Are Islamic finance and ethical finance the same thing? Our stance in these pages has always been clear — ethical finance is not always Islamic, and Islamic finance is not automatically ethical. A crossover there may be, a correspondence there is not. However, that is not to say that a closer relationship would not, and could not, be beneficial for both parties — and in this growing confluence, LAUREN MCAUGHTRY writes that one country has taken the undisputed lead…
Malaysia, long acknowledged as a global leader in Islamic finance, has in recent years been highly proactive in extending this stance to the ethical sphere, building on its reputation for Shariah compliant performance to support a growing platform for socially responsible finance. While the two are by no means the same, Malaysia has successfully leveraged its position as a highly respected Islamic finance jurisdiction and dominant Sukuk issuer to build out its ethical capabilities.
According to publicly available data from the Securities Commission Malaysia (SC), six SRI or green bond and Sukuk programs — with a cumulative value of US$1.02 billion — were issued between the 27th July 2017 and the 27th April 2018, while sovereign wealth fund Khazanah Nasional and government pension fund KWAP are already signatories to the United Nations-supported Principles for Responsible Investment (PRI), and local rating agency RAM Ratings is one of the six pioneer credit rating agency signatories to PRI’s Statement on ESG in Credit Ratings.
From issuing the world’s first socially responsible Sukuk in 2015 to launching the full set of Guidelines on Sustainable and Responsible Investment (SRI) Funds in January 2018, to the world’s first-ever ESG Sukuk Fund from BIMB in August 2018, Malaysia has made its ambitions in the ethical finance space clear — and activity is gathering momentum.
Brand new Sukuk
On the 20th September, HSBC Amanah in Malaysia launched the first-ever UN Sustainable Development Goals (SDGs) Sukuk, the second SDG issuance from a HSBC entity globally, following HSBC Group’s US$1 billion SDG Bond in 2017. The RM500 million (US$120.24 million) senior unsecured fixed rate SDG Sukuk, due in 2023, was drawn from the bank’s existing multicurrency Sukuk program of RM3 billion (US$721.42 million), with proceeds used to finance eligible businesses and projects in accordance with the HSBC SDG Bond Framework.
The offering received strong investor demand, with final orderbooks in excess of RM1.4 billion (US$336.66 million) and a bid-to-cover ratio of 2.85x from 25 accounts across government agencies and pension funds (51%), financial institutions (31%), insurance companies (9%), asset managers (8%) and corporates (1%). The Sukuk priced at the tight end of the final price guidance at a fixed profit rate of 4.3% per annum from an initial price guidance of 4.3-4.4%. The transaction represents the lowest coupon for a five-year non-government guaranteed Sukuk/bond in the Malaysian ringgit market in 2018 to date as well as the tightest spread over the benchmark Malaysian government securities for a financial institution since 2013 and for an Islamic bank in the Malaysian ringgit market since HSBC Amanah’s inaugural Malaysian ringgit Sukuk in 2012.
“This Sukuk is the world’s first-ever benchmark sustainable Sukuk issuance by a financial institution referencing the UN SDGs as use of proceeds. As such, it is a landmark in the Malaysian and global Sukuk markets,” said Stuart Milne, the group general manager and CEO of HSBC Bank Malaysia.
“UNDP welcomes HSBC’s commitment to using funds raised in the capital market to invest in the SDGs,” said Achim Steiner, the administrator of the United Nations Development Program (UNDP). “A world first, HSBC’s pioneering SDG Sukuk is a prime example of how to create innovative financing for the goals, and marks a milestone in aligning Islamic finance with the SDGs. UNDP is growing its work in this exciting area, working both with the private sector and government stakeholders.”
A work in progress
But the SDG Sukuk issuance was only the beginning, swiftly followed by yet another landmark UNDP initiative — one that could make a real impact in implementing Islamic finance solutions across the global ethical finance landscape.
At the 73rd session of the UN General Assembly in New York in September 2018, the UNDP, SC and the IDB announced a pioneering new partnership to advance the use of Islamic financing tools to fund the ambitious set of 17 SDGs that came into effect in January 2016 as a follow-up to the Millennium Development Goals, supported and implemented by the UNDP in 170 countries and territories worldwide.
“The scale of funding and technical support required to meet the SDGs are far beyond the scope of individual governments and multilateral agencies, hence it will be important to bring in the private sector and new partners who will be crucial in filling the significant funding gap,” commented a spokesperson for the UNDP. “Islamic finance is significantly aligned with values of responsible investing and is receiving wide acceptance as a vital funding solution to financing sustainable development projects. Green Sukuk, in particular, has emerged as an innovative financing vehicle for projects aimed to protect the environment and combat climate change, such as the renewable energy and green infrastructure projects.”
The partnership is just the latest example of the UNDP taking advantage of the global opportunities offered by Islamic finance. In 2016, the development agency launched the Global Islamic Finance and Impact Investing Platform with the IDB to provide market-based solutions to sustainable development challenges, aiming to position Islamic finance impact investing as an enabler of SDG implementation, and the latest proposition is designed to build on that relationship.
“UNDP strongly believes that this partnership will yield exciting results with increased engagement of Islamic financiers in development. We look forward to cooperating with partners across the public and private sectors to unleash innovative Islamic finance opportunities and governments toward the realization of the global goals,” said UN Under-Secretary-General and UNDP Associate Administrator Tegegnework Gettu.
A strong commitment
As ethical finance gains greater recognition on the global stage, Malaysia is strategically positioning itself to take advantage of this trend — to its own economic advantage, as well as sustainability benefit. And in this scenario, leveraging its existing strength in Islamic finance is by far the easiest route to success.
“Conversations around the areas of sustainability and inclusiveness have taken on greater importance in recent years as the world is facing worsening environmental deterioration and widening income and wealth disparity. Governments and multilateral institutions as well as the private sector and non-profit organizations are seeking viable solutions to protect the environment and combat climate change, which has been recognized to also be a major cause of persistent socioeconomic issues,” said Ranjit Ajit Singh, the chairman of the SC, in response to an emailed query from IFN. “Islamic finance is well placed to address these pressing global issues. With its underlying principles of equitable and participatory growth being closely aligned with those of sustainable and responsible finance, Islamic finance has significant potential that can be harnessed to provide innovative solutions to support the universal sustainability agenda.”
But Singh stresses that there are further steps to be taken.
“Its principle of shared prosperity serves to position Islamic finance as an appropriate channel to facilitate greater inclusiveness. Islamic social finance concepts of Waqf, Zakat and Sadaqah, for instance, provide for [the] distribution of ‘excess’ wealth to the needy or less fortunate, which in turn aids in mitigating inequality in society. General Waqf assets in particular have significant potential to be developed to generate substantial economic and commercial returns while at the same time provide enhanced social benefits to the community.”
This process has already been started — in 2017, six Malaysian Islamic banks launched a new Waqf fund revolving around economic empowerment, education, health and investment, in an effort to develop the Muslim economy — and this has already been emulated by other jurisdictions, most recently with the launch of the Alinma Wareef Waqf Fund in Saudi Arabia in September 2018.
While substantial differences may remain between the fields of Islamic and ethical finance, and while IFN continues to assert that the two are not the same thing, it must be emphasized that neither are they mutually exclusive. Initiatives such as the multilateral partnership between the UNDP, SC and IDB, the latest SDG Sukuk from HSBC and the numerous new Waqf and ESG Sukuk funds all combine to demonstrate that Islamic finance could not only play a role in promoting ethical finance in its jurisdictions, but that in fact, supporting the ethical story could open new doors for Islamic finance across the global financial landscape. And as those doors open, it looks as if Malaysia will be the first in line to step through.