Md. Touhidul Alam Khan :
As nations worldwide pursue sustainable growth and equitable development, the financial sector’s role has become pivotal. Islamic finance, grounded in ethical values and a strong commitment to social justice, presents a compelling alternative to conventional financing methods.
Islamic finance operates on the principle of integrating financial practices with tangible economic outcomes. Notably, instruments such as Sukuk (Islamic bonds), Islamic microfinance, and equity-based financing models like Musharakah and Mudarabah are tailored to effectively support development initiatives. These innovative tools not only foster economic progress but also ensure benefits are shared broadly within communities.
In 2018, Indonesia set a remarkable precedent by issuing the world’s first sovereign green Sukuk, successfully raising US$1.25 billion for environmentally sustainable projects. This initiative signified more than just financial innovation; it represented Indonesia’s commitment to sustainable development. The funds were allocated to various initiatives, including renewable energy projects, sustainable transportation systems, waste management enhancements, and climate resilience programs.
The green sukuk attracted ethical investors and demonstrated how Islamic finance could tackle pressing global challenges such as climate change. Following its initial success, Indonesia continued to issue subsequent tranches of sukuk, funding impactful projects like solar power plants and enhanced waste management systems, advancing the nation’s progress toward achieving the Sustainable Development Goals (SDGs).
Indonesia’s pioneering efforts in green sukuk have inspired similar initiatives in other countries, including Malaysia and the UAE, further illustrating the potential of Islamic finance to mobilize resources for projects yielding significant economic and environmental benefits.
Microfinance has emerged as a crucial tool for reducing poverty, yet traditional models often burden the very individuals they aim to assist with high-interest rates. The Akhuwat Foundation in Pakistan provides a transformative solution with the world’s largest interest-free microfinance program grounded in Islamic values. Since its establishment in 2001, Akhuwat has distributed over PKR 100 billion (approximately US$360 million) to over four million beneficiaries.
Akhuwat enables individuals to initiate small businesses, pursue education, and meet emergency needs through Qard al-Hasan (interest-free loans). By disbursing loans within community places of worship, the foundation fosters a culture of mutual responsibility and support, achieving impressive repayment rates exceeding 99 per cent.
Beyond financial aid, Akhuwat offers educational scholarships and health services, effectively addressing various aspects of poverty. This holistic approach exemplifies how Islamic social finance principles can facilitate economic empowerment and social justice.
Healthcare development in Saudi Arabia through Islamic PPPs
Saudi Arabia is leveraging Islamic finance to advance public-private partnerships (PPPs) within its healthcare sector, essential to national growth. Projects like the King Faisal Medical City, multi-billion-dollar healthcare complex exemplify how Islamic financial mechanisms like Istisna (contractual financing) and Ijarah (leasing) are utilized. These collaborations adhere to Shariah principles while sharing risks and rewards between public and private sectors.
Such structures facilitate the rapid development of essential infrastructure and encourage private sector engagement in national development initiatives. As part of the Vision 2030 strategy, Saudi Arabia emphasizes enhancing private sector involvement, particularly in healthcare, utilizing Islamic finance to achieve these objectives.
In the context of Bangladesh, Islamic finance presents significant opportunities for sustainable development, particularly given the country’s socio-economic landscape and demographic advantages. With over 160 million inhabitants, Bangladesh possesses a youthful population eager for innovation and entrepreneurship. However, despite its potential, the country faces challenges such as poverty, high unemployment rates, and limited access to traditional banking services.
Islamic micro-finance initiatives have shown promise in Bangladesh, offering interest-free financing options to the underbanked population. Organizations like Islamic Banks and others have implemented Islamic micro-finance programs to provide small loans that empower individuals to start businesses or pursue education without the burden of interest.
Additionally, Bangladesh can learn from Indonesia’s success with green sukuk by considering similar instruments to finance projects focused on environmental sustainability, such as climate-resilient infrastructure and renewable energy ventures. These initiatives would not only help mitigate the effects of climate change but also address the pressing needs of its population.
Moreover, the establishment of Islamic investment funds can facilitate resource mobilization for small and medium enterprises (SMEs), encouraging innovation and economic diversification. By leveraging equity-based financing models, entrepreneurs can access necessary capital without relying solely on collateral or credit history, which are often barriers in conventional banking.
Empowering SMEs with Islamic equity financing
Small and medium enterprises (SMEs) are crucial for innovation and job creation; however, they often face difficulties in securing financing. Islamic finance offers solutions through equity-based models like Musharakah and Mudarabah. In Malaysia, for instance, Islamic banks have introduced Musharakah financing, allowing banks and entrepreneurs to jointly invest in business ventures and share profits equitably.
This partnership approach alleviates financial burdens on SMEs while fostering transparency and responsible management. By facilitating access to capital, Islamic finance plays a vital role in nurturing SMEs, which stimulates economic activity and promotes social stability.
The contributions of Islamic finance extend beyond specific financial instruments. Its ethical framework promotes responsible investment, financial inclusion, and social welfare – all integral to sustainable development. Notably, it enhances access to financial services for populations that traditionally avoid conventional banking due to religious beliefs.
Moreover, by emphasizing investments in real assets and productive ventures, Islamic finance mitigates speculative behaviors, nurturing a stable economic environment focused on long-term growth. Instruments like Zakat, Sadaqah, and Waqf can mobilize resources for welfare projects, illustrating the potential for fostering social cohesion and poverty alleviation.
Despite its potential, Islamic finance faces challenges that need addressing to maximize its impact on development finance. Regulatory inconsistencies across jurisdictions can impede growth on a global scale. Harmonizing regulatory frameworks and Shariah standards is vital to facilitate cross-border transactions and attract international investors.
Moreover, raising awareness about Islamic finance concepts among policymakers, investors, and the public is essential, particularly in regions like Bangladesh where understanding may be limited. Educational initiatives and capacity-building programs can demystify Islamic finance and showcase its broad benefits for development.
Finally, fostering collaboration between Islamic financial institutions and international development agencies is essential. Partnerships can pool resources and expertise to effectively tackle global development challenges, amplifying the impact of Islamic finance in Bangladesh and beyond.
(The author is the Managing Director & CEO of National Bank Ltd, post graduate diploma on Islamic Banking & Insurance and international correspondent of Islamic Finance News (IFN), Malaysia).
