Muscat: As Oman charts its course towards a greener energy future, aligning with UN Sustainable Development Goals (SDGs) and fostering a climate-resilient economy, the challenge of financing this transformation in a sustainable manner looms large for our modest-sized economy. The estimated price tag, reaching tens of billions of US dollars, underscores the substantial investment required. For instance, Oman's nascent green hydrogen industry alone aims for $40 billion in investment by 2030. When factoring in the costs of decarbonizing various sectors and developing climate-resilient infrastructure, the overall figure becomes astronomical.
Recognizing this financial challenge, the Omani government, through the Ministry of Finance, underscores the pivotal role of Islamic finance, particularly sukuk, in supporting this seismic shift toward a sustainable future. The recently unveiled Sustainable Finance Framework outlines the intention to issue Green, Social, and Sustainability bonds, loans, or sukuk for projects delivering environmental and social benefits.

Islamic finance, inherently sustainable in nature, operates on principles such as shared reward, tangible underlying assets, and the avoidance of purely financial transactions. Often referred to as 'responsible investing,' Islamic finance shares common ground with Environmental, Social, and Governance (ESG) principles.

The key to unlocking sharia-compliant Islamic finance lies in leveraging Oman’s Islamic capital market, established in 2012 under the Islamic Banking Regulatory Framework. The market, predominantly centered around sukuk (Islamic bonds), has witnessed significant growth since its inception, with both private corporations and the Omani government issuing sukuk in Omani Rial and Dollar denominations.

Given the substantial funding required for Oman's green energy initiatives, local banks may fall short, leaving the capital market as a viable avenue for raising the necessary funds through sustainable bonds or sukuk. While Omani Rial-denominated issuances risk absorbing liquidity in a constrained market, dollar-based sukuk issuances offer access to a vast pool of sharia-compliant investors. These sukuk can be issued under Regulation S to target global funds, with the option to later tap into the US market through S144A.

Dollar-based sukuk have the potential to attract not only Muslim investors but also non-Muslim investors, as seen globally, reflecting their broader appeal. Conventional bonds may exclude Shariah compliant investors who prefer instruments structured around Islamic principles.

In Oman, the outlook for sustainable finance based on Islamic principles is promising, especially when directed towards inherently green and sustainable projects aligned with Oman’s Net Zero Strategy and the UN SDGs. Initiatives related to renewables, green hydrogen production, zero-carbon transportation, and water management can secure funding through instruments such as green sukuk and blue sukuk.