To promote the use of sustainable finance, financial institutions should use Islamic finance
By FATIHAH MANAF
In Malaysia, Islamic finance has been practised for more than 30 years since Islamic banking, takaful, and Islamic capital markets were introduced in the 1980s.
Many changes have occurred since then. Malaysia has a highly established Islamic finance ecosystem with a wide range of actors, goods, and services, as well as rules that control how Islamic financing is conducted.
Capital Markets Malaysia organised a panel discussion titled “Malaysia’s Experience in Leveraging Islamic Finance to Develop a Sustainable Finance Ecosystem” at the Malaysia Pavilion at Blue Zone, Sharm El Sheikh, Egypt, in conjunction with The 2022 United Nations Climate Change Conference (COP 27).
Five presenters spoke during the discussion, which was moderated by Datuk Zainal Izlan Zainal Abidin, Deputy Chief Executive, Securities Commission Malaysia. They focused on how Islamic finance and sustainable finance may collaborate to address global sustainability concerns.
“We were looking at how we can generate another driver for the Islamic capital market in Malaysia as well as globally when we were looking at the next phase of development for the Islamic capital market in 2013 or 2014,” said Zainal.
“Sustainability was not a prominent theme back then, as it has become in recent years or today. However, there were already some conversations about sustainability, or what we in Malaysia refer to as sustainable and responsible investing, or SRI.
“It is a phrase we employ to describe this section. The SRI Sukuk framework, the first to combine Islamic finance and sustainable finance, was created as a result.”
Switch to sustainable finance facilitated by Islamic finance
The SRI Sukuk framework was important, according to Jefferi Hashim, CEO of CIMB Investment Bank. Malaysia’s move to sustainable finance is made simpler by the framework. He mentioned that a similar situation also occurred in other Muslim nations.
“Unfortunately, most Islamic assets are still primarily found in Muslim-majority nations. How Islamic finance will function in countries that are not Muslim is the challenge,” said Jefferi.
“We have much room to grow here at home and in Muslim nations. The expansion is quick. As we continue to accomplish that, we’ll eventually achieve critical mass, making us a viable alternative source of finance that other businesses can follow.”
The CEO of Maybank Investment Bank, Fad’l Mohamed, said financial institutions should use Islamic finance to promote the adoption of sustainable finance.
He emphasised how Islamic and sustainable finance were compatible and aligned. He explained how sustainability factors may enhance investment returns and outcomes and were compatible with Shariah-investing concepts.
Fad’l added: “Financial intermediaries should use their influence to harmonise aspirations and motivate significant clients in the expanding Islamic finance market to take things a step further and consider potential eligible projects that they can adopt from the current activities to see how that can be in line with sustainable goals.
The ground is always fertile to use Islamic financing, according to Raja Amir Raja Azwa Shah, CEO of HSBC Amanah, when asked how to encourage Islamic finance to fund specific infrastructure projects. People will, however, inevitably encounter the conflict between what is long-lasting and what isn’t from the standpoint of cash flow.
Initiatives of Bursa Malaysia
According to Dr Wei-nee Chen, Executive Vice President and Head of the Carbon Market at Bursa Malaysia, under a framework made public in September, businesses were required to disclose specific common sustainability issues along with the applicable indicators.
“We are urging private limited businesses (PLCs) to align their climate disclosures with the Task Force on Climate-related Financial Disclosures (TCFD) in the longer term, or for the fiscal year ending in 2025.”
According to Chen, who has expertise working in the carbon-intensive oil and gas industry, the indices provided by Bursa Malaysia have pushed one company to flourish despite adversity and earn a four-star rating.
Promoting sustainable finance
Faroze Nadar, Executive Director of UN Global Compact Network Malaysia & Brunei, spoke on the readiness level of corporations to pursue sustainable agendas and highlighted some findings from the Malaysia Businesses Sustainability Pulse Report (SPR) 2022.
“According to the polls, a third of the 261 Malaysian businesses said they had no plan for sustainable financing. Unexpectedly, corporations exhibited a lower propensity than SMEs,” said Faroze.
“However, 42 per cent expressed a willingness to learn more about sustainable financing, and 24 per cent are prepared to start an effort in this direction. Forty per cent of stated it was irrelevant when looking at the SME space.”
Faroze stated that the group wanted to participate in sustainable and Islamic finance and work with other corporations to inform them that adopting a sustainable financing strategy may benefit the entire organisation.
“We’re very well positioned to innovate further in this arena,” Fad’l continued.
“Given Malaysia’s track record of worldwide leadership in Islamic financial markets, we must promote Islamic finance’s ability to overcome the difficulties experienced by the traditional sustainable finance sector. This could help the Islamic sustainable finance sector grow even further.”