Islamic Bank May Support Green Sukuk for Renewables Projects

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  • Push to expand green finance before Paris global warming deal
  • Pilot project on renewables worth $180 million in two years

The Islamic Development Bank indicated that it may issue green sukuk bonds compliant with religious law and increase lending for climate-related projects with an announcement at the United Nations global warming conference in Paris at the end of the year.

“Estimates for the 2030 agenda indicate that we need to move from billions to trillions of dollars of support annually for sustainable development,” Savas Alpay, chief economist of the IDB, said in a phone interview. “Traditional sources of development finance will not be enough. We must also look at non-traditional sources. We will be using Islamic finance to bring new resources to the table.”

The comments indicate the $80 billion green bond market is expanding beyond Europe and the U.S., where the instruments were pioneered.

Khazanah Nasional Bhd, Malaysia’s state-owned sovereign wealth fund, issued green sukuk last November after introducing guidelines for socially responsible debt in August 2014. It was the second entity after the London-based International Financial Facility for Immunization announce plans to sell ethical-based sukuk.

The Islamic Development Bank based in Jeddah, Saudi Arabia, has a $180 million pilot project to fund clean energy in its 56 member countries over the course of two years. About 25 percent of its energy investments are in renewables currently. It has invested about $2 billion in clean energy to date.

Islamic finance differs from conventional in structure, notably sharing risk and profit between the lender and the borrower. Global assets in this system are valued at $2 trillion according to Alpay, with a 17 percent growth rate between 2009 and 2014 mostly in the Middle East and Asia.

Green Sukuk

The Islamic Development Bank may also issue so-called green sukuk, which are Islamic bonds specifically for financing climate action projects. The conventional green bond market was pioneered in 2008 by the World Bank and today is valued at over $80 billion, according to data compiled by Bloomberg.

“Green sukuk could help launch more projects and products in markets where Islamic finance is strong,” said Nour Mousa, chief executive officer of Desert Technologies, a Saudi-based renewables developer. “Two thirds of new renewables installations are expected to be in emerging markets.”

Desert Technologies has projects in Egypt, Jordan and Saudi Arabia with a total capacity of about 275 megawatts. It is planning to expand to Asia with a focus on Pakistan, India, Indonesia and Bangladesh.

The Islamic Development Bank is assessing the results of its pilot project and will be using them to structure a “new approach” to climate finance. It has recently funded renewable energy projects in Sudan and Bangladesh.

“We will hopefully be announcing what the position of the IDB is in the upcoming Paris meetings,” Alpay said.