A vision of future finance

Islamic finance can be a force for good in the world by promoting ethical and sustainable development projects

The Islamic Development Bank (IsDB) was founded 44 years ago as a development finance institution to foster economic growth, financial inclusion and social progress in the global Muslim community in accordance with the principles of Sharia, or

The Islamic Development Bank (IsDB) was founded 44 years ago as a development finance institution to foster economic growth, financial inclusion and social progress in the global Muslim community in accordance with the principles of Sharia, or Islamic Law. The IsDB has 57 member states and touches the lives of one in five of the world’s population. With annual operations exceeding £7 billion a year and subscribed capital of £24 billion, the IsDB is the leading development bank for the Muslim community.

Underpinning the operations of the bank is the sukuk or Islamic bond market, which the IsDB has actively used, developed and promoted to raise capital for its programmes in financial inclusion, infrastructure investment, financial services support, education and health – and the London Stock Exchange (LSE) is central to the bank’s sukuk programme.

At a sukuk conference in London earlier this month – the Sukuk Summit – the IsDB’s president, His Excellency Dr Bandar M.H. Hajjar, set out the role the UK plays in support of the IsDB’s operations globally. He said: “The UK has demonstrated great leadership as the first non-Muslim country to issue sukuk back in 2014… the potential for the growth of Islamic finance is clear. Both the UK government and IsDB are actively promoting this objective, and London’s emerging role as a hub for Islamic finance is underpinned by a wide skill base, institutional flexibility and historical links with Muslim countries.”

The IsDB has listed 11 securities on the LSE, including five sukuk, which have raised £4.1 billion, and has just renewed its notes programme that will allow the bank to tap up to $25 billion (£18 billion) of sukuk issuance through the London market.

A major focus of Dr Hajjar’s vision for the bank is to help drive the development of Islamic finance globally and reach into new areas that require greater development. He said: “Islamic finance has long been seen as specialist or niche in Western economies, but this is changing… I want Islamic finance to be seen not as niche, but instead as a vehicle for ethical investment, promoting long-term sustainability, development capital and investment for Muslims and non-Muslims alike.”

He believes that Islamic finance can provide an example for a sustainable global financial system that the conventional system can learn from and maybe help to avoid future global financial crises such as the 2008 crash. He suggests that the conventional system needs to adopt a new banking and finance paradigm based upon universal justice, risk-sharing, a direct involvement with the real economy and the avoidance of excessive speculation – the key principles of Islamic finance.

The bank includes some of the world’s wealthiest countries as members, but also 26 of the world’s poorest countries, and its core financing activities are focused on supporting key development projects in these states.

To carry out its development remit, the IsDB extends Sharia-compliant loans to its member countries for the financing of infrastructural and agricultural projects such as roads, canals, dams, schools, hospitals, housing and rural development, both in the public and private sectors.

The investments, in which IsDB is often the sole lender or keystone financier, are designed to have an impact on the economic and social development of the member countries concerned, and are accorded priority by the respective governments. Such loans, in conformity with Sharia, are interest free and the bank recovers its administrative expenses by levying a service fee.

In 2015 and 2016, the IsDB backed a structural infrastructure programme in Turkey, supporting the financing of four renewable energy development projects and six energy-efficiency projects, which helped the country reduce its reliance on fossil fuels, diversify its sources of power generation, diminish its carbon footprint and connect remote rural areas to the power grid. In doing so, the IsDB created jobs, reduced the need to import natural gas from Russia, Iran and Azerbaijan, which was a significant draw on the country’s foreign exchange reserves, and helped boost Turkey’s industrial output.

The project helped Turkey bring 370 megawatts of electricity from renewable energy sources into its grid and reduced the country’s greenhouse gas emissions by more than one million tonnes.

The IsDB worked in partnership with a local partner, the Industrial Development Bank of Turkey (IDBT), providing $100 million on a total project cost of $640 million. This facility enabled the IDBT to leverage investment from other development finance institutions and commercial banks. These were the World Bank, International Finance Corporation, European Investment Bank, German development bank, KfW, and a consortium of local Turkish banks.

I truly believe that sukuk can change the world for the better, not only for investors, but for the billions of people who can benefit from the growth it drives

Dr Hajjar believes that Islamic finance and the IsDB have a key role to play in developing a sustainable global economy by, for example, supporting the rollout of renewable energy projects in developing countries in partnership with other development finance institutions and impact investors. He said: “We know consumers are looking for investments with ethical returns as well as financial returns. The Islamic finance sector has broken records of promoting financial, social and economic impact investing, as well as financial inclusion and shared prosperity.”

The IsDB has announced a funding plan of $2.5 billion for the first half of 2018, the largest since its inception in 1974 and, to support this, the bank recently launched a new $1.25bn sukuk under its $25-billion Trust Certificate Issuance Programme. The IsDB also recently launched the $500-million Transform Fund to provide seed money to innovative startups and smaller businesses, helping them implement development projects related to the UN’s sustainable development goals, especially in the areas of healthcare, education and fintech.

Key to the IsDB’s investment programme is the sukuk market and, with $11.5 billion of its own sukuk listed on the LSE, London is central to the bank’s development goals. Although Dr Hajjar concedes that the sukuk market is grappling with its own challenges, including liquidity issues, limited active trading, a lack of standardisation across domiciles and the tendency for Islamic finance investors to buy to hold when investing in sukuk, he still sees sukuk as a vehicle through which it and the global Islamic finance community can mobilise capital for key infrastructural investments in developing and developed nations.

He said: “I truly believe that sukuk can change the world for the better, not only for investors, but for the billions of people who can benefit from the growth it drives. I want the Islamic Development Bank to be at the heart of this movement and I see the UK having a key role in the market as it grows.”

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Islamic Development Bank in action

Financing priorities of the Islamic Development Bank (IsDB) are guided by a ten-year programme focused on funding projects that will effect real and sustainable economic change in the world’s most needy countries.

While infrastructure project financing is a mainstay of the IsDB’s financing focus, the bank has also increased its emphasis on poverty alleviation in partnership with many other international organisations and donors, including the Bill and Melinda Gates Foundation.

One of the IsDB’s main sources of financing is sukuk, or Islamic bonds, and to date the bank has listed all its outstanding public issuances in London and will continue to do so in the future. The IsDB has listed 11 securities on the LSE, including nine public sukuk, amounting to $11.5 billion (£8.2 billion). The UK is an important market not only for funding, but also for the IsDB’s liquidity investments.

Islamic finance can be an agent of change globally. The global financial order needs to adopt a new banking and finance paradigm that is built on the principles of justice, risk-sharing and direct linkages with the real economy and avoidance of excessive speculation. This is necessary so the world economy, in general, and the financial services sector, in particular, will achieve greater stability and a sustainable growth trajectory.

In addition, Islamic finance has strong potential in promoting not only financial, social and economic stability, but also financial inclusion, shared prosperity, infrastructure and comprehensive human development, which will set the foundation for timely implementation of the UN’s sustainable development goals.

Islamic finance can help alleviate poverty, reduce income inequality and promote sustainable growth

The IsDB is particularly focused on development finance in its member countries. The bank includes some of the world’s wealthiest nations among its members, but also some of the world’s poorest countries. Islamic finance can be used as an alternative financial tool to enhance financial inclusion in developing countries. Throughout this process of financial deepening, Islamic finance can help alleviate poverty, reduce income inequality and promote sustainable growth.

The IsDB is a project-based lender and does not offer its members budgetary support. Such support generally has limitations when it comes to stimulating real economic activities and addressing poverty and inequality, as well as financial and social stability in the bank’s member countries. Therefore, the IsDB sees sukuk as a tool for mobilising capital for public infrastructure and development projects that promote comprehensive human development and fairness.

An example is Gavi, an international NGO that seeks to vaccinate people in the world’s poorest countries against preventable fatal diseases. It issued a sukuk that raised more than $500 million to help protect tens of millions of children in developing countries against preventable diseases.

The IsDB can also have a significant global impact in increasing access to renewable energy. The bank is considering issuing a green sukuk to support renewable energy projects in its member countries, as well as diversifying the IsDB’s investor base.

In this way, the IsDB hopes to push sukuk issuance into non-Muslim capital markets. Although sukuk is currently more relevant to the IsDB’s member nations, over the past couple of years it has become more relevant with non-Muslim majority countries as an alternative tool to mobilise funds by tapping Islamic capital markets. Sovereign sukuk issued by the UK, Hong Kong, Luxembourg and South Africa are examples of how Islamic finance is broadening its appeal outside the Muslim world.

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