In a post-pandemic world, the financial landscape presents both risks and opportunities for institutions, especially Islamic banks. As highlighted by the UN Secretary-General Antonio Guterres on June 28, 2024, a mere 17% of global Sustainable Development Goals (SDG) targets are on track. This alarming statistic underscored the urgency for innovative financial solutions that can contribute to a sustainable future.
Historical data indicates a positive trend in Islamic finance. The Islamic Finance Development Report notes that Islamic finance assets reached $4.5 trillion in 2022, an 11% growth driven by nearly 1,871 institutions. By 2027, these assets are expected to rise to approximately $6.67 trillion, reflecting the sector’s potential in the global economic framework.
Islamic finance is governed by the principles of Maqasid Al-Shariah, which prioritize faith, soul, mind, offspring, and wealth. In the face of deteriorating global conditions, Islamic banks must engage in practices that ensure a sustainable tomorrow. One of the most effective strategies within this sector is syndicated financing, which can facilitate impactful investments that align with the Environmental, Social, and Governance (ESG) framework.
Collective efforts for sustainable implementation
Syndicated financing allows multiple banks to pool resources for larger projects, thus distributing risks and enhancing collective reputations in ESG compliance. This collaborative approach could unlock substantial investments in various environmental initiatives:
Renewable energy investments: The demand for clean energy is surging, with solar power becoming increasingly affordable; costs dropped by 79% since 2010. Reports suggest that harnessing just 50% of global rooftops for solar energy could meet worldwide electricity needs. Regions like Asia, North America, and Europe stand to benefit significantly from these investments. Moreover, the International Energy Agency forecasts that solar and wind energy capacity will more than double by 2028.
Green buildings: Urban growth is projected to reach 68% by 2050, necessitating the construction of environmentally friendly buildings. The International Finance Corporation estimates that investments in green buildings could hit $24 trillion in emerging markets over the next decade.
Hydropower expansion: As one of the most significant renewable resources, hydropower is expected to cover a substantial share of global energy needs by 2030, with a 17% increase in capacity anticipated. Approximately $127 billion is needed to modernize existing infrastructure, primarily in Asia and Africa.
Socio-economic contributions
In addition to environmental concerns, Islamic financing should focus on socio-economic development:
Microfinance and SME empowerment: With nearly 400 million SMEs generating a majority of global jobs, addressing the existing $2.9 trillion credit gap for women-owned SMEs is essential for economic inclusivity. The global microfinance market is projected to grow significantly, reaching $650 billion by 2033.
Education investment: The lack of access to education affects 244 million children worldwide, most notably in regions like sub-Saharan Africa and Southern Asia. Investing in education is crucial for fostering a sustainable future.
Affordable housing: With 110 million people displaced globally, the need for affordable housing is more urgent than ever. Reports indicate that two billion new homes will be required over the next 75 years, equating to 96,000 homes daily.
Navigating challenges
However, the path toward sustainable financing is fraught with challenges. Ensuring Shariah compliance is fundamental, particularly in mixed consortiums comprising Islamic and conventional banks. Effective communication and coordination between institutions are critical in addressing governance issues and differing ESG priorities. Additionally, geopolitical tensions and the pace of digitalization further complicate these efforts, highlighting the need for robust legal frameworks to mitigate potential cyber threats.
In conclusion, the need for collaboration among Islamic banks has never been greater. As stewards of future generations, it is essential to explore sustainable financing options that can significantly impact our society and environment. By leveraging the principles of Islamic finance and embracing collaborative syndicated financing, institutions can work together to create a more sustainable world for all.
The author is the Managing Director & CEO of National Bank Limited. He is a fellow member of the Institute of Cost & Management Accountants of Bangladesh (ICMAB) and the first Certified Sustainability Reporting Assurer (CSRA) in Bangladesh. He is also a post-graduate diploma from the Institute of Islamic Banking & Insurance (IIBI), United Kingdom.
