The SDGs and Islamic finance: 5 publications to read
By Mohammad Hashimi
The sustainable development goals (SDGs) represent the global development agenda and need mobilization of capital from a variety of sources including Islamic finance. Here are five publications in on Islamic finance and SDG that those interested in the topic should read.
1. Innovation in Islamic Finance: Green Sukuk for SDGs
Innovation in Islamic Finance: Green Sukuk for SDGs, The Islamic Finance Council UK, 40 pages, 2021
The report, commissioned by UNDP Indonesia, explores the role of green sukuk in the context of climate change and the green economy. Indonesia has issued the world's first sovereign green sukuk in 2018 and the world’s first retail green sukuk in 2019. The report highlights the opportunity for Islamic finance industry to play a major role in achieving the UN SDG. The report suggests green sukuk could bridge the gap of funding towards sustainability and provides several recommendations for the development of the green sukuk market.
It finds that “green sukuk are a relatively new development with limited issuances but have a clear alignment with the value system of Islamic law. As Islamic finance evolves, innovative products such as green sukuk represent the potential for a new class of products that consider more than legal permissibility, moving towards a positive impact in line with SDGs.”
2. How Islamic Finance Contributes to Achieving the Sustainable Development Goals
How Islamic Finance Contributes to Achieving the Sustainable Development Goals, OECD Development Co-operation Directorate, 44 pages, 2020
In this report, the authors argue that in Muslim-majority contexts, Islamic finance could be socially, culturally and ethically more acceptable than conventional finance and better suit development. The report discusses Islamic social finance instruments and opportunities that can be used for achieving UN SDGs.
The report “identifies the opportunities that Islamic finance presents for donors, as they look to deliver the Sustainable Development Goals (SDGs). To achieve the SDGs by 2030, Arab and OECD DAC donors need to mobilize innovative forms of financing and deliver the UN Secretary-General’s call to deepen the transformation of development finance systems.”
3. Reforming Islamic Finance for Achieving Sustainable Development Goals
Reforming Islamic Finance for Achieving Sustainable Development Goals, Tariqullah Khan, 19 pages, 2019
The author explains the possibilities of Islamic finance contributing towards SDGs in the light of objectives of Shariah. The paper examines that a change in the perspective current system will be helpful in achieving SDGs.
The paper suggests that Maqasid should be given more importance, and argues that “The paradigm of Islamic economics and finance is guided by the motivation of comprehensive human development (CHD) and its preservation as manifested in the objectives of Sharīʿah (maqāṣid al-Sharīʿah)”
4. Role of Islamic Finance in Sustainable Development Goals
Role of Islamic Finance in Sustainable Development Goals, Abdul Ghafar Ismail, Salman Ahmed Shaikh, 16 pages, 2017
The paper explains the potential of achieving UN SDGs in light of the philosophical foundations of Islamic finance. The authors focus on environmental and climate changes caused by human beings. The paper suggests Islamic social finance instruments like zakat (obligatory alms) and waqf (charitable endowment) can contribute towards scaling up efforts in commercially non-viable but socially vital projects and programs.
They find that “there is much potential for Islamic finance to promote sustainable economic development through such approaches as widening access to finance, financing infrastructure projects, and expanding the reach of Takaful. Real sector based productive enterprise in Islamic finance has positive implications for the ecosystem.”
5. Sustainable Development Goals and Role of Islamic Finance
Sustainable Development Goals and Role of Islamic Finance, Habib Ahmed, Mahmoud Mohieldin, Jos Verbeek, Farida Aboulmagd, 47 page, 2015
According to the authors, basic principles of Islamic finance stabilize the economic system and give importance to social responsibility. The working paper explains how social financing tools like Zakath and Waqf help to achieve SDGs by enhancing stability and resilience to the financial sector, financial inclusion, reducing vulnerability of the poor, contributing to environmental and social issues, and infrastructure development.
They argue that “practical measures are required to enhance the contribution of the Islamic financial sector to achieve the SDGs. We have identified five tracks through which Islamic Finance could support efforts to achieve the SDGs: financial stability, financial inclusion, reducing vulnerability, social and environmental activities, and infrastructure finance.”
Concluding thoughts
Together, these reports and papers display the harmony between Islamic economic thought, Islamic finance, and the SDGs. However, they also show that the majority of the work to practically utilize Islamic finance for achieving the SDGs remains to be done.
UKIFC launch 'Islamic Finance and the SDGs' report
The Islamic Finance Council UK (UKIFC), in partnership with Malaysia based International Shari’ah Research Academy for Islamic Finance (ISRA) and the Global Ethical Finance Initiative (GEFI), has today launched the third report in its 4-part thought leadership series that aims to assist and encourage active engagement in support of the UN Sustainable Development Goals (SDGs) by the global Islamic finance sector.
UKIFC Senior Adviser Sultan Choudhury will formally announce the report, to an audience of over 3,000 financial practitioners, at GEFI’s flagship annual Ethical Finance Summit.
The report provides an analysis of responsible banking in the Islamic finance sector, assessing the level of engagement with the Principles for Responsible Banking (PRB) amongst banks in Organisation of Islamic Cooperation (OIC) member states and analysing the approaches used by 9 Islamic finance signatories. It also features notes from interviews with Al Baraka Banking Group, Bank Pembangunan Malaysia Berhad, CIMB Group, Gatehouse Bank, Gulf International Bank (UK) and Jaiz Bank who have all shown notable leadership in responsible banking.
The PRB, which launched in 2019, is the world’s leading framework for responsible banking and is underpinned by six Principles that help signatory banks to align with the SDGs and the Paris Climate Agreement.
With its underlying Shariah principles, Islamic finance is naturally aligned to responsible banking and is well positioned to lead the financial services sector’s efforts towards achieving the SDGs. However, whilst a small number of organisations are making significant progress the report has highlighted the pressing need to raise awareness, in OIC member states and beyond, of responsible banking and the benefits to be achieved by integrating Shariah compliance with sustainable finance strategies and becoming PRB signatories.
TAKEAWAYS FROM THE REPORT INCLUDE:
- 49 of the 57 OIC member states do not contain any PRB signatory organisations.
- When the PRB was launched in 2019, 14.3% of the founding signatories were based in OIC member states. Now only 10.0% of the 221 PRB worldwide signatories are based within OIC member states despite the OIC member states having a collective population of over 1.82 billion (24% of the total world population).
- Of the 61 countries containing PRB signatory organisations, 13.1% are OIC member states.
- Within the 8 OIC members states that contain PRB signatories there are 22 signatory organisations, located in Africa (50.0%), Europe (27.3%) and Asia (22.7%).
- 38 PRB signatories offer Islamic finance products and services, which equates to 17.2% of all PRB signatories.
- The majority of Islamic finance institutions that are PRB signatories, 27 of the 38 organisations, are based outside OIC member states, across Europe, Asia, Africa, Oceania and the Americas.
- Only 3 of the 38 institutions offering Islamic finance products or services are fully Shariah-compliant, namely Al Baraka Banking Group (Bahrain), Gatehouse Bank (UK) and Jaiz Bank (Nigeria).
- The most popular Islamic product / service offered by non-OIC member states signatories is corporate finance, with 40.7% of signatories offering this. Amongst OIC member states the most popular product / services are personal banking and personal, business and corporate banking, at 27.3%.
PRB signatories are currently underrepresented in OIC member states, suggesting the PRB should increase its activities within OIC member states. Awareness of the PRB in OIC member states could be increased through working groups, targeted awareness and outreach activities. Given the mutual benefits of becoming PRB signatories to both Islamic finance institutions and the responsible banking industry, increasing engagement should be treated as a priority.
UKIFC experts quoted in Chartered Banker Magazine article 'Progressive Pakistan'
The Islamic Republic of Pakistan is by most standards a young country – its founding in 1947 was not without both complication and conflict, and historical political divisions have frequently laid obstacles in its mission to forge a path as an influential and modern Islamic republic. Today, however, the impact of decades of globalisation – along with economic growth across South Asia – puts the country in a strong position, most significantly demonstrated by its increasingly dynamic banking and finance sector.
This article originally featured in the Spring 2021 edition of the Chartered Banker Magazine - click here to download
As the world’s fifth most populous state, Pakistan is nothing if not a significant player in the South Asia region. Its current economic indicators do, however, tell a story of a country that up to now has been relatively slow to develop in its infrastructure, health and education, and business environment.
The hesitant pace of growth and development can be viewed through the lens of a challenging domestic political scene that saw the country struggle until recently to establish a more stable democracy. However, Pakistan has benefited from structural reforms in recent years that have injected new impetus into its continuing transformation as a modernising republic.
A $6.3bn cash facility from the International Monetary Fund (IMF) in 2013, for one, was designed to help Pakistan stabilise its public finances and address energy supply shortages, and measures to attract much-needed foreign investment brought inflows of $3.1bn in 2019-20 – of which the financial sector was the second-highest beneficiary.
Despite some bumps in the road, the positive consequences for banking and financial services in the country are now being felt across the board in Pakistan. The country’s central bank, State Bank of Pakistan (SBP), notes the progress made in financial inclusion across such a vast population, saying: “In June 2018, we had 64 million unique accounts in operation, which reflects a penetration of more than 50% of Pakistan’s adult population. As of June 2020, we now have 73 million unique accounts, of which 61% are active.”
These accounts are a mix of traditional branch accounts and digital/mobile platforms – the very territory that is ripe for further expansion. And, given that the Pakistan Telecommunication Authority (PTA) reports some 93 million citizens as having broadband access, the potential for further penetration looks promising.
It could be cited that there are three ways in which the country’s financial sector has managed to blossom under such a transformative environment for banking worldwide. A key piece in the jigsaw is the autonomy that SBP now enjoys in making vital monetary policy decisions. The reforms go back to 1994, with further powers being subsequently granted in 1997.
“The changes in the State Bank Act gave full and exclusive authority to the State Bank to regulate the banking sector, to conduct an independent monetary policy, and to set limits on government borrowing from SBP”, which had been enacted in the SBP Act 1956. “SBP formulates and monitors monetary and credit policy, and in determining the expansion of liquidity, it takes into account the Federal Governmentʼs targets for growth and inflation that the Bank [operates] in a manner consistent with these targets.”
Secondly, the momentum for digitisation in Pakistan means increasing the share of online banking, whether that includes retail point-of-sale payments or opening and using e-wallets issued by FinTechs. SBP has capitalised on the digital shift by collaborating with the Pakistani government to allow its citizens living abroad easy access to retail investment opportunities back home by launching the Roshan Digital Account (RDA).
“During the past four quarters, the number of registered mobile phone banking users increased by three million to reach8.9 million.”
Institute of Bankers Pakistan
But perhaps a most prominent characteristic of the financial sector here is the growth and development of a highly developed alternate – or Islamic – banking system.
The Islamic banking impact
As an Islamic republic, Pakistan is strategically and culturally well placed to develop Islamic finance products. It is one of the very few jurisdictions to enjoy explicit constitutional support for it, and this in turn has increased incentive and backing for its development from the state.
According to SBP, the government has used a number of legal and regulatory initiatives to help nurture Islamic banking. As part of the National Financial Inclusion Strategy, it is determined to increase the share of Islamic banking to 25% of the banking industry, and its branch network to 30% by 2023. SBP has enjoyed a pivotal role in promotion and development of the Islamic banking industry and, as a result, is recognised today as a stable and resilient segment of the overall sector.
Although often seen as niche banking instruments, Pakistan has been cannily nurturing a sub-sector of Sharia-compliant* products and services since the early 1980s, with the result that it has grown substantially in both appeal and reach.
SBP reports 22 Islamic banking institutions operating in the country, including “five fully fledged Islamic banks, one specialised bank and 16 conventional banks with Islamic banking branches”. In the financial year ending 2020, a further 361 branches were added to a network already spanning 3,274 branches in 122 districts. Lower-income citizens are also are part of the commitment to growth, with banks such as NRSP and MCB-Islamic offering a range of Islamic microfinance solutions.
S. Fahim Ahmad, a Karachi-based Senior Adviser to the UK Islamic Finance Council (UKIFC), has more interest than most in the positive impact of Islamic finance. A former senior banker with Citibank and passionate supporter of sustainable charities, he was asked to set up Pakistan’s representation to the Global Islamic Finance UN SDGs Taskforce, which aims to ensure that it can actively engage with the 17 UN Sustainable Development Goals (SDGs) and make Islamic finance part of this global initiative.
“The team at State Bank of Pakistan were easily convinced of the benefits of such a cause,” he explains. “They had never done this before, as their role is more that of a regulator. But they are ina position to manage the banks much better than I could.”
In November 2020, the Pakistan chapterof the Taskforce was launched, enrolling the support and participation of seven Islamic and conventional banks which it was felt could best drive forward the mission. Its four key objectives include enhancing engagement with the UN SDGs – but also to promote Principles of Responsible Banking (PRB); facilitate alignment tools that deliver on additional areas such as green financing and the Global Ethical Finance Initiative (GEFI); and share international experiences.
“This collaboration between SBP and UKIFC is a novel concept,” continues Ahmad. “The idea is to replicate this in other markets. We have had to catch up in many respects with developed Islamic finance markets, and this is a good chance to make up for that.”This level of engagement is a far cry from the early days when legal issues tended to slow the growth of Islamic banking in Pakistan.
Finally, after 2000, the founding of the country’s largest Islamic bank, Meezan, was made possible when the SBP agreed to scope out proper guidelines and a regulatory framework. Today, Islamic banks in Pakistan are so successful, they have a surplus of liquidity, which inevitably needs to find a home in investment instruments that are considered halal (permissible or lawful).
“There’s no doubt in my mind that there’s a huge demand for Islamic finance products,” adds Ahmad. “The impact of wider regional change in 1979-1980 had fundamentally changed the relationship we have since had with Islam, and the younger generation is, by extension, now more into Islamic banking.
”However, there is still no global uniformity among Sharia scholars about the acceptability of different products – and there is extensive room for growth yet. What will make Islamic banking take off in Pakistan? Ahmad argues that this will happen if the government uses it on a large scale, for example through sovereign or corporate bonds in sovereign sukuk.
“Social good is a key part of Islamic finance,” he adds. “Islamic banks hold a lot of liquidity as we know, and if they can deploy that into productive, socially impactful use, the whole economy will benefit.”
Pakistan banks on faith
A recent joint survey held by SBP and the UK Department for International Development identified an “overwhelming demand” for Islamic banking, regardless of whether or not the respondents were urban or rural. A huge majority (94.51%) came out in favour of the prohibition on interest, with 88.4% regarding contemporary bank interest as a similarly prohibited practice.Even non-banked respondents echoed the sentiment, at 98% and 93% respectively, and 62% of those who are banked would willingly pay more for Islamic banking products due to religious preferences.
As with other jurisdictions worldwide, however, the shift towards contactless and e-wallet transactions is strengthening the hand of the non-bank sector too. This has not been lost on SBP which, in 2019, responded by enabling “electronic money institutions” access to Pakistan’s payments ecosystem. It is only a matter of time before the pace of innovation injected into the sector will transform people’s payment habits across the country.
Facing the future with confidence
As the world starts to deal with the economic fallout from the coronavirus pandemic – which, in many countries, is still in full flow – Pakistan’s financial sector seems to have shown a healthy degree of resilience in the face of the shock of 2020. SBP puts this down to capital buffers put in place over the long term to strengthen the banks’ position. The higher capital adequacy ratio (CAR) of 19.5% at the end of September 2020 put Pakistan beyond the minimum local and global requirements for its banking system. Liquidity has also been uninterrupted following state interventions to support key parts of the economy during this period.
From this position of strength, therefore, Pakistan is able to focus on at least three priorities among many that will shape its financial sector into a growing force for the economy: continued digital transformation, affordable lending instruments for housing, and programmes to reduce the gender gap in access to finance.
On the digital front, the Digital Pakistan Policy and the National Financial Inclusion Strategy are two initiatives that hold promise in the battle to reduce the informal economy and make FinTechs a productive addition to the domestic market. In particular, the launch of Raast, an instant digital payment system, will be an innovative step forward in reducing citizens’ reliance on cash while making transactions cheaper.
This collaboration between State Bank of Pakistan and the UK Islamic Finance Councilis a novel concept... We have had to catch up in many respects with developed Islamic Finance markets, and this isa good chance to makeup for that.
Islamic Finance Council, UK
Long-term property lending policies – where SBP has given mandatory lending targets to banks on their housing portfolios and developers are being offered incentives – should help boost a sector badly in need of modernisation to benefit future homeowners.Third is the launch of SBP’s Banking on Equality Strategy, where a “gender lens” will be applied to the industry to ensure increased financial access for women based on a set of approved measures.
When viewed in the context of an often-turbulent history, there’s little doubting the progress made to date in Pakistan’s journey of banking and finance. The policies, commitment, and liquidity – three factors crucial to any developing economy – should herald a more prosperous and dynamic economy well into this century.
No one left behind
According to State Bank of Pakistan (SBP), women are disproportionately underserved by the country’s financial system. With only around 25% of bank accounts held in the name of women (even fewer are actually active), it has been widely accepted by government that economic development cannot be achieved without a healthier approach to reducing the gender gap. The bank has therefore created a policy entitled Banking on Equality: Reducing the Gender Gap in Financial Inclusion to ensurea manageable but proactive shift towards women-friendly business practices. The draft policy was presented in December 2020 for consultation.
The application of Maqaasid As-Shariah in achieving the UN SDGs
In simplistic terms, Maqaasid As-Sharia is defined as the “Goals of Shariah”. These encompass the 5 necessities of human existence. The preservation of: faith, life, intellect, lineage and wealth. These objectives have a great resemblance to the UN SDGs (United Nations Sustainable Development Goals). The SDGs are defined as “the world we want. They apply to all nations and mean, quite simply, to ensure that no one is left behind.”
Maqaasid As-Shariah involves realising the human well-being by enhancing welfare or benefit (maslaha) of the people on one hand, and preventing harm (mafsadah) on the other. The satisfaction of these needs is a basic human right and has been addressed under the generic term “Maqaasid As-Shariah”.
Although the SDGs have not been developed on a religious basis, most goals are nonetheless aligned with the spirit of Islamic law! Muslims are duty-bound by their religion to ensure the sustenance of the 5 necessities of Maqaasid As-Shariah. This means that the Islamic development is endogenously sustainable since preservation of life is an explicit objective of the Islamic law.
The dimensions of SDGs (the 5Ps) can also be found in Maqaasid As-Sharia as follows: People (Intellect), Planet (lineage), Prosperity (wealth), Partnership (faith) and Peace (life). When we talk about Maqaasid As-Shariah we are really talking about a guiding framework, a value system, the objectives of which are explained from the holy Qur’an. Some of these are referenced below:
- No Poverty, Zero Hunger, Decent work and economic growth (SDG1, 2 & 8)
[Chapter 16 v 97: “Whoever works righteousness, whether male or female, while he (or she) is a true believer verily, to him We will give a good life (in this world with respect, contentment and lawful provision)…”]
- Good health and well-being (SDG 3), Quality Education (SDG 4), Clean water and Sanitation (SDG 6)
[Chapter 7 V 160: “…Eat of the good things with which we have provided you…”]
- Gender equality (SDG 5)
[Chapter 49 v 13: “We have created you from a male and a female….Verily the most honourable of you with Allah is that (believer) who has at taqwa (piety)…”]
- Affordable & Clean Energy (SDG 7), Climate Action (SDG 13)
[Chapter 7; V85: ““…and do not mischief the earth after it has been set in order…”]
- Industry, Innovation & Infrastructure (SDG 9)
[Chapter 13 v 11: “…Verily, Allah will not change the good condition of a people as long as they do not change their state of goodness themselves …”]
- Reducing inequality & Peace, Justice & Strong Institutions (SDG 10, 16)
[Chapter 4 v 135: “Stand out firmly for justice…”]
- Responsible consumption & Production (SDG 12)
[Chapter 7 v 31: “…eat and drink but waste not in extravagance…”]
[Prophetic advice: “The food of one person is sufficient for two, the food of two people suffices for four people and the food of four people suffices for eight”]
- Sustainable cities & Communities (SDG 11)
[Chapter 8 v 46: “…do not dispute (with one another)…”]
- Life below Water (SDG 14), Life on Land (SDG 15)
[Chapter 30 v 41: “…Evil has appeared on land and sea because of what the hands of men have earned (by oppression and evil deeds)…”]
- Partnerships for the goals (SDG 17)
[Chapter 5 v2: “…help you one another in virtue, righteousness and piety (common good) but do not help one another in sin and transgression…”]
The UN SDGs are primarily intended for the well-being of human beings. As sustainable development strives for a balanced economy, society and environment, Islam too drives a balance between the 3 to maintain efficient and effective resource usage. If spirituality becomes a way of life upholding timeless moral, ethical and human values, sustainability is certainly assured and Maqaasid As-Shariah to serve as governance framework, guidelines and values.
Second Islamic Finance & SDG Taskforce meeting takes place
The second Islamic Finance and the UN Sustainable Development Goals (SDGs) Taskforce meeting has taken place virtually bringing together over 50 global Islamic finance leaders. At the meeting, convened by the State Bank of Pakistan (SBP) in partnership with the UK Islamic Finance Council (UKIFC), the SBP announced the launch of a country level working group bringing the leading banks across Pakistan to focus on green finance and the SDGs. Two further working groups, to be driven by Taskforce members, focused on Disclosure and Reporting and Education and Awareness were also announced.
The Taskforce is playing a leading role to encourage the adoption of the SDGs, highlight the green finance opportunity and promote the UN Principles of Responsible Banking within the global Islamic finance sector. This represents a $2.5 trillion global investment opportunity as part of the post-Covid-19 economic recovery. The Islamic Development Bank suggest that between $700m and $1trillion of this is within its member countries presenting an immediate opportunity for Islamic finance institutions.
State Bank of Pakistan Governor, His Excellency Dr. Reza Baqir, announced the launch of a Pakistan country working group that will:
“Explore the inherent strength of Islamic finance to develop a responsible business framework by engaging academia, policy makers and practitioners towards achieving SDGs.”
Leading the Awareness group UKIFC Advisory Board Member and meeting chair, Richard de Belder commented:
“Having identified a knowledge gap this working group will focus on activities that increase awareness, promote understanding and encourage adoption of the SDGs amongst the global Islamic financial and their related primary stakeholders.”
Leading the Disclosure and Reporting working group Gatehouse Bank CEO Charles Haresnape added:
“This working group is a unique opportunity to bring the Islamic banks signed up to the UN Principles of Responsible Banking together to share experiences with a view to developing a more consistent approach to disclosure and report.”
Despite a natural alignment few Islamic financial institutions are engaged with the SDGs. As we enter the decade of delivery the Taskforce has become an important platform to raise awareness of the Global Goals and catalyse practical action amongst Islamic financial institutions.
The meeting, also heard from Dr Hayat Sindi, Senior Advisor to the President, Islamic Development Bank, who spoke about how Islamic financial institutions are demonstrating resilience as world events continue to reshape the landscape of global financial services; how IFI’s can prepare themselves for the opportunities and challenges posed by such a changing economy; and especially with regards to investing in science and innovation so poorer countries can provide an adequate response to the Fourth Industrial Revolution.
NOTES FOR EDITORS
About The Taskforce:
With assets expected to reach US $3.8 trillion in 2022, Islamic finance is one of the fastest growing sectors in the global financial industry. Achieving the 17 Sustainable Development Goals (SDGs) agreed in the UN’s 2030 Agenda for Sustainable Development will take over US$5 trillion per year investment with the current financing gap standing at around $2.5 trillion per year.
The purpose of the taskforce is to explore the role the Islamic finance industry can play in addressing this funding gap and to better understand the commercial opportunities the SDGs present for the sector.
The UN’s SDGs are the blueprint to achieving a better and more sustainable future for all, addressing issues such as climate change, education and equality. Achieving the SDGs requires a coordinated global effort with Governments and private sector, including the financial services sector as a whole. Analysis indicates there is limited engagement by the global Islamic finance sector and this focused taskforce has been established by the UKIFC.
Islamic finance and the SDGs in the UK (Islamic Finance News)
This article originally appeared in Volume 17, Issue 29 of Islamic Finance News, and was authored by Omar Shaikh, co-founder and CEO of UKIFC and Chris Tait, Project Manager of UKIFC.
Islamic Finance and the SDGs – UK Update
With Covid-19 exposing the fragility of people and the planet the Sustainable Development Goals (SDGs) is a recognised global framework upon which we can, collectively, build our social, environmental and economic resilience. With its underlying Shari’ah principles, Islamic finance is naturally aligned to, not only support but, lead the financial services sector’s efforts towards achieving the Global Goals.
With a $2.5 trillion per year financing gap, the UKIFC has committed to a 24 month action oriented programme of activities to address barriers blocking Islamic Financial Institutions from embracing the SDGs.
A new high-level international taskforce to engage the Islamic finance industry with the SDGs was launched late last year. The taskforce, which is anchored in London and run by the UKIFC with the support of the UK Government, aims to promote understanding and encourage adoption of the SDGs amongst Islamic financial institutions.
Commenting on the launch Economic Secretary to the Treasury, John Glen MP, said: “This Taskforce will bring together the global Islamic finance community so it can help us meet our international, environmental and sustainability objectives – using UK expertise in sustainable finance to drive forward innovation around the world.”
The inaugural meeting was scheduled for March 2020, and recently took place virtually after a postponement, attended by leading Islamic finance institutions along with the Bank of England, John Glen MP and Islamic Development Bank President, HE Bandar Hajjar.
The UKIFC, in partnership with Malaysia based International Shari’ah Research Academy for Islamic Finance, recently launched the first report in a thought leadership series that aims to assist and encourage active engagement in support of the SGDs by the global Islamic finance sector. The report, Islamic Finance and the SDGs: Framing the Opportunity, provides an introduction to the SDGs within the context of Islamic finance, emphasising the opportunity the SDGs present to the Islamic finance sector. The report highlights:
- The limited participation from Islamic finance sector in leading UN initiatives such as Principles for Responsible Investment (PRI), Principles for Responsible Banking (PRB) and Principles for Sustainable Insurance.
- That to achieve SDG targets, Islamic Development Bank Member Countries need annual funding of between US$700 billion and US$1 trillion which represents around 40% of the total global SDG financing gap.
- An opportunity for Islamic finance to tap into emerging global liquidity pools seeking SDG-aligned products.
- Aligning with the SDGs supports the tayyib (pure, good) concept which contends that the focus of Islamic finance products and services should be on the evaluation of wider societal impact rather than an overly legalistic analysis of Shari’ah compliance.
In terms of practical action in 2016, DDCAP became one of the first Islamic financial sector signatories to the PRI thereby demonstrating a commitment to aligning responsible investment practices with the SDGs. The UK is also leading the way in relation to the Islamic finance sector’s engagement with the PRB. The principles offer the first SDG-aligned global framework that helps banks to integrate sustainability across their operations at the same time as enhancing their positive impact. In February 2019 the UKIFC became the first advisory body dedicated to Islamic finance to formally endorse the principles and Gatehouse Bank was the first fully Shariah compliant bank amongst the founding signatories when the principles are launched at the UN General Assembly in New York in September 2019.
Elsewhere UK-based Cogneum, in partnership with Bahrain Institute of Banking Finance and Innosoft Solutions, working to develop and launch the world’s first Shariah Governance software platform that links an Islamic bank’s activities to Maqasid al Shariah as well as the SDGs.
With assets expected to reach US $3.8 trillion in 2022, through its adeptness at innovative financial structuring, the global Islamic finance sector has the opportunity to take a leading role in driving capital towards the SDGs and UK organisations are well placed to contribute and support.
OTHER UK DEVELOPMENTS
All Party Parliamentary Group On Islamic Finance (APPGIF)
The APPGIF was re-constituted on 4th February 2020 with the continuing aim of promoting the understanding and development of Islamic finance both domestically in the UK and overseas as well as looking at the role Islamic finance can play in the wider ethical finance sector. It is an active body with 9 officer holders and a further 5 supporters from across the parties and from both sides of the house.
Sovereign sukuk
In 2014 the UK became the first country outside the Islamic world to issue sovereign Sukuk. The 5-year £200 million issuance received very strong demand, with orders totalling around £2.3 billion, and allocations made to a wide range of investors including sovereign wealth funds, central banks and domestic and international financial institutions. Following a “value for money assessment” in June 2019 former Chancellor Philip Hammond announced the UK will be issuing a second sovereign sukuk.
Other than the aforementioned the Debt Management Office announced in November 2019 that HSBC and Clifford Chance LLP were appointed on 4 November 2019 as structuring and legal advisors and, as yet, despite the procurement notice indicating that the contract would end on 3rd May 2020, there has been no announcement on the appointment of Structuring Bank(s). With the coronavirus pandemic causing great volatility in financial markets it remains to be seen whether the Sukuk will be issued this year.
By issuing a sovereign Sukuk the Government sought to pave the way for other public and private sector organisations to follow suit. However, Al Rayan Bank, which issued a public Sukuk for £250m in early 2018 to become the first bank ever to issue an Islamic bond in a non-Muslim country, has been the only other UK entity to enter the Sukuk market.
Shariah compliant student loans
As far back as 2013, when the UK hosted the ninth World Islamic Economic Forum, former Prime Minister David Cameron announced that “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”. Despite the Government commitment a shariah compliant student loan product is still not available to prospective and existing UK students. Whilst progress has been made a wider review of student finance, as well as the coronavirus pandemic, have caused delays and the solution, which we believe to be based upon a Takaful model, has yet to be formally launched.
Shariah compliant real estate investment in Scotland
Pre-coronavirus as the real estate market in the Middle East stabilised, Gulf investors have sought to diversify their property portfolios and select the UK as a preferred investment destination. Whilst London continues to dominate the strong yield projections in other UK cities (including Manchester, Liverpool and Leeds) has driven the trend for Gulf real estate investment to flow northwards. There has been significant activity in Scotland where there is a separate and distinct legal basis for structuring shariah compliant deals. Over the last 2 years, supported by organisations such as BDO, Gatehhouse Bank, Ocorian and Shepherd + Wedderburn, over £250million of Shariah compliant real estate deals have been concluded for properties in Aberdeen, Edinburgh and Glasgow.
Islamic fintech
The UK Islamic FinTech Panel, an independent group of Islamic finance and fintech practitioners, continues to focus on connecting entrepreneurs with government, and building international connections with the inclusion of participants from Bahrain, Dubai and Pakistan. Fintech success stories in the UK include Yielders, an Islamic crowdfunding platform for UK property that allows investors to buy shares in houses that it buys and lets, Wahed Investment who have launched their US robo-advisory halal investments platform into the UK and Niyah, a mobile-only Islamic banking solution providing an interest-free banking experience. Kestrl, an ethical banking fintech, is set to launch in the UK later this year.
Inaugural Islamic Finance and the SDGs taskforce meeting takes place
The inaugural Islamic Finance and the UN Sustainable Development Goals (SDGs) Taskforce meeting took place virtually, in light of the Covid-19 pandemic, bringing together over 40 global Islamic finance leaders. The pioneering meeting, convened by the Islamic Finance Council UK (UKIFC) in partnership with the UK Government, explored the role Islamic finance can play in addressing the $2.5 trillion SDGs funding gap as part of the post-Covid-19 economic recovery.
Islamic Development Bank President Bandar Hajjar welcomed the initiative calling for greater cooperation between the public and private sectors and to use the SDGs to inspire financial innovation.
Brexit brings risks and opportunities for UK Islamic finance but unlikely to revolutionise domestic industry, say experts
Article published by author: Hassan Jivraj
Publication name: Salaam Gateway
Date of publication: 16 JAN 2020
Article link: Click here
The United Kingdom is set to leave the European Union (EU) on January 31. Uncertainty looms as to whether the government will secure a trade deal with the EU or leave in December 2020 without one.
Nonetheless, Brexit presents various risks and opportunities, such as Islamic finance playing a role in bilateral trade negotiations and the UK’s second sovereign sukuk. Beyond these, it is unlikely it will significantly transform the industry in the UK, according to stakeholders polled by Salaam Gateway.
DEAL OR NO DEAL
The biggest uncertainty surrounding Brexit is whether the UK government will be able to secure a Free Trade Agreement (FTA) with the EU, or if it will leave the bloc without a deal.
The risk of a no-deal would have a negative impact on the UK’s conventional and Islamic banking sector.
“Impacts and shocks in the UK economy will obviously also impact the Islamic economy,” Nick Green, Partner and Head of Cross-border Investment at law firm Trowers & Hamlins in Dubai, told Salaam Gateway.
“If we have a No-Deal exit from the EU, the short-to-medium term impact on the economy will not be positive, although I think it will be flat rather than a deep recession,” he added.
Among some of the risks of leaving the EU without a deal is losing the passporting scheme, which allows financial institutions in the bloc to operate, and sell financial products and services in member states without having to apply directly to specific regulators.
“If the EU passporting scheme falls away it will be more difficult to set up banking operations in other EU countries but there is no evidence to suggest UK Islamic banks are looking to set up in the EU outside the UK,” said Chris Tait, Project Manager, Islamic Finance Council UK (UKIFC).
But Mohamed Damak, Senior Director, Global Head of Islamic Finance at S&P Global Ratings downplayed the risks of Brexit’s impact on UK Islamic banks.
“There is no significant linkage between Brexit and the competitive position of domestic Islamic banks in the UK,” he said.
“Islamic finance remains small in the UK with total assets of the Islamic banks at £4.5 billion at Year-End 2018.”
FDI DRIVER
In a post-Brexit environment, it is likely the UK government will seek new trading partners and relationships. Islamic banking and finance can play a role in attracting foreign direct investment (FDI), particularly with Muslim-majority nations.
From his vantage point in the UAE, Nick Green said that to date, most Gulf investors have generally viewed Brexit as a negative.
Middle Eastern investment into the UK is not unsubstantial, from £1.8 billion in 2016 it rose to £2.43 billion in 2017 and £2.6 billion in 2018, according to real estate services provider Savills.
With regards to the government’s position, a UK Treasury spokesperson told Salaam Gateway: “The government remains committed to developing Islamic Finance in the UK to support financial inclusion, encourage investment and enhance its competitiveness as a global financial centre.”
The UK’s five licensed Shariah-compliant banks all have significant shareholders from overseas, notes Stella Cox, Director of DDCAP Group and Chair of TheCityUK’s Islamic Finance Market Advisory Group.
All of the UK’s Islamic banks are majority-owned by Gulf-based financial institutions or investors. For example, Al Rayan is owned by Qatar’s Masraf Al Rayan. Similarly, Kuwait’s Boubyan Bank, previously the majority shareholder of Bank of London Middle East (BLME), acquired the lender in an all-cash takeover in December 2019.
“We have Islamic fund managers and insurance companies. Emerging technology businesses focused on Islamic financial sector opportunities, and also those within the wider halal economy are attracting foreign investors,” said Cox.
BANKING
While Brexit will present challenges for conventional and Islamic banks in the UK, it will also depend on the bank’s business line and how exposed financial institutions are to the EU.
Charles Haresnape, CEO of Gatehouse Bank said the bank does not trade across borders and that the impact of Brexit is much less than for UK banks which trade internationally.
“Any impact for us would be if customer demand for home finance reduced when customer appetite to purchase UK property contracted. We see this as a low risk given the historical resilience of the UK housing market,” he said.
“All things considered we believe the potential for an adverse impact on Gatehouse Bank from Brexit is low.”
From a growth and profitability perspective Mohamed Damak of S&P said asset quality and earnings of UK Islamic banks could be hit due to the significant concentration of their lending portfolio on real estate activities in case of a disruptive Brexit.
He noted around two thirds of total financing comprised real estate exposures at year-end 2018. But he said these banks enjoy a good level of capitalisation and asset quality indicators.
“At the end of 2018, the average Tier 1 ratio for UK Islamic banks stood at 17.9% and their NPLs ratio at 1.3% according to the Islamic Financial Services Board,” he added.
At present, Al Rayan is the only fully-fledged retail bank out of the five Islamic banks in the country.
Despite the small number of players and with the UK seeking to attract more Islamic investors, it is unlikely a new Islamic bank will be set up anytime soon.
“I don’t see appetite for a new Islamic lender to enter the UK at the moment,” said Nick Green.
“It is also unlikely that GCC financial institutions will set up a large presence in the UK. Instead, GCC investors looking to enter the market are more likely to acquire companies or existing financial institutions.”
However, he said there is potential space for the challenger banks to offer Islamic financial products, if they wish to expand their product line.
CAPITAL MARKETS
This year the UK is set to issue its second sovereign sukuk, which will help London maintain its position as a centre for Islamic finance.
“The UK’s second sovereign sukuk issuance is a key part of this strategy: supporting UK-based Islamic banks through the provision of high-quality, Shariah-compliant, liquid assets; encouraging the growth of the domestic Islamic finance industry and helping ensure the UK maintains its position as the leading Western hub for Islamic finance,” the UK Treasury spokesperson told Salaam Gateway.
The deal will follow the maiden sukuk issued by the government in 2014 when the sovereign became the first outside of the Islamic world to issue such an instrument.
In the following year, UK Export Finance (UKEF), the government’s credit export agency (ECA), guaranteed Emirates Airline’s sukuk to buy aircrafts.
However, there has been little activity in sukuk since then. The most recent Sterling-denominated sukuk came in February 2018 from Al Rayan Bank that issued a debut £250 mln sukuk, which followed a Shariah-compliant equivalent to a residential mortgage-backed security (RMBS).
Beyond the upcoming sovereign issuance, the pipeline of sovereign or UK corporate sukuk is likely to be limited due to cheap domestic funding.
“I don’t envisage UK companies will look at sukuk because domestic finance is plentiful, unless there is a Middle East element such as in the corporate ownership,” said Nick Green.
“It’s still cheaper to do conventional or direct lending. It tends to cost on average around 50bps to 100bps more for the UK’s Islamic banks to offer lending compared to conventional lenders, depending of course on size and purpose of facility.”
On a more positive note Bank of England is currently working on a facility for Islamic banks to help with their liquidity requirements, according to Wayne Evans, Adviser International Strategy for TheCityUK.
“This is a welcome development, as was the Bank’s decision to become an Associate member of the Islamic Financial Services Board,” he said.
INSURANCE
Another area that UK will likely seek to develop is the domestic takaful sector.
Stella Cox believes Lloyds of London is interested in promoting takaful and other Islamic insurance products and services.
In 2018, the Islamic Insurance Association of London released guidelines to address capacity constraints and challenges for takaful and re-takaful with the aim of supporting the sector. The guidelines followed the initial set released in 2016.
“The Islamic Insurance Association of London works under the auspices of the Lloyds platform and is seeking to ensure that the market operating environment is sufficiently enabled for Shariah-compliant business to grow further,” she said.
“Overseas investors have shown interest in establishing Shariah-compliant syndicates and we have a Shariah-compliant insurance underwriting agency within Lloyds. Lloyds members offer a range of Islamic products and services across a range of assets and requirements.”
But others say the scope for development in the UK is limited.
“The takaful industry remains small globally and even if we start to see some growth in the UK, we are of the view that it will remain rather small in absolute terms and relative to the insurance industry in the UK,” said Mohamed Damak.
He points to a lack of appetite from clients, lack of standards and also perhaps a lack of offering by the main insurance players.
“As in other markets, takaful companies will need to develop competitive products and do a better job in promoting their offerings/differentiate themselves from conventional insurers in order to grow,” he said.
WINNING OVER MUSLIMS
Irrespective of Brexit, there are still long-standing challenges that will continue to face Islamic banking in the UK, particularly the retail sector.
Shakeel Adli, Partner, Head of Islamic Finance at CMS Law, said the take-up of Muslim consumers has been relatively low. He said this in large part has been down to two factors; firstly a distrust as to whether the underlying products are in fact Shariah-compliant and secondly the pricing arbitrage with conventional products.
“More generally there needs to be greater financial literacy both amongst Muslims and non-Muslims for consumers to be able to make informed decisions,” he said.
He argues that where Islamic products have been particularly successful is when they have outcompeted the conventional market and as such have been able to attract both Muslim and non-Muslim customers.
He cites the examples with savings products in the UK where a number of the UK Islamic banks have offered higher rates than their conventional competitors whilst still allowing customers to benefit from the Financial Services Compensation Scheme.
MOVING FORWARD WITH SDGs ALIGNMENT
As Brexit Day approaches, the picture for UK Islamic finance remains mixed.
However, there are other initiatives taking place.
Chris Tait said the UKIFC recently launched a high-level Islamic Finance and Sustainable Development Goals (SDGs) task force that is supported by the UK Government and includes international stakeholders.
“The taskforce will enhance the engagement of the global Islamic finance industry with the SDGs through capacity building, awareness campaigns and promotional activities,” he said.
“Whilst not driven by Brexit it is a good example of the UK leading a global initiative aimed at leveraging Islamic finance to deliver the Global Goals.”