Islamic Finance & Impact Investing

On 25 September 2015, world leaders adopted the 2030 Agenda for Sustainable Development. The new agenda defines global sustainable development priorities and aspirations for 2030 and seeks to mobilize global efforts around 17 Sustainable Development Goals (SDGs) for people, planet, peace and prosperity. While the new agenda has been adopted by governments, its success relies heavily on the action, dedication and collaboration of all actors within the framework of a revitalized Global Partnership for Sustainable Development that is supported by concrete policies and actions as outlined in the Addis Ababa Action Agenda (AAAA).

The scale and ambition of the SDGs require massive financial and technical resources. The pre-pandemic annual financing gap of US$ 2.5 trillion in developing countries to achieve the SDGs increased to US$ 4.2 trillion in 2020.

Financing the Global Goals, however, is not an insurmountable task. Globally we have more than enough resources – but only if all available resources are effectively deployed to support the implementation of the 2030 Agenda. This includes an exploration of innovative sources of finance and the leveraging of private investments alongside traditional forms of development finance.

Islamic finance can be a strong and non-traditional source of financing for the SDGs. With global assets reached US$3.4 trillion in 2020, and projected growth of 8% per annum until 2025, Islamic finance has a footprint in Asia and Middle East; is ripe for growth in South America and Europe; and has future markets in North America, Central Asia and Australia. Given its emphasis on risk-sharing, linkages to real economic activities, partnership-based and equity-focused approaches, widened geographic reach and the rapid expansion of its global assets in Muslim and non-Muslim countries, Islamic finance can serve as a potent and yet untapped source to finance the SDGs. Its major principles– financial stability, financial inclusion and shared prosperity– can be instrumental in the successful implementation of policies on ending poverty (SDG-1), achieving food security (SDG-2), ensuring healthy lives (SDG-3), achieving gender equality (SDG-5), and promoting peaceful and inclusive society (SDG-16).

Another important source of funding for the SDGs is impact investing. The term was originally coined by the Rockefeller Foundation in 2007 to define investments that generate a measurable and beneficial social or environmental impact alongside a financial return on investment.

The impact investing sector has developed into a valuable source of development finance given that US$2.3 trillion were invested for impact in 2020 according to the IFC. Impact investing is widely recognized by G8, OECD, and the EU as an effective means of development finance. It is also acknowledged in the Addis Ababa Action Agenda which guides countries in the financing and implementation of the 2030 Agenda for Sustainable Development.

Blending Islamic Finance and Impact Investing 

With rigorous moral and social criteria and emphasis on business-society relations, the principles of Islamic finance and impact investing are compatible with one another.

The two industries resemble each other in a number of ways:

  • First, Islamic financing and Impact Investing are value-based investment structures. In both of these investment structures, investors associate themselves with a moral purpose: The motto “doing good and avoiding harm to others” which constitutes the main underlying ethical principle of both Islamic finance and impact investing.
  • Additionally, both Islamic finance and impact investing share a broader understanding of the relationship between business and society, one which is centered on advancing human wellbeing. Although both sectors accept that investors must earn acceptable returns from investments, financial returns only constitute one dimension of investment. Islamic and impact investors also seek to create positive social and/or environmental value alongside financial returns. This eliminates the clash of interest between the investor and society.
  • Finally, both sectors help build inclusive financial systems which actively integrate the global population that is either directly or indirectly kept out of the formal financial sectors.

These similarities suggest that bridging the two sectors might create a promising avenue to effectively respond to the growing challenges related to development financing, foster inclusive economic growth and support the implementation of the Agenda 2030.