamic finance.

Islamic finance, in its true essence, does not only avoid forbidden activities (Haram) but also actively encourages endeavours that are wholesome, pure, and beneficial for individuals and the environment (Tayyib). This is based on the idea that there are distinct gradations within Fiqh (Islamic Jurisprudence) and the Quran beyond simple compliance of "Halal" or "Haram".

Inspired by the notion of Tayyib, Islamic Finance Council UK (UKIFC) and the Global Ethical Finance Initiative (GEFI) will formally launch Project Tayyib at the COP28 Summit in Dubai this December. The project seeks to introduce a verification kitemark that seamlessly melds established Shariah-compliant practices with considerations of climate resilience, biodiversity preservation, human rights, and other critical ESG factors. Shaped by extensive market analysis, Project Tayyib focuses on four asset classes - capital markets, debt, real estate, and private equity.

The Islamic finance market's impressive global worth, standing at $4 trillion and experiencing consistent year-on-year growth, represents an untapped source of capital that could significantly contribute to funding the transition towards net-zero emissions and the achievement of the UN Sustainable Development Goals.

The scope for unlocking substantial market opportunities through this alignment is also significant. Notably, ESG investing is projected to surge by 84%, surpassing $30 trillion by 2026, in parallel with Islamic finance's anticipated growth to $5.9 trillion. While currently only 5% of sukuk issuances align with green or sustainable criteria, the evident demand for such products is compelling. The UKIFC envisions a potential influx of $30 billion through the green and sukuk (Islamic bonds) market by 2025.

By harmonizing the burgeoning Islamic finance and conventional finance sectors inclusively, Project Tayyib holds the promise of fostering a broader positive societal impact. As the COP28 climate summit approaches in the UAE—a hub for Islamic finance—the prominence of the Tayyib Project grows, poised to mark a significant stride towards effecting transformative change at the convergence of finance and sustainability. The sector’s engagement at COP28 will offer an opportunity for the industry to extend its commitment and bring its unique perspective and sustainable financing models to the global conversations.

Learn more about being a part of the Unlocking Islamic Finance Summit at COP28 here, and explore GEFI's Path to COP28 programme here.

Discover how you can participate in the Unlocking Islamic Finance Summit at COP28 here and visit this link to learn more about GEFI's Path to COP28 programme.


Empowering Change: Unveiling the All-Party Parliamentary Group on Islamic and Ethical Finance

All-Party Parliamentary Groups (APPGs) are unofficial, cross-party organisations that do not hold official status in the British Parliament. Although many prefer to include people and organisations from outside of Parliament in their administration and operations, they are still managed by and for Members of the Commons and Lords.

They have greater power than they may appear to have since the recommendations and reports that APPGs publish after their investigations frequently affect government policy. APPGs were established to serve a wide range of objectives by bringing together diverse stakeholders. They offer lawmakers an invaluable chance to interact with people and organisations outside of Parliament who are interested in the group’s topic. As a result, they can be highly responsive to proposals from organisations, and they might offer a venue for thoughtful debate and analysis.

Formerly the All-Party Parliamentary Group on Islamic Finance, the All-Party Parliamentary Group on Islamic and Ethical Finance was reconstituted in February 2023. The All–Party Parliamentary Group on Islamic Finance was first registered in 2016 ‘to give the Islamic finance industry a voice in parliament; to address issues as they arise such as Sukuk issuances, inclusivity, regulation, and taxation whilst positioning the UK as the European hub of Islamic financial services, and also to play a wider role in promoting ethical finance’. With The diversity in political affiliations of APPGs reflects that members put their interests in a particular policy area above their political affiliations and views.

There are ways for the public to engage with the APPGs, such as to respond to Calls for Evidence on particular topics or attend events, including Town Hall meetings. The APPGIEF has issued a Call for Evidence on “Financial Inclusion of Muslims in the UK”. It is an opportunity to investigate strategies to advance fairness, customised goods, and equitable access in the financial industry in order to expand the UK financial market. By closing the financial inclusion gap, the APPGIEF hopes to improve the financial environment and offer benefits to everybody by supporting the economic empowerment and social well-being of Muslims in the UK. This would provide an opportunity to influence policy change in UK.

By promoting Islamic finance, the APPG supports economic inclusion for the UK’s 3 million Muslims and develops Britain as a global Islamic finance hub. This would not only empower Muslims, but also lower economic inequality. A survey revealed that some Muslim students are unable to attend university due to a lack of Shariah-compliant student financing options. The availability of Islamic financial products leads to transparency and real economic activities because investors are aware of where their monies are invested and can therefore drive change.

You can contribute to the ongoing research by the APPGIEF by responding to the Call for Evidence here.


Empowering Education: The Case for Shariah-Compliant Alternative Student Finance

Access to education is a fundamental right that should be available to all individuals, regardless of their financial circumstances or religious beliefs. Financial solutions must consider different cultural and ethical factors in a varied nation like the UK.

A student loan is one area where this is especially
pertinent as it is designed by the government to widen access to higher education David Cameron as
Prime Minister in 2013 at the World Islamic Economic Forum in London stated “Never again should a
Muslim in Britain feel unable to go to university because they cannot get a Student Loan—simply
because of their religion.” The Department for Education recently announced its collaboration with
Islamic Finance Council UK (UKIFC) to develop a Shariah-compliant Alternative Student Finance
(ASF). In this blog post, we delve into the reasons why a Shariah-compliant option is essential for
fostering education and economic growth.

Central to this is the fact that Islam prohibits charging or paying interest (Riba). The fact that some of the companies that offer loans often invest in pornography, gambling, or alcoholic beverage industries also makes them prohibited under Shariah law. By offering a Shariah-compliant Alternative Student Finance (ASF), the government can ensure that all students, regardless of their religious beliefs, have access to an inclusive financial system that respects their values.

Islamic finance is built on principles of ethical behaviour and social responsibility. It emphasizes fair and just economic transactions that benefit society as a whole. By providing a Shariah-compliant ASF, the government would support students in pursuing education without compromising their faith. This initiative not only encourages responsible financial practices but also contributes to a more ethical and equitable financial ecosystem.

Access to education should not be hindered by financial barriers. According to an online survey by the Muslim Census in which nearly 40,000 Muslims in the UK responded, every year, 12,000 students are forced to pay for their own education or forgo it completely due to a lack of funding and ASF. ASF provided by the government would bridge this gap, ensuring that individuals from all walks of life have the opportunity to pursue their educational aspirations and contribute to society’s progress.

Education is not only a catalyst for economic growth, but the pursuit of higher education has also become increasingly important for career prospects and personal growth. The Muslim Census survey revealed that more than 1 in 10 qualified Muslim students do not attend university at all as a direct result of the absence of any financing options other than student loans. By investing in the education of its citizens, a government invests in the future prosperity of the nation. Shariah-compliant ASF supports this growth by enabling a diverse range of students to access quality education, thereby equipping them with the skills and knowledge needed to contribute effectively to the workforce and the economy. 

A government’s commitment to diversity and inclusion is reflected in its policies and initiatives. Providing a Shariah-compliant ASF option demonstrates a proactive effort to accommodate the needs of diverse communities within the country. This, in turn, enhances social cohesion by fostering a sense of belonging and respect among various religious and cultural groups.

Although it may be argued that other alternatives to funding education exist like getting scholarships or grants, opting for work-study programmes, crowdfunding, and employer sponsorship. A response to this is that most of these options are not readily available to all. Also, some may be tied to certain conditions which may be difficult to fulfil. 

Having a Shariah-compliant ASF would close a gap for Muslim students who have been at a disadvantage. The UKIFC is proud to be a partner of the Department for Education in creating a Shariah-compliant ASF.

Be a part of creating change and allowing Muslims in the UK to have access to financial products in line with their values by responding to the Call for Evidence by the All-Party Parliamentary Group on Islamic and Ethical Finance (APPGIEF) before the 18th of September, 2023.

APPGIEF Call for Evidence

Unveiling the ESG Controversy: How Islamic Finance Offers a New Perspective

A few weeks ago, headlines lit up with confusion and consternation as Philip Morris International (PMI), a cigarette producer, was awarded higher Environment Social and Governance (ESG) scores than electric car manufacturer Tesla. ESG was even termed the ‘devil’ by Elon Musk.

The criticism is premised on the fact that Tesla, which produces electric cars thus promoting a cleaner environment because it aims to reduce carbon emissions, got an ESG score of 37 on a 100-point scale. This is in comparison to PMI, the maker of Marlboro cigarettes which according to a WHO report causes the death of over 8 million people annually, was given a high score of 84!

This controversy in ESG underscores one of the primary differences between the conventional finance approach and the Islamic finance approach to potentially controversial industries. In a previous blog, we discussed the Islamic Finance stance on divestment versus engagement, which leans more heavily on negative screening than conventional finance. It, therefore, screens out any industries considered haram, meaning that it is forbidden to invest in alcohol, tobacco, or pork products. In doing so, Shari’ah-compliant investment funds are designed with a degree of controversy protection by excluding certain high-risk industries. In the case of PMI, tobacco is excluded from Islamic funds because it is an intoxicant and causes harm to its consumers. By removing these products from the pool of potential investments, it is easier to avoid conflict like that between Tesla and Philip Morris International. 

Tesla did score a 60 on the E which stands for ‘environment’ but scored 20 in social compared to PMI’s 84. It scored 34 in ‘governance’ against PMI’s 83. In ESG, the ‘S’ focus tends to be on employees within the company and external stakeholders from an environmental standpoint, meaning that a company will be positively viewed from a social standpoint for investing in community initiatives like education or development; however, this excludes a focus on the impact of the product itself on the community. For PMI, reinvestment in their environmental impact and pro-social policies pushed their ESG scores significantly higher than expected, with no consideration given to the fact that tobacco products kill over 8 million people a year. Tesla’s primary negative points were the mineral-heavy nature of electric vehicle manufacturing, plus poor social performance as controversy broke out regarding the negative treatment of employees. 

The ‘S’ focus from the Islamic finance standpoint has other elements. The conventional interpretation in the context of ESG is often restricted to workforce and diversity, safety management, customer management, and communities. Islamic finance has other social instruments such Zakat, Qard Hassan, and Waqf. Zakat is one of the five pillars of the Islamic faith, and it is comparable to a tax on assets that are worth more than a specific amount. It is utilized for social welfare without any reimbursement. It is a goodwill-based loan that is mostly given for welfare purposes. The borrower is simply required to repay the principal amount borrowed, not interest. Waqf or endowment, is a particular form of philanthropic deed that lasts forever. It entails giving away a fixed asset with the potential to generate income or offer benefits. 

In summary, the current ESG scoring can produce counterintuitive results by not considering product impact. Islamic finance on the other hand applies additional social screening to avoid investing in industries like tobacco that cause harm thereby focusing on the impact a product would have. Perhaps it would be a good time for an Islamic finance focused ESG scoring to be initiated which would close gaps on issues like this.