Syndicate content

Add new comment

How Islamic finance is helping fuel Malaysia’s green growth

Victoria Kwakwa's picture
Photo: bigstock/ f9photos

Income growth is not the sole aim of economic development. An equally important, albeit harder to quantify objective is a sense of progress for the entire community, and a confidence that prosperity is sustainable and shared equitably across society for the long term.  

Inclusive and sustainable development looks beyond GDP growth and can strengthen nations for generations to come.   However rising income inequality has impeded social mobility, increased social tensions, and undermined effective governance in many countries in recent decades.  In the World Bank Group, we are firmly committed to our twin goals of helping reduce the number of people living in extreme poverty, and to promoting shared prosperity, particularly among the bottom 40 percent of the population. 

Investments in infrastructure are essential for meeting both goals. Whether it be by connecting farmers to markets or by providing families with electricity and clean water, infrastructure investments can transform lives for the better. However, analysts estimate that developing countries require between US$1.7 trillion annually in infrastructure investment just to keep up with the rate of growth, while actual investment pledged each year is closer to US$880 billion – far short of the region’s needs. 

To close this huge infrastructure gap, we need more options for investment financing. It would be better yet if these options adhere to our principles of sustainable development, particularly given the specter of climate change. A tall order, but not impossible. 

Recently, with support from the World Bank, Malaysia launched a new initiative that addresses both these principles: financing sustainable, climate-resilient growth. 

When Islamic finance shot to prominence in 2008, performing well even during the global downturn, the investment community started taking notice. Though representing a tiny portion of the global financial market, growth of Islamic finance has been rapid. By 2015, the industry had surpassed US$1.88 trillion in size and its banking assets had doubled in merely four years. 

Islamic finance may just provide that extra helping hand to deliver more infrastructure to emerging markets and developing economies. 

Central to the premise is the sukuk, a bond that generates returns to investors without infringing Islamic ‘shariah’ principles, which prohibits the payment of interest. Given that the Islamic capital market is still relatively small, sovereign and quasi-sovereign sukuk can be used to finance infrastructure projects that can facilitate further inflows of private capital. Project-specific sukuk, instead of general-purpose sukuk, may be particularly helpful in bolstering infrastructure financing. 

In parallel, another development pioneered by the World Bank Group – ‘green bonds’ – is also making headway. Since 2008, the World Bank has issued US$10 billion in bonds through our green bond program for climate-sensitive investments, and has brought greater transparency and clarity to issuers and investors by participating in the crafting of the Green Bond Principles (voluntary guidelines framing the issuance of green bonds) and by setting best market practice for reporting on the use of proceeds. New issuances in the global market are expected to exceed $120 billion in 2017.   

Enter Malaysia with its innovative ‘green sukuk’ initiative, which will channel sukuk for climate-friendly investments, thus helping close the gap for both infrastructure and green finance.  

Malaysia is already a global leader in leveraging Islamic finance for infrastructure development, issuing more than 60 percent of the world’s infrastructure sukuk. Now the country’s regulators are taking one step further and using investments to achieving a public good. Launched this July with the issuance by a Malaysian company of MYR 250 million (about US$59 million) in bonds to finance a 50-megawatt solar photovoltaic plant, the ‘green sukuk’ is a bold new tool for development. 

The framework underlying this instrument is the result of collaboration between the Securities Commission of Malaysia, the Malaysian Central Bank and the World Bank Group. This was envisioned when Malaysia and the World Bank Group celebrated 58 years of partnership with the formal opening of our Global Knowledge and Research Hub in Malaysia in 2016.  

The ‘green sukuk’ is one of various corporate fixed-income securities of this type coming out of Malaysia. We hope that many similar issuances will follow, in Malaysia and in other countries, and that innovative green financing becomes the norm, not the exception. This development would take us one step closer towards our goal of sustainable and inclusive growth. 

A version of this blog appears in the South China Morning Post.