There is no doubt in the fact that financial sector play a pivotal role in the socio-economic development of any nation as it mobilize and allocate resources necessary for socio-economic progress. But the development of socio-economic sector through Islamic finance is quite different from the conventional modes of financing as interest is prohibited in Islamic finance where generating money by money is also prohibited.
According to Shariah, money itself has no value and the risk involved in investment of money should be divisible among all stakeholders ensuring increase in wealth through productive activities. In Islamic finance investment in gambling, unethical industries like tobacco and speculator activities are considered to be illegal where avoidance of uncertainty is only permitted through equity as Islam believes in comprehensive development of an economy that emphasizes social welfare by serving the public interest of maximizing benefit and reducing harm to the society. Therefore, firms in the society have a dual objective of generating economic gains along with a positive impact on society. There is a strong nexus between Islamic finance and nature. Islamic principles always intensify the worth of sustainable use of resources by discouraging the over exploitation, realizing the value of the environment even if it is in no one’s private ownership is vital for fostering a culture of care and responsibility towards the environment. The steps towards preserving and conserving the climate are fundamental to promote environmental sustainability. The first step in this dimension recognition of climate as an asset endowment by Allah and its use responsible use.
The financing of firms working with an objective to achieve sustainable environment during production is a challenging issue. The acceptability and growth in sustainable green finance require work in two domains i.e. creating a conducive environment for mobilizing capital for financing climate-friendly projects or firms and developing environment-friendly innovative financial instruments. The conducive environment means the development of a green finance ecosystem involving stakeholders that encourage the green businesses through regulatory frameworks and ensure the availability of financial instruments along with financing and an advisory mechanism. Sustainable Islamic finance shares similar kind of principles as that of sustainable finance which means financial stability, economic growth, poverty alleviation, wealth distribution, financial and social inclusion as well as environmental preservation. This has therefore allowed for Islamic finance to capitalize on these similarities to become a natural agent and tool to propagate sustainable green finance where a sustainable green finance ecosystem is comprised of four major stakeholders including,
- Advocates of sustainable green finance.
- Facilitators that provide sustainable green finance.
- Sustainable green ecosystem administrators and
- Ultimate enjoyers of green finance.
Each of these player have the huge responsibility to leave the blue prints in its implementation. The advocates may include state, international agencies, and organizations. The green finance facilitators may be financial institutions in general and Islamic financial institutions in particular. Islamic green finance may depends on grants and investments but the creation of social finance ecosystems requires coordination between the green finance advocates, green finance facilitators, administrators and enjoyers. In addition, product development centers and advisory firms are also necessary to create and maintain sustainable ecosystems. This will help to provide a framework, guidelines, and best practices to achieve the desired objectives of sustainable development.
Evolution of Green Bond & Sukuk Market
Now a days, advancement in tools of green finance are also catching global attention for decree of druthers options to finance socially responsible businesses that adds value in the society where Islamic finance is not an exception. Green Sukuk is the first step in this direction. Green Sukuk are asset-based financial instruments designed to provide funding for renewable energy and environment friendly projects that supports sustainable development goals.
Although the advancement of Green Sukuk is a positive step but the small market size poses numerous challenges in this domain. It is interesting that green equity is still missing which should be an integral part of sustainable climate finance. The green equity may be a differentiating point for new firms and the existing firms who may issue tracker stocks with the Shariah-compliant green specification. The green bonds globally witnessed an upward curve between 2013 and 2017.
Today, practitioners, as well as academicians, recognize the importance of economic development with the Islamic financial system. To meet the demand of the current market in Pakistan, it is recommended that practitioners need to capture more venues to catch the benefits of Islamic finance.
The Author is MD IRP/Faculty department of H&SS, Bahria University Karachi