Islamic finance can play a crucial role in achieving the Sustainable Development Goals, writes Ulrika Modéer of the United Nations Development Program. (Photo courtesy of Rumah Zakat)

Mainstreaming Islamic Finance to Achieve Sustainable Development Goals


OCTOBER 17, 2018

With the 2030 Agenda for Sustainable Development, we have agreed on a set of ambitious targets. The Sustainable Development Goals, or SDGs, are a bold set of goals representing a new opportunity for humanity to have a common framework to guide our collective actions and achieve a better future for all.

But the SDG funding gap – estimated at $2.5 trillion per year for developing countries – cannot be closed by traditional development aid alone. Filling this gap will require the engagement of new financing partners and tools to leave no one behind.

This is where Islamic finance can play a crucial role and offer governments a strong, non-traditional source of financing to advance their SDG implementation. With its emphasis on inclusiveness, and core principles, such as channeling funding to the real economy by promoting risk sharing, avoiding excessive speculations, and limiting debt to the value of assets, Islamic finance is strongly aligned with the SDGs. Islamic social finance tools, such as zakat and waqf, also have significant potential to address marginalization and vulnerability, when directed towards locally driven programs promoting social and economic inclusion.

The United Nations Development Program supports governments and partners to implement the SDGs around the world and our engagement with Islamic finance also spans the globe – from Palestine where we promote economic empowerment and small and medium enterprise development through Islamic microfinance, to Pakistan, where our Global Islamic Finance and Impact Investing Platform trained Islamic finance investors on SDG financing tools, to Bahrain, where we are helping Al Baraka Bank align its portfolio across 16 countries with the SDGs. But it is here in Indonesia that the strongest links between Islamic finance and the SDGs have been forged.

The Islamic Development Bank has estimated that between $230 billion and $560 billion is given in zakat each year globally. Recognizing the potential, Indonesia has paved new ground in leveraging zakat for the SDGs. The UNDP is proud to be working with the National Alms Agency (Baznas) to apply zakat funds, for the first time ever, towards local SDG plans, beginning with renewable energy projects in underserved communities. The first project, launched in 2017, will provide electricity to 803 households from four villages in Jambi Province, benefiting almost 5,000 people. Baznas and the UNDP will further the collaboration by implementing a livelihood enhancement program in Jambi to increase the local population's income-generating capacity.

Zakat can also be a critical funding lifeline in the aftermath of crisis, when it is so important to crowd-in financing from public and private sources to reach the most vulnerable and affected communities. In response to the tragic earthquakes and tsunami in Central Sulawesi and Lombok, the UNDP will support Baznas to help ensure the zakat they have collected helps provide rapid emergency relief.

Waqf, or Islamic endowment, has an even bigger potential. The value of waqf land and property in Indonesia alone is estimated at around $27 billion. If directed towards SDG outcomes, waqf could make a significant change in support of Indonesia's commitment to reducing poverty and inequality.

We welcomed the launch of the Waqf Core Principles by the Indonesian government and the Islamic Development Bank in Bali last weekend. These principles will provide sound supervisory waqf management and enhance its disclosure and transparency. We are pleased to support the Indonesian Waqf Agency (BWI) in upholding those principles and to working together to develop the first blockchain enhanced waqf digital platform to increase waqf collection and enhance the effective use of waqf land.

I believe that the UNDP's development experience and expertise can offer a range of support to stakeholders in the waqf ecosystem. To governments regulating and overseeing waqf institutions, the UNDP offers technical support on policy, administration, and regulatory best practices can help align countries' waqf sectors with national SDG agendas and offers impact identification and measurement tools. We can also support donors by helping them identify and track the SDG impact of their envisioned philanthropy. And all these efforts are in place to ultimately serve the beneficiaries of waqf endowments – now and in the future.

In addition to Islamic social finance, the potential of commercial Islamic finance for the SDGs remains largely untapped. The SDGs represent a tremendous business opportunity. We witnessed the issuance of several green sukuk, including Indonesia's first sovereign green sukuk earlier this year, which was developed with the support of the UNDP. This green sukuk was more than three times oversubscribed by investors, and its proceeds went exclusively towards climate change action. Just recently, Islamic lender HSBC Amanah Malaysia issued the world's first SDG sukuk. With sukuk representing 16 percent of the total Islamic finance assets, the opportunities to further expand Islamic impact investing are huge.

To unleash this potential, the UNDP stands ready to continue to support Indonesia's efforts to apply Islamic finance where it is needed most, and to learn from the country's innovative practices in building a bridge between Islamic finance and sustainable development. The UNDP is present in all Organization of Islamic Cooperation countries – by utilizing our global network and local knowledge base, as well as our impartiality and neutrality, the UNDP can help governments and private partners around the world unlock the financing needed to achieve the SDGs and leave no one behind.

Ulrika Modéer is assistant administrator and director of the Bureau of External Relations and Advocacy at the United Nations Development Program.