Islamic finance on cusp of kick-starting green sukuk

market

Last week, I questioned sustainable and responsible investing (SRI)

professionals at a conference in the U.S. about whether a green

sukuk would be forthcoming from any of the main issuers in this

market. It seems only natural that at some point there would be a

green sukuk to match the green bond issuance which has come from

nearly nowhere just a few years ago to over $35 billion in 2014.

Prior to 2013, issuance volume never topped $5 billion in a single

year. The natural place for this issuance would be from a

development bank of some variety since they led the market

development and accounted for 44% in 2014 according to the

Climate Bonds Initiative which has a Green Sukuk Working Group.

The reaction to the idea for a green sukuk in a room with relatively

few people directly working on Islamic finance was largely positive.

However, those who did have experience looking into the concept of

a green sukuk said that the major obstacle—which would be most

acute for a development bank—was the preference from Shariah

scholars for tangible assets to structure the sukuk, something that

development financial institutions find in short supply within their own

balance sheets.

Overlaps



Recognition exists for the potential to find overlaps between growing

market segments (green bonds and sukuk) and this was articulated

in February 2015 in a blog post by Michael Bennett, the Head of

Derivatives and Structured Finance at the World Bank. He wrote

that “A sukuk in which the proceeds are used to fund a specific

environmentally sustainable infrastructure project, such as the

construction of renewable energy generation facility, could appeal to

both sukuk investors and conventional environment-focused

investors.” In addition, the structure of sukuk “provide investors with

a high degree of certainty that their money will be used for a specific

purpose”.

But then, if the overlaps are so clear and recognised by institutions

such as the World Bank, why have no green sukuk been issued

either by the World Bank or by any other development bank including

the Islamic Development Bank?

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