Islamic finance offers enormous opportunity to support SDGs and address inequality

Aug 23, 2017

With assets expected to exceed $3 trillion by 2020, Islamic finance can play an important role in helping to fill the financing gap to achieve the SDGs.


You might have missed it, but last month marks a milestone in how Islamic finance can contribute to address inequality and eradicate poverty in Indonesia

When Indonesia’s National Board of Zakat (BAZNAS) agreed to support the widening of electricity access to the poor in Jambi province in July, it marked the first official disbursement of the Islamic zakat fund to support the Sustainable Development Goals (SDGs).  The agreement sees Baznas disbursing $350,000 to UNDP’s project to deliver renewable energy to rural communities facing high poverty levels through the development of two micro hydro power plants. Some 30 million Indonesians – or 12 percent of the total population – do not have sufficient access to electricity, which prevents communities from improving their standard of living and is a major constraint to achieving the SDGs in Indonesia.

This agreement is a breakthrough and it should set a precedent in how Islamic finance at large can play a greater role in contributing to the 2030 global goal agenda. Against this backdrop, this week the Indonesian Finance Ministry is hosting the 2nd Annual Islamic Finance Conference, ‘The Role of Islamic Finance in Eradicating Poverty and Income Inequality’ in Jogjakarta. Eradicating poverty and socio-economic inequalities are two of the 17 SDGs and a major constraint to sustainable development. Eight men own the same wealth as half the world, according to a recent Oxfam report. The report adds this striking inequality is holding back efforts to end poverty.

With support from UNDP and other development partners, Indonesia has been leading the way in the implementation of SDGs. The recent Presidential Decree No.59 of 2017 gave the much-needed institutional framework, roles and responsibilities for the implementation of SDGs. But the challenge remains huge as the country will be implementing this ambitious agenda in a context of low government revenues, the decreasing significance of Overseas Development Assistance, and lagging international private financial flows.

This is where Islamic finance industry, along with the private sector, can come in with solutions.

With assets expected to exceed $3 trillion by 2020, Islamic finance can play an important role in helping to fill the financing gap to achieve the SDGs. With financing SDGs estimated to cost up to $7 trillion annually, it’s become apparent that governments and development stakeholders cannot do this alone.

The shift towards private resources was highlighted in the recent report by the UN Secretary General, António Guterres, on repositioning the UN Development System to deliver the 2030 Agenda. That report says there is a need to “reorient available public and private sources of finance… to ensure global inclusive growth and shared prosperity”. The report adds new partnerships between governments and markets are needed to ensure sustained flows of funds from the private sector to support the SDGs and that innovative instruments can foster risk sharing and accountability.

But Islamic finance offers much more than just funding for the SDGs. Its underlying philosophy on social solidarity and inclusive growth embodies socially responsible development. Islamic finance also brings valuable networks and partnerships. Religion is a force of change and engaging with religious organizations is crucial for peace, development and promoting tolerance, especially at the grassroots.

The SDGs are democratic in spirit, built from the ground up with partnerships at their core. Recognizing the partnership potential of Islamic finance and the SDGs, the Islamic Development Bank (IDB) and UNDP signed an MOU in May 2016. Overall though, while Islamic finance is a great potential source of financing and partner for the SDGs, this potential remains largely untapped and overlooked.

Zakat is a form of Islamic finance that can advance the SDGs. There are some commonalities between zakat and the SDGs. The SDGs are about alleviating poverty and reducing inequality by redistributing wealth, principles which are aligned with the five foundational goals of Islam, known as Maqasid Al Sharia.

While countries have varying approaches on state involvement in zakat collection and disbursement, typically, zakat is given informally and individually from person to person. Indeed, just one quarter of zakat contributions are estimated to be channeled through formal certified organisations.  Nonetheless, there is a growing recognition that giving to higher level causes, rather than individuals, may have greater impact and that sustainable solutions require skills and capacity development, as found in formal organisations.

In Indonesia, zakat has the potential to contribute $32 billion per year, or about 3.4% of GDP. Today, the contribution channeled through BAZNAS, the national zakat agency, is just 1% of that potential. Our agreement with Baznas last month marks the first time that a zakat organization has committed to supporting the SDGs anywhere in the world.

Innovative financing offers opportunities to channel Islamic finance to support the SDGs. An Islamic crowdfunding campaign was launched during the Ramadan earlier this year by the UN High Commission for Refugees (UNHCR) to support the Syrian refugees. UNHCR obtained religious rulings from top Muslim clerics in Egypt, Morocco and Yemen as well as senior Islamic scholars in Saudi Arabia, to persuade wealthy Muslims to donate their alms for relief work. The campaign has mobilized almost $1.8 million with eight thousand backers, providing immediate necessities and a place to sleep for over seven thousand refugees.

Impact investment is a new form of financing that is growing rapidly and estimated to be worth $1 trillion globally by 2020. It has much in common with Islamic finance, being value-based with a moral purpose to do good, intending to generate a measurable, beneficial social or environmental impact alongside financial return and building inclusive financial systems for all.

UNDP and IDB have launched a global platform to help Islamic financiers meet impact investors and social enterprises and create commercially viable financial solutions which yield positive social and environmental outcomes. It serves as a knowledge hub for experience sharing, a forum for policy dialogue and advocacy and a market place for deal sourcing and match making.

The International Finance Facility for Immunisation provides a further example of innovative Islamic financing. The Facility issued a $500 million ‘Vaccine Sukuk’ in December 2014 followed by a second issued in September 2016 for $200 million. The proceeds are used to support life-saving health and immunization programmes in the poorest countries in the world. It was one of the largest sukuk issued by a supranational entity and the first fully social responsible sukuk on international financial markets.    

These examples illustrate the role that Islamic finance can play in supporting the SDGs but much more is needed. Development organisations can take the following steps:

  • Build on the development experience, learning and networks that Islamic organisations offer, including Islamic principles regarding financial inclusion and social solidarity;
  • Obtain buy-in from clerics and Islamic groups through engaging in research, consultations and raising awareness on SDGs and their relevance to Islamic finance principles;
  • Support zakat and other Islamic institutions to create incentives for people to contribute through formal channels, through financial inclusion programmes that use new technologies, promoting transparency and greater efforts to monitor and communicate development impact;
  • Collaborate with Islamic institutions to identify innovative financing instruments that can channel Islamic finance towards the SDGs;
  • Coordinate with Governments to establish a system that tracks the contribution of Islamic finance towards the SDGs.

The core of Islamic values emphasise social justice and inclusivity. With the SDG’s motto ‘Leave No One Behind’, Islamic finance offers real prospects for being one of the answers for how we achieve the SDGs.

By Francine Pickup, UNDP Indonesia Deputy Country Director.

This article was first published on The Jakarta Post dated August 23rd 2017.