Green energy, housing to unlock Islamic finance potential

Islamic banks should embrace sustainable finance practices to unlock funding opportunities in green energy, affordable housing and infrastructure projects, Azhar Aslam, head of Islamic banking, Standard Chartered Bank Pakistan said during an interview with The News.

These avenues should be considered a great opportunity by Islamic financial institutions (IFIs), which could better manage environmental and social impacts in a Shariah-compliant way that contributes to sustainable development.

“There are few key initiatives in the country that provide green investment and sustainable financing opportunities such as green energy, as the government aims to increase the share of alternative sources of energy to 20 percent by 2025 and 30 percent by 2030 under the new renewable energy policy,” Aslam said.

Naya Pakistan Housing Scheme and Ravi Riverfront Urban Development Project, and the development of overall infrastructure projects including environmentally friendly economic zones, ports to support trade, highways, sustainable water reservoirs for long-term economic development, can also have potential for the shariah-compliant lenders in sustainable finance, he added.

However, there were some challenges being faced by the stakeholders in adopting socially responsible finance in Pakistan.

“Pakistan like any other developing country has limited fiscal budget and its private sector has nominal incentive to fund sustainable projects. Promoting sustainable financing in the country, therefore, requires a well-designed evidence-based strategy backed by a deep understanding of challenges,” Aslam said.

“There is a need to create awareness about the importance of meeting UN Sustainable Development Goals (SDGs) on war footing in our country to preserve and protect our future generations.”

Highlighting a hindrance in this matter, he pointed to a lack of coordination between various stakeholders involved in SDG space and authentic data to highlight the significance, achievements and future prospects.

Since the inception of Islamic banking (IB) in the country, the focus has been on providing a full suite of interest-free financial products and services to cater the needs of individuals, businesses and sovereign entities.

“To a great extent, this goal has been achieved. Due to increasing awareness of sustainability and impact-based banking at international and local level, we believe the next phase of IB should be value based intermediation (VBI), to make IB a brand beyond profit maximisation and legalism that offers human-centric wholesome value propositions of integrity, inclusivity and sustainability.”

Sustainable finance generally refers to the process of taking due account of environmental, social and governance (ESG) considerations when making investment decisions in the financial sector for the lasting benefit of both clients and society at large.

The Covid-19 pandemic has raised awareness of sustainability issues in many ways. The SCB Sustainability Review Report 2020 stated that over the next three years, 42 percent of investors would consider investing five to 15 percent of their funds in sustainable investment, while nine percent indicated they would like to have 25 percent or more of their funds allocated to this area.

Standard Chartered offers Islamic banking through Saadiq Islamic Banking, and was well positioned to lead the sustainability agenda through certain themes, he said.

Various governments along with central banks have been working on the proposition of sustainability and sustainable finance. The State Bank of Pakistan has recently expanded the scope of its renewable energy scheme to lend support to industries in addressing the dual challenge of energy shortage and climate change.

He suggested that Saadiq Islamic Banking could partner with governments at strategic level to support such projects from funding, advisory or distribution perspective. One of the examples is SC Saadiq Islamic Banking Malaysia being the central bank’s partner in implementing VBI in the country.

Owing to its footprint in the Muslim world; Saadiq Islamic Banking could brand itself as a value contributor to the overall ecosystem of Muslim economies / Muslim majority markets (food, pharma, cosmetics, fashion, and travel sectors). The halal market current volume is $2.2 trillion and projected at $3.2 trillion by 2024.

“With its digital capabilities, we can offer investors halal and ethical finance opportunities (for eg halal certified entities) through a competitive Shariah-compliant platform,” Aslam added.

In key Saadiq Islamic Banking markets there was a double-digit growth in Islamic finance along with rapid urbanisation and need for infrastructure development financing.

The success of infrastructure projects in using Islamic finance has inspired countries such as Bangladesh, Djibouti, Indonesia, Kazakhstan, Malaysia, Mali, Morocco, Nigeria, Pakistan, Saudi Arabia, Turkey, and Uzbekistan to continue to pursue Islamic finance, in undertaking infrastructure projects.

In realising the country’s sustainable development needs, a significant amount of funding was required both from the public and private sector; the head of Islamic banking said, and added that this provides another opportunity for the Islamic finance industry to contribute with a capital market instrument called sukuk, a shariah-compliant investment certificate.

The sustainability linked sukuk were also known as green sukuk. Raising funds through sustainability linked sukuk can help the government and private entities to finance environmentally friendly sustainable projects.

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