Introduction

• Ms Usha Rao-Monari, UN Under-Secretary-General and Associate Administrator of UNDP
• Datuk Syed Zaid Albar, Executive Chairman, Securities Commission Malaysia
• Mr Mohamed Abida, Head Islamic Development Bank, Centre of Excellence, Kuala Lumpur
• Mr Yusry Yusoff, Chief Executive Officer, Islamic Banking and Finance Institute Malaysia, (IBFIM)
• Dr Azura Othman, Chief Executive Officer, Chartered Institute of Islamic Finance Professionals (CIIF)

Distinguished speakers, guests, Ladies and Gentlemen,

Allow me to start by extending my appreciation to our co-organiser of this conference, the United Nations Development Programme (UNDP), for this strategic collaboration. It is apt that the main theme of this conference is on Islamic finance and Sustainable Development Goals, being priority areas for both the UNDP and the SC.

When the Sustainable Development Goals (or SDGs) were adopted in 2015 by the United Nations, it was already recognised then that achievement of the Goals would be very challenging, but nonetheless necessary. Today, seven years on, with the last two years – as we know – being hit with the COVID-19 pandemic, the Goals have become exceptionally more challenging to achieve, while the urgency has escalated.

The COVID-19 pandemic has evolved from a major public health crisis to become a global economic crisis. The economic impact is enormous, with long-lasting repercussions for people, businesses and governments. Although actions taken to restrict economic and social activities have helped to prevent greater loss of life, they have also resulted in loss of livelihoods and incomes, as well as serious social issues, the full extent of which is still unfolding.

An OECD report in 2020 mentioned that COVID-19’s impact on SDG financing needs in developing countries is expected to increase the financing gap by 70%, to USD 4.2 trillion per annum post-pandemic. However, to put this substantial figure into context, plugging the financing gap would require the reallocation of only 1.1% of the global financial assets held by banks, institutional investors and asset managers, which amount to USD 379 trillion, into SDG-aligned economic activities.¹

Therefore as governments put in place their respective economic stimulus packages and recovery plans, there is opportunity to influence, encourage or even drive such reallocation of financial assets, to achieve a recovery that is both sustainable and inclusive – in other words, a recovery that creates opportunities for employment, income and growth, and at the same time accelerate action towards medium and long-term sustainability goals.

In pursuing this desired outcome, it is imperative to explore all possible means to initially counter the impact of the pandemic and subsequently restore the pathway towards the SDGs. In this regard, the potential of Islamic finance, particularly through the Islamic capital market, is tremendous in addressing the funding gap for the SDGs, especially given the inherent compatibility of the principles underlying both Islamic finance and sustainability.

Harnessing Islamic finance and capital market instruments to broaden and diversify the funding options that can cater to the different needs and preferences of various stakeholders will facilitate a quicker rollout of initiatives towards achieving the SDGs. A stakeholder group that should naturally be receptive to such Shariah-compliant solutions is the Organisation of Islamic Cooperation (OIC) countries.

According to the Islamic Development Bank, the SDG financing gap for OIC countries amounted to about US$1 trillion a year, making up 40% of the estimated global funding need of around US$2.5 trillion a year, based on statements made in 2019, which was prior to the start of the COVID-19 pandemic.²

A study by the Statistical, Economic and Social Research and Training Centre for Islamic Countries (SESRIC) in 2020 highlighted that the overall impact and implications of the pandemic will significantly hinder the progress towards achieving the SDGs for the OIC countries. To the extent the hindrances relate to funding issues, the Islamic capital market can potentially provide solutions to alleviate some of these challenges.

Nevertheless, the interest in embracing Shariah-compliant solutions to fund SDG-aligned projects and initiatives has expanded beyond just the OIC countries. For instance, the UK Government via the HM Treasury, together with the UK Islamic Finance Council, is spearheading the Global Islamic Finance & UN SDGs Taskforce to explore the role the Islamic finance industry can play in addressing the SDG funding gap and to better understand the commercial opportunities the SDGs present for the sector.³

Ladies and Gentlemen,

In the Malaysian context, the role of Islamic finance and Islamic capital market in economic growth and development has been increasingly pronounced especially over the past two decades, and is expected to remain so as the country charts its recovery path to build back better. Over the longer term, this role may expand further as Malaysia pursues its net-zero GHG emission aspiration by 2050 as announced at COP26 last November.

In respect of the capital market, the SC released in September last year the Capital Market Master Plan 3, or CMP3, which leverages on the strengths and advances of the Malaysian capital market to further harness its potential over the next five years. The CMP3 will serve as a strategic framework for the capital market’s growth taking into consideration the next phase of development that includes focusing on Sustainable and Responsible Investment (SRI) and the Islamic capital market (ICM), among others to facilitate the transition to an economy that is sustainable and inclusive.

Strategies in these areas will build upon the solid foundations established under the earlier Master Plans. Initiatives such as the SRI Sukuk Framework and the Islamic Fund and Wealth Management Blueprint launched in 2014 and 2017 respectively, had been instrumental in charting Malaysia’s positioning to be a regional centre for Shariah-compliant SRI.

To further reinforce and elevate the SRI agenda for the capital market, the SC issued the Sustainable and Responsible Investment Roadmap for the Malaysian Capital Market (SRI Roadmap) in 2019 to provide a strategic direction for developing a facilitative SRI ecosystem. The SRI Roadmap identifies 20 strategic recommendations to position the country as a regional SRI hub and strengthen the role of the capital market, including the Islamic capital market, in complementing national priorities to achieve global agendas including the SDGs.

Continuing from these initiatives, the CMP3 has laid out the pathway in expanding the reach of the Islamic capital market to the broader stakeholders of the economy. To support the sustainable development agenda, this includes building an enabling ICM ecosystem for Islamic social finance.

At this juncture, please allow me to share some specific examples or solutions over the last few years that demonstrate how the Islamic Capital Market can help accelerate the achievement of the SDGs.

• Issuance of the inaugural SRI Sukuk, known as Sukuk Ihsan, by Khazanah in 2015 to fund the development of trust schools. This supports SDG 4 on “Quality Education”.

• The offering of Waqf shares structured under a social enterprise model through an initial public offering by Larkin Sentral, a bus terminal operator, launched in 2017. This initiative focused on the social agenda to alleviate income disparities. Dividends from the Waqf shares were utilised to subsidise rental rates on small shop lots for selected tenants especially single mothers and lower-income groups. This supports SDG 10 on “Reduced Inequalities”.

• Issuance of the world-first green sukuk in 2017 where the proceeds were utilised to finance a large-scale solar project. A number of other green sukuk were issued subsequently to fund various green and energy-related projects. These primarily support SDG 7 on “Affordable and Clean Energy”, and also SDG 11 (“Sustainable Cities and Communities”) for a green building project.

• A combined issuance by Malaysia’s national mortgage corporation Cagamas of its inaugural ASEAN Sustainability SRI Sukuk and Islamic Medium Term Notes (IMTNs) in 2020.⁴ The proceeds seek to improve the home financing outreach of the community as the sukuk programme is used to fund the purchase of eligible Islamic financing for affordable housing. At the same time, the proceeds from the IMTNs are channelled to fund Islamic house financing. This supports SDG 1 on “No Poverty” and SDG 11 (“Sustainable Cities and Communities”).

• Issuance of the inaugural fund under the Waqf-Featured Fund Framework. The waqf assets will be channelled to the following focus sectors – health, community empowerment, and education. This supports multiple SDGs including SDG 3 (Good Health and Well-Being), SDG 4 (Quality Education), SDG 10 (Reduced Inequalities).

The Malaysian Government has also issued sukuk over the past two years to support sustainability and social objectives. In 2021 Malaysia issued the world’s first sovereign US dollar sustainability sukuk to support sustainable projects. The issuance reflects the Government’s commitment towards sustainable economic development. The sukuk proceeds encompass broad fund mobilisation where they are channelled for not only social causes but also green outcomes and projects aligned to the SDGs.

Earlier in 2020, the Government issued the first-of-its-kind fully digital Sukuk Prihatin, initiated in response to the Malaysian public’s interest to participate in the rebuilding of the country during the COVID-19 pandemic, including for social causes. This issuance was also a landmark transaction from the digital aspect as the facility allowed the public and corporates to subscribe via online banking channels making it seamless for Malaysians to contribute through digital modes in view of facilitating the country’s recovery.

There are also examples of the Islamic capital market’s role at the international level. Aligned with SDG 3 on “Good Health and Well-Being”, issuance of social impact sukuk by the International Finance Facility for Immunisation Company (IFFIm) in 2014 demonstrated the ICM’s viability to address a major social issue. The transaction, for which the World Bank acted as the treasury manager, is the world’s first social impact sukuk, whereby the proceeds were utilised for children’s immunisation in the world’s poorest countries.

Another notable issuance is the Islamic Development Bank’s inaugural sustainability sukuk to provide relief post-COVID 19 pandemic in its member countries. More specifically, the proceeds from the sustainability issuance are mobilised towards social projects with a focus on ‘access to essential services’ and small and medium enterprises (SME) financing and employment generation’.⁵ Among others, the issuance supports SDG 8 on “Decent Work and Economic Growth”.

Ladies and Gentlemen

As the demonstration effects that contribute to the SDGs continue to be acknowledged within the Islamic capital market space, the SC remains committed to advance the sustainable agenda and promote the awareness that Islamic finance tools are naturally aligned with the SDGs. This is consistent with the CMP3, which aims to leverage on SRI and ICM pillars towards shaping a stakeholder economy by mobilising more capital towards sustainable businesses⁶.  Innovations that include SRI sukuk and Islamic social finance instruments such as Waqf-featured funds have demonstrated how the ICM facilitates the intermediation of capital formation for commercial purposes, while also contributing to positive outcomes for the society and environment.

To facilitate greater impact to the socio-economic development in Malaysia, the SC will focus on exploring the ICM framework as a reference point and its products and services as funding sources to continually develop the Islamic social finance sector. As outlined in the SDGs, it is vital to alleviate hardship among the underprivileged population. The Islamic capital market is an avenue to support fund mobilisation in this area through the Islamic wealth management and distribution system, including Zakat for which the potential to contribute towards SDG achievement has not been extensively developed.

Moving forward, there are also opportunities for impact assessments to be integrated with Islamic social finance instruments. This will enable measurable impact investments in the areas of socio-economic development and promote economic well-being, ensuring that investors will be able to measure whether the capital invested has achieved its desired impact objectives.

The impact investment segment holds much promise and potential for Islamic finance and Islamic capital market, as according to International Finance Corporation, up to USD 2 trillion is invested with a mandate to achieve positive impact. Investors’ appetite for impact investments is substantially larger however amounting to an estimated USD 25 trillion or about 10 percent of global capital markets⁷.

In essence, it is imperative that the industry stakeholders collectively chart the next phase of strategic development for Islamic finance and capital market, towards enabling a conducive ecosystem for sustainable initiatives. Market intermediaries, financial institutions, Shariah advisers, multilateral institutions, non-profit organisations and others need to work collaboratively, as well as with governments and regulators to build capacity and capability, facilitate innovation, develop practicable solutions, and establish effective knowledge-sharing channels. At the same time, greater adoption of digitisation and technology will also broaden and accelerate the capacity for stakeholders to enhance the ecosystem. Structured platforms for collaboration will enable the Islamic finance industry to progress and provide the catalyst for emerging segments such as Islamic social finance and impact investment to thrive, whilst achieving increased inclusivity.

In addition, further development of Islamic finance and capital market towards closer alignment with the Maqasid Al-Shariah – a concept which places value on advocating righteous behaviour, moral conduct, and acts of goodness – will enhance its role and relevance in the global sustainability agenda.

The international and domestic examples on the compatibility of Islamic finance principles with the SDGs have provided a pathway on how to harness Islamic capital market solutions in order to attain the Global Goals for the benefit of the sustainable agenda.

However, in spite of international recognition of Islamic finance’s potential role to meet social financing needs and SDG funding gaps, certain segments such as Waqf and Zakat remain under-developed and should be further harnessed in the immediate term to support the advancement of the SDGs. Similarly, the more developed sukuk market should be deepened and broadened to be utilised for more diverse activities and projects that contribute to the SDGs.

2030 is only eight years away, and much more needs to be done to achieve the targets. It is therefore incumbent upon all relevant stakeholders to raise awareness and drive greater adoption of Islamic finance solution which can fill some of the substantial funding gap for the SDGs, thus contributing to the common good of the world.

On that note, I wish everyone a productive conference.