Working with Islamic Finance to achieve the SDGs: A win-win?

May 9, 2019

Photo: Fauzan Ijazah / UNDP Indonesia

This blog series takes a look at the new landscape of financing for development, the focus of our upcoming Istanbul Development Dialogues, an annual a global development forum where policy-makers, business leaders, and experts discuss issues of our time.

Islamic finance, a method of financial system which complies with sharia law and forbids charging interest, has become a growing source of funding for development. Because inclusion, women’s empowerment, fairness, accountability and sustainability are embedded in its principles, if offers a natural connection with the Sustainable Development Goals (SDGs).

UNDP has been exploring ways to increase Islamic finance’s impact by linking Indonesia and Turkey together, through UNDP Alternative Finance Lab and UNDP Innovative Financing Lab that has been helping countries explore new funding opportunities.

We wondered: How can Islamic finance be designed to better serve the SDGs in Europe, Asia and beyond?

Here are the key findings of our research:

1.     There are five Islamic financial instruments with high potential: sukuk (the equivalent of bonds), microfinance, waqf (charitable endowment), zakat (an obligatory form of giving) and corporate social responsibility.

2.     These can be mixed with microfinance, cryptocurrencies and other modern mechanisms. Sukuk transactions have been using blockchain since 2017.

3.     A total of 37 institutions from Indonesia, Turkey and other countries have been identified as potential partners. In Indonesia, these include micro-waqf bank, corporate social responsibility funds and other institutions handling social crowdfunding or green sukuk. In Turkey, we found a vibrant ecosystem of Islamic crowdfunding start-ups and SMEs. Some were funding refugees with zakat and blockchain technology, while others were financing Ramadan packages with zakat and issuing socially responsible investment sukuk.

4.     There are significant differences between regions and local contexts: for instance, different legal jurisdiction may affect how institutions work. Still, Islamic finance tools and instruments are applicable in many parts of the world, which means that there is a treasure trove of lessons to share from different countries.

5.     Beyond its convening role, UNDP can help steer their efforts, supporting coordination and design, and helping iron out technical issues.  

Photo: Fauzan Ijazah / UNDP Indonesia

There is much more research to be done in countries such as Malaysia, Saudi Arabia, Bahrain and Qatar. We have no doubt that tapping into the enormous potential of Islamic finance and blending it with other sources of financing will scale up impact and accelerate progress in Muslim-majority countries between now and 2030. It’s a win-win situation for Islamic banking institutions, the private sector and international development organizations.

UNDP Indonesia, through the Innovative Financing Lab, has been working on Islamic finance since 2016. It has extensive experience with testing different Islamic finance instruments, such as “zakat for SDGs” and the “waqf digital platform” to encourage cash waqf contributions and assisting the Government of Indonesia in the issuance of the first sovereign green sukuk.

Under the overall theme of “Putting money to work for sustainable development”, the Istanbul Development Dialogues, taking place 27-28 May 2019, will seek to tackle some of these issues.