Islamic Finance: An Innovative Avenue For Financing The Sustainable Development Goals
The 2030 Agenda for Sustainable Development seeks to eradicate poverty in all its forms, promote sustained and inclusive economic growth and ensure social development and environmental protection while supporting peaceful, just and inclusive societies. To succeed, the international, national and local actors, including the private sector, will have to venture in a true global partnership backed by adequate financial and technical resources.
For developing countries, the required investment for the Sustainable Development Goals (SDGs) would be approximately US$4.5 trillion per year, with an additional requirement of US$3.1 trillion. The Official Development Assistance is nowhere nearly sufficient to implement this agenda. Thus, the Addis Ababa Action Agenda calls for the mobilization of all possible sources of finance and the alignment of all financing flows and policies with economic, social and environmental priorities.
Private resources are key to achieving the SDGs
Fortunately, there are enough resources globally to address the greatest development challenges. The financing gap required for the SDGs is only 1.1 percent of the value of global capital markets, which is estimated to be US$218 trillion. We now need to deploy all these resources in a coherent and coordinated fashion to move from billions in development assistance to trillions in development investments. This includes exploring innovative sources of finance and leveraging private investments alongside official development assistance.
Is private financing sustainable? While global capital is massive, dwarfing funds available to governments, such investment of private resources often does not generate positive human development outcomes. On the other hand, the right business models can advance social purposes while generating profits. This is the growing domain of impact investments as well as inclusive and sustainable businesses that aim at generating beneficial social or environmental impacts and financial returns. Impact investment is worth billions and is widely recognized as an effective means of development finance.
In this quest for new sources of financing, Islamic finance can play a critical role. Indeed, it is one of the fastest-growing segments of the global financial industry, from US$200 billion in 2003 to an estimated US$1.8 trillion in 2015, with global assets expected to surpass US$3 trillion by 2020.
Islamic Finance - Socially Responsible Investment
It is in this context that Islamic finance has become increasingly relevant as a means to fund development, including in non-Muslim countries. Since its origins, Islamic finance has embodied socially responsible investment principles. It provides safeguards for vulnerable populations and prohibits investments in activities related to tobacco, alcohol and drugs, speculation, gambling, pornography and weapons manufacturing. The core principles of Islamic finance are also the main tenets of the 2030 Agenda and are similar to those of impact investment: inclusiveness, equitable and participatory growth, social and distributive justice, open and accountable institutions, sustainability and women’s empowerment.
Islamic financial instruments are many, yet the Sukuk and the Micro-takaful stand out. The Islamic equivalent of bonds— Sukuk grants the investor a share of an asset along with the corresponding cash flows and risk. They can provide a significant source of financing for infrastructure development and impact-driven initiatives, thereby contributing to the achievement of the SDGs. For example, International Finance Facility for Immunization issued its first Sukuk in December 2014, a three-year, US$500 million transaction that was the largest debut Sukuk ever issued by a supra-national entity. Referred to as the “Vaccine Sukuk”, it brought the concept of socially responsible investing.
On the other hand, insurance products such as the Micro-takaful is a type of Islamic insurance, where members contribute money into a pooling system in order to guarantee each other against loss or damage. In Bangladesh, Micro-takaful products also protect the livelihoods of low-income households. These are profitable, for the insurance company and also have a positive social and community impact.
Global Islamic Finance and Impact Investing Platform
The Islamic Development Bank and UNDP have established the Global Islamic Finance and Impact Investing Platform (GIFIIP). The Platform acts as a knowledge hub, a forum for policy dialogue and advocacy, and a marketplace for deal sourcing and matchmaking. It promotes market-based solutions to sustainable development challenges, with the aim of positioning Islamic finance and impact investing as leading enablers of global SDG implementation through private sector engagement. Key strategies include developing appropriate investing tools and instruments, and improving access of impact enterprises to Islamic funding.
The Global Platform opens up new markets and new sources of funding, promotes increased recognition, and the security of a shared ethos for both impact investing and Islamic finance. For member countries of the Organisation of Islamic Cooperation (OIC), involvement with the platform is an opportunity that can greatly improve the lives of citizens affected by poverty –nineteen of the 50 Organization of the OIC member countries are in the low-income country group. Many OIC countries are also affected by a ‘youth bulge’, where higher investment and capital will be needed to utilize this spare capacity.
Islamic finance resonates clearly with the 2030 Agenda and unleashing its potential is an opportunity for sustainable development that cannot be missed. The time has come for the international community to promote such innovative ways to finance development and to create appropriate partnerships.