Unleashing the potential of Islamic Finance: Global perspectives on achieving the SDGs with Islamic finance tools and concepts
This report summarises discussions from a roundtable on Islamic finance’s potential to advance the UN Sustainable Development Goals (SDGs). It explores the alignment of Islamic finance principles with the SDGs, highlighting the need for regulatory clarity, technical capacity building, and incentives to strengthen Islamic finance markets.
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OVERVIEW
Introduction
The 2030 Agenda for the UN Sustainable Development Goals (SDGs) is approaching, yet substantial financial resources are still needed. The funding gap is estimated to be in the trillions of US dollars annually, necessitating broader partnerships, including the private sector, to support development efforts. Progress across SDGs is uneven, with setbacks due to the COVID-19 pandemic, and economic and social barriers risk excluding some countries and communities from sustainable development. Islamic finance addresses these barriers by mobilising alternative funding to deliver the SDGs to underserved Muslim communities and beyond. It presents a unique opportunity for innovative solutions, with its concepts intrinsically linked to value creation and sustainability. The report explores opportunities, challenges, practical examples, and future pathways to unlock the potential of Islamic finance for the SDGs.
Harnessing Islamic finance for SDGs
Islamic finance offers an alternative funding source for achieving SDGs, with its principles aligning with the SDGs’ spirit. The maqasid al-Shariah, which underpins Islamic finance, emphasises socially responsible growth, alternative business models, environmentally conscious development, and wealth redistribution through Islamic social finance. While the global Islamic finance market has grown significantly, market development varies across jurisdictions. Regulatory clarity, capacity building, and incentives are crucial for strengthening market development. Standardised regulations are also important for cross-border collaboration to achieve the SDGs. The takaful market, a de-risking tool, should be developed alongside Islamic banking and capital markets. Islamic social finance instruments like waqf and zakat offer redistributive mechanisms to channel private capital to underserved communities. Credible data and a robust reporting framework that integrates financial and impact-based information are essential for demonstrating the impact of Islamic finance on achieving SDGs.
Value of Islamic finance in driving SDGs
The alignment between maqasid al-Shariah and SDGs is broadly agreed upon, but challenges remain in clarifying this alignment and deepening collaborations. Frameworks like the Securities Commission Malaysia’s maqasid guidance can help address the knowledge gap and highlight practical ways to use Islamic finance for SDGs. The SDGs have also prompted the Islamic finance community to re-examine its frameworks and assess the current system against the maqasid al-Shariah. Partnerships between scholars, practitioners, regulators, and market players are necessary to facilitate understanding and practical applications of an enhanced scope of Shariah compliance.
Role of Professional Accountancy Organisations (PAOs)
The accountancy profession is key in promoting confidence in Islamic finance through credible reporting and disclosures, enabling greater scale and cross-border financing. Professional Accountancy Organisations (PAOs) promote Islamic finance through collaborations, capacity building, and advocacy for the adoption of international financial reporting standards. They also support government commitments to Islamic finance and provide technical expertise for data assurance. The demand for multi-disciplinary talents with Shariah expertise has increased, necessitating upskilling and addressing the skills gap. PAOs can provide professional education and work with stakeholders to create a skills framework for the industry, guiding education, training, and career pathways.
Conclusions
Islamic finance and the SDGs are spurring innovation in the financial sector globally. Unleashing the potential of Islamic finance offers a way to enrich sustainability thinking and expand sustainable finance markets. Key reflections from the roundtable include the need for regulators and policymakers to incentivise Islamic finance market development and harness the linkages between Islamic finance and the SDGs. Successful Islamic finance models and solutions can be replicated and scaled up through global collaboration. However, greater attention is needed in areas like education, governance, and data availability to overcome awareness gaps, build trust, and attract investment. Developing an ecosystem for better data collection and availability is crucial for evidence-based governance and evaluating Islamic finance solutions.