Shariah-compliant Investing Masterclass
Check out the latest Asset TV session featuring our advisory board member and director, Omar Shaikh, joined by Sefian Kasem, HSBC Asset Management, and Umar Yaqoob, Aviva Business.
Together, they explore how Shariah-compliant pensions are reshaping retirement in the UK, bridging access gaps, boosting outcomes, and driving innovation through “do no harm” values, smart screening, and inclusive product design.
MIFC Partnership
MIFC Partnership
We are proud to announce an exciting new partnership with the Malaysia Islamic Finance Centre Leadership Council (MIFC) - an initiative of Malaysia’s financial market regulators and relevant government agencies dedicated to developing Malaysia’s Islamic finance market by engaging with industry and government.
Our Advisory Board Member, Omar Shaikh announced the partnership alongside MIFC chairman, Tan Sri Azman Mokhtar on 28 May 2024 in front of Prime Minister YAB Dato' Seri Anwar Bin Ibrahim at the Global Forum on Islamic Economics and Finance, organised by the Ministry of Finance Malaysia and Bank Negara Malaysia in collaboration with various stakeholders.
With the MIFC’s focus on propelling the next phase of growth and to solidify Malaysia's position as a leading international Islamic financial centre, the partnership will explore scope for collaboration around Islamic finance product innovation, the development of cross-border financial activities to support the Islamic Economy activities and capacity building and education.
During the Forum, the MIFC Leadership Council presented its visionary position paper, entitled "Establishing Islah through Islamic Finance," which provides strategic recommendations for policymakers and industry leaders to foster a more inclusive, sustainable, and humane financial system. The paper also outlines 10 key focus areas and 18 high-impact projects, such as elevating sustainability via a Biodiversity SRI Sukuk, unlocking equity risk capital, and strengthening philanthropic finance instruments like zakat and waqf. It calls for 10 transformative 'hijrah' shifts, underpinned by 7 guiding principles focused on inclusivity, sustainability, and ethical practices.
We look forward to working with MIFC to help align financial practices with Maqasid al-Shariah to promote societal welfare.
Islamic Finance, SDGs, and Consumer Attitudes: a Convergence of Ethical Banking
In an increasingly values-driven financial landscape, consumers demand more banking products that align with ethical and sustainable principles. Islamic finance, with its deep-rooted ethical foundations, is uniquely positioned to meet this demand. Insights from the UKIFC reports, Islamic Finance and the UN SDGs: Retail Banking Customer Perspectives and Attitudes of Banking Customers Towards the UN SDGs, along with Gatehouse Bank’s Islamic and Ethical Finance Consumer Report 2024, shed light on the potential of Islamic finance to address these growing expectations.
Growing Appetite for Ethical Finance
The Gatehouse Bank report highlights a rising interest in Islamic finance products, as Muslim consumers increasingly seek Shariah-compliant savings accounts, current accounts, and investment funds. The report reveals that 88% of Muslim consumers would consider shifting from conventional banking to Islamic if comparable services were available, demonstrating a strong preference for aligning financial decisions with their ethical and religious values. Additionally, non-Muslim consumers are also showing interest in ethical and green finance, with 16% expressing interest in green savings accounts.
This trend aligns with UKIFC findings, which highlight how Islamic finance principles naturally support many of the UN Sustainable Development Goals (SDGs). By prohibiting investments in harmful industries and prioritizing social justice, Islamic finance aligns with many SDGs such as responsible consumption, poverty reduction, and sustainable economic growth. Thus, it appeals to both Muslim and non-Muslim consumers who prioritize ethical and green finance products.
Values-Driven Investment
The most encouraging trend in these reports is the consumers willingness to pay a premium for products that reflect their values. The Gatehouse study indicates that 75% of Muslim consumers are willing to accept higher prices for Islamic finance products that adhere to their ethical standards. This sentiment also extends to green finance, with over half of Muslim consumers are willing to pay more for sustainable options and 22% of consumers not of the Muslim faith would switch to green finance if providers were trustworthy and transparent.
The UKIFC reports suggest that this willingness to invest in products aligned with personal values presents an excellent opportunity to advance the SDGs, particularly those related to poverty reduction (SDG 1) and reducing inequalities (SDG 10).
Education and Overcoming Barriers
Despite growing interest, a key challenge remains: a lack of understanding. The Gatehouse report notes that 24% of respondents are unsure about how Islamic finance works, with women in particular reporting lower familiarity with these products. Similarly, the UKIFC’s findings highlight the need for improved financial literacy and consumer education on the ethical principles of Islamic finance and its alignment with the SDGs.
This highlights the need for Islamic finance providers to undertake educational initiatives that clarify how Shariah-compliant products work and their alignment with global sustainability goals. Enhanced awareness and education can support both Muslim and non-Muslim consumers seeking transparent, ethical, and sustainable financial solutions.
Conclusion
As consumers becoming more attuned to ethical and sustainable finance, Islamic finance is well-positioned to play a pivotal role in this growing market. The UKIFC and Gatehouse reports indicate an increasing demand for financial products that align with ethical values, driven by younger generations and sustainability-conscious consumers. By leveraging principles of transparency, ethical investment, and social welfare, Islamic finance can contribute to a more sustainable and equitable financial system.
The challenge now lies in bridging the knowledge gap, dispelling misconceptions, and developing products that are not only ethically sound but also competitive and accessible to all consumers. As these reports collectively suggest, the future of finance is not solely about profit but also about purpose—and consumers are ready to lead the way.
"Progress and Perseverance: The Journey Towards Alternative Student Finance in the UK"
The current student finance system provides financial support to eligible students pursuing higher education in England. This support primarily covers tuition fees, maintenance loans for living expenses, and additional grants or loans for specific circumstances.
The system operates on the principle of income-contingent repayment, where students only start repaying their loans once they earn above a certain income threshold. Interest rates are applied based on the RPI inflation rate and how much a student repays will vary depending on the student’s income levels after studies. The repayment threshold for Plan 5 (the repayment loan issued to new students starting from August 2023) will be adjusted annually by inflation from April 2027. The current system however has caused financial exclusion for students (Muslims and others) who believe obtaining an interest-based loan for higher education is against their religious beliefs. The ban on (or aversion to) interest is a feature across Abrahamic faiths.
Additionally, individuals from low-income families, lower socio-economic neighbourhoods, or minority communities often face disproportionate challenges. These can include living in overcrowded conditions, experiencing various forms of deprivation, and encountering barriers to educational achievement. When access to higher education becomes more restricted, these groups tend to be the most severely impacted. For many in these situations, obtaining a degree that opens doors to quality employment opportunities can be a crucial stepping stone. It often serves as a powerful tool to break cycles of disadvantage within families and communities, potentially improving prospects for current and future generations. Although it may be argued that higher education is not the only path to success, vocational training, entrepreneurship, and other alternative routes can also play significant roles in improving socioeconomic outcomes. The key is ensuring equitable access to a range of opportunities that can lead to financial stability and improved quality of life. To ensure every British citizen has equal access to higher education, the journey to introduce Alternative Student Finance (ASF) began with the Prime Minister announcing this in 2013.
ASF is designed to provide a Sharia-compliant alternative to traditional interest-bearing student loans. It will be open to all eligible students regardless of faith. It is intended to cover tuition fees and living costs for eligible higher education courses, much like conventional student loans. Instead of charging interest, it uses a model based on the Islamic finance principle of Takaful or ‘mutual guarantee’. Students will receive payments to support their education whilst guaranteeing to repay amounts in the future once the graduate’s income reaches the relevant agreed upon threshold. This means ASF repayments will be based solely on what people earn, like the existing loan based system. The repayment amounts are calculated to ensure that students using ASF repay the same amount they would have under the existing loan based system.
The Islamic Finance Council UK (UKIFC) has been at the forefront of supporting the development of ASF in the United Kingdom. It was formally appointed in 2017 and has been assisting the Department for Education (DfE) since. This blog post outlines the key milestones in this journey, highlighting the progress made and the challenges faced in developing a Sharia-compliant student finance option.
Here’s a comprehensive look at the ASF milestones achieved on this journey.
The Early Stages (2010-2013)
In 2010, the need for an ASF system was identified, leading to initial discussions and proposals for changes in the existing student loan system. The following year Baroness Verma announced that the government was investigating the possibility of introducing an ASF, working with key organisations such as the Federation of Student Islamic Societies and the National Union of Students (NUS).
The Government’s higher education reforms introduced changes to interest rates on student loans and increased the tuition fee cap to £9000 per year, posing significant challenges for many in the Muslim community in 2012. This led to a coordinated campaign by Muslim organisations and the NUS to raise awareness of the negative impact of interest-bearing loans.
At the World Islamic Finance Forum in 2013, Prime Minister David Cameron MP promised to introduce a student finance system compatible with Islamic principles, ensuring that no Muslim student would be deterred from pursuing higher education due to financial constraints.
Consultation and Legislative Steps (2014-2017)
In April 2014, the government launched a ten-week consultation to gather opinions on a Sharia-compliant alternative finance product. Just under 20,000 formal responses and 68 comments were received. The overwhelming support led to the decision to adopt a mutuality based “Takaful” model for ASF. This would provide an alternative structure compatible with Islamic finance principles offering student finance on the same terms as existing student loans thereby ensuring complete parity for all students.
The publication of the Green Paper “Fulfilling Our Potential” in 2015 and the White Paper “Success as a Knowledge Economy” in 2016 provided further justification for the creation and adoption of an alternative student finance solution. The initial bill was accompanied by an Impact Assessment which highlighted the benefits of having an ASF.
As part of the legislative process, Lord Sharkey submitted an amendment that would hold the government to quarterly reports on ASF development. Lord Sharkey had noted, “…my amendment would require the Secretary of State to tell all relevant schools about the progress being made and to give an estimate of the likely date of availability.” He further stated “my amendment simply asks the Government to say when this conflict between faith and funding will be resolved. This was pressed to a vote but lost narrowly, by 227-225.
The Higher Education and Research Act gained royal assent, securing the powers to introduce ASF. The Act marked a significant legislative milestone. To enable the government to implement an extra student financing model called “alternative payments” that would not include interest, Sections 86 and 87 of the Higher Education and Research Act were passed in April 2017.
Development and Advocacy (2017-2022)
The DfE commissioned a study to support ASF development and appointed the UKIFC in October 2017 to help design an ASF model. The then Prime Minister, Theresa May MP, commissioned a review of post-18 education and funding in February 2018 (the Augar review). This wholistic review had a material impact on the timeline to introduce ASF.
In May 2019, DfE published an ASF research report highlighting positive perspectives on ASF from current and future students. In the same month, the findings of the Augar review were released which further highlighted reasons to have the ASF. There was a further debate on ASF in July 2019 at the House of Lords where the late Lord Sheikh who had also been the Co-Chair of the All-Party Parliamentary Group on Islamic Finance emphasised the need to fulfil the commitment made by David Cameron highlighting the considerable delay to date.
Following COVID-19, in 2021 the collaborative advocacy efforts from the Muslim community and NUS reignited due to the concerns and disappointment with the delays. The Muslim Census released the results of its online survey in October 2021 which revealed that over 12,000 students annually were negatively impacted by the lack of ASF. The Equal Access to University Education campaign was initiated by a coalition of Muslim charities and community organisations to advocate for ASF principally led by Asha Hassan and supported by Stephen Timms MP, Lord Sharkey, and others. They made a call to the then Prime Minister, Boris Johnson MP, to ensure ASF was rolled out by September 2022.
In February 2022, the government gave a conclusion to the Augar Review and confirmed that it will consider if and how ASF can be delivered as part of the Lifelong Loan Entitlement (LLE) which was a key recommendation of the Augar review. An opportunity in an accountability hearing in June 2022 of the universities minister led to a public commitment to introduce ASF alongside the LLE in the 2025/26 academic year pending consultation results.
Recent Developments (2023-2024)
The government published the outcome of the LLE consultation in March 2023 and confirmed that ASF will be delivered as soon as possible after the introduction of the LLE and emphasised its commitment to ensuring the availability of ASF, although it would not be delivered at the launch of the LLE in 2025/26 as previously hoped.
A government policy paper and blog post announced plans for ASF with UKIFC being contracted to provide advisory service. The Student Loans Company (SLC) began work on the ASF project pre-discovery with the UKIFC being appointed to support it in May 2023. This signalled the start of concrete development efforts towards operationalising ASF. Baroness Barran MBE [then Parliamentary Under Secretary of State, Department for Education] provided an update in September 2023 reflecting revived commitment from government, and highlighting that she was meeting on a quarterly basis with legislators, leaders of the Islamic community, the SLC and the UKIFC to discuss the government’s progress to provide ASF as soon as feasible. She provided another update in a letter to the House of Lords in December 2023.
The SLC discovery phase of the ASF project ended in March 2024, marking a crucial step towards the implementation of ASF.
Looking Ahead
The journey towards establishing ASF has been long and eventful, marked by significant milestones and persistent advocacy. Disappointingly, over a decade from the first announcement we are not there – yet! Introduction of ASF remains a significant step towards ensuring that higher education in the UK is inclusive and accessible to all, respecting the diverse beliefs and needs of its student population.
Key milestones including the legislative amendments and the completion of the SLC ASF discovery phase, are important milestones towards making this long-awaited finance option a reality. It is hoped that the new government will continue and successfully get ASF over the finishing line promptly.
ASF will not only benefit some Muslim students but also contribute to greater financial inclusion in higher education across England which in turn will help drive economic growth. It remains imperative for DfE and SLC to set a specific deadline to avoid leaving students in uncertainty. Additionally, Scotland and Wales should promptly develop plans for implementing ASF-equivalent options.
ASF TIMELINES
- 2010 – Changes in student loan system proposed.
- 2011 – Baroness Verma stated that the government was ‘ investigating the possibility of introducing an alternative finance system and were working with organisations such as the Federation of Student Islamic Societies and the National Union of Students https://www.theyworkforyou.com/lords/?id=2011-11-01a.1203.0 (Paragraph 5 ).
- September 2012 – The Government’s Higher Education reforms (introduced changes to interest rates on student loans and an increase in tuition fee cap to £9000 per year). Following the Brown Review posed problems for many in the Muslim community. This meant that the more affordable £3000 pa tuition fee cost was trebled with the addition of real interest. This was highlighted via a co-ordinated campaign by Muslim organisations and NUS to raise the profile of the harm interest-bearing loans could cause some students and their families.
- October 2013 – David Cameron MP promises (at the World Islamic Finance forum) to introduce a system of student finance compatible with the principles of Islamic Finance. He 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.’’
- April 2014 – Government launched a ten-week “Sharia-compliant Alternative Finance Product” consultation in April 2014. The goal of the consultation was to gather opinions on the acceptability of an alternative finance product based on the Takaful Model from students, Muslim communities, and the public. The consultation closed in June 2014. According to the Government, 19,886 formal responses and 68 comments (via a designated email address) were received. The responses were from individuals, academicians, charities, business representatives/trade unions, and business owners. Responses were made online through a survey monkey link.
- September 2014 – Government issued its response in September 2014 committing to introducing ASF due to overwhelming support in the consultation and concluded that a ‘Takaful’ system will be most suitable for ASF.
- November 2015 – Government published Green Paper (Fulfilling Our Potential).
- May 2016 – Government published White Paper (Success as a Knowledge Economy) which provided more justification for the creation and adoption of an alternate student financing solution.
- June 2016 – The initial bill was accompanied by an Impact Assessment which highlighted the benefits of having an ASF.
- March 2017 – As part of the legislative process, Lord Sharkey submitted an amendment that would require the government to make quarterly ASF progress reports. This was pressed to a vote but lost narrowly, by 227-225.
- April 2017 – Higher Education and Research Act gains royal assent (powers to introduce ASF were secured). In order to enable the government to implement an extra student financing model called “alternative payments” that would not include interest, Sections 86 and 87 of the Higher Education and Research Act were passed in 2017.
- August 2017 – The DfE commissioned a study to support the development of ASF.
- October 2017 – Specialist advisers, the UKIFC, were appointed in October 2017 to help DfE design an ASF model.
- February 2018 – Theresa May MP commissions a review of Post-18 Education and Funding.
- May 2019 – DfE publishes ASF research report (Current and future students’ perspectives) which sought to analyse the experiences of Muslims who took out student loans and those who did not, as well as those who did and did not enrol in higher education. The study discovered that several interviewees’ opinions on interest and personal money were significantly influenced by their religious beliefs. It also reported that ‘‘Individuals are overwhelmingly positive about the ASF model, feeling it is attractive to them, and will be attractive to their families, friends, and community and thus encourage more Muslim students to go university, particularly those who could be deterred by the need to use interest-bearing loans to finance their studies. They also feel ASF will be attractive to a wider audience, beyond the Muslim community’’. In the same month, the Independent panel report (Augar review) to the Review of Post-18 Education and Funding was released and it further highlighted reasons to have the ASF.
- July 2019 – There was a further debate at the House of Lords where late Lord Sheikh who had also been the Co-Chair of the All-Party Parliamentary Group on Islamic Finance emphasised the need to fulfil the commitment made by David Cameron.
- January 2021 – Government publishes an interim response to Augar review. ‘’The Government is committed to ensuring that all students with the potential to benefit from further and higher education are able to access it. The Government will provide a further update on the ASF product in due course.’’
- April 2021 – Through Parliament, Lord Sharkey attempted to set a six-month timeframe for ASF after the passing of the Act during the Financial Services Bill Report debate. It did not succeed.
- May 2021 – Equal Access to University Education Campaign held a campaign webinar, titled “Boris Johnson – Where are our Halal Student Loans?
- July 2021 – An adjournment debate led by Stephen Timms MP was held in the House of Commons with the universities minister highlighting the delay and sharing accounts of people who have been unable to attend the university due to the lack of ASF.
- October 2021 – Spending review took place alongside the Autumn Budget. The collaborative advocacy efforts from the Muslim community and NUS reignited due to the inexplicable delays. The Muslim Census released the results of its online survey in October 2021 which revealed that over 12,000 students annually were negatively impacted by the lack of alternative student financing (ASF). Equal Access to University Education Campaign was initiated by a coalition of Muslim charities and community organisations to advocate for ASF. They made a call to the subsisting Prime Minister Boris Johnson to ensure ASF was rolled out by September 2022.
- February 2022 – Government gives a conclusion to the Augar Review and confirms that it will consider if and how ASF can be delivered as part of the LLE.
- February 2022 – Government launches a consultation on the LLE.
- June 2022 – An opportunity in an accountability hearing in June 2022 of the universities minister led to the public commitment to introduce ASF in line with LLE in the academic year 2025/26 whilst they awaited the results of the consultation of the LLE. https://www.parliamentlive.tv/Event/Index/03f0d267-f992-4193-9d8f-746930d28032 10.28.37, 10.33.09
- March 2023 – Government published the outcome of the LLE consultation and confirms that ASF will be delivered as soon as possible after the introduction of the LLE and emphasised its commitment to ensure availability of the ASF, although it would not be delivered at the launch of the LLE in 2025/26 but noted that an update would be available in late 2023.
- May 2023 – DfE re-appoints UKIFC to provide advice on Islamic finance.
- July 2023 – Government published a policy paper and blog post announcing plans for ASF in England through an advisory engagement with UKIFC.
- August 2023 – SLC began work on the ASF project pre-discovery and kicked-off.
- September 2023 – Baroness Barran stated that she meets on a quarterly basis with legislators, leaders of the Islamic community, the Student Loans Company, and the UKIFC to talk about the measures the government is taking to provide alternative student financing as soon as feasible.
- December 2023 – Baroness Barran provided an update on Alternative Student Finance in a letter to the House of Lords.
- February 2024 – The British Board of Scholars and Imams (BBSI) issued BBSI Guidance on Student Finance: Between Prohibition and Lawfulness
- March/April 2024 – SLC discovery phase complete. ASF will need to follow the introduction of the LLE, as referenced in the letter from Baroness Barran to Peers in December 2023.
- *April 2024 – ASF remains aligned to Lifelong Learning Entitlement delivery timetable: ASF continues to be developed as part of the wider Lifelong Learning Entitlement (LLE) reform programme, with implementation dependent on the rollout of the LLE
- October 2024 – DfE appoints UKIFC to undertake the role as the Secretariat for the Islamic Finance Supervisory Board supporting governance and Sharia compliance oversight for ASF.
- November 2024 – Government updates ASF guidance and confirms revised LLE timeline (2026/27): The Department for Education updates ASF guidance, confirming the Lifelong Learning Entitlement will now be introduced in the 2026/27 academic year, with ASF delivery aligned to this timetable.
- December 2024 – House of Commons Library publishes updated ASF briefing: The House of Commons Library updates its briefing on ASF, confirming policy continuity and summarising progress on implementation planning and governance structures.
- June 2025 – Government publishes updated operational description of ASF: The Department for Education publishes updated guidance confirming ASF design features, including use of a Takaful model, equivalence with existing student finance, and delivery through Student Finance England.
- June 2025 – GOV.UK updates ASF guidance confirming independent Sharia governance structure: Government guidance confirms the establishment of an independent Islamic Finance Supervisory Board to provide Sharia certification oversight for ASF before launch.
- June 2025 – UKIFC website updated with information on the Islamic Finance Supervisory Board and UKIFC’s role as Secretariat to the Board supporting Sharia certification oversight for the Alternative Student Finance product.
- April 2026 – Department for Education launches early market engagement for an ASF Student Bank Account. The procurement seeks a banking partner to establish and manage a dedicated account structure to support the Alternative Student Finance model, ensuring funds are handled in a manner compliant with Islamic finance principles, including non-interest-bearing arrangements and FCA-regulated safeguards.
- July 2026 – ASF remains in development ahead of LLE implementation: ASF has not yet launched and remains dependent on the implementation of the Lifelong Learning Entitlement. Government confirms ASF will be introduced following LLE rollout in 2026/27.
* The below updates were made on 1 July 2026
Pioneering Islamic Sustainable Finance: Insights from London Climate Action Week Round Table
The Islamic Finance Council UK (UKIFC), in partnership with PwC, brought together key industry leaders, Islamic finance experts, and sustainability professionals on Tuesday 25th June in London for an exclusive Unlocking Islamic Sustainable Finance round table. The event, which explored the burgeoning intersection of Islamic finance and sustainability, formed part of the London Climate Action Week (LCAW) programme.
LCAW is an annual event that began in 2019, organised by E3G. It gathers global leaders, organisations, and communities to address climate change challenges. LCAW features diverse activities such as forums, workshops, and showcases, playing a crucial role in advancing climate solutions and fostering collaboration among policymakers, businesses, and the public. The week highlights London’s commitment to sustainability and climate action, reinforcing its role as a global leader in addressing environmental issues.
The Unlocking Islamic Sustainable Finance round table was the first Islamic finance event to feature on the LCAW programme, thereby marking a significant milestone in the industry’s engagement with global climate action efforts.
Key areas of discussion are summarised below:
Market Opportunity and Growth for Islamic Sustainable Finance
According to new data from the Al Huda Center of Islamic Banking and Economics, global Islamic banking assets could hit $5 trillion by 2025, while S&P projects that the Islamic finance sector could experience an annual growth rate of 10 per cent in 2024. The round table discussions highlighted the substantial role Islamic sustainable finance can play in achieving the transition to net zero and achieving the UN Sustainable Development Goals (SDGs).
During the round table, it was also highlighted that adherence to Shariah-compliant finance reinforces consumer trust in the institutions that uphold these principles, particularly in Organization of Islamic Cooperation member states, many of whom are impacted by climate change and in need of finance and investment. Islamic finance also plays a pivotal role in enhancing financial inclusion by offering alternative mechanisms that cater to underserved populations.
With an increasing recognition that Islamic finance can help deploy capital to where it is most needed, according to the Financing a Sustainable Future report, green and sustainability sukuk has emerged as an innovative instrument which is attracting strong market demand.
Green Sukuk Guidance
The discussion moved on to what might be the most significant recent development in relation to Islamic finance in recent years. The publication of Guidance on Green, Social, and Sustainability Sukuk was a key output of the High-Level Working Group on Green and Sustainable Sukuk (HLWG) that was developed by the London Stock Exchange Group, Islamic Development Bank and International Capital Market Association. The guidance aims to promote sustainable finance instruments within the global sukuk market, providing clarity on issuing sukuk aligned with principles of sustainability, facilitating investments in projects that benefit the environment and society.
Sukuk has grown to become a significant asset class in the global bond markets with around US$220 billion issuances last year. In the sukuk market, there are roughly US$1 trillion worth of outstanding shares. This year, US$5 trillion worth of bonds have been issued, indicating a 50–60% increase in the market. Meanwhile, Green and sustainable sukuk issuances accounted for less than US$500 million in 2017 and increased to US$10.8 billion last year. In comparison, the market for green social sustainability bonds was valued at US$50 billion in 2014, when the Green Bond Principles were established and Global ESG bond issuance reached $621.8 billion in the first nine months of 2023. As a result, the guidance would also benefit issuers and individuals who are new to the sukuk market, especially green investors. It also takes a practical view especially in terms of developing economies particularly in the Middle East where a substantial portion is driven by sectors which need to transition. Chief financial officers of companies, sovereign teams, asset managers, and Shariah boards are anticipated stakeholders of the guidance.
Regulatory Developments
A key focus of the discussion was the evolving regulatory landscape, particularly in the Gulf region. The UAE Central Bank’s recent mandate requiring Islamic financial institutions to develop climate action plans through its Guiding Principles Regarding Islamic Sustainable Finance signals a significant shift in regulatory approaches to sustainability. This development aligns with UKIFC’s advocacy for greater integration of sustainability principles within Islamic finance regulatory frameworks.
It was highlighted that Islamic banks, while making efforts to align with the guidance, should measure changes to track progress. There was a consensus that they should also be given some flexibility during the transition process.
Tayyib Inspired – Islamic Sustainable Investing Platform (ISIP)
The round table also provided an opportunity for UKIFC to introduce its Islamic Sustainable Investing Platform (ISIP) to the UK audience having been showcased recently in Dubai, Kuala Lumpur and Istanbul. The ISIP is inspired and framed by the Islamic concept of “Tayyib” (pure, wholesome, and impactful). It complements the existing “halal” paradigm successfully built by the early Islamic finance pioneers and supports the development of the Islamic asset management sector. It reflects an aspiration for excellence which has been applied to Islamic investment sector.
ISIP serves as a showcase for independently assessed Islamic investment products that align with sustainability goals. The launch of the platform is a significant step forward in making Islamic sustainable finance more accessible and visible to a global audience. It presents an opportunity for Islamic finance to contribute unique perspectives to global sustainability efforts.
Challenges, Opportunities and Updates
Participants engaged in discussions about the challenges facing the Islamic sustainable finance sector. A key issue that emerged was the need to broaden the investor base, particularly among pension funds and institutional investors. Overcoming this challenge highlighted the importance of education and awareness-raising.
The Accounting and Auditing Organisation for Islamic Financial Institution (AAOIFI) Standard 62 on Sukuk was mentioned as a challenge facing the industry. It was noted that the standard now gives a narrower definition of Sukuk and a higher entry level into the market. This will impact green and non-green sukuk issuances, thereby becoming a key consideration for all market players.
On a more positive note, some UKIFC-led research was shared during the round table which, encouragingly, showed that 80% of Islamic finance customers want products aligned with SDGs. This consumer demand presents a clear opportunity for the industry to develop products that meet both religious and sustainability criteria.
Looking Ahead
The round table concluded with a sense of optimism about the future of Islamic sustainable finance. Key areas for future focus include:
- Continued collaboration between Islamic finance institutions, regulators, and mainstream sustainable finance players
- Further development of standards and guidelines to facilitate market growth
- Enhanced efforts to educate investors and consumers about Islamic sustainable finance products
- Exploration of how Islamic finance principles can contribute to addressing global sustainability challenges
- Exploration whether there was appetite for shariah compliant pensions from Islamic banking customers
As a pioneer in this field, UKIFC remains committed to driving forward the Islamic sustainable finance agenda. By combining the ethical principles of Islamic finance with contemporary sustainability frameworks, a new suite of financial solutions can be made available that benefit both people and planet.
Unlocking Islamic Sustainable Finance Round Table in Dubai
The Unlocking Islamic Sustainable Finance round table took place at the PwC Middle East office in Dubai on Thursday 23rd May 2024.
At the event, the Islamic Sustainable Investing Platform (ISIP) Application Guidelines were released and discussions with the UAE Central Bank were held on the implementation of the Central Bank’s Guiding Principles Regarding Islamic Sustainable Finance released just before COP28.
Participants included senior representatives of financial institutions and market makers such as the Mashreq Bank, Dubai Islamic Bank, S&P Group, Abu Dhabi Islamic Bank, London Stock Exchange Group, National Bank of Fujairah Islamic, Mashreq Bank, Ajman Bank, Dubai Islamic Bank, Emirates Islamic Bank, Standard Chartered Bank, Commercial Bank of Dubai, Abu Dhabi Islamic Bank, Emirates Islamic Bank, HSBC, PRI, and Emirates NBD.
Key discussion points from the session are summarised below:
Overview of Islamic Sustainable Finance
The opening remarks noted the growth of Islamic finance assets and the increasing issuance of green sukuk. Headline figures include:
- Green and sustainable sukuk issuances have surged, crossing $10 billion last year
- Islamic Finance Development report by ICD ELSEC, noted that the Islamic finance market is rapidly growing, with assets predicted to reach $6.7 trillion by 2027
Islamic finance and sustainability are critical areas that present challenges and immense opportunities at their intersection.
Global Ethical Finance Initiative (GEFI) and the Islamic Finance, Council, UK (UKIFC) highlighted their activities at the forefront of developing Islamic sustainable finance and mainstream sustainable finance ecosystems. Through collaborative efforts, they have launched several initiatives, such as the Global Task Force on Islamic Finance and UN Sustainable Development Goals (SDGs) and High-level Working Groups on Green and Sustainable Sukuk. These initiatives, alongside thought leadership, advocacy, and capacity building, aim to promote Islamic sustainable finance on a global scale.
Regulating Islamic Sustainable Finance – UAE Central Bank Approach
Discussions noted that despite being perceived as a natural leader in sustainability, Islamic finance initially did not take the forefront in this area globally. Historically, there was a misconception and a disconnect between the expectations of Islamic finance and the principles of sustainability. While Islamic finance inherently aligns with sustainability through its emphasis on ethical investments and social responsibility, it lacks a structured approach and clear guidelines. Recent developments, including the establishment of guiding principles and taxonomies, aim to bridge this gap. The UAE Central Bank recognised this gap and issued guiding principles in 2023 to encourage Islamic financial institutions to incorporate sustainability into their Sharia decision-making.
The guidelines are designed to prompt action and frame the concept of sustainability within shari’ah by reference to principles of socially responsible and ethical ownership and utilisation of wealth/resources (trusteeship, justice, equity, ihsan and adl). They utilise a framework derived from Sharia injunctions on permissible, recommended, obligatory, discouraged, and prohibited activities to evaluate investments through a sustainability lens.
Implementation considerations discussed include:
- lack of a taxonomy at present
- integrating this new layer into existing Sharia decision making processes without disrupting business flows and guiding the scholars through the process
- banks are exploring how best to develop internal processes and controls to comply with the principles
A financial institution shared its experience of using a two-screen process in implementing the guidelines. There is one Shariah screening process and then a second green or sustainability screening process. It was emphasised that this was not a combined process but rather two separate perspectives, the Islamic and the sustainability. Banks also shared how they internally score their clients and assess how they can help them on that journey toward net zero. Other examples from the banking industry highlighted the role of giving incentives to clients who reduce their water consumption or add renewable energy sources to their operations. Where targets are met discounts are applied on their financing rate.
It was suggested that the Central Bank should allow implementation of the guidelines in phases considering the current system has been operating for over 50 years. Other discussion points included the importance of giving incentives to banks and other ecosystem actors to adopt enhanced sustainability approaches. A point was also raised about further regulation that will guide banks on how to support Shariah scholars in the process of implementing the guidelines.
Introduction of the Islamic Sustainable Investing Platform (ISIP)
The ISIP was initially announced at COP28 and the platform application guidelines formally revealed at the roundtable. ISIP provides a listing of independently assessed, validated and showcased Islamic investment products that are directly aligned to sustainability goals. The platform draws inspiration from the concept of “Tayyib,” (meaning pure, wholesome, and impactful) and aims to encourage the development of Islamic sustainable finance.
Rather than add another burden, the ISIP approach leverages existing market frameworks like the Principles for Responsible Investment (PRI) that major Islamic investors have already adopted. Islamic financial institutions can apply to have their Sharia-compliant products across asset classes like equities, sukuk, real estate, and private equity assessed for sustainability criteria by independent third parties.
Summary
The roundtable facilitated an excellent set of engaging and insightful discussions amongst financial institutions in the UAE to explore how the Central Bank’s Guiding Principles Regarding Islamic Sustainable Finance can be effectively implemented. GEFI/UKIFC plans to host a larger Islamic Sustainable Finance event in Dubai in Q4 2024. Organisations interested in partnering are invited to get in touch.
Shaping a Sustainable Future: UKIFC's Impactful Journey at COP28 and Beyond
The Islamic Finance Council UK (UKIFC) was a strategic partner for the Global Ethical Finance Initiative (GEFI)’s #PATHTOCOP28 Programme – the first and largest finance-focused campaign for COP28.
The programme had seven high–profile events which included the Evening Lectures 'Adam Smith & Ibn Khaldun at #PATHTOCOP28, the COP28 Climate Finance Summit: Financing Survival which Scotland’s First Minister – Humza Yousaf; Unlocking Islamic Finance at COP28, and the SDG Hive.
The Unlocking Islamic Finance Summit was the largest Islamic finance event at COP28. The event which had in attendance global experts and scholars in the industry, delved into discussions on Green and Sustainable Sukuk, transitioning from Halal to Tayyib by enhancing consideration of ESG factors, and the pivotal role of Shariah scholars in promoting sustainability.
The UKIFC has been at the forefront of advancing the intersection of Islamic finance and sustainable development over the years, we are therefore delighted to share some remarkable achievements and announcements that underscore our commitment to shaping a sustainable future through Islamic finance.
- 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.
- 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.
- 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.
- 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).
- 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:
- 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.
- 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.
- 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.
- 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.
- 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.