MANAMA –

The Islamic Research and Training Institute (IRTI) of the Islamic Development Bank (IsDB) Group has published the second edition of the Global Report on Islamic Finance, which highlights steps for unleashing the potential of Islamic finance to help harness the much-needed funds for long-term investment in development programs.

The report notes that by unleashing the potential of Islamic finance, funding could be harnessed for programs aimed to eradicate extreme poverty, develop infrastructure, provide education, ensure access to clean water, and fight climate change. It therefore proposes incentivizing risk sharing and asset-backed finance as the potential mechanism to attract financing for long-term investments.

However, the report finds that in order to optimally tap the potential of Islamic finance in this regard, there is the need to develop the enabling legal, regulatory, and financial ecosystem.

The report made two major recommendations, namely to strengthen the financial system through developing the regulatory environment, and to enhance the institutional framework and diversity of instruments for long-term financing.

Subtitled “The Role of Islamic Finance in Financing Long-Term Investments”, the report was launched today by the Acting Director General of IRTI, Dr. Sami Al-Suwailem, during the 25th World Islamic Banking Conference in Bahrain. Following the launching, Dr. Rami Abdelkafi of IRTI gave a presentation on its key findings and recommendations.

The report presents global perspectives on the challenges of financing the 2030 global agenda for sustainable development, and highlights the prospects of Islamic finance towards addressing the funding gap.

Development partners have identified that the scale of funding required to achieve sustainable development goes beyond the scope of traditional financing sources, underscoring the need to tap from alternative sources.

While private sector funds are available for investment, the report finds that these resources are mostly deployed in short-term instruments, largely because of the potential risk of investing on the long term. The annual long-term funding gap for the Sustainable Development Goals (SDGs) is estimated to be $2.4 trillion, even though $42 trillion is available in short-term funds with low or negative returns.

Islamic finance, which is based on the principles of risk sharing, addresses the risk element and therefore offers an alternative channel to mobilize long-term financing.

The report noted that at present, the bulk of Islamic finance is provided by Islamic banks. The future of long-term Islamic funding depends very much on the development of non-bank financial intermediaries. These include Islamic capital markets, Takāful markets, other institutional investors such as pension funds, sovereign wealth funds, private equity funds, and Awqā

f (endowment funds). The long-term nature of many of these non-bank financial intermediaries means that they can act as shock absorbers in many financial markets.

Awqāf are currently underutilized. They have the potential to engage the private sector and become a systemic approach to overcome the shortages in long-term financing. Awqā

f are rich in one of the important factors of production – land – as they involve the donation of a building, plot of land, or other real assets.

However, they are short on other factors such as capital, labor, and organization. Given that the problem of long-term financing is not simply of time, but is also a problem of size and scale, Awqāf may well be used to alter projects’ cash flows by providing a factor of production of significant value, so as to reduce the otherwise large upfront cost and make the project a viable business case for the private sector. — SG