Islamic Finance and Sustainable Development
The world witnessed a steady growth in the Islamic financial industry despite the global economic slowdown and unstable oil prices. Financial analysts expect this development to be a positive sign for the year 2019 observing the interest among industrial players and investors in banking and financial institutions, project financing, capital markets, legal provisions and education courses offerings at university level moving towards Islamic finance. In addition to risk-sharing element, the attractive point of Islamic financial products is mainly due to financing for development and green-based projects in promoting United Nations Sustainable Development Goals (SDGs) agenda. Islamic finance has a bright future even in challenging times and aggressively embracing financial disruption in the digital edge.
The Islamic economic principle on risk sharing has its positive attraction to players and investors over the conventional finance of risk transfer and interest-bearing financing. The stance of Maqasid Shariah (objective of laws) with regards to property combines the element of ibqa’ (promote good) and hifz (prevent harm) dealing somehow changed the perspective on financial products from debt and capitalism in the conventional bond market to partnership and responsible investment in sukuk. On this note, at the end of Q1 2018, Bank Negara Malaysia (BNM) has initiated the Value-Based Intermediation (VBI) to deliver a positive and sustainable impact on the community, economy and environment.
Malaysia remains the world’s leading sukuk market with a total of 1.3 trillion ringgit (US313.9 billion) (reported by the Malaysian Securities Commission in December 2018). In addition, the Securities Commission at the end of 2018 has opened sukuk market initiatives to retailers. This will further expand the depth and breadth of Shariah-compliant products. For the period of 2015 up to 2018, Malaysia’s 80 percent deficit is funded by sukuk issuance.
Malaysia maintained a 35 percent stake in the global sukuk issuance followed by Saudi Arabia (26.5 percent). Sukuk is one of the most impressive Islamic financial products accessible to the international community. The Chief Executive of Shuaa Capital, the company which runs sukuk funding for Jabal Omar Development; for property project in and around Mecca said: “Sukuk represent an ideal financing mechanism for the long-term funding requirements of real estate, as reflected by the dominance of the sector in issuing sukuk over the past 18 months in the region,”.
The development project and financial product at the Gulf Cooperation Council (GCC) and China’s Belt and Road Initiative (BRI) also capitalised on Islamic financing opportunities. Since the launch of the BRI in 2013 major Chinese banks establish outbound Islamic financing framework in providing the Islamic financing products. Chinese banks and institutions have increasingly tapped on this market and represents approximately 1 percent of global assets worth about $2 trillion and expected to increase to around $3 trillion by 2020.
How does Islamic finance play its role in the SDG? Money raised through green financing is assigned to green projects such as renewable energy, project to reduce emission or adapt to climate change. Indonesia has sold $1.25 billion the world’s first sovereign green sukuk in March 2018 and was oversubscribed, signalling the growing market demand for sustainable and responsible investments.
With the support by an online market platform and technological innovation, Islamic finance reaches the unbanked community and rural area more easily. The expansion of banking and financial institution via mobile applications in the case of Bangladesh for instance has improved the financial inclusion through introduction of new financial products such as bKash and Dutch-Bangla Bank Mobile Banking. In terms of technological advancement, the encouraging innovation on Islamic fintech has the impact to provide better and secure online transaction.
In matters related to platform and marketing in Islamic fintech arena, innovation utilising block chain, smart contract, robo-advisory has significantly gained its position. For example, Malta is considering registering the block chain financing of agricultural projects applying the Murabahah (cost-plus) and Qard Hasan (benevolent loan) contracts. Furthermore two Islamic crypto exchanges are also expected to register in Malta for services of virtual financial assets. While Bahrain based Islamic crypto exchange graduates from central bank’s regulatory sandbox with the issuance of new regulations around crypto-assets, including supervision and enforcement standards. Domestically, the Securities Commission Malaysia (SC) has released draft guidelines for initial coin offerings (ICOs) and property crowdfunding, providing much-needed clarity for Islamic fintech participants.
Islamic finance is becoming more interesting when a number of academic institutions have established a research centre focusing on the block chain and offering courses on undergraduate and post-graduate studies in Islamic finance and fintech. These long-term strategic actions for education and human capital investment will definitely uplift the industry to the next level field.
The forward-looking financial analyst is optimistic on the future of Islamic finance. It is a hope that the industry will continue to grow and at the same time, many start-ups will innovate new ways of levelling financial platform, mechanism and avenue for Islamic finance. The whole Islamic financial landscape will be the playing ground for SDGs initiatives to maintaining and promoting benefits for the whole mankind in this world and Hereafter.