Photo for illustrative purposes only. The SDGs on the windows at Panama City Tocumen International Airport on October 18, 2018. Susie Hedberg

Islamic Finance

UK Islamic finance advisory, Malaysian research institute partner on new SDG reports


LONDON - The UK Islamic Finance Council (UKIFC) and the Malaysia-based International Shariah Research Academy for Islamic Finance (ISRA) have launched the first report in a new series to encourage active engagement with the U.N. Sustainable Development Goals (SDGs) in the global Islamic finance sector.

UKIFC is a not-for-profit advisory body dedicated to Islamic finance. ISRA was set up by Malaysia’s central bank.

The report, the first of three, emphasises the opportunity the SDGs present to the Islamic finance sector.

“UKIFC's aim with these reports is to identify practical issues and solutions that will assist Islamic financial institutions in their understanding of and alignment with the SDGs,” said Richard de Belder, UKIFC Advisory Board Member. 

“The other two reports will focus on the views of the Shariah scholars and senior management and the challenges that top level management are facing in terms of the SDGs.”

The first report’s key findings include the limited participation from the Islamic finance sector in U.N. initiatives like the Principles for Responsible Investment, Principles for Responsible Banking and Principles for Sustainable Insurance.

The report forecasts that to achieve SDG targets, the 57-member countries of the Islamic Development Bank need annual funding of between $700 billion and $1 trillion, which represents around 40% of the total global SDG financing gap.

It further highlights the opportunity for Islamic finance to tap into emerging agnostic global liquidity pools seeking SDG-aligned products and increase tactical alignment with development bank funders.

The report notes that alignment with the SDGs supports the tayyib 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 Shariah compliance.

Islamic finance assets are expected to reach $3.8 trillion in 2022, estimates the report.

SDGs CONVERGENCE WITH MAQASID AL SHARIAH

All of the stakeholders involved agreed there is a strong correlation between SDGs and Maqasid al Shariah.

Dr Akram Laldin, executive director of ISRA, said SDGs are compliant with Shariah, particularly in areas like health and eradicating hunger.

He argues that there needs to be education about this convergence among the Islamic financial institutions and Shariah scholars.

“It’s about perception and raising awareness,” he said. “This is part of the Shariah goals. The key is getting the message across through more discussions. Being Shariah-compliant should also be tayyib not just halal, this is the objective of the Maqasid al Shariah.”

He pointed out that since the global financial crisis there has been increasing awareness of looking beyond finances, i.e. profit.

“Once there is understanding [of SDGs], there will be a real push for things beyond financial returns,” he said. There needs to be screening which involves Fiqh but also Maqasid.”

UKIFC TASKFORCE

The reports series is the second part of the UKIFC’s two-fold strategy to help Islamic financial institutions align with the SDGs. It follows the advisory body’s announcement in November of the establishment of the Islamic Finance and SDGs taskforce, that is supported by the British government’s Treasury department.

The taskforce's initial term will be 24 months and it will involve UK and international stakeholders. It is likely the taskforce will form various working committees and its first meeting is on July 6, according to de Belder.

“The purpose [of the task force] is to explore the role the Islamic finance industry can play in addressing the SDG funding gap and to better understand the commercial opportunities the SDGs present for the sector,” he said.

Stella Cox, CEO of DDCap Group said there will be a limited number of taskforce members, with those invited being drawn from across the world, and with the onus being on financial practitioners, regulators and development bodies.

“These members, and DDCAP is one, will work within the strategic objectives of the taskforce in setting the agenda and driving practical action,” she said.

Cox explained that themes of work will call for the taskforce and its members to identify and analyse the challenges that Islamic financial sector institutions face in delivering against SDG objectives and, thereafter, to explore and initiate practical solutions to address them. 

“When required, the taskforce will work and consult with a larger body of experts,” she said. 

“It is expected that the taskforce will meet in different jurisdictions twice a year and its working groups will meet remotely on a regular basis. As announced already by UKIFC, the UK Government has agreed to be a founding country partner.” 

CONVINCING OTHER STAKEHOLDERS

Richard de Belder said that many Islamic financial institutions have not yet aligned with the SDGs because they have a limited understanding of them and because they do not see how they are relevant to their commercial agenda. 

He argues, however, that research shows organisations that adopt ESG principles, including the SDGs, outperform those which do not and for this reason, Islamic financial institutions need to actively consider the benefits of aligning with the SDGs.

A key challenge remains convincing stakeholders like clients, investors and shareholders for Islamic financial institutions to implement SDGs in their corporate strategy or product offering.

de Belder said that if an Islamic financial institution decides to align itself within the ethical finance space and in particular with the SDGs this will require a significant and sustained amount of effort as change management research has shown there are challenges in shifting an organisation's core goals and culture. 

“Such a change will require senior management to come on board but it is also critical to bring employees and other stakeholders along as well,” he said. 

“Sometimes the pressure to change may come from institutional investors who have an ESG/SDG agenda, from customers and clients or from external sources such as regulators or the actions of competitors.”

He noted that conventional investment and asset managers such as BlackRock are moving into and promoting the 'ethical finance' space, including the SDGs, and this impetus is likely to have a ripple effect which will also encourage some Islamic investment and asset managers to follow suit. 

Stella Cox argues that SDGs are the blueprint to achieving a better and more sustainable future for all, addressing issues such as climate change, education and equality. She stressed that achieving the SDGs requires a coordinated global effort between governments and private sector, including the financial services sector as a whole. 

She explained that national initiatives such as the UAE Guiding Principles on Sustainable Finance, the Securities Commission of Malaysia’s Sustainable and Responsible Investment Sukuk Framework and Bank Negara Malaysia’s Values-based Intermediation Financing and Investment Impact Assessment Framework Guidance Document, each make reference to the SDGs.

“These frameworks emanate from core markets for Islamic financial practice,” she said. “AAOIFI has also been developing standards and screening parameters for socially responsible and sustainable investment.”

“So the inference is that regulatory pressure will increasingly oblige the executive management of Islamic banks and financial institutions to adopt an approach to business that will require consideration of the SDGs, as we have seen already from regulators across other parts of the world that have taken such actions within their home markets,” she noted.

FINANCING OPPORTUNITIES

Despite the challenges, Richard de Belder said that the massive financing gap that exists to achieve the SDGs in developing countries could offer opportunities for many Islamic financial institutions. 

“SDGs-based financing can come in a myriad of forms,” he suggested. 

“The IFFIM 'Vaccine Sukuk' was not an infrastructure model but one based on 'debt' financing and would fall within SDG 3,” said de Belder, referring to the goal of ensuring healthy lives and promoting wellbeing for all at all ages.

“Many SDGs will require infrastructure financing and these are, regardless of a SDG tag, more complex to structure.”

He explains that for this type of financing targeted at the poorer Muslim countries, the structure will need to be creative, in part to make the returns attractive.

They could involve, for example, blended finance. This could comprise Shariah-compliant financing (including Islamic social finance), and different tranches, including, for large projects, conventional finance sitting alongside the Islamic portion. 

“For corporates and government bodies that are able to position their project as falling within one or more SDGs, this has the potential for them to access new financing sources,” he said.

(Reporting by Hassan Jivraj; Editing by Emmy Abdul Alim [email protected])

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Hassan Jivraj