Green developments in Islamic finance

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The global increase in environmental awareness has led to a marked rise in the appetite for green bonds and this an opportunity for green Sukuk issuances says Dominic Coyne, Manager—Fund Services Group at VG.

Ras Al Khaimah, Abu Dhabi, Dubai…. No, not a bucket list of potential holiday destinations but a rich source of new business potential for offshore jurisdictions. Islamic finance encompasses many forms of Shari’ah-compliant transactions, for example, a group of friends and family agree to purchase a commercially leased property using a commodity Murabahah to ring-fence the Shari’ah-compliant investors from any Haram elements within the structure.

This type of investment is a tried and tested, efficient vehicle using a trusted team of experts. Around the world, however, we are now seeing a rise in interest in vehicles such as Green Sukuk, a new and exciting investment option that will hold particular appeal for the environmentally conscious client.

SUKUK Sukuk is far from new, with its history stretching back over a thousand years. Indeed Sakk, the singular of Sukuk, is believed to be the origin of the modern Western word cheque. A traditional Sukuk consists of financial certificates, effectively Shari’ah-compliant bonds, structured in such a way as to generate returns to investors without infringing Shari’ah law that prohibits the earning of interest.

Investors in a Sukuk have an undivided beneficial ownership of the underlying assets and holders are entitled to share in revenues generated by those assets and in the proceeds if the assets are realised. According to the State of the Global Islamic Economy Report 2016/17 there were $2 trillion of assets being managed in a Shari’ah-compliant manner in 2015, and $342 billion of those assets were comprised of 2,354 Sukuk issues.

GREEN SUKUK Increasing environmental awareness worldwide has seen a marked rise in the appetite for green bonds and the Islamic finance sector is actively exploring the potential for this form of socially responsible investment (SRI), which speaks directly to some of the core principles of Islamic finance, which are: prohibiting interest (Riba); steering clear of uncertaintybased transactions (Gharar); avoiding gambling; and avoiding investment in prohibited industries.

Malaysia has been the market leader in the issuance of Green Sukuk, with guidelines issued in 2014 for SRI. These set out that the proceeds of SRI Sukuk can be used to preserve the environment and natural resources, conserve the use of energy, promote the use of renewable energy and reduce greenhouse gas emission. Malaysia launched the world’s first Green Sukuk on 27 June 2017. Due to the infancy stages of Green Sukuk there isn’t much data to promote its track record but if we look at the $30 billion of green bonds issued in the second quarter of 2017, the potential is very good.

UAE DEVELOPMENTS The UAE Green Growth Strategy was launched in 2012 by HH Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai. The aim of the strategy is to put forward the country’s ambition to become a global hub and a successful model for the low carbon green economy so as to enhance the competitiveness and sustainability of its development and preserve its environment for future generations. Underlining this commitment, the Cabinet of the United Arab Emirates issued a decision to implement the UAE Green Agenda 2015-30. Whilst it is early in the development of Green Sukuk, it is logical that it is a natural home for such investment. By its very nature, Sukuk is restricted to a pool of approved assets and environmentally friendly projects are an excellent fit, enabling the socially responsible client to invest, for example, in renewable or clean energy initiatives.

In an ever-changing regulatory environment, there will most certainly be challenges, not least the drafting of documentation acceptable to governments, investors and Shari’ah scholars. Nonetheless, the demand for green investment options and the appetite for an Islamic finance solution can only grow. Growth in Islamic finance may not in the future be restricted to traditional investment vehicles. There is increasing appetite for environmentally friendly products and considerable potential in the UAE. Green Sukuk as a standard investment vehicle may still be some way off but momentum is building, and the potential worldwide is huge.