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Monday, October 2, 2023

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Lack of sustainable finance architecture holding Muslim jurisdictions back, says International Finance Corporation

With the growing need for sustainable finance uptake in Muslim-majority jurisdictions, ISFI spoke to Yavar Moini and Garth Bedford, the senior investment officer and ECA [Europe and Central Asia] financial markets advisory services lead respectively from the International Finance Corporation (IFC), to learn more about why Islamic sustainable finance developments are lagging in Central Asia and the Middle East.

Current IFC focus

As a development institution under the World Bank group, the IFC engages with financial institutions to develop capacity.

“Right now our focus is more on getting the partner financial institutions to develop a climate finance business line … A lot of our efforts are to help them get to a point where they can meet that target.” Garth explained.

From a top-down perspective, this takes the form of the IFC assisting in the development of green taxonomies and regulation while on the ground, it engages with market players to ensure that there is a sufficient level of literacy to ensure that green washing is not taking place.

While their approach is sustainability first, the IFC will aid in the development of Islamic sustainable products should it contribute to financial inclusion in the face of market demand.

“The partners that we are working with may identify a particular opportunity which can make their financing more accessible to the market. In these countries, this could be a green Sukuk or a green line of financing,” Yavar noted.

Islamic sustainable finance gaps

In the MENA region, Jordan and Egypt are at the forefront in terms of sustainable finance adoption, being the only two Muslim countries that are part of the IFC’s sustainable banking network, the experts agreed. The two countries have an ‘advanced approach’ to developing sustainable finance with incentives and regulations in place.

According to Yavar, for sustainable finance to be implemented, both the architecture and a regulatory push need to be in place. For the majority of the countries in the region, the basic sustainable finance architecture does not exist.

On top of having a willing regulatory counterpart, which is instrumental, the availability of donor funding also contributes significantly to the development of the sustainable finance architecture in a country.

The stability of a country and its ability to utilize donor funding transparently are factors that contribute to a region’s ability to pool funding. It comes down to having a clear, accountable counterpart and strategy with good risk management and governance in place, Garth noted.

While Jordan is a frontrunner in the region, the Islamic component is notably lacking. With only three Islamic banks in the country, contributing to roughly 20% of its banking assets, none of them have explicitly moved toward implementing green finance.

IFC’s Islamic finance push

Currently, the IFC is trying to identify how strong the interest is for Islamic sustainable finance in the country. According to Yavar, the IFC is in discussions with one of the Jordanian Islamic banks to identify what it can do with the bank in the sustainable finance space.

According to Yavar, the Islamic sustainable finance industry as a whole is lagging, and Jordan just reflects that.

“Until some of the bigger Islamic banks start to do much more and provide a template for others to follow, I think we’ll have a challenge,” Yavar commented.

While there is a business case for adopting sustainable practices, Garth notes that there are short-term losses that financial institutions will face.

For example, financial institutions may lose business by implementing sustainable risk management practices considering sustainability risks in pricing, thereby driving away customers by offering a higher financing rate. The short-term costs can be a hard pill to swallow for financial institutions. This, in addition to a concern over market demand, also contributes to why financial institutions may not be adopting such practices.

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