The Contribution of Islamic Finance to the Sustainable Development Goals (SDGs): The Case of Islamic Banking and Islamic Capital Market in Malaysia

Table of content

Islamic Finance & SDGs Impact


This article was first published in the World Scientific Annual Review of Islamic Finance.

Written by Ezzat Ezzuddin, Master of Islamic Finance Practices (MIFP), INCEIF University.

1.0 Introduction

The recent growth of Islamic finance industry reflects that the Shariah-based financial systems has started earning a consistent attraction and global inclination as the new alternatives and viable options to the long-deep rooted conventional finance. According to the Asian Development Bank (n.d.) and Triebel (2017), Islamic finance is one of the world’s fastest growing financial sectors, with a projected compound annual growth rate of more than 10% since 2009. This trend is particularly perceptible in Muslim-dominant countries, specifically in Asia and the Middle East regions, where the tenets of Islamic finance has been gaining its social, cultural, and ethical acceptance across broad economic and non-economic sectors, to the extend its dominance overruled the conventional counterpart. Although that Islamic finance representing only a modest percentage in the global financial market, the industry has successfully demonstrated a strong trajectory and solid milestone since its foundation in 1960s. This can be seen when the assets have proved its resilience during the years of pandemic in 2020-2021, with the total worth propelled to an impressive USD$4 trillion (Refinitiv, 2022) manifesting the previous prediction by the State of the Global Islamic Economy Report 2022 (Shafaki, 2022). With the Year-on-Year (YoY) growth assets of 17%, the projected total asset value for the global Islamic finance markets will amount to $5.9 trillion US dollars by 2026 (Puri-Mirza, 2023), catering to about a quarter of the world’s population’s financial needs (S&P Global Ratings, 2022).

Aside of being unique underlying principles and distinguished business mechanisms, Islamic finance, much like its conventional sister, currently has been actively associates itself in assimilating and integrating the United Nations (UN)’s Sustainable Development Goals (SDGs) into the industry’s components and its working sectors in order to remain prominent and consistently notable in the global financial markets. Given the fact that the principles of Islamic finance that advocates for social inclusivity and economic justice, it has created a fertile ground for its business operations a seamless adoption and a quicker adjustment into the SDGs practice due to its similar inherent alignment with the core values and objectives of the SDG framework. By strategically aligning the industry’s practice with the UN SDGs, Islamic finance seeks to assert its long-term commitment and constant relevance to be positioned as part of the global effort in thriving the initiatives of promoting and uplifting the landscape of more equitable, highly ethical and socially responsible investing by 2030. Through this value-based convergence, Islamic finance appears to hold a significant untapped potential for substantial and non-traditional source of financing in ensuring the global sustainable agenda is progressively realized, making its overall sector plays a huge role in diversifying and varying the sources of capital mobilization. Following to this reason, there has been a lengthy discussion and intellectual discourse among the academicians and scholars on how actually the ideas of these SDGs have always been existed and incorporated in the teaching of Islamic finance way before the twentieth century and prior to the establishment of the SDGs in 2015. The claim on the mirror twinning is mainly due to the reason that both Islamic finance and SDGs share a common end-goal and strives for social well-being through fostering ethical and responsible financial practices that brings a positive impact on the environment, economy and society at large.

The sharing goals between both community development advocacy is proven through Islamic banking which was founded on higher objectives grounded on social justice namely, to build financial intermediation based on risk-sharing for socially responsible economic activities. Similar to the Islamic capital market where the Shariah screening methodology initially prohibited and excluded the business activities involving alcohol, pork production, gambling, prostitution and tobacco-based companies. Aside from certifying securities to be Shariah-compliant, the wisdom behind such exclusion and screening is due to the negative social implications and environmental impact. Those positive outcomes are all on the same page with the goals of SDGs, namely Goal 1 – No Poverty, Goal 10 – Reduced Inequalities, and Goal 12 – Responsible Consumption and Production.

Although that Islamic finance by its core has already based on virtue and ethics, the stakeholders in Islamic finance are putting their effort to ensure that the industry is integrating the world’s mainstream agenda into the operations of Islamic financial system, including in the end-products, corporate governance, work culture, employees and employers’ mindset, as well as the reporting standard, so that the whole Islamic finance sector can remain relevant in the long run and in line with the conventional finance. The countless efforts are demonstrated when Islamic finance has a total value of USD$16 million of environmental, social and governance (ESG) sukuk outstanding in the global sukuk market, with UAE leading the chart constituting of almost USD$6.5 million ESG sukuk outstanding, followed by Indonesia and Malaysia with USD$4.2 million and USD$3.3 million respectively (Refinitiv, 2022). In fact, number of Muslim countries also have been working in shifting their financial and economic sector into the SDG-based practices. For instance, Saudi Exchange (formerly the Saudi Stock Exchange ‘Tadawul’) in Saudi Arabia has launched the ESG Guidelines in 2018 primarily to raise ESG awareness, initiate initiatives, and encourage sustainable investment in their local stock exchange market (Saudi Exchange, n.d.). Malaysia, which is one the most active and leading Shariah-compliant markets in the world, also has developed specific guidelines to cater the needs of the disclosure of ESG practices and SDGs progress report. This includes the Value-Based Intermediation (VBI) by Bank Negara Malaysia (BNM) and Guidelines on Sustainable and Responsible Investment Funds by Securities Commission Malaysia (SC). These endeavors collectively demonstrate that Islamic finance is earnestly striving to contribute its utmost commitment towards realization the world’s sustainability agenda.

Therefore, this article is prepared and aimed to discuss the theme of sustainable finance and its social impact perspectives. The article shall investigate on how Islamic finance contributes to the Sustainable Development Goals, environmental preservation, and social welfare, and how it aligns with the global sustainable finance movements. The discussion in this article also flashes out some of the primary and noteworthy developments contributed by Islamic finance industry throughout the process in joining the global team in translating the SDGs into the industry practices. For the purposes of this article, the author decided to limit the discussion context exclusively within the Islamic banking and Islamic capital market in Malaysia only. Towards the end, the author reflects on lessons Singapore can draw from Malaysia’s accomplishments in the Islamic finance industry, suggesting potential areas for emulation and learning.

2.0 Islamic Banking

Malaysia has a long track record of building successful domestic Islamic banks for over 30 years since the first establishment of the national corporation of hajj savings – Tabung Haji in 1963. Today, Islamic banking sector in Malaysia has reached the highest peak and full-maturity phase when there are quite significant number of full-fledged Islamic banks being operated in the country, including several foreign owned-entities and conventional financial institutions who have established its own Islamic window and Islamic subsidiaries. According to Fitch Ratings (2023), Malaysia is now the world’s third-largest Islamic banking market, with Islamic financing accounted for approximately 41% of local banking-system loans at end-2022. This esteemed and respected recognition is further recognized by a local report namely, Malaysian Investment Development Authority (MIDA) (2023) that Malaysia remains the largest Islamic banking market in Asia-Pacific, encompassing 62.7 percent of total Islamic banking assets in the region, and the country is expected to maintain its strong position over the next two years. Over the preceding years, Islamic banks in Malaysia also have been working so hard in strengthening its global reputation by committing to execute the sustainability agenda into its business operations and product innovation. Hence, below are some of the major contributions made by Islamic banks in Malaysia as an effort to align with the global sustainability agenda:

2.1 Islamic microfinance

Islamic microfinance is one of the most notable efforts made by Malaysian industry players in ascertaining that the realization of the global sustainability agenda is viable and feasible through Islamic banking products. Islamic microfinance is the alternative Shariah-compliant microfinancing solution against the conventional microfinance which is an interest-based loan. It is a provision of access to small amounts of credit complying with the Shariah principles to the poor and those who do not have assets for collateral, financial records, and credit history (Haque et al., 2019) (Furniturewala, 2016). Similar to the conventional, Islamic microfinance also serves the purpose to improve the welfare of the poor and elevate its socioeconomic status by providing affordable credit, undertaking entrepreneurship activities, generating certain level of income, and later taking part in consumer spending in enhancing their living standard. Rather than charging interest on the borrowed money, Islamic microfinance works differently as it comprises an array of underlying instruments ranging from risk sharing, profit generation and capital collection between the financier and recipients. For instances, Islamic microfinance may adopt either the profit-loss sharing contracts (Musharakah and Mudarabah) or sale-based contracts (e.g. Murabahah, Inah and Ijarah) or supplemental contracts (Qard, Kafalah and Ujrah) or even the Islamic social finance instruments (Qard Hassan, zakat, waqf and sadaqah) for the modus operandi (Ahmad, 2002).

The idea of Islamic microfinance has been introduced since the establishment of Grameen Bank in 1983 and since then, its offerings have grown rapidly over the years including in Malaysia, following to the rising demand on the Islamic-based lending among the Muslims lower income and financial disadvantaged groups. The targeted segment of Islamic microfinance scheme is not only bounded to those with limited financial means, but in fact the market demography is also heavily driven by the strong demand among the local micro, small and medium enterprises (MSMEs) as they are often neglected from the mainstream banking system and access to the formal financial services. BNM (n.d.) and (OECD, 2022) highlighted that the landscape of Malaysian economy is mainly supported by MSMEs, which make up about 97.2% of all business establishments and contributing more than a third of the nation’s Gross Domestic Product (GDP), as well as providing job opportunities to more than 6 million people in the country. In light of this reason, BNM (n.d.) has took a strategic initiative by introducing Micro Financing Scheme in 2006, a microfinance scheme that allows selected participating financial institutions to provide easy, fast, reliable, and convenient access to business financing of up to RM50,000 without the needs of collateral. This scheme, which remains continues as of today, is constitutionalized under the National Sustainable Microfinance Framework and has been supporting the funding needs of micro enterprises and self-employed individuals with a lower rate of financing. Some of the participating institutions with their initiatives are Bank Islam (iTEKAD Microfinancing), Maybank Islamic (SME Micro Financing), CIMB Bank Islamic (Xpress Cash Financing-i), and Bank Rakyat (Skim Pembiayaan Mikro-i [Micro Enterprise Fund]), to name a few. Considering that the MSMEs industry is the critical component of Malaysia’s economic backbone, Islamic microfinance plays a huge role in ensuring this segment is financially included and not being left unattended to prevent any significant adverse effect towards the whole nation’s socioeconomic growth.

Islamic microfinance is aligned with the Goal 1 of the SDGs, which is to end poverty in all of its form everywhere. There is no doubt that Islamic microfinance is one of the major effective tools for poverty alleviation through entrepreneurship activities and socioeconomic development with small lending on businesses. According to a research study conducted by Nawai and Bashir (2009), the microcredit scheme under the Amanah Ikhtiar Malaysia (AIM) has proved strong evidence that Islamic microfinance is indeed an essential tool for poverty eradication. Both Omar et al. (2012) and Mamun et al. (2012) were also on the same page when their research findings revealed that Islamic microfinance does cause a significant positive outcome towards the household income and quality of life among the poor people in Kedah, Malaysia. This is mainly because of Islamic microfinance managed to offer the minimum Islamic banking services at a reasonable cost, with minimum documentation and simple loan procedures (Usman & Tasmin, 2016).

Therefore, this shows that the offerings of Islamic microfinance schemes by Islamic banks in Malaysia is considered as a great effort to adopting the global sustainability agenda in eradicating or at least, reducing the national poverty level. Aside of being innovative in Shariah-compliant banking products, Islamic microfinance is a powerful tool in addressing the sustainable financial inclusivity among the society.

2.2 Islamic Green Financing

Another effort made by Malaysian industry players in ascertaining that the realization of the global sustainability agenda is viable and feasible through Islamic banking products is the introduction of Islamic green financing. Islamic green financing refers to the giving of financial support that is specifically directed towards environmentally sustainable projects or initiatives, complying with Shariah principles. It involves providing capital or funds to businesses, projects or activities that eventually will result in environmental benefits e.g., reducing all types of pollution and greenhouse gas (GHG) emissions, improving energy efficiency such as wind energy or solar energy, as well as taking mitigation measures on climate change (Securities Commission Malaysia, 2019). The funding of green financing may also cover various types of organizational pursuits e.g., renewable energy projects, energy-saving buildings, sustainable agriculture, waste management, and electrical transportation. Similar with the conventional counterparts, Islamic green financing also aimed at promoting cleaner energy sources, conserving ecological balance and maintaining environmental sustainability, provided that the core businesses or projects involved are within the Shariah parameter and absence from any Shariah non-compliant elements.

The local banking industry’s shift towards more Islamic, green-based financing is hugely incentivized by the benchmark set by the governor of central bank when BNM expected to see that at least half of new bank financing to be aligned with climate supporting or transitioning activities by 2026, which is less than three (3) years from today (Salim, 2023). This time-sensitive benchmark has caused all banks, both Islamic and conventional, made very drastic, rapid and quick changes on their internal business operations to be more focused and concentrated on the sustainable, green and environmental-friendly projects, ensuring that they are on the right track with the regulator’s aspiration. This is evident when Bank Islam Malaysia Berhad has endorsed RM500 million in financing for over 150 vendors of equipment for oil and gas services under the Petronas’s Vendor Financing Program (VFP) that supports the economic transition with carbon output (Kaur, 2023). The substantial amount of financing largely stemmed from the bank’s decision to ramp up its green financing budget to RM800 million in 2020 (Hani, 2020). In the meantime, MBSB Bank Bhd has approved nearly RM800 million worth of cumulative green financing as of 30 August 2022 (The Star, 2022), while RHB Bank had approved RM290 million in financing over RM500 million from loan applications in the two months since the relaunch of its SME Green Financing Scheme (Kuen, 2023). Additionally, United Overseas Bank (Malaysia) Bhd (UOB Malaysia) took identical action when they approved RM6 billion in their sustainable financing product’s segment, which specifically meant to assist real estate players in transitioning to net zero emissions (Kaur, 2023). The sustainable financing approval by UOB Malaysia was mainly fueled by its own two financing frameworks namely, the Sustainable Finance Framework, which helps owners and developers of green buildings to create green real estate, while the second is the Smart City Sustainable Financing Framework, which provides support to businesses that help build smart and sustainable cities. These four cases demonstrated that financial institutions play a relatively huge role in assuring that a portion of funds deposited by the depositors are to be channeled and utilized towards eco-friendly activities or those that facilitate green transitions.

Besides, BNM has re-strategized its focused outreach on the target segment of Islamic green financing by calling for all financial institutions in Malaysia, including Islamic banks to bring together the SMEs industry onto this ESG/SDG journey with the aim of realizing the country’s ambition to achieve net zero GHG emissions by 2050. This brilliant move has created a smoother and less hassle pathway for the SMEs to be financially access in getting material support for their transition to more sustainable and greener practices (Kuen, 2022).

Islamic green financing is aligned with the following goals of the SDGs:

Goal of SDG Aspects Explanation
Goal 6 Clean water and sanitization Ensure availability and sustainable management of water and sanitation for all.
Goal 7 Affordable and clean energy Ensure access to affordable, reliable, sustainable and modern energy for all.
Goal 9 Industry, innovation and infrastructure Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation.
Goal 11 Sustainable communities and cities Make cities and human settlements inclusive, safe, resilient and sustainable.
Goal 12 Responsible consumption and production Ensure sustainable consumption and production patterns.
Goal 13 Climate action Take urgent action to combat climate change and its impacts.
Goal 14 Life below water Conserve and sustainably use the oceans, seas and marine resources for sustainable development.
Goal 15 Life on land Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss.

Table 1: Selected goals from the SDGs related to environmental impacts

(Source: UN’s official website)

From the table above, it clearly shows that Islamic green financing does satisfies quite number of SDGs in terms of environmental impacts. For instance, Islamic green financing which designed specifically for the customers to purchase of any nature-tolerant and renewable energy equipment e.g., solar panels, electric vehicles (EVs), hybrid cars, EVs chargers, battery power energy savers, smart thermostats, LED lighting etc., does help in easing the Goal 7, 11, 12 and 13 of the SDGs to be realized and practically manifested. These green initiatives can be seen in one of the local Islamic banks in Malaysia, Bank Muamalat (n.d.) which offers their retail customers such facility, under their Green Financing Solutions namely, Eco Green Financing with the purpose of providing affordable financing for sustainable living, ranging from credit card, personal financing, home financing and vehicle financing. RHB Islamic (n.d.) also do offer the same on their green-based financing facility namely, (i) RHB Vehicle Financing-i for retail banking, and (ii) SME Green Renewable Energy Financing-i for SME banking.

All in all, this shows that the offerings of Islamic green financing schemes by Islamic banks in Malaysia is considerable effort towards embracing the global sustainability agenda in aiming towards reducing the environmental impacts in the long run and foster more eco-friendly alternatives. Aside of being uniquely distinctive in Shariah-compliant banking products against the conventional, Islamic green financing may serve as a potent instrument in meeting and joining the focal point between the SDGs with the ultimate objective of Shariah (Maqasid al-Shariah), where both perspectives are intended to preserve the well-being of our environment (hifz al-biah).

3.0 Islamic Capital Market

Malaysia is one of the most global prominent Islamic Capital Market (ICM) hub in the realm of Islamic finance. According to a news report prepared by Nair (2023), Malaysia is remained to be recognized as the leading player in ICM and the world’s third-largest Islamic finance assets market following to its tremendous assets under management (AUM) and a steady stream of sukuk issuances over the past decades. This happens mainly because of the financial market of ICM in Malaysia is predominantly charted by the market capitalization of Shariah-compliant public listed companies (PLCs) and outstanding sukuk which has grown at a healthy rate during the COVID-19 years, from RM2.04 trillion in 2019 to RM2.31 trillion in 2021, representing a compound annual growth rate (CAGR) of 6.5% for the period. Today, as of August 2023, the Islamic capital market accounts for 64% of the Malaysian capital market, which carries the total value of AUM of RM2.4 trillion (SC, 2023) (Bursa Malaysia, 2022). Over the preceding years, ICM in Malaysia also have been unwaveringly devoted in augmenting its global reputation by pledging to carry out its market trading and product innovation to be aligned with the global sustainability agenda. The efforts somehow have been fruitful and reaped its rewards when recently Malaysia ICM’s position elevated to the first rank on the Sustainability Indicator[1] by Islamic Finance Development Indicator (IFDI) (Refinitiv, 2022). Hence, below are some of the major contributions made by ICM in Malaysia as an effort to align with the global sustainability agenda:

3.1 Green Sukuk

Green sukuk is one of the most notable efforts made by the ICM industry players in Malaysia in manifesting the worldwide agenda for sustainable development movements. Sukuk refers to trust certificates representing an undivided beneficial ownership in underlying assets or business venture, with its structure is grounded based on Shariah principles and concepts and endorsed by any relevant Shariah advisory boards. In the context of green sukuk, it refers to a Shariah-compliant fixed income instrument used to raise funds for green projects, in which the proceeds raised by the issuer may only be used for environmentally friendly projects, investments and business expenditure. According to the UK Islamic Finance Council by United Nations Development Projects (UNDP) (2021), green sukuk reflects the same green concepts and principles as green bonds and is issued in the same manner as non-green sukuk, but with a few additional features and characteristics. They go on to say that green sukuk differs in terms of the establishment of a green framework, green certification by an independent reviewer, post-issuance on funds used, and the environmental impact. Azhar et al. (2023) also had the same definition which green sukuk is an innovation from the sukuk itself, and the funds raised from the investors or companies are allocated to develop halal and environmentally friendly products.

There has been a wide debate whether the green sukuk is fundamentally alike to the conventional green bonds. It is true that both instruments are developed with the purpose of financing the eco-conscious projects from the issuance proceeds. However, the major difference between both instruments can be seen in the underlying financing structure, which is the same difference as between a sukuk and a bond. Green sukuk is based on a respective Shariah contract – Wakalah, Ijarah, Mudarabah etc., while green bonds remain as a loan or debt arises from investors who are willing to lend principal to the issuer for a certain period of time. Despite the green bonds being distinguished from the regular bonds which have no specific issuance purposes, the green bonds can also be viewed identical to green sukuk in terms of green project financing such as financing renewable energy power plant, green building, inland/marine waste management etc., in which these business investments are bringing the benefits towards preserving the well-being of the environment and society.

Environmental preservation has consistently received investor attention in recent years, as shown by the growing interest in socially responsible investment (SRI) instruments. It is a laudable endeavor for green sukuk to play the role as a Shariah-compliant financing instrument for renewable energy and other environmental sustainability projects.  The World Bank (2018) mentioned that the green sukuk is a significant new climate finance instrument possessing a great potential to channel the USD$2 trillion of Islamic financial market to finance the green and sustainable investments business projects. This is primarily because sukuk has become an important source of funding for long term development projects that serve the public interest, ranging from infrastructure, building, healthcare, transportation, telecommunication, education, shelter, mosques to technology. All of the key benefits coming from sukuk issuance have made the Securities Commission Malaysia (SC) to introduce the SRI Sukuk Framework in 2014 with the goal of enabling companies to raise funds while tackling the sustainability concerns and challenges. Aside of being benchmarked against the international standards and best practices, the SRI Sukuk Framework have set the turning point for the majority of sukuk issuers in Malaysia to reshuffle their investment strategy concentrating into more socially and environmentally responsible businesses. This is evidenced by RM10.58 billions of SRI sukuk was issued in Malaysia in 2022 alone, which has brought the cumulative amount of SRI sukuk issuance under the SRI Sukuk Framework to RM18.92 billion since its debut in 2014, and roughly RM16.58 billions of this total was recognized under both the SRI Sukuk Framework and the ASEAN Green Bonds Standards (CM2, n.d.).

Following to the introduction of the SRI Sukuk Framework, SC then approved Tadau Energy Sdn Bhd to issue the first green sukuk in Malaysia and the first in the world in 2017, raising MYR250 million (which equivalent to USD$59 million) to finance the construction of large-scale solar photovoltaic power plants in Kudat, Sabah as part of ongoing efforts to encourage more green-based financing (SC, 2017). The first green sukuk the has received the highest rating by the Center for International Climate and Environmental Research Oslo (CICERO), and subsequently marked another significant milestone by ICM Malaysia in terms of product innovation as it is synchronizing with the rising global trend of green bonds and social impact bonds. Notwithstanding with that, Quantum Solar Park Malaysia Sdn Bhd followed quickly and closely from behind when they issue RM1 billions of green sukuk where the issuance proceeds to be used for building three 50 megawatt (50MW) alternating current solar photovoltaic power plants concurrently, one each in Gurun (Kedah), Merchang (Terengganu) and Jasin (Melaka) (Damodaran, 2017). Not so long after that, PNB Permodalan Nasional Bhd, via its wholly owned unit PNB Merdeka Ventures Sdn Bhd also announced its sukuk program of up to RM2 billion in nominal value to fund its green building – Merdeka PNB118 Tower project in Kuala Lumpur (The Edge Markets, 2017). These increasing pattern of green sukuk or SRI sukuk issuance has eventually led Malaysia to be the prime issuer of sustainable sukuk among the ASEAN countries, accounting for USD$3.9 billion of issuance value or 56% of the total ASEAN SRI sukuk issuance, as of November 2021 (EY, 2022).

Therefore, it is concise to say that green sukuk is in line with the global movements on social and environmental aspirations. As noted from the Table 1 above, green sukuk explicitly helping to achieve the targeted SDG goals i.e., clean water and sanitization (SDG 6), affordable and clean energy (SDG 7), industry, innovation and infrastructure (SDG 9), sustainable cities and communities (SDG 11), responsible consumption and production (SDG12) and climate action (SDG 13). Green sukuk is the key factor in ensuring the available funding and existing private capital by the Islamic financial institutions or big corporations are to be mobilized towards developing more sustainable infrastructure projects. Without such Shariah-compliant financial instrument, Islamic finance industry may find quite challenging to provide a targeted financing mechanism that channels investments into projects aligned with the global sustainability agenda.

Speaking of facts, green sukuk is a huge step towards bridging the gap between conventional investors and muslim investors. The gap can be seen when conventional investors may subscribe to any conventional green bonds and green sukuk available in the market. In contrast, muslim investors are restricted to green sukuk only, and not allowed and impermissible to invest in any conventional bonds as it is an interest-based instruments. Despite the green bonds may realize some public benefits (maslahah mursalah), muslim investors are still restrained to do so. Thus, the emergence of green sukuk somehow has helped in integrating the investors – muslim and non-muslim – who have the same underlying values and principles in their investment choices. It is a brand-new, cutting-edge financial product that can be used anywhere and by everyone in the world. Muslim investors will now have an array of choices for investment in the capital market – non-green and green sukuk. Green sukuk allows and encourages more traditional investors to participate in the sukuk market, particularly those seeking more ethical and socially responsible investing options. It bridges the gap between sustainable investors and sukuk investors, who want to invest in a scheme that adheres to certain ethical values (Ali, 2018). A simple illustration on how green sukuk can bridge the gap among the green and non-green investors is as per below table:

Non-Green Green
Bond Conventional Investors Conventional Investors + Conventional Green Investors
Sukuk Conventional Investors +

Muslim Investors

 All Investors

Table 2: Comparison of Non-Green and Green Investors for Bond and Sukuk

Source: Author’s own ideas

 All in all, this shows that the offerings of green sukuk by ICM in Malaysia is considerable effort towards embracing the global sustainability agenda in aiming towards reducing the environmental impact in the long run and foster more eco-friendly alternatives. Al-Qardhawi (2001) listed environmental protection and preservation as another ultimate purpose of Shariah, placing it on par with the other main five goals of Maqasid Shariah (Al-Qardhawi, 2001). He argued that it is important to note that preserving the nature is the same as preserving the life (al-nafs), the intellectual (al-’aql), the posterity (al-nasl), the wealth (al-maal) and the religion (ad-deen) as well as covering the best interest of the public (maslahah ‘ammah). If we live in a polluted environment, deserted nature and depleted natural resources, the lives of the human beings in this world would definitely be at stake, threatened and detrimentally harmed. Hence, anything that contributes to the development of a better environment, preserving social welfare, and eliminating societal harm satisfies both SDGs and Shariah’s goals, which is likewise the case for green sukuk.

3.2 ESG Islamic Fund

Another effort made by Malaysian industry players in ascertaining that the realization of the global sustainability agenda is viable and feasible through Islamic capital market products is the introduction of ESG Islamic fund. Islamic fund here refers to the investment funds, which means a pooled capital from different investors with similar investment objectives and then this pooled money is managed and invested in a range of asset classes by professional investment managers. Usually, each investor owns a portion of or units in the invested fund making them entitled for any dividend, profit, returns or distribution income, if any. Some of the common types of investment funds are Unit Trust Funds (UTF), Wholesale Funds (WSF), Exchange Traded Funds (ETF), Private Retirement Schemes (PRS) and Real Estate Investment Trust (REIT). In the context of ESG Islamic fund, it means that the investors, regardless muslim or non-muslim, aimed to invest their money into a respective type of fund which the underlying investments are primarily comprised of Shariah-compliant and ESG-rated securities only. What this entails is, investors who place their money into the ESG Islamic fund is technically investing in Shariah-compliant securities/instruments, while at the same time the respective securities/instruments are rated or classified as ESG category as it carries the ESG criteria. With that said, ESG Islamic fund is both Shariah and ESG compliant.

There has been a contentious debate among the industry practitioners that both Shariah and ESG investing have overlapping principles as both operates on the basis of ethical and responsible investing. Principal Malaysia (2022) and Saturna Sdn Bhd (Subramaniam, 2020) in the views that Shariah and sustainable/ESG investing share many of the same principles and values, which includes the encouragement of stewardship, social responsibility, and responsible behavior. Mitchenall (2022) also on the same page as he shares his thought that investments adhering to the ESG principles and those in line with Islamic finance could merge into a single investment vehicle because they both prioritize moral values, transparency, and fairness. Hence, it is possible for an investment to be both Shariah compliant and ESG compliant. For instance, stocks of companies whose core business activities are primarily involved in tobacco, gambling, alcohol, pornography and weapons productions are deemed as Shariah non-compliant stocks and normally will be excluded from the listing index. At the same time, ESG investing also places the same criteria as such activities considered as violations against moral injunctions, bring negative social repercussions and may cause pollution to the environment. Such exclusionary screening criteria is the grounds on how the ESG method is widely used and acceptable in Shariah methodology. However, it should be emphasized that despite certain similarities between Shariah and ESG investing, it is possible for an investment to be qualified as ESG-compliant but not Shariah-compliant, and vice versa.

A fund’s investment strategy in ensuring its manifestation towards Shariah-ESG-compliant may differ from one to another. One fund may strictly adhere to certain established Shariah indices and approved ESG scores e.g. S&P 500 ESG Shariah Index and S&P Global 1200 ESG Shariah Index which both issued by S&P Dow Jones Indices, and FTSE4Good Bursa Malaysia Index issued by Bursa Malaysia, while another fund may openly be benchmarked against any Shariah ESG scoring providers during its portfolio structuring, provided such Shariah-ESG scoring are truly legitimate and widely approved in the fund management industry. Let us take a look at one example of Hong Leong Global Shariah ESG Fund, where the investable universe of the fund is limited to only in Shariah-compliant stocks of S&P Global 1200 ESG Shariah Index, which is an ESG index that is designed to measure the performance of securities meeting sustainability criteria by excluding companies with significant business activities relating to thermal coal, tobacco and controversial weapons and/or companies with disqualifying UN Global Compact (UNGC) scores. This shows that Hong Leong Global Shariah ESG Fund adopts a single index constituent for its Shariah-ESG-Compliant.

Similar with green sukuk, ESG Islamic fund is the triumph and outcome from the issuance of Guidelines on Sustainable and Responsible Investment Funds (SRI Guidelines) by the SC in December 2017 (Bix Malaysia, 2023). The SRI Guidelines demonstrates a firm commitment by the SC to building a conducive ecosystem to spur the growth of SRI funds in Malaysia, for both conventional and Shariah-compliant funds. The SRI Guidelines are also mainly intended to facilitate and enable any existing local funds under the SC’s purview to be reengineered or restructured as SRI funds. The introduction of such a policy on national level has broadened the assortment of SRI products and attracted more local investors to the SRI arena. As a result, Malaysia recorded 28 of registered and approved SRI Islamic funds, comprising both unit trust funds and wholesale funds, as of 2 October 2023 (SC, 2023). Some of the ESG Islamic funds are, Hong Leong Global Shariah ESG Fund, United-i Asia ESG Income Fund, RHB i-Global Sustainable Disruptors Fund, ASEAN Equity Fund, Pheim Global ESG Islamic Fund and PMB Shariah ESG Global Equity Fund, to name a few. Despite the aforementioned, Bursa Malaysia Berhad (2022), as part of the participating regulatory authority in capital market in Malaysia, also had jointly putting their effort in appreciating the global sustainability agenda by launching two (2) new ESG themed indices under the FTSE Bursa Malaysia Index Series namely, the FTSE Bursa Malaysia Top 100 ESG Low Carbon Select Index (FBM100LC) and the FTSE Bursa Malaysia Top 100 ESG Low Carbon Select Shariah Index (FBM100LS). These newly indices expand the current FTSE4Good Bursa Malaysia Index in the Bursa’s trading exchange by adding the benchmarking offerings in the ESG, low carbon and climate risk index space to cater the evolving investors’ demand for ESG and Shariah-compliant index solutions.

All in all, as the name applies, ESG Islamic fund, by its inherent nature, is remains explicitly in line with the SDGs goals. Depending on what type of fund and its investment objectives, ESG Islamic fund may be congruent with all of the 17 goals of the SDGs, including the Goal 2 (zero hunger), Goal 10 (reduced inequalities), Goal 16 (peace, justice and strong institutions) and Goal 17 (partnerships for the goals), as it demonstrates a noteworthy alignment with a spectrum of SDGs – social responsibility, environmental focus and ethical governance. Not only it matches with the global sustainable financial movements, ESG Islamic fund can also be considered as a wise and prudent Shariah-compliant financial instrument in bridging the funding gap that is required to achieve multiple SDGs at one time, especially those related with the Goal 9 – infrastructure development and industry innovation.

4.0 Concluding Remarks

In conclusion, it is safe to say that Islamic finance industry in Malaysia is still on the right track in terms of contributing to sustainable development goals, environmental preservation, and social welfare, as advocated by the United Nations. All of the key stakeholders in Malaysia also have been working hard to make sure the overall Islamic financial ecosystem is aligning with the global sustainable finance movements. Small progress is still progress, despite whether it is small or huge. In fact, we have yet to discuss and deep dive into the progress being made in the takaful and Islamic social finance sector in Malaysia, since this article has been focusing the subject matter only within the local Islamic banking and Islamic capital market industry.

Author in the opinion that these whole SDGs initiatives and movements have eventually delivered inspiring thinking about what the Islamic finance industry actually can do and how the overall sector may improve to achieve more than what is routinely done and executed. Perhaps in the future, there will be another enhanced version of SDGs which we may not be able to visualize and come across in our mind yet. For example, we can see today on how quickly technology can be developed to the extend there is a debate on how an artificial intelligence (AI) can deliberately generate hukm by itself, and perhaps, these technology development aspects can be newly integrated or reconsidered as part of the global sustainability aspirations.

Eventually, the pillar of Islamic finance is remained grounded on the basis of Maqasid Shariah. Regardless how recent, new, and contemporary the global sustainability agenda, Maqasid Shariah is and will always be the primary guideline of Islamic financial system. It will be much better if macro and micro maqasid perspective can be the rulebook for the Islamic financial institutions in resolving the social, governance and environmental issues, rather than solely concentrating to the adoption of SDGs only. Maqasid al-Shariah, is the overarching concept that includes all the other concepts such as SRI, ESG, SDG, VBI and other similar concepts. These admirable ideas are generally in line with the objectives of Shariah, and the industry must look into the different criteria and values that can be acquired from such concepts.

As for the case of Singapore, author believes that there is still more homework need to be done and more groundwork need to be realized. Unlike Malaysia, a Muslim country and dominantly resided by Muslims people, Singapore is the opposite and the other way round. Being a minority population in Singapore, it will be very taxing for the Muslims to gain equal attention and collective appeal from the higher authority to allow, even to introduce Islamic finance framework in the local market space considering that Singapore’s financial system has always been long-rooted and firmly established on interest-based system. The absence of Islamic financing and takaful products today are proof of the poor demand for Islamic-based solutions making Islamic finance is remain at nascent stage in the country.

The establishment of IFSG holds promising potential to significantly bolster the growth and advancement of Singapore’s Islamic financial sector. Let us together hope and pray that the presence of IFSG is poised to provide invaluable support and guidance, catalyzing further development within this domain, not only for the local Muslims community, but rather the sake of Islam and to seek the pleasure and bless from Allah Almighty.

Author’s Profile: Ezzat Ezzuddin, CPSA

Ezzat Ezzuddin is a young, committed Shariah professional carving his path in the Islamic finance industry. He kick-started his career journey as an Assistant Consultant in Amanie Advisors Sdn Bhd, a global-renowned Shariah advisory firm, where he was entrusted to supervise and oversee investment activities of Islamic funds by local and international asset management companies. Ezzat then joined Hong Leong Islamic Bank Berhad as an Islamic Trainee, where he worked closely with the Shariah Advisory and Shariah Secretariat team of the bank. Presently, he serves as a Shariah Executive in BIMB Securities Sdn Bhd, an Islamic stockbrocking services in Malaysia, of which his main responsibility is to advise and guide clients in undertaking of Shariah-compliant investments. Graduating with a Bachelor’s Degree in Shariah Muamalat Management from Academy of Islamic Studies, University of Malaya Kuala Lumpur, Malaysia, Ezzat Ezzuddin then completed his postgraduate studies in Masters of Islamic Finance Practice (MIFP) in INCEIF University. His intense passion in doing research and strong proficiency in writing skills have led him to participate in IFSG’s initiatives to enhance the literacy of Islamic finance in Singapore, including the published online article titled “Essential Guide to Islamic Finance for Singaporean Muslims” and “Ultimate insurance guide for Singaporean Muslims”. As part of his commitment to be a respected Shariah advisor, he is also a Certified Professional Shariah Auditor (CPSA) by Islamic Banking and Finance Institute Malaysia (IBFIM), and currently pursuing the professional certificate of Certified Shariah Advisor (CSA) under the Association of Shariah Advisors in Islamic Finance Malaysia (ASAS).

References

Singapore Islamic Finance Country Report 2023: Insights & Trends

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