By Rushdi Siddiqui, co-founder and managing director of Azka Capital
There are a number of common denominators between Islamic (and ethical) finance and clean (green) energy. The colour green is closely linked to Islam, yet, very little ‘green’ (environment considerations) in Islamic finance (for real estate/project financing).
The demand for both Islamic finance (IF) and clean energy (CE) was a by-product of visionaries seeking alternatives for interest based finance and fossil fuel, respectively. The pioneers were often categorised as ‘ahead of their time’, a commonly understood code phrase for ‘won’t work or be accepted.’
Yet, propelling pioneers of both industries was the recognisation there would be negative consequences if the world continued to follow status quo, greenhouse gases resulting global warming and debt and derivative fuelled financial crisis. Thus, a viable option was needed that would eventually ‘scale size’ and become ‘conventionally competitive.’
As in any embryonic industry, like IF and CE, there are growing pains associated with inefficiency, availability, pricing, reliability, tax, etc., and, only through low or sunset subsidies and passage of time, would it become mainstream acceptance.
In assuming nearly four decades have passed since the birth of IF and CE, these two sectors have more in common and need to work together.
Ethics: Harm and Haram
Ethics is in the eye of the beholder, hence, one man’s ethics may be another’s sin. Notwithstanding, ethics can be viewed, at minimal, ‘do no harm’ and in the case of Islamic finance, ‘do no haram.’
Clean energy may be defined as ‘… sustainable provision of energy that meets the needs of the present without compromising the ability of future generations to meet their needs … sustainable energy include renewable energy sources, such as hydroelectricity, solar energy, wind energy, wave power, geothermal energy, artificial photosynthesis, and tidal power …’ Source: Wikipedia.
Islamic finance ‘… banking activity that is consistent with the principles of Shariah … Sharia prohibits … investing in businesses that provide goods or services considered contrary to Islamic principles is also haraam (‘sinful and prohibited’). Source: Wikipedia.
Thus, the overlap between IF and CE may be summed up as PPPA: Principals (secular conduct/behaviour and spirituality), Preservation (stewards of the Earth), Protection (of good), and Avoidance (of bad).
Application
All inventions and innovations attempt to address a gap, as the end goal is a knowledgeable customer that furthers the cause by purchasing and/or participating. To convince the customer of conscience requires primarily values alignment and, secondarily, acceptable levels of price penalty premium. But, for how long?
Query: Is there an acceptable premium on values?
For IF, the customer is willing to pay little bit more for financing home and car or insurance premium (Takaful), and willing to accept slightly inferior returns on their investment, as long as there are regulator and scholar sign-off. Thus, an acceptable level cost of being a Muslim (CoBM) in the short term, i.e., a sunset subsidy from the client to the compliant institution/offering.
In jurisdiction where taxes are part of the economic system, like the UK, Islamic finance had to lobby to level playing field. For example, as Islamic financing often requires ‘two transactions,’ hence, removal of double stamp duty for Islamic mortgages in UK was necessary to make it tax efficient. In such cases, there is often a ‘push back’ from conventional finance about ‘special treatment’ for IF.
For CE, subsidies, including tax credits, are the necessary spark to encourage its use and position as an asset class to make it ‘conventional competitive’ to fossil fuel and invite private sector money, respectively. However, once the subsidies are removed within the gestation period or earlier to, say, budget concerns or effective lobbying, it becomes less attractive asset class (for mutual or private equity funds) or use.
Conclusion
Greenhouse gases have resulted in global warming, and the financial crisis I and II presented a systemic risk to the global capital/financial markets. Clean energy is looking to diversify into growth stories of emerging markets, like Abu Dhabi’s Masdar City, and Islamic finance is looking to the west to showcase a blueprint linking financing to the real economy (asset backed).
Islamic finance and clean energy can work symbiotically, however, requires low level of subsidy and a leveled playing field. There are two types of returns: (1) financial returns and (2) societal (or social) returns, the key is finding right balance.
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