Islamic Finance Could Help Fund Sustainable Development

Given the large scale of the needed financial resources to channel in support of SDG’s, the funding goes beyond the available public financial resources to shift to private finance and investment. Islamic finance as a form of financial stability offers tremendous potential in reinforcing links between finance and real economy. In fact the application of Islamic finance principles on a broader scale, offer strong preference for risk-sharing arrangements and a rejection of interest-bearing debt instruments.

An alternative approach to developing domestic capital markets is to expand the role of Islamic finance in equity-based markets in both stock and Sukuk (Islamic bond) markets. The Sukuk market has been particularly instrumental for fund raising and investment activities. Although most Sukuk rely on fixed income instruments, Sukuk can be structured as a partnership instrument to channel capital into productive activities.

Traditionally, Islamic finance possesses models for solidarity-based financing with important features of social sustainability. The Zakat, or wealth tax, is obligatory for all who are able to do so, is an essential Islamic redistribution mechanism considered to be a personal responsibility for Muslims to ease economic hardship of the poor. Zakat has great potential to mobilize additional untapped resources for poverty alleviation. However, its impact on reducing the vulnerability of the poor depends on the collections and the allocation of its disbursements.

Finally, a distinctive value of Islamic finance is a form of financial stability that cannot be divorced from wider ethical and moral codes. It is based on the Islamic approach to social progress founded on the need for balanced development, which covers both material and spiritual development.

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