gif Market Review
A New Shariah Finance Method: Green Tech Bonds
Source:
GlobalIslamicFinanceMagazine.com
Islamic finance is growing at an unprecedented rate, and conse- quently there is a new type of financial model being developed in order to encourage millions of pounds worth of long-term in- vestment in green technology, in particular from the Islamic com- munity.
Hundreds of billions of pounds’ worth of investment in green technology is required around the world in order to implement a low-carbon future. However, many projects are currently unattractive propositions for investors due to their long- term nature. Furthermore, un- der Shariah law the lending of money for gain is forbidden, and consequently even with a sur- plus of cash in the Muslim world many green energy projects are still unable to attract funding in Islamic nations, such as Saudi Arabia.
All three challenges are being tackled by the development of a type of bond called Green Suduk Climate Bonds. The Climate Bonds Initiative, The Gulf Bond and Sukuk Association and the Clean Energy Business Council of the Middle East and North Africa have recently launched a Green Sukuk Working Group, which will use market expertise to promote the issuance of Sukuk for the fi- nancing of climate change investments and projects, such as renewable energy projects. The Working Group is also inviting participa- tion from other organisations interested in the potential of green Sukuk financing.
Sukuk are financial certificates, or the Islam- ic equivalent of bonds, which are structured to comply with Shariah Islamic law, which prohibits the charging or paying of interest. To give an idea of the potential, Standard & Poor estimates that 20 percent of banking
72 Global Islamic Finance April 2012
he said. “This group will help investors more easily identify Shariah-compliant, clean energy investment opportunities.”
Nick Silver of the Climate Bonds Initiative has identified an urgent need for it in order to “mobilise fi- nance for both renewable energy and climate adaptation projects in both the Middle East and in other developing Muslim coun- tries such as Bangladesh and Pakistan”.
In- terest
in both Shariah-com- pliant and ethical invest-
ing is on the rise. Green Su- kuk can support this trend by expanding the range of available financial in- struments
That there is capital seeking investment is confirmed by Far- mida Bi, a partner at Norton Rose, an international law firm in London: “Banks need more high-grade paper (Sukuk) to place their money in, but there is hardly any” he says.
“There is a lot of pent up demand (for Sukuk),” agrees Mohammed Dawood, head of capital markets at HSBC Amanah, the bank’s Is- lamic arm.
customers in the Persian Gulf and Asia would now choose an Islamic financial product over a conventional one with a similar risk- return profile. Due to the lending of money in Islamic culture having a moral dimension, rather than just a financial one, the ethical aspects of green financing is predicted to be treated as highly significant.
Aaron Bielenberg of the Clean Energy Busi- ness Council, a non-profit, non-governmen- tal association established in Masdar City, Abu Dhabi, said that projects in the region are desperate for finance. “There is a sig- nificant and growing number of projects […] that are ideally suited to Sukuk investors,”
Michael Grifferty of the Gulf Bond and Sukuk Association says this means the time is right for the launch: “Interest in both Shariah-compliant and ethical
investing is on the rise. Green Sukuk can support this trend by expanding the range of available financial instruments. They also support national development strategies by offering longer term finance for essential in- frastructure.”
Issuance of Islamic bonds (Sukuk) had a record year in 2011. This year looks set to be even better. In January, the biggest- ever Sukuk from Saudi Arabia, and the first government-backed Sukuk was struck: a SAR15 billion (US$4 billion) 10 year deal for the General Authority for Civil Aviation, led by HSBC Saudi Arabia.
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