Islamic Finance

Central Bank of Egypt directs local market to abide by sustainable financing principles

Published 25 Jul,2021 via Daily News Egypt - The Central Bank of Egypt (CBE) has directed all banks operating in the local market to take the necessary measures to implement sustainable financing principles.

The CBE indicated, in a letter to banks, that it has previously issued several initiatives aimed at achieving sustainable development goals (SDGs), and promoting sustainable financing.

This comes in light of its interest in establishing the concept of sustainable financing, which contributes to supporting financial and banking stability. The CBE has also been working towards achieving Egypt’s long-term stability in the economy, environment, and society as a whole.

The CBE stressed that the banking sector is one of the most important sectors that support development efforts. As a result, it is not possible to achieve the SDGs, including environmental and social goals, without banks having an active role in this, by directing financing to more sustainable economic activities.

It added that the integration of environmental and social elements, as well as governance rules, has a positive impact on company performances and reduces risk ratios, in addition to being an important factor for attracting foreign investments.

The CBE pointed out that sustainable finance has become one of the most important topics addressed at international forums, and forms the interest of many central banks.

As part of this, a general framework has been developed to define sustainable finance and the CBE’s directives regarding the requirements of its application in the Egyptian banking sector.

It defined the concept of sustainable financing as referring to financial or banking services that take into account the environmental, social, and governance elements in the bank’s decisions when granting credit or its investment decisions.

This aims to achieve a sustainable benefit for each of the clients, the concerned parties, and the society as a whole.

There are three essentials for sustainable financing. The first is the environmental element, which represents the factors related to the environment, such as climate change, gas and carbon emissions, air and water pollution, water scarcity, and global warming.

The second is the social component, which takes into account a social impact, such as providing job opportunities and improving working conditions. This includes health and safety, the rights of workers, and influencing the communities of the population surrounding the projects concerned.

The CBE stressed that sustainable financing leads to supporting financial and banking stability. It noted that studies have proven that the integration of environmental and social elements and governance rules has a positive impact on the performance of companies and reduces risk ratios.

Therefore providing financing to these companies is considered low risk, which reflects positively on the stability of the financial system.

It also contributes to enhancing investment opportunities and injecting foreign currency by attracting a new segment of investors who target sustainable financing, in addition to direct foreign investment in the banking sector and the national economy.

Sustainable financing enhances the issuance of green bonds in light of the increasing spread of environmental and social investment, with the possibility of establishing green banks. These will be set up in accordance with the provisions of the Central Bank Law, whereby a new type of bank will be licensed, namely specialised banks.

Green banks help in securing low-cost capital financing for clean and renewable energy projects, and projects that generally aim to improve environmental quality at appropriate prices and conditions.

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