The synergies between sustainable and ethical finance on the one hand and broadly Islamic finance on the other are clear and well established. Given that both of these topics have received and continue to receive a great deal of attention in the online and offline financial press, one has to ask: why have these synergies not resulted in the kind of growth in financial markets that one might expect?
Part of the answer to this question lies in governments’ activity or perhaps we should say inactivity. Governments have an important, if not essential, role to play in national and international financial markets in signaling the strategic direction of financial markets, in creating the conditions (through, for example, regulation) that shape the development of financial markets and in providing incentives (such as tax breaks) for specific activities.
Notwithstanding the importance of these government actions (and we need to see more of them), they are not capable of directly increasing, in this instance, the extent of financial market activity that links sustainable and ethical investment with a step-change improvement in extending the depth of the markets including improved market liquidity for Sukuk issuers.
In order to make practical the kind of benefits and advantages from bringing conventional finance and Islamic finance together, we need action in financial markets from a wide and increasing range of financial market participants. Governments may set the context but the financial markets and the private sector are the only ones which can make this strategy a reality. Indeed, while we wait for governments (globally) to catch up on their responsibilities, there is much that can be done by the private sector to advance practice in this area.
In this article, therefore, we are going to set out 14 reasons (not in any order of priority or importance) why there is a need for more market participants which combine the efficiencies (both technological and operational) of dedicated Sukuk issuance platforms like Al Waseelah and, equally importantly, structuring specialists and marketplace operators which are aligned to the goal of democratization of Sukuk issuance such as Bedford Row Capital, Wethaq, Fasset and a small but growing list of others, which are ideally placed to bring the advantages of combining conventional and Islamic finance to market.
• Mainstream banks are just not interested in this market — even now! Issuers, such as Al Waseelah, specialize in the SME market (in the GBP50–250 million (US$68.83–344.15 million) range) and have a proven route to market. Financial institutions are capital-rich, looking for high-quality projects (both conventional and Islamic) to invest in: to resolve this issue, a combined effort is needed of structurers and issuance platforms working together to cater to these market opportunities.
• The SME marketplace needs capital to flow (to function, to aid recovery, to promote sustainability and just transitions). There is significant scope for Islamic finance to grow in these spaces. The combination of issuer and structuring specialist makes this real.
• Knowledge of conventional financial markets plus the development of experience in the field of Islamic finance facilitates a no-nonsense, smart, quick and impact-focused route to market (often with dedicated and specialist fintech solutions for which there are a growing number).
• The combination of issuer and structuring specialist provides access to international markets (and thus supports domestic growth).
• Specialist knowledge gained through immersion in this market facilitates a demystifying of Islamic finance through a process we call delabeling, thereby making Islamic finance products readily understandable and available to a wider investment base — promoting democratization.
• Specialist knowledge of both western financial markets and Islamic finance enables both issuer and structuring specialist to focus on what matters to investors (impact, outcomes, etc). This is particularly valuable in attracting investment in Islamic financial products from ‘traditional’ western markets: investors like to invest in products they understand!
• Bringing Islamic financial products to (particularly) western markets is still relatively novel. Exceptionally thorough and effective due diligence on the part of the structuring specialist can (and does) assist the issuer with the complexities (and changing dynamics) of regulatory compliance in international markets.
• Effective structuring of bonds also permits linking the achievement of sustainability targets, for example, to dividend payments. Failure to meet targets results in higher dividends (the coupon goes up). The thorough and voracious nature of these market-driven processes can (and does) engender greater confidence in Islamic products on the part of investors.
• There is significant capital and liquidity in Islamic banks to expand the financing of new businesses (or refinance established businesses) across the entire Islamic finance world but it needs a route to market. Specialist issuers and structuring specialists exist to provide this route to market (so essential to economic prosperity and just transitions).
• So-called traditional western finance tends to struggle with the ‘S’ (social) in environmental, social and governance (ESG). Conversely, Islamic finance is very strong on the ‘S’: to the extent that there is an emphasis, for example, in social impacts in Sukuk. To maximize the potential impact of Islamic finance on financial markets, there is an urgent need to link the expertise of structuring specialists with that of Shariah scholars to ensure that the ‘S’ in ESG is promoted effectively.
• In the absence of legislation or regulation (or perhaps we should say in the confusion of legislation and regulation that exists nationally and internationally), effective, robust and trustworthy structuring of Sukuk is of enhanced significance — particularly in attracting investors. Cooperation between issuers and structuring specialists (rather than simply lawyers) provides such an established route to market.
• For Islamic finance to grow and thrive, it needs to draw investors not just from the Islamic world but from broader international financial market participants. The experience, expertise and track record of Bedford Row Capital provides the assurances that investors from non-Islamic backgrounds require to make the necessary steps.
• There is demand for new product supply lines — one which emphasizes green, socially-conscious and sustainable investments wrapped in the robust principles of good governance: all highly desirable qualities in western markets.
• Finally, the focus of issuers such as Al Waseelah on SMEs and the services of a non-bank structuring specialist whose core business is sub-benchmark issuances or emerging economy issuers means that, together, the services offered are flexible, innovative and outcome-focused.
The potential for Islamic finance to grow and to make significant impacts globally is vast. This can only be achieved, however, if effective, robust and trustworthy routes to market are opened up and operationalized. This is the ultimate goal of all market participants and it is not exclusively for traditional Islamic financial institutions. New entrants like Orestes Asset Management will bring a new actively managed fund which will combine in a retail-friendly manner ethical finance and Shariah compliant stock selection in a retail-friendly product.
These activities, however, are taking place in an increasingly internationalized context in which international bodies are pressing the commercial world to become sustainable (in investments and in business practices) and national as well as supranational (eg the EU) bodies are introducing mandatory regulation into financial markets focused on carbon reduction and sustainability. Islamic finance is ideally placed to take advantage of these developments but, at present, it remains outside these international developments. Al Waseelah, for example, is one of only two Islamic finance companies to be registered with the UN Principles for Responsible Investment (UNPRI) and to report on its activities under the UNPRI reporting framework. Although relatively new and although many, if not all, investors and companies in the west are still getting to grips with its consequences, the Sustainable Finance Disclosure Regulations already have significant implications for Islamic financial products — and knowledgeable issuers and structuring specialists have an essential role to play in acclimatizing Islamic financial market participants to these developments. Knowledge of and compliance with developments in international financial markets are essential components of today’s financial world to which the combination of issuer and structuring specialist is equally dedicated in their efforts to tap into the global liquidity which should be available to the entire Islamic finance marketplace.
Dr Scott Levy is the CEO of Bedford Row Capital and Professor Kevin Haines is the head of social policy of Bedford Row Capital.