Fitch exec tips Islamic finance for green bonds boost

Green bonds backed with the ethics of sukuk could spur Islamic finance on to a bright future, according to senior figure at rating agency

The growth of Islamic finance over the next few years could receive a significant boost from the emergence of green sukuk – a type of green bonds framework – according to a senior figure at Fitch.

In an opinion piece posted on the blogging platform Medium, Fitch global head of Islamic finance Bashar Al Natoor cites developments in Malaysia as a prime example of this trend.

As Al Natoor points out, Malaysia’s Securities Commission recently revised its sukuk guidelines by incorporating new requirements for the issuance of sukuk rooted in socially responsible investment (SRI).

Those new guidelines, he notes, “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 emissions”.

While only a recent entrant to the SRI field, Al Natoor writes, Malaysia’s level of SRI assets under management is second only to Japan’s.

Indeed, those assets currently comprise an estimated 30% share of the Asian SRI market – with that share primarily attributed to Malaysian Islamic funds.

Al Natoor also highlights a “strong push” for SRI in the United Arab Emirates (UAE), via the UAE Green Agenda’s Green Finance and Investment Support Scheme.

The Agenda’s scheme has undertaken an endeavour to promote financial growth through investment in green projects, products and services – and among the financial vehicles being considered in that effort, Al Natoor notes, is green sukuk.

Turning to why sukuk is so compatible with green finance, Al Natoor explains: “For one, to finance sustainable infrastructure through green sukuk can further broaden this market, as well as [helping to] bridge the gap between conventional and Islamic financial worlds.

“Both environmentally sustainable investors and sukuk investors aim to use their money in manners that comply with certain values and beliefs.”

He goes on: “Green sukuk funding and environmentally sustainable infrastructure projects, such as the construction of renewable or clean energy projects, could appeal to both sukuk investors and conventional environment-focused investors, as sukuk [policies] by design are structured [around] a specific pool of assets.”

Al Natoor adds: “A closer look reveals that there is a need for infrastructure globally that could require up to hundreds of billions of US dollars a year in additional financing; this is a real opportunity for green sukuk where we find key and potential Islamic finance markets are primarily young and growing populations.

“However, this opportunity has not yet been tapped into; 2016 was no different to previous years where we saw limited activity in the Islamic finance regions’ infrastructure bond financing – let alone Islamic finance and sukuk.”

Perhaps the most critical challenge for green sukuk to resolve, he notes, is overcoming its currently meagre acceptance by international investors – a problem that stems from a lack of market standardisation.

Scroll to top