Green Initiative In Islamic Finance

Islamic banking is a total value based social system that seeks to enhance the general welfare of society as whole and is driven by a maslaha which is based on the premise of fairness , transparency and shared risk and rewards. In this respect issues such as sustainable environmental development , sustainable  energy and global warning should became part of the Islamic finance agenda in the fulfillment of the spirit of Islamic finance tenets. As such an important area for Islamic finance to venture into is green financing With the global economy transitioning towards a low carbon , more sustainable model , the development of an Islamic financing facility for the green technology sector is another blue ocean waiting to be discovered.

However the most part , Islamic finance has remained largely passive and absent from the international debate on environment issues in spite of its value proposition. Islamic finance should move from being concerned with just the way in which activities are being financed to start focusing on what kind of activities are funded and on their impact on the environment.

Islamic environment funds and Shariah compliant financing mechanism need to seriously consider supporting projects that are involved in carbon trading , bio fuel ventures, solar and hydrogen power plant , waste incineration and recycling projects. Such investments are need the hours and represent a serious alternative the unchecked free market approach . Growth in Islamic banking should be equal the shift increase in awareness of climate change and its impending consequences and develop onto a more environment friendly path.

Recognizing the massive potential in green technology to expand growth in Islamic finance and support\ sustainable development ijn economic , social and environment dimensions , many countries have undertaken initiative to into this new niche are for growth. In UK recently the government announce its incentive to develop an Islamic Green Deal that would make energy financing available to Muslim and would thus allow them to take adb\vantages of country energy efficiency programme . Currently the government offer households business energy efficiency loan under the green deal scheme at interest rate around 7 %.

In Malaysia the government ;launch the Green Technology Financing Scheme or GTTFS in 2010 to promote green technology through the provision of soft loan financing to companies that supply and utilize green technology. the scheme offers maximum financing of RM 50 million for suppliers and RM 10 million for consumer companies. As a sign of commitment , the government susbsidised 2% of the profit rate or interest rate charged and guarantees 60 % of the financing amount through the Credit Guarantee Corporation Malaysia . This scheme present an opportunity for Islamic Banks to expand into a new growth areas . In August 2013, Bank Muamalat Malaysia launched the Smart Green Mortgage for Solar Photovoltaic , offering financing services to install home solar system and thus allowing home owners to benefit from the country’s Feed in tarif Plan. AmIslamic Bank Bhd, Malayan Banking Bhd, Kuwait Finance House and HSBC Amanah Malaysia as among the existing participating financial institutions (PFIs) under GTFS who have been supportive towards green financing.

The Malaysian government is extending the Green Technology Financing Scheme (GTFS) till 2022, with an allocation of MYR 5 billion(~USD 1.1 billion) for the second round of the scheme, GTFS 2.0, starting in 2018. As the World Bank and other institutions are pioneering green bond initiatives, Malaysia, one of the most active centers of Islamic finance, is taking the lead to provide a marketplace to fund similar green projects through Sukuk.

Despite the fact that Islamic finance shares the same ethical values with green initiatives and promotes greater socially responsible investment s, the green and renewable energy sector remain an untapped potential that has yet to be explored by Islamic Banks.


According to Malaysian Corporation Technology the Islamic finance sector in the country contributed only 20% or RM 300 million of the RM1.5 billion fund disbursed under GTFS . In 2013, 109 approved projects have received financing worth RM1.5 billion by 22 banks, of which 17 projects are receiving financing worth RM300 million from six Islamic banks . For the first 9 months of 2013, 33 companies received approved financing facilities totaling RM416 million. The approval rate for the financing has also improved from 54% in December 2012 to 59% in September 2013,

In 2017 ,  Edra Power’s Tadau Energy issues Malaysia’s first ‘green’ Sukuk. The launch of Malaysia’s first green Sukuk marks another significant milestone in product innovation that strengthens Malaysia’s position as a leading Islamic finance marketplace as well as its value proposition as a centre for sustainable finance.


Although the effort are underway to promote green financing and the utilization of the schemes to the financial players. green SME entrepreneur find themselves struggling to obtain  financing from Islamic Bank even though their business proposal have been certified green and are eligible for funding under GTFS.

In recent study conducted by IslamicBanker on Exploring Issue and Challenges of Green financing in Malaysia , it was found that the top three challenges perceived by banks are project viability , lack of track record and lack of understanding or knowledge of technologies when evaluating financing applications.

Finding also showed that while the GTFS allows banks to engage in sustainable financing , most banks have yet undertaken any specific initiatives in promoting green financing . The lack of participation of Islamic banks in green financing can contributed to a number of reasons such as:

  1. High Capital Investment and long payback period
    Green technology projects usually require huge capital investments with lengthy payback periods. This is one of the reasons why Islamic banks were reluctant to finance these projects even though their exposure to risk is only 40% of the total exposure.
  2. Validity of green project certificate
    The green project Certificate issued by Green Technology Corporation is only valid for a period of 6 months. However due to the rigid evaluation process , it normal takes ,ore than 6 months to evaluate the commercial viability of green projects.
  3. Knowledge gap
    limited benchmark and proven track record of successful green technology projects deter Islamic banks from financing green initiatives . Most Islamic banks admit that they lack of internal green technology experts to help evaluate green projects.
  4. Green Technology projects are considered high risk
    Green Technology projects often involve the use of innovate technology which Islamic banks consider high risk due to unpredictable cost saving and productivity gains. Hence they are less likely to approve green technology financing applications.
  5. Lack of technical knowledge
    General , the technical knowledge required to adequate evaluate green technology project contribution and profitability is often lacking amongst Islamic Bankers. While they are aware of the GTFRS to  a certain, not many are equipped with sufficient technology knowledge related to proposed projects to access this type of applications . Another prominent problem, faced is that technologies are generally associated with unfamiliar , high and unclear risks . Such risk associated with renewable technology investments fall outside the scope of plain vanilla finance that Islamic bankers are more familiar with.

Since most green projects are large undertaking that required long term investment with long gestation periods Sukuk can play pivotal role to supporting the growth of the green technology sector. Moving forwards Islamic finance needs to promote the issuance of Sukuk for financing of climate change investment and projects , particulary renewable energy and climate adaption projects. Spearheading these initiatives the Middle East establishment  of Green Sukuk Working Group by Climate Bond and Association , the Clean Energy Business Council 9 CEBC) of the Middle East and North Africa  and Gulf Bond and Sukuk Association. This working group identifies green energy projects that fall under Shariah suitable categories for potential investors.

Another major player in green and renewable energy sectors is the Islamic Development Bank ( IDB) investing total of US 1Billion in a various renewable project and energy efficiency projects . The top five countries that have benefits from IDB are Morrocco , Pakistan, Egypt , Tunisa and Syria. Turkey received financing of UzSD 100 million from IDB to finance the development of renewable energy projects. In May  2017 , IDB is working with entities in Jamaica  to finance renewable energy projects.

In Malaysia Malaysia Amanah Rays investment bank teamed up with the Asian Finance Bank (AFB) to launch an Islamic green fund . This was set up to invest in environmentally friendly projects such as bio ventures that are Shariah Compliant. Plans to launch a second Islamic green fund that will focus on developing environmentally friendly project in Asia and Middle East are already on table.

In 2016 , the World Bank Group Global Knowledge and Research Hub joined a Technical Working Group with Bank Negara Malaysia and the Securities Commission supporting the Malaysia Green Finance Program, leveraging from our experience and expertise in green financing. The program aims to encourage investments in green or sustainable projects through the development of green Islamic finance markets initially in Malaysia, and subsequently, in the ASEAN region.

Today, the program has supported the launch of the first green Sukuk in the world on June 27, 2017. The sukuk is a green Islamic bond where the proceeds are used to fund a specific environmentally sustainable infrastructure project, such as the construction of renewable energy generation facility.

Islamic banks must not misss out on this opportunity to carve a niche market in this high growth green sector . However innovative Islamic financing solutions that address the needs of green ventures should be explored to allow greater participation of Islamic Banks in the emerging green technology sector.




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