Uncovering the impact potential of Islamic finance in Asia

 

Sarah Hussain and Patsian Low

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As the mainstream capital markets and sustainable development movement converge, the silos that represent types of funding are breaking down to meet the demand of mobilising capital for greater impact. In this context, Islamic finance can potentially complement other forms of capital in the Continuum of Capital to serve as a source of funding for initiatives aimed at creating environmental and social impact alongside economic development.

Islamic finance is being globally recognized as a key enabler for achieving social goals. In 2016 the United Nations Development Program (UNDP) and the Islamic Development Bank (IsDB) established the Global Islamic Finance and Impact Investing Platform to position Islamic finance as a part of the impact investment ecosystem. Combined with Islamic finance’s value-oriented approach towards investing and its potential for growth, it can serve as a critical source of funding in the Continuum of Capital for social organizations and impact enterprises in the country.

A recently held panel discussion on Ethical and Responsible Finance in Singapore at IFN Forum, Singapore 2018 illustrated the potential for Islamic finance in the region, and its convergence with ESG investing and socially responsible investing. Speakers suggested that improved regulatory guidance in the region could help to encourage the use of Islamic finance tools as socially viable investments and create an environment for Shariah compliant financing to work with other forms of capital to create more impact. Furthermore it is essential to engage in dialogue and learn from best practices around the world to fully realize the potential of Islamic finance in achieving development outcomes.

Malaysia catalysing its Islamic finance ecosystems
Malaysia has shown efforts in institutionalising Islamic finance since the 1970’s. In 1983 the Malaysian government enacted the Islamic Bank Act, after which numerous financial institutions joined the market. Malaysia also became one of the first countries to launch a Sustainable and Responsible Investment (SRI) Sukuk[1] framework to facilitate socially responsible investments that can mobilise Islamic finance, following which in December 2017 the Securities Commission Malaysia issued the Guidelines on Sustainable and Responsible Investment to encourage investment for socially viable initiatives. Earlier that same year, Malaysia became the first country in the world to launch a green Sukuk, a RM250 million offering by Tadau Energy to finance SRI projects in renewable energy.

Aside from Malaysia, Asia is home to other markets that can benefit from, and be a source of, this new form of impact capital. For example the IsDB officially opened its Country Gateway Office in Indonesia in 2014, to more effectively manage IsDB’s portfolio in the country. In 2017, the UNDP hosted a conference in Jakarta on leveraging innovative finance for achieving the SDGs and supported Indonesia’s Ministry of Finance in issuing their first ever Green Sukuk Bond of $1.25 billion.

A critical source of funding to Meet the SDGs
Islamic finance can also contribute to the growth of impact enterprises by providing capital to growth-stage social organizations and impact enterprises. It can be channeled as impact investment through crowdfunding (murabahah[2]), green investments, microfinance, social investments and SME finance, particularly playing an important role in providing asset-based financing options for SME’s. AVPN’s Continuum of Capital study launched in AVPN Conference 2018 shows that there are clear gaps to the capital that can support the growth of impact organisations – the Asian Islamic finance market estimated at USD$528.7 billion as of end 2017[3] could be directed towards the ‘missing’ areas to potentially bridge those gaps.

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While there are clear opportunities for these various forms of capital to contribute to greater impact in Asia, the challenge is how to design and execute impactful capital partnerships and collaborations between foundations, development institutions, investors (secular and faith-based), companies, and governments. The intent is evident among the increasingly vocal interest from public and private funders, the need of the hour is to identify actionable steps to bring these different capital streams together. Globally, the impact investment markets are estimated to grow to US$307 billion by 2020[4]. Relative to the Islamic Finance market size of $2.2 trillion[5] worldwide, it is clear that scalable change can be possible if these sizable capital pools can work together for the greater good of the people and the planet.

Patsian Low is Asia Policy Director at AVPN

Sarah Hussain is an Associate at AVPN


Footnotes

  1. ^ Unlike conventional bonds that represent debt obligation of the issuer, a Sukuk bond represents shared ownership of an asset. The issuer of the Sukuk bond sells a certificate to a buyer and uses its proceeds to purchase an asset, of which the buyer will then have partial ownership. The issuer then buys back the bond after a pre-fixed period of time.
  2. ^ A method of Islamic financing where the seller sets the cost and profit of a commodity, and the buyer pays over time
  3. ^ Islamic Finance in Asia: Reaching New Heights. Malaysia International Islamic Finance Centre, Apr. 2018
  4. ^ Impact Investing Market by Illustrative Sector (Education, HealthCare, Housing, Agriculture, Environment, Clean Energy Access, Climate Change, Financial Inclusion, Rural Development, Sanitation & Waste Management), and Country – Global Forecast to 2020. Markets and Markets, July 2017 www.marketsandmarkets.com/Market-Reports/impact-investing-market-265004523.html.
  5. ^ Islamic Finance Development Report 2017. ICD-Thomson Reuters, 2017

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