JKAU: Islamic Econ., Vol. 32 No. 1, pp: 3-21 (January 2019) DOI:10.4197/Islec.32-1.1 3 Reforming Islamic Finance for Achieving Sustainable Development Goals Tariqullah Khan Professor of Islamic Finance, College of Islamic Studies, Hamad Bin Khalifa University, Qatar ABSTRACT. The paradigm of Islamic economics and finance is guided by the motivation of comprehensive human development (CHD) and its preservation as manifested in the objectives of Sharīʿah (maqāṣid al-Sharīʿah). However, the real world free-market economies are driven by the linear economy paradigm under the influence of Hotelling’s 1931 famous work concerning the economics of exploiting natural resources, in which, the ecological environment is not recognized as a resource. The global financial architecture is designed to protect and preserve the linear economic paradigm. In practice, Islamic finance has also remained a ḥalāl sub-set of this system. The resultant social, environmental, and governance imbalances have recently led to different initiatives sponsored by the UN including the Sustainable Development Goals (SDGs). Like the maqāṣid, the SDGs also aim at achieving and preserving human development. In practice, for the first time, a real paradigm shift from the linear to the ecological/circular economy is noticeably taking place, also inducing the transformation of the financial architecture. In this paper, in a broader perspective, we use the CHD and SDGs interchangeably, and discuss a number of paradigmatic and regulatory reforms that will be required to enhance the actual effectiveness of Islamic finance in achieving the ideals of CHD, and the SDGs at large. The paper in fact outlines a wider scope of the potential reform initiatives. Keywords: Maqāṣid al-Sharīʿah, SDGs and Islamic finance, SDGs and design of financial contracts, Reforming Islamic finance, Regulating Islamic finance, Circular economy and Islamic finance, Reforming Sharīʿah governance; Reporting SDGs, ESGs and Islamic finance. JEL Classification: Q01, Q56 KAUJIE Classification: B5, H51
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economy and Islamic finance, Reforming Sharīʿah governance; Reporting SDGs,
ESGs and Islamic finance.
JEL Classification: Q01, Q56
KAUJIE Classification: B5, H51
4 Tariqullah Khan
1. Introduction
Transformation of societies and economies, and
development of the relevant institutional architecture
and infrastructure, is a continuous process. What is
the Islamic vison of development that can be used as
a criterion for benchmarking the desirable transfor-
mation? This question became pertinent during 2006
when the Islamic Development Bank (IDB) went
through an internal reform and a new ‘Vision 1440H’
for comprehensive human development (CHD) was
formulated and adopted. The intellectual discourse
concerning the reform, in fact, triggered a motivation
for more detailed and formal academic works on the
CHD, the first among these being Chapra’s “The
Islamic Vision of Development in the Light of
Maqāṣid al-Sharīʿah” (Chapra, 2008). Since then, a
sizeable literature on the maqāṣid and its contempo-
rary applications has emerged. Tag el-Din (2013), is
a good example of attempting to relate the maqāṣid
framework for achieving balanced socio-economic
development in the free market economy.
The CHD is achieved by simultaneously uphold-
ing and preserving the human necessity for: (a)
religious faith, (b) life with dignity, (c) progeny and
future generations, (d) responsible mind and intellect,
and (e) wealth and graceful sustenance. As elaborated
in the above cited works of Chapra and Tag el-Din,
the maqāṣid framework was developed by scholars
like al-Ghazali, Ibn Taimiyyah, Ibn al-Qayyim and
al-Shatibi during the 12th and 14
th centuries. The fra-
mework has remained as the architectural founda-
tions of an ideal Islamic economics and finance
paradigm. As such, the maqāṣid represent the local
aspirations of the society.
Economic development parse has always remain-
ed in the agenda of national governments with differ-
ent ideological motivations, manifestations, achieve-
ments, and frustrations. In recent years, one measure
of the progress of countries was the UN millennium
development goals (MDGs). The MDGs era (2000-
2015) ended with mixed results. Progress was made
in several areas but MDG-1, concerning elimination
of absolute poverty, remained largely unaccom-
plished. Most of this failure still remains in member
countries of the IDB as documented in the IDB MDG
target study (Bello & Suleman, 2011). Since 2016,
the UN has embarked upon a new development
program termed as the sustainable development goals
– SDGs (see appendix section A for the complete
list). In IDB member countries, SDG-1 still remains
to be MDG-1 in scope and challenge. In this specific
SDG, financial inclusion is a priority area and Islamic
finance promotes access to financial services by
removing the faith-barrier to conventional finance.
Apart from SDG-1, there are several other simila-
rities between the SDGs and MDGs. However, the
SDGs are, in fact, a paradigm shift from MDGs. The
MDGs followed the conventional capitalistic linear
economy paradigm – its core being that the environ-
ment is not a resource and wealth creation is the
necessary and sufficient condition to cater to the
interest of the economy and future generations. The
SDGs, on the other hand, are augmented by the
United Nations (UN) Global Compact Principles
(GCPs), UN Principles of Responsible Investments
(PRIs), and the Global Reporting Initiative (GRI &
UN Global Compact, 2017). The goals of the SDGs
and the GCPs and PRIs are given in the appendix. In
addition to the UN, other institutions such as those of
the European Union are actively engaged in a para-
digm shift from linear to an ecological and circular
economy (see, for example, European Commission,
2017).
In the existing linear paradigm, wealth creation
could inflict further damage to the ecological envi-
ronment, and hence could be disastrous in its conse-
quences for the future security of humankind and
other species. With this background, a new global
financial architecture motivated by the SDGs imple-
mentation requirements is emerging, parallel to Basel
III. In addition, the pressure on the existing global
financial architecture is also increasing due to the
emergence of the distributed ledger technology (DLT)
and potential financial disintermediation.
Another important area of shift in paradigm is in
the role of faith (local aspirations) as a positive moti-
vating force for achieving SDGs as compared to the
MDGs regime, which took it for granted that faith is
a barrier to accessing health, educational, and finan-
cial services. Religious philanthropies and faith-based
finance can enhance resources for the SDGs in the
Reforming Islamic Finance for Achieving Sustainable Development Goals 5
frame-work of a blended approach along with public
sector resources and private investments. Unlike the
MDGs, the SDGs give importance to local realities,
values, and institutions. More importantly, faith-
driven policies like Islamic finance can be consistent
with local aspirations and could be readily owned by
the relevant population segments. This brings the
SDGs closer to the maqāṣid al-Sharīʿah driven CHD.
The paradigm-shift in the SDGs opens up oppor-
tunities for Islamic finance that were not available
under the MDGs. Therefore, there is the expectation
that Islamic finance can play an important and wider
role in achieving the SDGs. This potential role of
Islamic finance can be enhanced by paradigmatic and
regulatory reform and support as well as surveillance.
In this regard, we identify the following broader areas
and these areas could also be themes for future
research:
(a) Facilitating a shift from the linear economy
paradigm to a circular/ecological economy par-
adigm;
(b) Transformation of the global financial archi-
tecture;
(c) Developing synchrony between local aspira-
tions (maqāṣid al-Sharīʿah), national goals,
and the SDGs;
(d) Reforming Sharīʿah governance by taking into
account the synchrony between the local aspi-
rations, national goals, and the SDGs, and by
integrating the Islamic institutions of compass-
ion in financial sector reforms;
(e) Strengthening the Islamic financial architecture
by removing structural risks in the design of
financial products;
(f) Incentivizing waste control and management
and promoting SMEs in ecological/circular
economy; and
(g) Encouraging integrated reporting on SDGs.
2. Shift the Paradigm
One of the prime objectives of the Sharīʿah is the protection and preservation of the rights of future generations and the enhancement of opportunities and security for them. In this context, intergenera-tional equity is an important debate and environ-mental balance has significant implications for future welfare and security. With a similar perspective, the conservationist movement for protecting natural resources and the environment was initiated by the early 1900s. In a seminal article, Hotelling (1931) offers an economic refutation of the conservationist arguments. Briefly, he argues that in the interest-based financial system, the interest mechanism will dictate through market forces whether it is more profitable to conserve the environment or to trans-form the environment into financial resources and transfer these to financial institutions and markets and earn financial returns. Hotelling argued for the transformation instead of conservation of natural and environmental resources. Costanza et al. (1997) explain that:
According to Hotelling’s model, even when market prices fully reflect the value of a species, it will be efficient to exploit a species to extinction or totally degrade an ecosystem if the value of the species or the ecosystem over time is not increasing at least as fast as money deposited in an interest-bearing bank account. (p. 54)
This argument was so convincing that it has domina-ted economic thought and policies ever since its publication in 1931. It is obvious that, in the model, the environment as such cannot be considered as a resource. The more it is extracted, the man-made capital/wealth can be created, the more is consumed and wasted. Given an effective demand through the credit mechanism, the more resources could be extracted. In this manner, the economy becomes a linear system of extracting, using, wasting, and extracting more. The interest-based financial system essentially becomes an engine for driving such a linear economy.
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8 Tariqullah Khan
3. Transform the Architecture
There is no doubt that for achieving the SDGs, the
global financial architecture has to undergo signifi-
cant transformation. In the absence of a consensus
regarding the definition of international financial
architecture, we describe it as a set of intertwined ins-
titutional parameters. These include: (a) the unalter-
able foundational principles concerning business and
finance; (b) the universal ethical norms of market
practices and business conduct in financial services;
(c) the international best practice standards pertaining
to financial services and (d) the relevant institutions.
Traditionally, the relevant institutions are the
Bank of International Settlements (BIS), Basel Com-
mittee for Banking Supervision (BCBS), Financial
Action Task Force (FATF), Financial Stability Board
(FSB), International Accounting Standards Board
(IASB), International Organization of Securities Co-
mmissions (IOSCO), International Monetary Fund
(IMF), and the World Bank (WB). These institutions
have the man-date to ensure safeguarding and stren-
gthening those parameters of the architecture with
their different instruments of policy support. Histori-
cally, these institutions and the standards set by them
have completely ignored the relevance of ecological
concerns for systemic stability.
The paper by the University of Cambridge’s
Institute for Sustainability Leadership in association
with the UNEP Finance Initiative (CISL & UNEP-
FI, 2014) raises important questions concerning this
critical gap in the Basel III banking regulations.
However, the SDGs, PRIs, GCPs, and initiatives
like the research of the GRI and UN Global Comp-
act (2017) which focuses on ESG and SDG disclos-
ures, are radically influencing the behavior of busin-
esses and their reporting systems worldwide. Hence,
the UN and GRI principles and their institutional
base now play a proactive role in the transformation
of the global financial architecture.
The traditional description of financial architect-
ture is also applicable to the global Islamic financial
architecture, covering in particular the Islamic
Financial Services Board (IFSB), Accounting and
Auditing Organization for Islamic Financial Institu-
tions (AAOIFI), the OIC Fiqh Academy (OIC-FA),
and the Islamic Development Bank (IDB), in addi-
tion to the international institutions listed. These insti-
tutions also do not have any proactive agenda for the
ESG concerns and SDG implementation except that
in 2016 the IDB and UNDP have signed a MoU for
enhancing the role of Islamic finance in SDGs
implementation.
The global financial architecture and its Islamic
sub-set are designed to function within the frame-
work of the linear economy and cater to its needs and
requirements. As mentioned above, the linear econo-
my paradigm does not consider the ecological envi-
ronment as a depletable resource. It is market-driven
– earning more by maximum resource extraction,
production, usage, and even waste and more extrac-
tion. The global financial system is a part as well as
facilitator of this paradigm.
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10 Tariqullah Khan
Figure (4) Islamic financial architecture in the global context
UN
SDGs
& ESG
concerns
G20 policy reforms
International financial architecture
International Islamic financial architecture and
standard setting
National legislative and judicial systems recognizing Islamic finance
specificities
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Sharīʿah bodies
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notes are important)
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implement genuine Islamic financial services
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financial engineering and product development work)
Derived and adapted best practice standards for Islamic financial services industry (slowly changeable parameters but with significant
consensus); SDGs, ESG concerns, PRIs, GCPs, etc.
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12 Tariqullah Khan
On the other hand, Islamic finance offers a good
example of a prescription that caters to local prefere-
nces and hence guarantees inclusion. The same could
also be relevant for other services like educational,
health, and social development programs. Qatar
National Vision 2030, with four pillars – people,
economy, culture, and environment, is an example of
an outstanding policy prescription that caters to such
local preferences and hence, synchronizes local
aspiration and global goals. A mapping and compari-
son of the three in Figure 7 shows a complete syn-
chrony bet-ween the pillars with a realigned financial
architecture.
Figure (7) SDGs regime – reasons for optimism
5. Reform Sharīʿah Governance – Ḥalāl is
Essential but Insufficient
Compliance with local aspirations (maqāṣid al-
Sharīʿah) is a very broad and high-level policy re-
quirement in the national context, whether it is in the