How Islamic Finance Can Help Achieve the SDGs
In 2015 the United Nations introduced the new global development agenda for 2015 through 2030 and adopted a set of seventeen Sustainable Development Goals (SDGs) for action by the member states. According to the United Nations Development Programme (UNDP), the SDGs comprise a global agenda in the form of a universal framework for comprehensive development. It aims to plan for a better and sustainable future and address the global challenges faced by people and the planet. Prominent among the goals are the eradication of poverty, dealing with climate change and environmental degradation, and improving human health and education, amongst a range of other goals related to the environment and socio-economic development.
One of the most salient factors challenging the achievement of SDGs by 2030 is the shortage of financial resources. Several reports and studies have stated that around US$5-7 trillion are required every year to achieve the SDGs, which cannot be obtained from governments or even from donor agencies. In other words, there is a huge gap between the available resources and the fund requirements to achieve the SDGs. Thus, SDGs will have very substantial resource implications across developed and developing countries. In developing countries alone, the required investment for the Sustainable Development Goals would be approximately US$2.5-3 trillion per year for food security, basic infrastructure (roads, water and sanitation, and power stations), health and education, and climate change mitigation. Because of that, all possible resources must be mobilized if the world is to succeed in achieving the SDGs. In this connection, the potential of Islamic finance for playing a key role in supporting the Sustainable Development Goals is vital.
One of the areas that can enhance the contribution of the Islamic finance sector to the SDGs is through philanthropic instruments such as zakat, waqf and sadaqah. Philanthropy is considered the third sector of the economy, which could play a major role in realizing SDGs by reducing the vulnerability of the poor and developing the education and health sectors. Historically, awqaf have played an essential role in these areas as well as the financing of infrastructure and many other necessities. Further, cash waqf—a special type of endowment that differs from the ordinary real estate waqf in that its corpus consists of cash— has long proven its efficiency in making waqf an effective tool for social finance and welfare programs such as promoting educational scholarships and healthcare facilities.[i]
In line with this, several Islamic banks are promoting Islamic social finance instruments such as cash waqf. For instance, Bank Muamalat Malaysia Berhad (BMMB) introduced a cash waqf scheme in collaboration with Perbadanan Wakaf Selangor (PWS) (Selangor Waqf Corporation). Likewise, BMMB launched a unique debit card called ‘Aisya Debit Card-I’. It is a first of its kind in Malaysia and the world as it incorporates spending with social responsibility features. The bank (BMMB) has decided that part of the fee income that accrues to the bank from the interchange fee received from the merchant will be contributed to waqf.[ii]
In addition, enhancing the role of an instrument such as sustainable and responsible investment can play a crucial role in facing different socio-economic development issues, including the challenges posed by the COVID-19 pandemic. This can be achieved through the alignment between the underlying principles of Islamic finance and sustainable and responsible investment (SRI). For instance, the Islamic Development Bank (IsDB) raised US$1.5 billion with its first-ever sustainability sukuk to tackle the aftermath of COVID-19 in its member countries. The proceeds from the debut sustainability issuance will be exclusively deployed towards social projects, with a focus on ‘access to essential services’ and ‘SME financing and employment generation’ under the umbrellas of ‘SDG-3: Good Health and Well-Being’ and ‘SDG-8: Decent Work and Economic Growth’.
Similarly, Malaysia launched Sukuk Prihatin (RM500 million) for supporting post-recovery measures of the COVID-19 pandemic. The proceeds from the Sukuk Prihatin will be channelled to the COVID-19 fund for the implementation of economic recovery measures that include, among others, enhancing connectivity to rural schools, financing micro-enterprises and providing research grants for infectious diseases. Such innovation in the Islamic capital market sector, particularly in social and sustainable sukuk, is considered an alternative tool for mobilizing financing that could gain broader relevance and attract socially responsible investors, which will in turn contribute to the SDGs.
To sum up, Islamic finance can play a major role in addressing the current threat faced by the society and has the potential to contribute to the mobilization of resources for realizing the SDGs. This can be achieved through crafting new instruments or modifying existing ones for that purpose while contributing to overall financial inclusion and supporting economic growth. Equally important is unlocking the potential of Islamic social finance instruments such as waqf, zakat and sadaqah, which are of particular importance due to their potential to instill cooperation and solidarity and provide an alternative mode of finance.
[ii]Bank Muamalat (2016). Press Release, Retrieved from: https://www.muamalat.com.my/downloads/media-room/press/2016/PR-BANK_MUAMALAT_Debit_Card_Launch_2016.pdf