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The exciting road ahead for Islamic finance: A guest blog by Omar Shaikh

There are exciting developments taking place in the $4.5 trillion global Islamic finance industry. COP28 shone a spotlight on its potential as a source of capital for sustainable development, and tomorrow the long-awaited Al Mizan: A Covenant for the Earth will be published as a call to action to Muslim communities. We asked Omar Shaikh, Managing Director of the Global Ethical Finance Initiative (GEFI), which ran the largest finance-focused campaign for COP28, to give us an overview of the key developments.


By Omar Shaikh


The recent COP28 conference marked a significant milestone in the global effort to combat climate change. As the finance world continues to focus on sustainability, Islamic finance is emerging as an untapped pool of capital that aligns faith-based finance with environmental, social, and governance (ESG) principles.


Omar Shaikh, GEFI
Omar Shaikh, Managing Director, GEFI

As a global $4.5 trillion industry adhering to the Shari'ah (Islamic law), Islamic finance does not permit receipt and payment of "riba" (interest), "gharar" (excessive uncertainty), "maysir" (gambling), short sales or financing activities that are considered harmful to society. As such, Islamic financial institutions are uniquely placed to finance the transition to net zero.


The backdrop to COP28 was a world fighting a climate and nature crisis with a financial system that was not delivering for people and the planet. This presented an opportunity for Islamic finance to step up to play a bigger role.


Islamic Finance at COP28

COP28 saw a greater focus on Islamic finance than previous COPs with much of the effort being driven by the Islamic Finance Council UK (UKIFC) together with GEFI and Dubai International Financial Centre (DIFC). The UKIFC’s “Unlocking Islamic Finance at COP28”, which formed part of the Path to COP28 campaign (the first, and largest finance-focused campaign for the Dubai Climate Summit), was hosted by DIFC and was the main (and largest!) event focused on Islamic finance, attracting over 200 leaders and practitioners.


At the Summit, the Global Islamic Finance & SDGs Taskforce announced the publication of its Key Outputs Report and the UKIFC launched Tayyib Inspired – a pioneering project seeking to integrate responsible investing and Islamic finance to create a more sustainable, inclusive, and equitable world. This groundbreaking approach presents a $500bn market opportunity.


The Central Bank of the United Arab Emirates, and the Higher Shari’ah Authority, used COP28 as a platform to issue guiding principles on sustainable Islamic finance. These guidelines aim to incentivise and encourage Islamic financial institutions (IFIs) in the UAE to bolster sustainability within their practices and processes, aligning with a vision that considers both environmental and social dimensions. The guiding principles comprise ten directives for IFIs, aimed at instituting and effectively implementing sustainability. These directives involve clear strategies and plans to facilitate this objective.


Scenes from GEFI's The Path to COP28 events in Dubai. Clockwise from top left: Omar Shaikh; audience members; Scottish First Minister Humza Yousaf (also a speaker) at GEFI's Climate Finance Summit; Alya AlZarouni, Chief Operating Officer at DIFC Authority, announcing plans to create the first AI-driven sustainability knowledge hub; one of the panel discussions.


Green Sukuk

At COP28, the UKIFC and London Stock Exchange Group published the Financing a Sustainable Future – Green & Sustainability Sukuk Update 2023, which was a key outcome of the High-Level Working Group on Green and Sustainability Sukuk (HLWG).


Explanation of sukuk

The report highlighted that green and sustainability sukuk issuance had reached $9.4 billion in 2022 as sustainability sukuk maintained their strong growth momentum in the aftermath of the Covid-19 pandemic. In 2023, green and sustainability sukuk issuances set yet another record, having exceeded the $10 billion mark by the third quarter.


A notable development at COP28 was the Islamic Development Bank, London Stock Exchange Group, and International Capital Markets Association (ICMA) announcing a collaboration to publish a green sukuk practitioners’ guide aligned with the Green Bond Principles and Sustainability Bond Guidelines as published by ICMA.


This was another output of the High Level Working Group and will support the growth of green and sustainable finance within the global market for sukuk by providing issuers and other market participants with guidance on how sukuk may be labelled as 'green' or 'sustainable' in line with the principles through examples, case studies, and best practices. The guidance will also help to improve investors’ awareness of sukuk as an asset class in the global fixed-income markets.


The UAE, which hosted COP28, accounted for 40% of total regional sustainable sukuk issuances in 2023 and most recently the First Abu Dhabi Bank (FAB) issued 2024’s first green sukuk at $800 million. It sets a robust precedent in channelling investments towards impact-driven assets aligned with ESG goals.


The UAE hosted COP28 in December 2023.
The UAE hosted COP28 in December 2023.

Predicted to exceed $1 trillion in 2024

Fitch Rating has also predicted that the global Sukuk Market will exceed $1 trillion in 2024, and issuances are estimated to be between $160 billion and $170 billion. Last year the total green and sustainability sukuk raised crossed $10.1 billion, representing 6.5% of all sukuk issuances.


From our work at the UKIFC, we believe that sustainable sukuk issuers have a significant opportunity to access global liquidity pools due to the overlap between Islamic and ESG finance, notably in the agnostic liquidity pools of the Global North, which are looking for emerging market returns to be invested in the Global South in a way consistent with ESG.


Sustainable Banking Practices

Islamic banks are increasingly incorporating sustainability criteria into their operations and investment decisions. The principles of Islamic finance, which include risk-sharing, ethical investment, and asset-backed financing, naturally align with environmentally conscious practices. An opportunity to develop the Islamic banking space post-COP28 is for shariah-compliant banks to expand their offerings of green retail products.


Ninety per cent of respondents felt it important to have their bank’s products aligned to the SDGs, and seven out of ten said they would use their bank's goods more if they were sustainable. – Survey of 2,000 bank customers by UKIFC in 2023

According to a survey by the UKIFC in 2023 of 2000 bank customers from four continents, 90% of respondents felt it important to have their bank’s products aligned to the SDGs. Of those surveyed, seven out of ten stated that they would use their bank's goods more if they were sustainable. Gatehouse Bank which was one of the banks whose customers responded has developed green home finance products and we expect this trend to continue across other IFIs with dedicated sustainable investment accounts.


Conclusion

As the world transitions towards a cleaner energy future, Islamic finance has an immense opportunity to enable investment consistent with both climate goals and faith-based values. – Omar Shaikh

As the world transitions towards a cleaner energy future, Islamic finance has an immense opportunity to enable investment consistent with both climate goals and faith-based values. In addition, as a faith-based form of finance, the innate wisdom within the theological concept of sufficiency can also be a critical approach to reducing the burden on the planet's limited resources. Such wisdoms, along with principles of stewardship are key contributions that the collective faith voice can – and must – make at forthcoming COPs.


COP28 commitments can be a launching pad for the Islamic finance industry to scale up sustainable financing and develop innovative solutions for a low-carbon society, taking a substance-over-form approach. There are great opportunities and whilst the road ahead may be challenging, it is an exciting one for some of us.




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