Financing the UN Sustainable Development Goals (SDGs) agenda in OIC countries requires trillions of dollars. Obviously, governments’ budgets are not enough to provide the needed financial resources. Thereby, the private sector in general and the Islamic financial sector in particular are required to bridge the financing gap and support the achievement of the SDGs. This is particularly true in the context of COVID-19 where social and economic challenges are skyrocketing while governments have little leeway in terms of fiscal and monetary interventions.
Despite innovative initiatives in green and social finance from financial engineering and technological standpoints, Islamic finance is still far from playing a leading role in impact finance. In addition, it is clear that the industry’s efforts in addressing the pandemic’s effects are still below expectations.
Review of 2020
As in 2018 and 2019, Southeast Asia is still leading the Islamic finance industry in catalyzing Islamic finance investing toward sustainable development. Malaysia maintained its global leadership with new sustainable and responsible investment Sukuk issuances: green Sukuk by Solar Management (RM260 million (US$62.96 million)), Leader Energy (RM260 million) and Sparks Energy (RM220 million (US$53.28 million)) and social Sukuk for affordable housing by Malaysia’s national mortgage corporation, Cagamas (RM100 million (US$24.22 million)).
In Indonesia, the government tapped into the global Sukuk market once again by issuing US$2.5 billion in three tranches, one of which is a green Sukuk facility. Furthermore, the country issued retail Sukuk (IDR5 trillion (US$353.06 million)) as part of the government’s efforts to finance the economic recovery from the COVID-19 pandemic.
In the GCC, 2020 has been an interesting year for Islamic impact finance. After Majid Al Futtaim’s first-ever green Sukuk in GCC last year, the following green Sukuk issuances were successfully conducted in 2020: first, Abu Dhabi’s Etihad Airways’s US$600 million issuance was linked to its sustainability targets to reduce net emissions by half by 2035 and reach net zero carbon emissions in 2050.
Second, Saudi Electricity Company’s US$1.3 billion facility was to finance its ‘smart meter’ rollout scheme and facilitate the Kingdom’s transition to a low-carbon nation. Finally, in Turkey, Zorlu Energy made history by becoming the first green Sukuk issuer in the country (first issuance: TRY50 million (US$6.25 million)). The issue’s proceeds were used to finance sustainable infrastructure and clean transportation investments.
At the development finance institutions level, the IsDB listed a US$1.5 billion Sukuk facility on NASDAQ Dubai and will use the capital raised to support COVID-19 relief initiatives. According to the IsDB, the Sukuk proceeds will exclusively fund social projects under the bank’s Sustainable Finance Framework, with a focus on access to essential services and SME financing and employment generation categories under SDG 3 ‘Good Health and Well-Being’ and SDG 8 ‘Decent Work and Economic Growth’ for its 57 member countries, to assist them in tackling the aftermath of the COVID-19 pandemic.
Unfortunately, we have not seen in 2020 strong impact finance initiatives in the Takaful industry. There is no doubt that insurance, as a risk protection mechanism, is important to achieve the 2030 agenda for sustainable development especially in the COVID-19 context.
Preview of 2021
As in previous years, Southeast Asian and GCC countries should continue to lead the Islamic impact finance momentum through diversified and innovative structures. Will the COVID-19 crisis incite OIC countries in general to play an active role in sustainable finance? The answer is likely to be positive, especially after the first COVID-19 Sukuk of the IsDB and the Indonesian government on one hand, and the successful experience of COVID-19-related instruments in conventional finance internationally on the other.
Fintech innovation can play an important role in bridging the gap between sustainability challenges and Islamic finance in efficient and cost-effective ways. For instance, mobile and crowdfunding innovations can unlock financial inclusion by significantly reducing the costs for payments and providing suitable access to capital domestically and internationally for the unbanked, the underbanked and SMEs.
Data technologies can facilitate collecting, analyzing and distributing sustainability and impact indicators for better economic decision-making, better regulation and better risk management. Finally, blockchain can empower effective and efficient financial markets with a level-playing field and market integrity for long-term impact investors. It is fair to bet that technology will be an important part of the next Islamic impact initiatives in 2021 and will support the industry to fulfill its ethical, social and environmental promises.
Conclusion
Despite some successful impact finance initiatives especially in Southeast Asia and the GCC, they remain limited both in scale and scope. OIC markets have not yet seen the potential of the Islamic finance industry to drive sustainable development with positive environmental, social and governance outcomes. Undeniably, expectations from the private and public spheres are high with respect to social and economic challenges in the current COVID-19 context. The industry has no choice but to hasten the pace and leverage impact as a competitive advantage.
Dr Mohamed Wail Aaminou is the general manager of Al Maali Consulting Group. He can be contacted at [email protected].