Green sukuk market set for take off as demand grows

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Islamic finance professionals believe the green sukuk market is set for take off as demand builds, but global expansion will require greater standardisation and regulation, new research shows.

The research was conducted by IslamicMarkets.com, a leading platform that provides access to expert knowledge and financial opportunities, to support the Global Islamic Finance Forum 2022 (GIFF2022), 5-6 October in Kuala Lumpur.

The event, themed as ‘Take the Reins’, is organised by the Association of Islamic Banking and Financial Institutions Malaysia (AIBIM), in support of the Malaysia International Islamic Financial Centre (MIFC), and aims to generate an active discourse on the work required to strengthen Islamic finance’s global leadership.

The study with leading Islamic finance professionals found that 83 per cent of Islamic finance professionals expect demand for green sukuk – Shariah compliant investments in renewable energy and other environmental assets – to increase over the next three years. On the other hand, 25 per cent expect a dramatic increase in demand for green sukuk.

Research points to the decarbonisation strategies of Gulf countries and a recent report has claimed the Gulf Cooperation Council (GCC) can unlock USD$2 trillion in cumulative Gross Domestic Product contribution. This will provide more than one million jobs in addition to bringing in foreign direct investment in sustainable industries through green finance.

Around 87 per cent of Islamic finance professionals agree that GCC’s focus on sustainable projects provides a major boost to the green sukuk market. Total issuance of green sukuk has amounted to USD$15 billion since 2017, but the Islamic Finance Council UK (UKIFC) is forecasting the market could expand by another USD$30 billion to USD$50 billion by 2025. Six out of 10 (60 per cent) of Islamic finance professionals questioned, supported that estimate, with another 17 per cent forecasting the market could go above USD$50 billion. Just 23 per cent believe the market will be worth less than USD$30 billion by 2025.

Furthermore, research found that 87 per cent of Islamic finance professionals believe now is an excellent time for investors to harness the opportunities available in green sukuk, given that COP27 and COP28 are taking place in the Arab world. However, the study found that for green sukuk to take off globally, there needs to be greater standardisation including regulation. Islamic finance professionals are optimistic this will happen with 88 per cent expecting improvements over the next three years.

Islamic finance professionals also see Governments increasingly adopting the approach of the Malaysian authorities that bear the costs of third-party checks for issuers of SRI green bonds. Around 80 per cent forecast a rise in Government incentives for those considering investing in green sukuk over the next five years. A possible issue, however, is the technical knowledge of Shariah scholars when it comes to green and sustainable investment. Just 39 per cent believe it is good or excellent, while 19 per cent worry it is poor or very poor and 36 per cent say it is average.

GIFF2022 Chairman Arsalaan Ahmed said, “Confidence is building in the green sukuk market with optimistic predictions on growth in demand. The optimism is built on strong foundations given the growing focus on sustainable investments in the Arab world, as exemplified by the actions of Gulf countries. —Zawya News

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