Unlocking Islamic Social Finance to Help Communities Address Vulnerability and Inequality

October 13, 2018

Remarks by Ulrika Modéer, UNDP’s Assistant Administrator and Director of the Bureau of External Relations and Advocacy, at the event Mainstreaming Islamic Finance into Global Initiatives: Another Formidable Pillar in Promoting the SDGs.

As prepared for delivery

Excellencies, Distinguished participants, Ladies and Gentlemen;

Selamat Pagi,

I am pleased to be here today to discuss how Islamic finance can contribute to the SDGs, and how UNDP is working with partners throughout the world to harness innovative financing solutions to meet the SDGs.

With the 2030 Agenda, we have agreed on a set of ambitious targets. The SDGs are a bold set of goals representing a new opportunity for humanity to have a common framework to guide our collective actions and achieve a better future for all. But we all recognize that the SDG funding gap[1] cannot be closed by traditional development aid alone[2]. Filling the funding gap will require the engagement of new partners and tools to leverage additional financing for development and leave no one behind.

Islamic finance has the potential to be a crucial tool to offer governments a strong, non-traditional source of financing to advance their SDG implementation. By 2030, it is estimated that between 50-80% of the world’s poor will reside in fragile and conflict-affected countries – many of which are also in Muslim-majority or countries with significant Muslim populations.   

It is particularly in these contexts that Islamic finance has the possibility of being a game changer. The primary tools of Islamic finance can not only inject further investments in many crises that are underfunded and neglected by ODA, but can also act as a catalyst for Governments, private sector and aid agencies to work closer together in programming that addresses the root causes of risk and vulnerability, in addition to meeting immediate humanitarian needs[3].

UNDP and Islamic finance social tools

Islamic social finance can help governments and communities meet a range of development needs. Zakat, with its defined set of beneficiaries in need and rapid disbursement, can be vital for crisis response. Waqf, our theme for today, is well-suited for building resilience through institutions, infrastructure, and permanent sources for funding the SDGs.

As a whole, social Islamic finance tools such as Zakah, Waqf, and Sadaqah have a significant potential to address marginalization and vulnerability, when directed towards locally driven programmes promoting social and economic inclusion.

The Islamic Development Bank has estimated that between $230 and $560 billion is given in Zakah each year globally. The Koran identifies specific categories of zakat beneficiaries, including helping the poor and needy, refugees and displaced people and liberating those in bondage – providing a strong alignment between Zakat and the SDGs’ commitment to leave no one behind.

Indonesia is a global leader on Zakat for the SDGs. Our UNDP Indonesia team worked with BAZNAS, the national Zakat collection agency, to apply Zakat funds, for the first time ever, towards local SDG plans, beginning with renewable energy projects in underserved communities. The project, launched in 2017, will provide electricity to 803 households from four villages in Jambi province, benefiting almost 5,000 people. BAZNAS and UNDP will further the collaboration by implementing a livelihood enhancement programme in Jambi to increase the local population’s income generating capacity.

In response to the tragic earthquakes and tsunami in Central Sulawesi and Lombok,  UNDP will support BAZNAS to help ensure the zakat they have collected helps provide emergency relief to the population. Zakat can be a critical funding lifeline in the aftermath of crisis, when it is so important to crowd-in financing from public and private sources to reach the most vulnerable, and affected communities.

Turning to Waqf:  the value of waqf land and property in Indonesia alone is estimated at around 4.4-billion-squared metres, with an economic value of $27 billion. If systematically directed towards SDG outcomes, waqf could become a game-changer in support of Indonesia’s commitment to reducing poverty and lessening inequality. However, several limitations prevent the use of waqf towards effectively supporting the SDGs. These include the need for standards and principles governing the management of waqf assets, as well as the need for new institutional arrangements that build on pre-existing initiatives to move from current models of parallel financing to actual SDG-related financing. Today’s launch of the international Waqf Core Principles is therefore a very welcome step in the right direction, as they will provide sound supervisory waqf management and enhance its disclosure and transparency. UNDP is pleased to have supported the development of these new standards through our partnership with Badan Waqf Indonesia. We are also working together to develop the first block-chain enhanced waqf digital platform to increase waqf collections and enhance the effective use of waqf land.

However, more is needed to tap the potential of waqf and other Islamic social finance tools and channel them towards development outcomes.

·         We need experts capable of structuring waqf into blended finance mechanisms using a collection of knowledge and best practices which can be adapted to the local policy environment.

·         We also need budgeting mechanisms which allow for government funding to catalyse and facilitate Islamic social finance tools for the SDGs.

I believe that UNDP’s development experience and expertise can offer a range of support to stakeholders in the Waqf ecosystem. To governments regulating and overseeing Waqf institutions, we offer technical support on policy, administration, and regulatory best practices. Importantly, we can help align countries’ Waqf sectors with their national SDG agendas. To managers of Waqf institutions, we offer impact identification and measurement tools. These tools can better align their efforts with the SDGs. Third, we can support donors by helping them identify and track the SDG impact of their envisioned philanthropy, and help integrate the SDGs into the charters by which donors establish endowments. And all of these efforts are in place to ultimately serve the beneficiaries of Waqf endowments – now and in the future.

UNDP stands ready to continue to support the Government of Indonesia’s efforts to apply Islamic finance where it is needed most, as well as to other Governments and private partners around the world that are looking to better access Islamic financing towards development outcomes.

In addition to  Islamic social finance, we’re also helping engage commercial Islamic finance, for example through our joint work with the Islamic Development Bank on the Global Islamic finance and Impact Investing Platform (GIFIIP), which is helping to link investors with SDG-aligned projects, including expanding Green Sukuk opportunities.  We recently witnessed the issuance of several green sukuks around the world, including Indonesia’s first sovereign green sukuk earlier this year, which was developed with the support of UNDP. This green sukuk was oversubscribed by more than three times by investors, and its proceeds went exclusively towards climate change action (SDG 13).

And just last week, a private Bank, HSBC, issued the world-first SDG sukuk.  With sukuk representing 16% of the total Islamic finance assets, the potential to catalyse Islamic impact investing towards sustainable development knows no bounds.

Conclusion

But we are just getting started. UNDP is present in all OIC countries; by utilizing our global network and local knowledge base, as well as our impartiality and neutrality, UNDP is well situated to partner and collaborate with Islamic finance stakeholders to help governments unlock the financing needed to achieve their SDGs. 

Let me stop here and thank you for the time that you have given me this morning and congratulate our partners on launching the Waqf Core Principles today. I am looking forward to exchanging experiences and learning more about the roles of Islamic Social Finance for the achievement of the global goals and exploring new ways to partner together.

Terima kasih.