How faith can support the Sustainable Development Goals

The conclusion of the Millennium Development Goals (MDGs) agenda at the end of this year will herald in the post-2015 framework, providing the basis for development beyond 2015. An all-encompassing consultative process to delineate the essentials for development that is sustainable is expected to culminate in September when the UN General assembly will adopt the Sustainable Development Goals (SDGs). The SDGs set out an exhaustive blueprint for international development that is focused around the three major pillars of sustainable development: economic, social and environmental.

Much has changed over the last fifteen years with the financial crisis in the Eurozone and MENA impacting the availability of Official Development Assistance. The post-2015 process has identified and is seeking to tap, amongst others, new sources of funding from non-traditional donors, including Faith Based Organisations (FBOs).

FBOs have been making positive contributions towards poverty alleviation and have been remarkably effective in societies where religion is predominant. Citizens often better relate to the moral and altruistic nexus fostered by these organisations. The grandeur of government institutions and the language of secular donor agencies and Civil Society Organisations (CSOs) are often out of sync with local exigencies, and reinforce a sense of alienation of values and language. FBOs are concerned with human values that are enshrined in social justice and meet both spiritual and development needs. Spirituality and faith perspectives tend to be absent from the work of secular organisations and their emphasis is on numbers, data and statistics rather than the more human elements that individuals can understand. This was no better exemplified than in the recent Ebola epidemic where the simple dignity of appropriate faith rituals in dealing with the deceased was often not afforded to people.

The moral and cultural proximity FBOs represent in the communities they serve puts them at a distinct advantage over other CSOs in ensuring sustainable change. This momentous affiliation between citizens and local mobilisation of resources through faith-based civil society is becoming ever more visible and significant to donors and stakeholders. For the past decade, increased engagement is being witnessed between FBOs and the donor communities to harness resources for development and, in the context of Muslim FBOs, to explore the potential of Islamic financing to support the SDGs.

In his speech in 1995, Lord Edward George, the then Governor of the Bank of England, recognised the “growing importance of Islamic banking in the Muslim world and its emergence on the international stage” and the need to align Islamic banking with the conventional means of what he described as “competitive innovation.” The Islamic finance sector has progressed by leaps and bounds since then with growing integration into the global economy.

Islamic economic principles emanate from the notion of unity and social responsibility consistent with values of goodness that serve humanity, underlining rights and obligations of individuals towards each other, in contrast to a system that promotes a self-centred or commercial approach tailored towards personal gains and profit maximisation. However, the sector remains niche, failing so far to substantially fulfil social targets. Its impact on the SDGs will be limited unless broader goals of Shariah are aligned into the process including issues of access to poor communities to finance. Islamic finance has a critical role to play in promoting the resilience of the financial system as it offers ethical financial solutions to meet socially responsible objectives.

Today there are many examples of non-Muslim entrepreneurs offering Shariah compliant financial products, successfully mobilising financial resources and synthesising them for business ventures.

Islamic finance is no longer confined to banking, having diversified into capital markets and insurance in addition to non banking services and extends to a range of economic subsectors that include education, health, agriculture, water security, housing and rural communities as well as international trade. Modern Islamic finance offers rich investment opportunities for Shariah compliant placements to investors which in turn enhance development prospects.

Effectively exploiting this sector requires an enabling and robust legal and regulatory framework to ensure Islamic financing services (IFS) successfully deliver on development opportunities. Diverse tools and business structures are available through which Islamic finance is channelled that address the peculiarities of each sector and specific requirements of individual business plans. Each business relationship is determined through a tailored risk sharing and mutually inclusive framework right up to the end result. Similar principles could be employed to achieve better development objectives. The IFS regulatory framework provides an alternative and a solution to the frailties of the international financial system and can contribute in bolstering the stability and resilience of the financial sector while enhancing social sustainability.

Excessive debt was the main contributor to the global financial crisis and will remain an inhibitor to economic growth unless there is a radical shift from debt to equity based financing. Empirical evidence indicates the resilience of Islamic banks which continued to achieve higher credit and asset growth even after the crisis, making them comparatively more stable than conventional banks. Islamic financial institutions are reliant on the principles of risk sharing and reinforcing financial linkages to the real economy which are concurrently employed as risk mitigating measures.

Gambling elements in financial activity are excluded and transactions must rely on tangible assets insulating the system from speculation and uncertainty, although, admittedly, some products offered by Islamic financial institutions resemble derivatives due to the lack of operational structures available. Islamic equity based organisations too are few in number and underdeveloped due to the deficit in proficiency in this field and in many instances, absence of enabling legal and regulatory regimes. But important lessons can be learned from the principles of Islamic economics on improving accountability and long term value creation with a view to exploiting synergies between sustainable finance and the Islamic finance architecture.

The asset backed sukuk market has seen considerable development and are generally accepted financial instruments although sukuks still only represent 8% of Islamic financial assets. Interestingly, the first sukuk was issued by shell Malyasia in 1990, a non-Islamic company. Appropriately structured risk sharing sukuk bonds can provide feasible alternatives to finance development projects including infrastructure initiatives in a productive and transparent manner. Sukuk financing as vehicles for fundraising are also addressing the resource gap for multilateral development banks and have been implemented by the United Kingdom and Europe with the former considerably expanding its sukuk profile over the last thirty years.

Muslim countries, barring a few, have the highest poverty rates in the world and yet poor populations do not have access to formal financial services. While some are unable to benefit from these services for economic reasons an alarmingly large number are excluded because the interest charged is contrary to their religious beliefs. Shariah compliant financing would be an important tool in expanding outreach to up to 72% of the population living in Muslim countries presently excluded from the facility. The poor are considered high risk as financial institutions are unable to establish their creditworthiness and are therefore prevented from lending, becoming victims of the conflict between outreach and sustainability. Goals will have to be re-evaluated as a commercial approach is not suited for poverty eradication.

Zakat, Waqf (Islamic endowments), Takaful (Islamic insurance), sadqa (voluntary act of charity emanating from the sense of moral responsibility of the faithful towards the destitute) are comparable to the solidarity based financing models that are “socially responsible financing”. Zakat is the mandatory giving from a portion of an individual’s overall wealth, which is then redistributed as a mechanism for reducing poverty and inequality.

Data on the precise amount of zakat collections are unreliable but even conservative estimates put the figure at US$200 billion per annum with a vast potential to mobilise untapped resources for poverty alleviation. Zakat funds have also been mobilised for disaster response and resilience in disaster prone countries such as Pakistan and Indonesia. The proceeds of waqfs are used to finance social development needs while cash and commodity based loans provide interest free loans. Zakat funds could be integrated for microfinance programmes. Funds channelled through these sources could contribute towards addressing the sustainable development shortfall, however, policies and parameters derived from religious scholarship need to be set out in the modern context.

The faith aspect will be an important ingredient in the development dynamic. Faith based organisations are seen to be more representative of the communities in which they operate and perform the role of a conduit between communities and state actors; bold and enterprising enough to give judgement on sensitive matters of faith to often providing a parallel and informal system of governance. They have been able to efficiently respond to people’s needs, harbouring and imparting the same value system as the communities they serve. In so doing they have over time built their credibility in delivering on education, health, welfare, disaster relief and achieving progressive social change in general. This fiduciary relationship better positions them to mobilise funds through faith-inspired incentives.

The stage has been set for all stakeholders to integrate and harness the wisdom, innovation and economic power of Islamic systems of finance, social investment and redistribution in order to traverse new opportunities for development. Actors must now work together instead of competing with one another on a resilient approach to mobilise funding.

Have you read?
Why refugees need more than emergency aid
3 ways we should rethink humanitarian aid

Author: Dr Mohamed Ashmawey, CEO, and Shamila Mahmood, Policy and Research Coordinator at Islamic Relief Worldwide.

Image: People are pictured at the Dubai International Financial Centre November 10, 2013. REUTERS/Omr Mohamed.