By Taofeek Alani Ajibade
INTRODUCTION
It is no longer a gainsaying that finding alternative financial systems is more important than ever in our contemporary world where financial instability, economic inequality, and environmental damage are all on the rise. The global economy, which is primarily motivated by the desire to maximize profits, has come under increased scrutiny and heavy criticisms for its role in promoting economic inequality and causing environmental damage. Islamic finance, with its tenets firmly anchored in morality and social
duty, stands out as a strong substitute in this context. This article briefly examines the ways in which Islamic finance can be used to advance environmental sustainability and economic growth, providing a thorough examination of its tenets, workings, and possible challenges.
The Ethical Foundations of Islamic Finance
A set of moral precepts that make Islamic banking distinct from traditional financial systems are at its core. Shariah, or Islamic law, which places a strong emphasis on justice, equity, and the well-being of society at large, is the source of these ideas. Islamic finance is based on the idea of responsibility and risk (profit and loss) sharing, in contrast to conventional finance, which frequently places a higher priority on profit than anything else. This is clear from the Islamic financial transactions’ prohibition on riba (interest), gharar (excessive uncertainty), and maysir (speculation). Islamic finance promotes profit-sharing and equity-based commercial arrangements, in which both parties share the venture’s risks and
gains, as an alternative to interest-bearing loans. This approach not only aligns with the ethical teachings of Islam but also contributes to financial stability by avoiding the speculative bubbles and boom-bust cycles characteristic of interest-based economies. Moreover, Islamic finance mandates that investments be made in tangible assets or real economic activities, which directly supports productive sectors of the economy and contributes to sustainable economic development.
Islamic Finance and Economic Development
One of the most compelling arguments for the adoption of Islamic finance is its potential to foster inclusive and sustainable economic growth. By prohibiting exploitative practices and promoting risk-sharing, Islamic finance ensures that wealth is distributed more equitably within society. This is particularly relevant in the context of developing countries, where access to capital is often limited, and poverty is widespread. Islamic microfinance, for example, has gained significant traction as a tool for poverty alleviation. By providing interest-free loans and equity-based financing to small businesses and
entrepreneurs, Islamic microfinance institutions help individuals and communities break free from the cycle of poverty. These financial products are designed to empower the economically marginalized, enabling them to participate in economic activities and improve their living standards.
Moreover, the emphasis on ethical investment in Islamic finance extends to the selection of industries and projects that receive funding. Islamic financial institutions are prohibited from investing in activities deemed harmful to society, such as alcohol, gambling, and production of weapons. This focus on ethical investments ensures that the economic development promoted by Islamic finance is not only inclusive but also socially responsible which is also the focus of Sustainable Development Goals.
Islamic Finance and Environmental Sustainability
In addition to its role in economic development, Islamic finance offers significant potential for advancing environmental sustainability. The principles of Islamic finance align closely with the goals of sustainable development, particularly in their emphasis on goals 13 (Climate Action), 14 (Life Below Water), 15 (Life on Land) & 16 (Peace, Justice and Strong Institutions). For instance, issuance of Sukuk (Islamic bonds) is one of the main ways that Islamic finance can support environmental sustainability. Sukuk are asset-
backed and need to be connected to particular projects or investments, in contrast to traditional bonds. Sukuk is the perfect tool for funding green projects because of its structure, including eco-friendly infrastructure, sustainable agriculture, and renewable energy projects. Sukuk is already being used for environmental goals by a number of nations and financial institutions. Today, over 20 countries in
Europe, Asia, Middle East and Africa have issued either corporate or sovereign Sukuk with Malaysia and United Arab Emirates at the forefront. Other countries include Bahrain, Indonesia, Iran, Qatar, Kuwait, Pakistan, Saudi Arabia, Singapore, Somalia, Turkey, Brunei, UK, Hong Kong, Egypt, Ivory Coast, Senegal, Gambia, South Africa and Nigeria. To finance renewable energy projects and lower carbon emissions, for example, Indonesia issued a $1.25 billion green Sukuk in 2019. Similarly, to encourage climate-friendly investments in its member nations, the Islamic Development Bank has started a Green Sukuk program.
Considering the population of Nigeria, Sukuk has a great potential to transform economic status if effectively utilized. With population of over 200 million and a significant Muslim population estimated at over 50%, Nigeria is home to far more Muslims than all the leading Sukuk markets of Malaysia, Saudi Arabia, UAE, Kuwait and Qatar put together. In addition, Nigeria, estimated as the largest economy in Africa with a Gross Domestic Product of about $500 billion, has a larger economy than them, with the exception of Saudi Arabia. On this note, it is reported that Osun State issued a Sovereign Sukuk valued $277.93 (N100 billion) in 2017. These projects show how Islamic financing has the ability to raise funds for environmentally sustainable projects around the world. Furthermore, the prohibition of wasteful and harmful practices in Islamic finance extends to environmental conservation. The principle of maslahah (public interest) in Islamic law mandates that financial activities should not harm the environment or deplete natural resources. This principle can be applied to promote sustainable business practices, encourage investments in clean technologies, and support efforts to combat climate change.
Challenges and Opportunities While the potential of Islamic finance to contribute to economic development and environmental sustainability is significant, several challenges must be addressed to fully realize this potential. One of the primary challenges is the lack of standardization in Islamic financial products and practices. The diversity of interpretations of Shariah law across different regions and jurisdictions can lead to inconsistencies in the application of Islamic finance principles, which may hinder its widespread
adoption. Another challenge is the perception that Islamic finance is primarily relevant to Muslim-majority countries. While it is true that Islamic finance has its roots in Islamic law, its ethical principles are universally applicable and can be adopted by individuals and institutions of all faiths. Raising awareness about the benefits of Islamic finance and promoting its adoption in non-Muslim-majority countries will be crucial to expanding its impact on a global scale. Moreover, the integration of Islamic finance into the broader global financial system presents both challenges and opportunities. On one
hand, the unique characteristics of Islamic finance may require adjustments to existing regulatory frameworks and financial infrastructure. On the other hand, the growing interest in ethical and sustainable investing presents an opportunity for Islamic finance to play a leading role in shaping the future of global finance.
CONCLUSION Islamic finance represents a promising alternative to conventional financial systems, offering a pathway to economic development and environmental sustainability that is rooted in ethical principles and social responsibility. By promoting inclusive economic growth, supporting ethical investments, and financing environmentally sustainable projects, Islamic finance has the potential to address some of the most pressing challenges facing the world today. However, to fully harness the potential of Islamic finance, it will be essential to overcome the challenges of awareness and integration into the global financial system. As the world continues to seek solutions to economic and environmental challenges, Islamic finance offers a compelling model that aligns financial activities with the broader goals of sustainable development. With the right support and investment, Islamic finance can play a transformative role in creating a more equitable, just, and sustainable global economy.
About the Author Taofeek Alani
Ajibade is a prolific writer and researcher with expertise in legal and non-legal topics. He is a graduate of the prestigious Faculty of Law, Usmanu Danfodiyo University, Sokoto, with ardent interest in Corporate and Commercial Practices, Islamic Finance, Islamic Fintech, Tech Law, Arbitration, and Litigation. He can be reached via: Email: taofeekajibade02@gmail.com Phone: 08085374513 LinkedIn: Taofeek Ajibade. ACIArb (UK)
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