Islamic finance can reduce debt, boost sustainability; SBP official

KARACHI: Islamic finance can facilitate the transition to sustainable finance as it reduces debt crises and ensures that funds are used for their intended purposes, a central bank official said Tuesday.

Ghulam Muhammad Abbasi, director of Islamic finance at the State Bank of Pakistan, spoke at a conference on Islamic banking and finance organized by the Institute of Business Management in Karachi.

He cited a recent S&P Global report that forecasts green, social and sustainability-linked bond issuances to reach $1 trillion, comprising 16 percent of total issuances in 2023. Abbasi said that amidst climate crises, economic fluctuations, conflicts, and pandemics, the UN Sustainable Development Goals (SDG) report reveals that progress on over half the targets is falling below expectations, with 30 percent regressing.

"We're in an era where environmental shocks and socio-economic inequalities increasingly destabilize economies," he said. "Recognizing that traditional finance's unchecked production, consumption, and resource distribution negatively impact the environment and society."

"Islamic finance is ideally placed to help the transition towards a sustainable finance paradigm," he said and added that being asset-backed, Islamic finance ensures that the transaction is less prone to debt crises and that the funds are deployed for the prescribed purpose, minimizing defaults. It is essential and especially focuses on social and ethical considerations, risk and reward sharing, and avoidance of excess uncertainty.

Abbasi said that Islamic financial institutions have not yet aligned their business models as the Islamic climate finance industry is estimated to account for only 2 percent of the Islamic financial services industry globally.

Moreover, only a few Islamic financial institutions have to date participated in important global initiatives, such as the UN principle of responsible banking, responsible investment, and responsible insurance, which embeds sustainability at the strategic level, the portfolio level, and the transaction level across all business lines.

Pakistan is among the top 10 countries which are hard hit by climate change, he said. The SBP, being a responsible regulator of the financial system, has taken various initiatives, not only for financial inclusion but also for green and sustainable finance, he added.

Addressing the conference, Dr Ishrat Husain, former governor of the SBP and advisor to the prime minister, stated: "The fundamental purpose of Islamic banking is human dignity. Through this medium, the aim is to provide opportunities for marginalized communities to lead a dignified life.

At the same time, it also fills the gap between social classes. However, Islamic financial institutions should have product differentiation from conventional banking to strengthen market penetration."