Islamic Finance to bring Balance to SDG Financing

As an alternative type of funding, Islamic finance provides a stable environment and less burdensome debt compared to conventional funds in terms of financing the Sustainable Development Goals (SDGs).

According to Columbia University economist Jeffrey Sachs, all countries must make balanced investments in the SDGs, putting infrastructure as the first priority along with investments in education, health and renewable energy. Thus, there would be a bigger need for funding, including debt financing.

With a target to be achieved by 2030, the SDGs are an ambitious pact to end poverty and hunger, improve health and education, as well as combat climate change. As the SDG deadline nears, developing countries would be likely to take out more debt, according to Sachs.

"There are countries who, could afford the infrastructure and still need more to develop education and health. If they need to borrow to fulfill that, let them borrow," Sachs said during the Islamic Development Bank (IDB) annual meeting in Jakarta on Tuesday.

As a Keynesian, he expressed his belief that long-term economic growth was triggered by increasing the pace of investment as well as national savings. If the government’s income and public savings were not adequate, more loans were fine as long as they were well spent, he added.

Amid increasing worry over the risk of piling debts, Jeffrey saw Islamic finance as an alternative to offset the risk on the balance sheet. The risk-sharing scheme applied in the system is more like equity-based financing rather than debt.

"Islamic finance for SDGs is a wonderful contribution. It might be a key [so] that we could have more financing without engaging in more debt. The Wall Street crisis is the crisis of too much debt, too much short-term debt. It is a very exciting idea and we should discuss it together," he said.

Similarly, IDB chief economist Savas Alpay said the Islamic economy could bring stability as it bound the finance and real sectors more closely, with more transparency in risk sharing.

Islamic social contributions such as zakat (alms), sadaqa (charity) and waqf (donations) could also act as a pioneering form of aid to make low-income populations bankable, in line with financial inclusion programs that can increase national savings, he said.

"These are two keys; most of our population is unbanked so they cannot take a part in economic production. We have to make sure that everybody has access to this. Second, if you look at the global crisis, Islamic finance gives the financial and real sectors a transparent and close connection and offers more potential to keep our economies away from crisis," he said.

Despite the small share of less than 10 percent in most IDB member countries, Islamic financing is on the rise as more governments begin to utilize the instruments, especially sukuk. However, more private participation is needed and individual investors must be aware of the sharing concepts.

"We have to make sure with the customers that they are ready for this kind of profit-loss sharing idea. In fact, Malaysia recently started an investment account platform where the depositors are now taking action beforehand, either they are investing in normal deposits or investment account deposits," he said.