Islamic Finance & Environmental Degradation

 

Introduction

We live in critical times where global economic growth has slowed down, countries are fighting recession, populations are growing amidst rising unemployment, and climate change is reshaping policies in an unprecedented fashion. In today’s world, a nation’s success is defined by its economic growth that is expected to be perennially upwards, despite having limited resources in the form of physical, human and natural capital.

 

As the populations of nations increase, the demands on governments and Mother Nature to provide increase, leading to policies and actions that may be beneficial, and perhaps populist, in the short term but detrimental in the long run.

As nations continue to focus on economic growth, and pursue policies that are geared towards utilization and optimization of available resources to ensure growth, it is imperative that non-GDP factors such as environmental protection, health of citizens and cohesive social fabric be incorporated in any measure of a nation’s growth and success.

Studies have shown that growth in a nation’s Gross Domestic Product (GDP) per capita does not necessarily lead to improvement in the wellbeing of their citizens, as focus on production growth often comes at the cost of health and environmental detriment. Sole focus on GDP growth as a measure of success can exacerbate our demands on earth and nature to provide the resources we consume and to absorb our waste. 

In order to address the deficiency of GDP as a true indicator of economic success, the concept of Inclusive Wealth was formulated and introduced as an alternative measure of wealth, as it provides a holistic snapshot of a nation’s wellbeing and their prospects for long-term sustainability. The Inclusive Wealth Index (IWI) measures a nation’s wealth based its capacity to create and maintain human wellbeing over time. It examines and evaluates the productive base of a country, and estimates the social value (not dollar price) of all the assets from which utility can be derived such as produced, human, natural and social capital. (UNU-IHDP, 2012)

The Islamic finance industry has seen immense growth over the past two decades, promoting itself as a sustainable mechanism due to its requirement to be linked to the real economy, and avoiding interest rates, which is unsustainable by nature. However, any endeavor in the name of Islam must lead towards the attainment of Maqasid Shariah, which means objectives of Shariah. Maqasid Shariah is made up of mainly 5 pillars, which are the protection and preservation of religion, life, intellect, lineage, and property. In this regard, the propagation and promulgation of Islamic finance must also fulfil Maqasid Shariah. This article discusses the possibility that the advent of Islamic finance has led towards the protection and preservation of nature and natural capital.

 

Finance & Environment

Neoclassical economic theory suggests that both manufactured and natural capital are close substitutes, as such environmental degradation can be offset by returns from manufactured capital, with values based on monetary units. (Rennings, Wiggering, 1997). Wilson (2010) also discussed the importance of considering environmental degradation within the scope of sustainable finance, citing that economic growth that ignores environmental impact violates the very essence of sustainable finance.

One of the theories that connects economic development to the environment is illustrated by the environmental Kuznets curve, which implies that economic development leads to environmental degradation only up to a certain point, after which levels of environmental degradation begins to diminish. This relationship is depicted in the figure below.

 

Towards this end, many empirical studies have been conducted on the linkage between economic growth and environmental degradation, with most testing the environmental Kuznets curve theory.

Jalil & Faridun (2011) investigated the impact of financial development, economic growth on environmental pollution in China from 1953 to 2006, and found that financial development in China has actually led to a decrease in environmental pollution. For the case of BRIC countries for the period of 1992 – 2004, Tamazian et al (2009) found that higher degree of economic and financial development also led to a decrease in environmental degradation, using CO2 reduction as the indicator, and called for more financial liberalization to help further reduce environment degradation. A study by Frankel & Rose (2005) found that trade seemed to reduce three measures of air pollution, namely SO2, NO2 and particulate matter, concluding that there is little evidence that trade has a negative effect on the environment. Hafeez et al (2018) ambitiously investigated the effect of finance on environmental degradation via the environmental Kuznets curve in 52 countries, using data spanning from 1980 to 2016, and found that in the long run, finance significantly enhances environmental degradation, and there is a bi-directional causality between finance and   environment degradation in the short term.

However, there are studies which have identified the contrary. Akbostanci et al (2009) investigated the relationship between per capita income and environmental quality for Turkey and found an increasing relationship between CO2 emissions and income, thus not supporting the EKC hypothesis.

 

Islam & The Protection of Nature

There are many references to nature in Islamic texts, especially in the Quran and Hadith. Islam encourages the protection and safeguard of the universe as a whole, with special emphasis on the protection of self and the environment. We shall explore some of the references and their implications.

 “And do not commit abuse on the earth, spreading corruption.” (Qur’an, 2:60)

“And do not desire corruption in the land. Indeed, God does not like corruptors.” (Qur’an 28:77).

In the verse above, Allah SWT commands man not to commit abuse and spread corruption in the land. In this context, corruption does not only refer to abuses against fellow mankind, rather to the environment also. Corruption towards the environment can refer to pollution of all types and causing indiscriminate harm to wildlife and vegetation.

And it is He who has made you successors upon the earth and has raised some of you above others in degrees [of rank] that He may try you through what He has given you. Indeed, your Lord is swift in penalty; but indeed, He is Forgiving and Merciful.” (Surah 6:165)

The Prophet warned, “Beware of the three acts that cause you to be cursed: relieving yourselves in shaded places (that people utilize), in a walkway or in a watering place.” (Narrated by Muadh, Ranked sound by Al-Albani)

In another hadith on indiscriminate harm to wildlife, The Prophet said, "Whoever kills a sparrow or anything bigger than that without a just cause, Allah will hold him accountable on the Day of Judgment."  The listeners asked, "O Messenger of Allah, what is a just cause?" He replied, "That he will kill it to eat, not simply to chop off its head and then throw it away." (An-Nasa'i)

In addition to not causing harm to the environment, Allah SWT also commands mankind to protect all elements of nature, as man is regarded as a vicegerent of God on earth, whereby man will be held accountable for any corruption of the resources that has been bestowed onto him. As such, it is imperative for man to be mindful of the environment and protect the natural resources bestowed so that it continues to benefit mankind.

The Prophet Muhammad also encouraged fellow Muslims to plant trees and to take care of plants and crops for the benefit of man and animals. This is illustrated in the following hadith.

If the Hour (the day of Resurrection) is about to be established and one of you was holding a palm shoot, let him take advantage of even one second before the Hour is established to plant it.” (Narrated by Anas, authenticated by Al-Albani)

 “Whoever plants a tree and diligently looks after it until it matures and bears fruit is rewarded” (Musnad).

If a Muslim plants a tree or sows seeds, and then a bird, or a person or an animal eats from it, it is regarded as a charitable gift (sadaqah) for him.”  (Sahih Bukhari)

The importance of protecting the environment was also reinforced by the Caliphs, after the time of the Prophet. Caliph Ali ibn Abi-Talib (RA) was reported to have said “Partake of it gladly so long as you are the benefactor, not a despoiler; a cultivator, not a destroyer. All human beings as well as animals and wildlife enjoy the right to share Earth’s resources. Man’s abuse of any resource is prohibited as the juristic principle says, ‘What leads to the prohibited is itself prohibited”.

Even in the event of war, which was considered to be the biggest man-made event that can damage a country and its environment, Muslims were urged to not undertake any activities that will affect nature and its elements. It was reported that Abu Bakr al-Siddiq commanded that “Stop, O people, that I may give you ten rules for guidance on the battlefield. Do not commit treachery or deviate from the right path. You must not mutilate dead bodies; do not kill a woman, a child, or an aged man; do not cut down fruitful trees; do not destroy inhabited areas; do not slaughter any of the enemies’ sheep, cow or camel except for food; do not burn date palms, nor inundate them; do not embezzle (e.g. no misappropriation of booty or spoils of war) nor be guilty of cowardliness…You are likely to pass by people who have devoted their lives to monastic services; leave them alone."

It is imperative for Muslims to understand the gravity of these words as they continue to consume nature for their well-being and economic benefit. As evident in the references above, protection and safeguarding of the environment and all its elements, is an essential duty of all Muslims that has to be ensured within all activities of mankind.

 

Islamic Finance and Sustainable Development

Before we discuss about sustainability, we should understand its definition. United Nations defines sustainability as “meeting the needs of the present without compromising the ability of future generations to meet their own needs.” It is towards this end that the UN Sustainable Development Goals was designed towards improving the lives of citizens of the world and to maintain intergenerational equity.

In line with this definition, Moran et al (2008) refer to sustainable development as a conscious effort to promote well-being and economic development within the natural and ecological constraints of the biosphere.  Furthermore, Hasan (2006) states that achieving sustainability demands that the long-run economic growth rate be maintained, intergenerational equity of natural capital be attained, and that environmental degradation be limited. In other words, a sustainable economy is one where the needs and wellbeing of the present must be ecologically sustained over time.

The current issues and failures of the fiat monetary system has been subject of many studies. The rise of Islamic finance, and its exponential growth in recent years, were based on its position as being a real-economy based sustainable alternative to the traditional interest-based financial system.

However, most of the focus has been on the economic sustainability of Islamic finance, and not on overall sustainability. It does not make economic sense if the financial system is deemed “sustainable” at the cost of the environment. Any financial or economic system that is focused on sustainable growth, have to take into account the non-financial aspects of the economy, namely human capital, social well-being and the environment.

Any system that is banking on “Islam” should ensure that all aspects of Islamic teachings and adherences must be taken into account for proper sustainable development. Failure to do so make it seem like a quick-fix or an arbitrage on current inefficiencies, rather than an inclusive and sustainable development tool.

As such, it is important to determine if the growth of Islamic financing has contributed to environmental degradation in any way. Studies on the Islamic finance – environmental degradation nexus should be conducted to check for any empirical relationship. There should also be conscious effort in implementing checks on the potential of Islamic finance products and industry to contribute to environmental degradation. It is also proposed that whenever any project is considered for Islamic financing, the cost and effect to the environment is also taken into account. Only then can we claim that Islamic finance is indeed a truly sustainable alternative to conventional finance towards achieving sustainable and inclusive growth.

 

 References

Rennings, K., & Wiggering, H. (1997). Steps towards indicators of sustainable development: linking economic and ecological concepts. Ecological economics20(1), 25-36.

Tamazian, A., Chousa, J. P., & Vadlamannati, K. C. (2009). Does higher economic and financial development lead to environmental degradation: evidence from BRIC countries. Energy policy37(1), 246-253.

Akbostancı, E., Türüt-Aşık, S., & Tunç, G. İ. (2009). The relationship between income and environment in Turkey: is there an environmental Kuznets curve? Energy policy37(3), 861-867.

Wilson, C. (2010). Why should sustainable finance be given priority? Lessons from pollution and biodiversity degradation. Accounting Research Journal23(3), 267-280.

Jalil, A., & Feridun, M. (2011). Impact of financial development on economic growth: empirical evidence from Pakistan. Journal of the Asia Pacific Economy16(1), 71-80.

Frankel, J. A., & Rose, A. K. (2005). Is trade good or bad for the environment? Sorting out the causality. Review of economics and statistics87(1), 85-91.

Hafeez, M., Chunhui, Y., Strohmaier, D., Ahmed, M., & Jie, L. (2018). Does finance affect environmental degradation: evidence from One Belt and One Road Initiative region? Environmental Science and Pollution Research, 1-14.

Moran, D. D., Wackernagel, M., Kitzes, J. A., Goldfinger, S. H., & Boutaud, A. (2008). Measuring sustainable development—Nation by nation. Ecological economics64(3), 470-474.

Hasan, Z. (2006). Sustainable development from an Islamic perspective: Meaning, implications, and policy concerns. Journal of King Abdulaziz University: Islamic Economics19(1).

UNU-IHDP. (2012). Inclusive wealth report 2012: measuring progress toward sustainability. Cambridge University Press.

 

About Author: Mohamed Mahees Raheem is an Economic & Sustainable Development Consultant at Z Consulting Group Sdn Bhd


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