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

Green Sukuk: an interest-absent investment into nature and biodiversity

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 recognizing 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 interest-free financial returns to investors. 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.

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 unprofitable nature of ecosystem conservation practices is an issue to be addressed to mitigate their unattractiveness to financiers.  Therefore, global discussions emphasize 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 fossil-fuel dependent 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’s 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, helping address 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.

Shari’ah rules governing Green Sukuk are capable of addressing some of the limitations of the current green bond regime, offering more rigorous governance and accountability. 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. 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.

Existing Green Sukuk issuances and supporting frameworks in the GCC, Indonesia, and Malaysia (who dominate the Green Sukuk market) have been focused on renewable energy, energy efficiency, sustainable transportation, sustainable water and wastewater management, and carbon neutrality (UKIFC, 2022). 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 internalize 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.

Existing Green Sukuk 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.

However, the non-revenue nature of conservation projects and nature-based solutions risks them being excluded from the biodiversity Islamic finance agenda considering these non-revenue projects are traditionally addressed through interest payments. While it is certainly possible to engineer the existing Green Sukuk contractual arrangements to target nature-based and conservation solutions, through an Ijarah and Wakalah hybrid, for example, it is important to expand the contractual offerings through product innovation to maximize ecosystem investment and risk-sharing opportunities for Shari’ah-mandated investors.

Innovative Green Sukuk Models for Nature and Biodiversity

While they have not been replicated, 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 the unprofitable nature of community investments as it linked returns to specific performance targets (Edana, 2019). Such structuring can 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 utilizes non-profit instruments overseen by the government to finance 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, the incorporation of “Green Waqf Frameworks” is being explored (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.


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 utilizes 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 maximize investment opportunities, promote risk-sharing, and ultimately create substantial positive environmental and societal impacts.

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.

Navigating Islamic Finance: Embracing Divestment or Engagement for Ethical Investments

Prophet Muhammad (pbuh) said:

The world is sweet and green and verily Allah (SWT) has made you stewards in it.
– Sahih Muslim

The notion of convergence of Islamic Finance and ESG continues to be a point of interest particularly for those interested in investing. The question of whether to divest or engage is a continuous debate that is driven by a growing understanding of the significance of ethical investing and gathering momentum in the financial sector, however, with the prohibitions that exist in Islamic Finance which are based on Shariah. The question of whether to divest or engage is clear when it comes to Shariah compliance. This article focuses on divestment or engagement on ESG principles that are in tangent with Shariah principles. 

Islamic finance refers to financial practices that adhere to Shariah, the ethical principles of Islamic law.  As a result, Shariah compliance is a prerequisite for the completion of economic and financial transactions. The Shariah prohibits interest/riba, excessive uncertainty/gharar, games of chances and gambling/maysir and qimar. It also prohibits investments in industries such as alcohol, pornography, and production of ammunition.

Whether an investor decides to divest or engage, the primary motivation remains the reduction of harm.  This is based on Islamic legal maxim – there is to be no harm and no reciprocating harm, “Harm shall neither be inflicted nor reciprocated” (Sunan Ibn Majah, 2340). Everybody has an obligation, based on their capacity, to prevent harm based on the verse of the Quran (Qur’an 2:286) ‘Allah does not burden any soul more than it can bear’. 

Also, the concept of stewardship of the earth and its resources is emphasised in Islam. The responsibility of humans is to do good and refrain from doing bad as a vicegerent of Allah. The verse below underlines that since humans have been placed in charge of managing the earth, they have a duty to do so.

The Quran states that: 

“It is He who has made you successors on the earth and raised some of you in ranks above others, that He may try you in what He has given you. Indeed, your Lord is swift in penalty; but indeed, He is Forgiving and Merciful.” Qur’an 6:165

Divestment versus Engagement

Divestment, also known as disinvestment, involves selling or giving up one’s shares to a company. This is often the result of objecting to a company’s practices or policies.  It involves investors taking out their shares from portfolio businesses that don’t fulfil ESG standards. 

Allah (swt) says in the Quran:

“Corruption has appeared on land and sea by what people’s own hands have wrought; that He may let them taste the consequences of their deeds so that they may turn back” – Qur’an 30:41

In 2019, three Islamic faith-based organizations – the Bahu Trust, Islamic Foundation for Environmental & Ecological Sciences (IFEES), and the Mosques & Imams National Advisory Board (MINAB)  issued a unified demand for the divestment from fossil fuels and reinvestment in cleaner renewable energy as the sole means of ensuring a sustainable future for the current and future generations. This resulted in the first divestment commitment by a Fiqh Council – the Islamic Society of North America on fossil fuels in 2016.

There are arguments for and against divestment. The positives include raising awareness regarding certain issues and impacting consequences on companies that fail to meet certain ethical standards. In industries that rely heavily on investors, this is a more significant threat. However, the negative side of divestment is the loss of maintained influence, as the moment an asset manager sells their shares in a company, they can no longer be a positive influence on said company or pressure its board to implement more pro-social or pro-environmental policies. 

Engagement involves investors working with portfolio firms or issuers to help them manage or disclose ESG performance or concerns more effectively. It can take many different forms, including proxy voting, shareholder activism, and open communication with the company’s management. It is often encouraged before divestment occurs because it motivates investors to improve portfolio firms’ performance in order to achieve ESG goals. For instance, Engine No.1’s engagement effort with ExxonMobil led to it adopting more renewable energy and sustainable value creation by convincing big investors to vote for three new board members with backgrounds in clean energy.

There are verses in the Quran that encourage ‘enjoining good’ which can be used to argue for engagement in Islamic Finance. Investors can lean in to engage with companies that are falling short of their ESG obligations. 

Divestment and Engagement in Islamic finance are effective ways to advance ethical investing while upholding the fundamentals of Islamic finance. Investors can help to create a more sustainable and socially just financial system by divesting from unethical sectors and engaging with companies to promote ethical behaviour. Through these actions, Islamic finance can play a significant role in creating a more ethical and sustainable future for the global financial landscape. The maxim ‘severe harm is removed by lesser harm’ allows an investor to opt for the lesser of two harms. Ultimately, the decision lies with the investor in how much they are willing to engage with a company.

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An Ethical Convergence: Islamic Finance and ESG Principles

By Oyin BamgboseJuly 11, 20230 Comments


In recent years, Environmental, Social, and Governance (ESG) considerations have become increasingly important in the financial industry. The term was first used by the UN Global Compact in 2005. ESG despite having financial relevance, originally was not a part of financial analysis.

The term “ESG” refers to a firm’s overall impact on the environment, society, and the strength and openness of its corporate governance, including matters such as executive compensation, company leadership, audits, internal controls, and shareholder rights. The environmental considerations center on how the company lessens its environmental impact, for instance, resource depletion, greenhouse gas emission, and deforestation. The social component is concerned with the way a company affects both workplace culture and the larger society, for instance, working conditions, including child labour and slavery; and health and safety. The term “governance” describes the procedures for making decisions, reporting, and managing the day-to-day operations of an organisation including issues on donations and political lobbying, corruption, and bribery.

Similarly, Islamic finance, which is guided by the principles of Islamic law (Shariah), continues to grow rapidly. Islamic finance refers to financial services – such as banking or investment – where money is raised and used in line with Shari’ah. It prohibits interests (riba), engagement with gambling (maysir), uncertainty (gharar), and prohibited industries like alcohol and pornography. It offers perspectives that aligns closely with ESG objectives. This blog post explores the reasons why Islamic finance is inherently compatible with ESG principles and how Islamic banks are taking steps to align with ESG principles. One area of convergence between ESG and Islamic Finance is that both encourage economic expansion and financial stability, as well as the protection of the environment and the eradication of poverty. For instance, countries like Saudi Arabia and Malaysia have begun to issue green and sustainable sukuk. These investments in environmental assets and renewable energy are compliant with Shari’ah.

Just like ESG, Islamic Finance requires screening out certain industries, the beneficiaries’/clients’ values must be reflected in the portfolios, together with the objective of creating a just and sustainable society and avoiding environmental or human harm. The screenings could be absolute, for instance, it could prohibit weapons, pornography, and cluster ammunition. Where the screening is relative, the rules can entail for instance barring businesses whose tobacco sales account for at least 10% of their total revenue. Companies or issuers that perform poorly in terms of ESG factors or that transgress international soft laws like the UN Guiding Principles on Business and Human Rights may also be excluded. Investments in conventional financial services, cigarettes, alcohol, pork, pornography, guns, gambling, human smuggling, and other goods and activities that are regarded as illegal are prohibited under Islamic finance, which is based on Shari’ah regulations.

Islamic finance places emphasis on investments in real assets and tangible projects that have a positive impact on society. This emphasis is consistent with the ESG philosophy of investing in businesses and initiatives that meet social needs, produce sustainable value, and improve the general well-being of communities.

Although similarities exist between ESG and Islamic Finance, there are areas of divergence. Islamic Finance prohibits security lending and shorting. ESG does not prohibit it but some investors running ESG investing strategies also will not partake in security lending and shorting, while others will apply rules that allow them to vote on shareholder resolutions.

Islamic banks are taking steps like their conventional counterparts to align with ESG. Some of them are signatories to the Principles on Responsible Banking like Al Baraka Banking Group (Bahrain), Gatehouse Bank (UK) and Jaiz Bank (Nigeria) which are fully Shari’ah compliant. A new three-year ESG strategy to incorporate ESG risk concerns within the banking framework was recently highlighted in the Abu Dhabi Islamic Bank’s second annual ESG report.

Overall, there is a chance to increase the influence of ethical and responsible investing due to the convergence of Islamic finance and ESG. It enables Islamic financial institutions and investors to include ESG factors and support sustainable development while upholding their core values and tenets. This convergence encourages the development of ethical finance, broadens the use of sustainable investment strategies, and helps create a more equitable and sustainable international financial system.

Register here to participate in the conversation on ESG at the Ethical Finance Global 2023 summit organised by our partner GEFI.

Faith In Finance: Collaborating Faiths for Economic Integrity

By Oyin BamgboseJune 16, 20230 Comments


Faith groups have a long history of incorporating values into financial decision-making. For thousands of years, the world’s major faiths have included instructions on how to carry out business in an ethical manner, and the modern ethical finance movement has its roots in religious investment funds seeking to exclude weapons manufacturers from their portfolios in the 1970s. The Pax World Fund, launched in 1971 by Methodists in reaction to the Vietnam War, is still active today and known as Impax Funds.

In 2018, the Edinburgh Finance Declaration was launched by UKIFC in collaboration with GEFI and the Church of Scotland after a three-year dialogue. The Edinburgh Finance Declaration is a ray of hope in a world where economic systems frequently put financial gain ahead of morality. By working together, these institutions strive to promote financial integrity, responsible investment, and economic justice.

In this article, we look at the six shared values in operation in both Islam and Christianity which the Declaration identifies as providing an ethical framework. They are – StewardshipLove of the NeighbourHuman FlourishingSustainability & PurposefulnessJustice & Equity and the Common Good.


Both religions place an emphasis on stewardship which implies that the money we possess ultimately belongs to God and is to be spent in accordance with righteous moral standards, with investments made with the welfare of humanity in mind. In the Holy Quran (Q2:30), human beings have been appointed as vicegerents on earth and Genesis 1.26- 27 has a similar provision.

Love of the Neighbour

It suggests a sense of social duty and a dedication to advancing others’ well-being, rather than just expressing love or other forms of connection. It was reported by a companion of Prophet Muhammad (p.b.u.h) Abu Hurayrah that the Prophet (p.b.u.h) said: “Jibra’il kept enjoining good treatment of neighbours until I thought he would make neighbours heirs.” Loving one’s neighbour is also mentioned in Matthew 22:34-40. This concept helps to develop empathy, kindness, and care for other people.

Human Flourishing

It refers to a person’s condition of maximum well-being and development, during which time they are experiencing personal growth, fulfilment, and potential realisation not just for themselves but for the overall good. Additionally, it entails the capacity to completely embody the virtues of charity, compassion, and justice within a society through not only the advancement of commerce but also one that is mindful of the needs of all.

Sustainability and Purposefulness

The idea of stewardship means that human beings must take responsibility to manage the available resources and use them efficiently. Sustainability and environmental stewardship are frequently values that cross religious boundaries. By working together, religious groups can influence the financial sector to support initiatives that put focus on renewable energy, environmental protection, and ethical business practices.

Justice and Equity

Justice, equality, and compassion are values that are emphasized in both religious traditions. There can be cooperation in the financial sector to combat systematic injustices, poverty, and marginalisation. As a result of his concern for the extreme poverty of his parishioners, Rev. Henry Duncan founded the first savings bank – Ruthwell Parish Savings Bank in 1810 with the intention of promoting saving among the working class and protecting them from the degrading effects of poor relief. Interestingly, Mit Ghamr established the first Islamic bank on his model. Although both banks were short-lived, they were foundations for the recent banking models.

Common Good

This shapes how followers interact with and give back to their communities and the larger world, guiding their personal behaviour and informing both religions’ ethical teachings. This underscores the requirement to pay zakat. It is the third pillar of Islam which mandates that Muslims donate 2.5 per cent of their qualified wealth each year to support Muslims who are in need. Although voluntary, the idea of paying tithes in Christianity can be linked to this.

In conclusion, by working together, these institutions strive to promote financial integrity, responsible investment, and economic justice. The partnership between UK Islamic Finance Council (UKIFC) and the Church of Scotland serves as a model for interfaith cooperation and demonstrates the potential for transformative change within the community.