RAM Ratings sees great potential in Green Sukuk, in tandem with the increased interest in both Shari’ah-compliant and ethical investment. The use of Islamic instruments to raise capital for sustainable development projects will set a new precedent; Green Sukuk is anticipated to become key to the financing of low-carbon and renewable-energy economies. As the phrase implies, Green Sukuk involves certifying the environmental credentials of the project to be funded as well as its compliance with Shari’ah principles.
Presenting a paper on Assessing Green Sukuk at the Green Financing Dialogue session at the Global Islamic Finance Forum 2014, RAM’s Zakariya Othman observes that there is an increasing demand among various stakeholders that Islamic finance should also reflect the ethical, social and environmental aspects of financing. While Green Bonds have been in existence for a number of years, Green Sukuk has picked up momentum in recent years, with a number of Green Sukuk launched since the first issuance of a Green Sukuk in France in 2012. In the Islamic finance market, the Islamic Development Bank is already a major player in clean-sector investments, with more than $1 billion spent in countries such as Morocco, Pakistan, Egypt, Tunisia and Syria. The first such Sukuk issuance in Malaysia for sustainable development was issued in early 2013 under a larger $1.5 billion multi-currency Sukuk programme.
“Islamic finance principles serve to insulate the financial system from excessive leveraging, speculation and uncertainty, which in turn contributes towards the promotion of financial stability and long-term sustainability,” notes Zakariya, who adds that Islamic finance is not only expected to grow in Muslim countries but also in markets that are concerned with socially responsible objectives and ethical financial solutions. From the Shari’ah perspective, the need to care for the environment and the proper use of natural resources are explained well in the Quran. The introduction of Green Sukuk balances the Maqasid al Shari’ah, where Islamic finance is not expected to be purely commercial but also serve a social purpose.
Foo Su Yin, RAM Ratings’ CEO, adds, “The introduction of the Sustainable and Responsible Investment (SRI) Sukuk Framework by the Securities Commission is timely, and can help by expanding the range of financial instruments to cater to a broader investor base and for larger projects.” In Malaysia, there are limited options for green financing; its Green Technology and Financing Scheme only provides a green project with a maximum capital of MYR 50 million. With the SRI guidelines in place, there is now added impetus to initiate the issuance of Green Sukuk, which will offer tremendous growth potential through Malaysia’s well-developed Islamic finance market.
As it stands, Sukuk has become an important source of funding for long-term development projects, ranging from infrastructure building, healthcare, transportation and telecommunication to education. Nonetheless, Foo cautions that a sustainable Green Sukuk market is not without its challenges; one of these is to assure investors that the utilisation of Sukuk proceeds is for projects with economic value while simultaneously meeting accepted and credible green standards. As a step forward, these new initiatives will offer more transparency on Green Sukuk financing and provide investors the opportunity to invest in attractive instruments with sustainable environmental values.
Originally published on www.cpifinancial.net