Sustainability and Islamic finance

The unique characteristic of Medina Economics is the fact that almost all the building blocks of the Islamic economic system were completed in the lifetime of the Prophet Muhammad (PBUH) and have his stamp of approval in compliance with Shariah guidance.

The subsequent Islamic victories during the period of the Caliphs saw this economic system go beyond Arabia and remain in force for centuries. It contributed to the rise of empires as they became the centers of civilization and progress.

An evident fact was the essential welfare concept of these realms as Islam insists on the perspective of well-being in all facets of life and Islamic Financial Instruments (IFIs) are no exception. They allow the well-being of society by assigning the responsibility of the underprivileged to the privileged members of the social order. Islam is clear on the impact of actions and, therefore, insists on the quality of interaction and responsibility of each individual towards fellow citizens and society at large.

The world is now talking about ESG – Environment, Society and Governance – on grounds of sustainability. Along with sustainability, the call for ethics and well-being is also being heard as a default principle to make the ESG action successful. As I write this piece, the fact that the call for well-being and a general state of happiness is now being considered essential to keeping the world order intact, is highly satisfying and encouraging, because the Quran and the Sunnah (life of the Holy Prophet PBUH) have highlighted both in much detail 1,500 years ago.

Islamic Economics presented the philosophy of gain in worldly financials and gain in the hereafter in the same breadth, spotlighting the fact that our actions have a long-term and lasting reaction; nothing terminal about it. Finance is part of life and not life itself. Money is a means to an end and not the end. Well-being, happiness, and care are essential for a community to thrive. Luxuries tend to distract; so, minimalism will strengthen focus. Gains are not always monetary; the welfare aspect is crucial too.

Using this as a springboard, I delved deeper into it and would like to begin by referencing a published interview of Greget Kalla Buana, Islamic Finance Specialist, UNDP Indonesia, who unpacks the main characteristics of IFIs and highlights their massive potential to accelerate the attainment of the Sustainable Development Goals (SDGs).

Greget gave the example of a forest community in Indonesia’s Jambi province, which can now access green electricity, thanks to the Islamic form of donation called Zakat. The Islamic principles of the Shariah economy unleashed much-needed funds, to the tune of billions of dollars, to support sustainable development and address the climate crisis without taxing the local population.

The Indonesian government took up SDG Finance as a specific initiative and, for that, a special Financing Lab was set up to test funding models for development initiatives and how IFIs can support them. They utilized the Zakat fund (BAZNAS), combined with the CSR funds of Bank Jambi, to support renewable energy initiatives. The government of Indonesia issued the first Green Sukuk to finance climate change mitigation and adaptation.

Indonesian Waqf Board (BWI), supported by IPB University, Waqf Centre for Indonesian Development and Studies (WACIDS), and the Green Waqf Movement Team, have developed a Green Waqf Framework, which aims to utilize Waqf to support climate action in areas with tangible social-environmental impacts.

Civil Society Organizations (CSOs) also tapped into Islamic fund resources for poverty reduction. An organization like Tadmon aggregated a crowdfunding platform with five hundred CSO and fifty-seven OIC member countries, enabling Indonesia to become one of the pilot countries, and the first in the Asia Pacific, to implement it. Indonesia is also home to the Centre of Excellence (CoE) in Islamic Finance for Sustainable Development Goals.

Established in 2021, the CoE in Islamic Finance for SDGs is a joint initiative with the intervention of Universitas Islam Internasional Indonesia (UIII), UNDP, and the Islamic Development Bank (IsDB). The Center focuses on project development assistance, SDGs alignment, and knowledge building. Zakat, Waqf, Sukuk, and Takaful are all geared for a wider and continuously growing economic ambit and are in sync with the vision of Indonesia to become a global Islamic finance hub.

My objective for quoting and elaborating on this Indonesian case study is two-dimensional. One angle is, of course, the rise of Islamic Banking and its ever-widening scope, and my wish to keep amplifying it in the interest of the Pakistani consumer. The second is to look into the similarities of this project with that of the city of Medina. Adding sustainability to our financial initiatives is the call of the hour and, from what I have learned, it is smoothly integrated with the IFIs, creating an ecosystem to ensure perfect collaboration that will be easy and with a lasting impact.

Historically, it was only after the Hijrat (Migration) to Medina in 622 AD that the economic system of Islam started to become visible. The small steps towards welfare, business development, war strategy, trade practices, farming, etc., started coalescing into a fine net work of welfare and profitability.

The concept of Amaanat that had already been in practice was now complimented with investments. This is where collaboration for the greater good became visible through the historical bonding of the Ansaar (the people of Medina) and the Muhajireen (the immigrants from Makkah) for social and commercial initiatives. Zakat was introduced for rotation of finance. Loans and profit-loss partnerships became the sustainable model. Projects for food, and water security were prioritized and regulations for communal living standards were introduced.

The historical realm of the Ansaar and Muhajireen project is metaphorically a great road map for the economic development of a community. Responsibility and compassion are intricately interwoven in this Islamic socio-economic setup -responsibility for each other as well as for resources. Therefore, the Islamic conception of development is endogenously “sustainable” due to its emphasis on the responsible use of resources, moderate consumption, and simple living. When the Muhajireen arrived in Medina, the Ansaar received them as brothers.

The Ansaar offered division to the immigrants of their money, land, and house, but the immigrants preferred to work for it and become partners in profit hence setting up profit and loss partnerships. The revitalization of the land led to a major farming development in the city, followed by a movement to revive the neglected agricultural land, with land acquisitions according to the Shariah rule laid down by the Prophet (PBUH), “Whoever revives a barren land, it is his,” narrated by Al-Bukhari.

Lands and valleys were distributed for cultivation. Many of the valleys that were cultivated in the Prophet’s (PBUH) time became famous. A trader was given the highest respect and facilities. The Muhajireen and the Ansaar were not the only ones who established the agricultural renaissance among the agricultural workers in Medina.

Other young men from outside Medina converted to Islam and joined them. The city’s economic organization allowed the sponsorship of their immigrant brothers. As a rule, Mosques had a multiplicity of functions so that a new Islamic fabric – brotherhood – is achieved seamlessly for the new society.

Rules for water and planting were rolled out, including replantation - whoever cuts a tree, let him plant another in its place. Endowments, Sadaqah, Zakat, investments, sponsorship of able workers, ownership of farm by the farmer essentially, free giving of lands that could be revived for agriculture, interest-free loans backed by land or produce, profit-and-loss sharing, simplicity of life and orientation of all action with values ensured the rise of Medina as a city that became the resource and index for some great empires.

Fiqa-al-Muamlat (Islamic Commercial Law) covers a horizon as wide as the treatment of natural resources, land, production, consumption, trade, commerce, income, wealth, property taxation, and other areas.

The ethics of the content is in sync with the Islamic purpose of life. Sustainability, well-being, money for investments, and expansion of opportunities may be very modern debates now, but IFIs have been carrying them for centuries. Islamic finance’s potential for funding for development is remarkable. Inclusion, women’s empowerment, fairness, accountability, and sustainability are embedded in its principles and it organically offers a natural connection with the SDGs.

We can see in the case of Indonesia how Zakat, Sukuk, and Waqf have become agents of change. Pakistani banks can look at developing a green framework combining these three for sustainability. Identification of areas that need investment and channeling the Islamic provision of funds through the selected options. At present, the Islamic banking industry in Pakistan consists of 21 Islamic Banking Institutions (IBIS) including big establishments like Meezan Bank, Dubai Islamic, Al-Baraka, BankIslami Pakistan, and then with conventional banks like Faysal Bank converting to Islamic Instruments and creating a blueprint for others to follow, I believe we have a golden opportunity to make this work.

Similarly, the 3 Ms – Musharka, Murahaba, and Mudarabah – can support partnerships with underprivileged or in-need agents/resources, and communities to help and develop.

If the question arises as to why Islamic, conventional instruments can support too; let me clarify that the entire debate is about the concept of well-being and responsibility that is inherent in Islamic economics due to the absence of Riba and by default the banks and the depositors become part of the responsible segment of society, where investments need to validate their viability and progress.

What is stopping us now from replicating the same system and working towards the rise of consciousness again? The consciousness for sustainability, well-being, and holistic development. Islamic instruments can comfortably pave the way allowing us to meet the 2030 target of sustainable goals.

Copyright Business Recorder, 2022