1. The World’s Leading Islamic Finance News Provider
www.islamicfinancenews.com
Much has been written about the
correlation between Shariah compliant
finance and socially responsible investing
(SRI) in terms of their ethical and moral
foundations; but so far the two sectors
have seen little crossover despite obvious
similarities in terms of their goals,
methods and expectations. However, a
groundbreaking new product pioneered in
the UK is seeing its profile grow rapidly in
popularity – and could perhaps represent
a new avenue for Islamic investment to
assist in socially responsible projects
without compromising on financial return.
Social impact bonds (SIBs, or ‘pay for
success’ bonds) are essentially fixed income
products that act like public-private
partnerships, allowing private investors
to purchase government (or government-
related entity)-issued bonds for the purpose
of funding social schemes – as an alternative
to public funding or raising taxes. The
funds are used for a specific social purpose
which, if successful, then repays the original
investors with returns based on the savings
accrued as a result.
A pioneering instrument
The structure was pioneered in the UK
town of Peterborough in 2010, with the UK
Ministry of Justice selling GBP5 million
(US$8.42 million) of social impact bonds
to social investors including charitable
trusts, banks and philanthropists to
fund a pilot rehabilitation scheme
for young offenders. If the rate
of reoffending was significantly
reduced, investors could receive up
to GBP8 million (US$13.47 million)
after six years – a return
of 7.5%. Although as of
April this year no money
had been paid out to
investors, the program is
reported to have been a success with a fall
in reoffending of around 11% over three
years; and the first payment should be
made to investors this summer following
an independent assessment of performance.
Following this success, the government just
this month announced a further investment
of GBP31 million (US$52.2 million) in SIBs
to improve the job prospects of the 14-24
age group and get young homeless people
into sustainable employment.
These types of bonds have also been
used in multiple instances across the US,
where they are growing in popularity
as alternative avenues to state funding
that guarantee returns (or they don’t pay
out). In summer 2012 the first example
was launched in New York City targeting
juvenile recidivism, funded by a US$9.6
million investment from Goldman Sachs
which was guaranteed by a US$7.2 million
grant from Bloomberg Philanthropies. Since
then New York State, Massachusetts and
Salt Lake City have all issued SIBs with a
trend towards increasing sophistication as
structures evolve and institutional investors
take on more of the risk. As of April 2014 a
further 12 US states were also considering
pay-for-success schemes; and in the 2014
US budget proposal the 'Pay for Success'
scheme was allocated almost US$500
million along with a further US$300 million
to set up a Treasury Department
fund to incentivize state and local
governments to develop SIBs.
Islamic opportunities
So what opportunity does this
hold for Islamic finance? The
UK, with its stated ambition
of developing itself as a
center for Islamic finance,
Social impact bonds: A new tool
for Islamic finance?
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Volume 11 Issue 19
IFN Rapids .........................................................2
Islamic Finance news.........................................6
Shariah Pronouncement.................................15
ICD Exclusive Report: ICD and Tabung Haji
join efforts to enhance mobilization of savings in
ICD member countries.......................................16
IFN Reports:
Sukuk race: Luxembourg lags behind; Scotland:
A new hub for Islamic finance?; The Cambodian
conundrum; A new addition to Oman’s Takaful
market; GreenTech upbeat on prospects for a
green bank despite uncertain demand; Dubai
goes green: New collaboration marks a focus on
environmental investment; ...............................18
Special Reports: Czech Republic: Opening the
door to Islamic finance in the heart of Europe ...26
Case Study:
Dubai Government’s US$750 million Sukuk
issuance..............................................................28
Country Focus: Latin America
IFN Analysis: Dancing to a new beat: Islamic
finance in Latin America ................................ 24
Feature: Islamic finance in Latin America
— the scope for growth .......................... 32
Sector Focus: Technology
IFN Analysis: Technology in Islamic finance:
A new age for Islamic finance?..........................25
Features: Innovation — the path to continued
growth in Islamic finance.......................... 33
IFN Country Correspondents:
Morocco; UAE ......................................... 29
IFN Country Correspondents:
Real Estate............................................... 29
Deal Tracker.....................................................34
REDmoney Indexes ........................................34
Eurekahedge data ...........................................36
Performance League Tables...........................38
Events Diary.....................................................43
Company Index...............................................44
Subscription Form...........................................44
continued on page 3

2. 3©
14th
May 2014
COVER STORY
has already recognized the potential
that SIBs hold for the industry. “SIBs are
an area of interest for us at the Islamic
Finance Council UK, and an integral
part of our proposal to set up a Scottish
Ethical Hub to create synergies between
ethical and Islamic finance,” confirmed
Mujtaba Khalid, a senior associate with
the Islamic Finance Council UK and
specialist researcher into Islamic social
investing, to Islamic Finance news. “We
have already been in talks with persons
involved in the UK's SIB offerings.”
Not only is there an obvious match
between socially responsible and Shariah
compliant investing, but the idea of
using Islamic fixed income products
such as Sukuk as a means to connect the
two sectors is becoming increasingly
popular. For example Malaysia, which
introduced an Environmental, Social and
Governance Index in its Budget 2014 last
October, also announced an SRI Sukuk
initiative to encourage “sustainable and
responsible” investments. In March of
this year the Securities Commission
of Malaysia (SCM)
confirmed that a
framework for socially
responsible Sukuk was
in the process of being
finalized and would
be launched by
the third quarter
of 2014. “The
SRI Sukuk is the Islamic capital
market’s response to the rising trend of
green bonds and social impact bonds that
have been introduced globally to finance
a wide range of sustainable activities
such as those addressing the needs
of the country like infrastructure and
small businesses,” said Dr Nik Ramlah
Mahmood, the deputy CEO of the SCM.
Development opportunities
And while Malaysia hopes to leverage
its deep pool of institutional liquidity
to capture the Shariah compliant SRI
market and become a global center for
sustainable investment, considerable
continued on page 4
Social impact bonds: A new tool for Islamic finance?
Continued from page 1
As conventional social impact bonds
develop their structure is becoming
ever more sophisticated, with
institutional investors increasingly
willing to take on risk as their
precedent becomes more established
and a track record of success
is visible. But what of Shariah
compliant SIBs – how might these be
structured?
Mujtaba Khalid of the Islamic Finance
Council UK suggests that an Islamic SIB
could be set up using a Jualah contract,
or ‘reward’ structure; which is an
accepted structure deemed permissible
by the Maliki, Shafi’e and Hanbali
schools.
A Jualah structure is a contract of service
based on the successful completion of
a difficult task. One party (the offeror,
or Ja’il) offers specific compensation to
anyone (worker, or Amil) in return for
achieving a specific task, target or result
within a (not necessarily predetermined)
period of time.
Jualah is not in principle a binding
Shariah contract, as the Ja’il can
rescind the offer before the work starts.
However, once work has started the
contract becomes binding on the offeror
(i.e., once an SIB program has started,
a Shariah compliant Juarah SIB would
become binding on the issuing authority
or government). Notably, once work
has started the Juarah contract is also
binding on the Amil, or provider, as
long as he undertakes not to revoke
the contract within a specified period.
Once work has commenced, the
property of the offeror is transferred
to the possession of the Amil – but
not the ownership. This means that
the Amil acts as a trustee rather than
as a guarantor of the property, and is
thus not liable for any loss or damage
except as a result of his own negligence,
misconduct or violation of specified
conditions.
The key difference between Jualah and
Ijarah is that in a Jualah contract, the
reward is dependent upon the success
of the specified task. Jualah can also be
a public offer meaning that whoever
delivers the work first can claim the
reward (while in Ijarah the tenant or
Amil must be specified in advance),
which means that a Jualah contract can
be put out to public tender.
“A government can give a range of
social linked projects that it wants
completed – e.g. a power plant or a
hospital - and link them to tax rebate.
Companies would have the option to
choose a project that they believe they
can efficiently implement,” explained
Mujtaba to Islamic Finance news.
As a simple example, a government
may give an open tender for a US$20
million power plant under a Jualah
SIB. A firm may owe $20 million in
taxes. This firm can take on the project
and the project may end up costing the
firm US$18 million but it can ask for
a US$20 million tax rebate provided
that the plant meets all the required
specifications.
The advantages for SIB application are
clear, and with such a structure already
in place and approved by most Shariah
scholars, it seems as if an SIB could
simply be the next logical step along
the road towards sustainable social
investment.
Not only is
there an
obvious match
between socially
responsible and
Shariah compliant
investing, but
the idea of using
Islamic fixed income
products such as
Sukuk as a means
to connect the two
sectors is becoming
increasingly
popular
SIB — proposed Shariah structure

3. 4©
14th
May 2014
COVER STORY
potential also exists for these instruments
in Muslim markets across the globe.
In regions such as the GCC where
there are high levels of infrastructure
demand, SIBs can also be used to enable
the private sector to access public
opportunities in an ethical manner while
still offering a compelling financial
return. In developing countries such as
Pakistan or Bangladesh where taxation
is low and state funds are strained, the
public-private partnership element
can offer a new avenue of sustainable
funding for social investment in key
areas such as housing, education,
healthcare and water; while avoiding
further international borrowing and
decreasing dependence on overseas aid.
“Personally I believe that the real
potential for SIBs is in developing
countries, and Islamic finance can play
a pivotal role in this,” agreed Mujtaba.
“Pakistan as a case study can benefit
from SIBs as the government is looking
to promote Islamic finance and is in
need of capital to deal with an energy
shortage. To tackle inefficient and corrupt
contractors, the government can make
use of SIBs.”
This could in fact be an invaluable tool
to help improve private sector service
in developing nations that struggle with
corruption, as the investor/provider
does not receive their return unless the
program achieves deliverable success.
“As tax collection in Pakistan is low
and what ends up in the government's
coffers is even lower, SIBs can also help
the government balance inflows and
outflows,” pointed out Mujtaba.
A long-awaited bridge
But not only do SIBs offer an ideal
opportunity for Islamic social investment
– they also offer the elusive prospect
of a link between the Islamic and
conventional financial markets. The
World Bank last year released a research
report entitled ‘How socially
responsible investing can
help bridge the gap between
Islamic and conventional
financial markets’ which
highlighted that while
a lack of Shariah
compliant fixed
income products
is inhibiting the
growth of the Islamic capital markets,
the same is also true for the SRI market:
“Therefore, the development of socially
responsible Sukuk could benefit both
markets simultaneously, expanding the
universe of Sukuk issuers and Sukuk
buyers while at the same providing
the SRI community with a new kind of
ethical fixed income instrument.”
According to Michael Bennett, the head of
derivatives and structured finance at the
World Bank: “Sukuk are appropriate for
SRI investors because they provide… a
high degree of certainty that their money
will be used for a specific purpose. In
order to comply with the underlying
Shariah principles, the funds raised
through the issue of a Sukuk must
be applied to investment in
identifiable assets or ventures.
Therefore, if a Sukuk is structured to
provide funds to a specified development
project that is appealing to SRI investors,
such as a renewable energy project or
a low-cost housing program, there is
little chance the investors’money will be
diverted and used for another purpose.”
Speaking to Islamic Finance news, Bennett
confirmed that: “The rapid growth of
the Sukuk market is a testament to the
power of investor demand. If those
investors now start to focus more on the
use of proceeds, and demand products
where the proceeds are used to fund
clearly defined environmental and social
development programs, the market for
green Sukuk and social impact Sukuk
should be extremely robust."
Fixed income gap
It is notable that up until now, the
development of the SRI market has
largely been on the equity side with
limited progress in the fixed income
space. “This lack of investment
opportunities has meant that SRI fixed
income investors often have been
forced to choose between having a
well-diversified portfolio and having
a portfolio that meets all of their SRI
criteria,” said Bennett. “Since Sukuk
[are] most similar to a conventional fixed
income security, the development of
SRI-oriented Sukuk could help fill in this
fixed income gap in the SRI market.”
There is certainly a gap in the Islamic
market for such products. The
conventional sector is very familiar with
social development bonds to channel
investment towards emerging economies
– the first being pioneered by the World
Bank as far back as 1947. However,
although the IDB plays a vital role in OIC
development and has launched a number
of significant Sukuk programs, beyond
this there are very few Shariah compliant
products which offer investors access
to socially responsible or development
activities – and even for the IDB Sukuk, it
is arguable how many buyers of its bonds
do so on ethical grounds, as opposed to
their desire to hold highly sought-after
‘AAA’-rated Shariah compliant paper.
Impact investors
“We believe the lack of supply of such
products is largely a result of a lack
Social impact bonds: A new tool for Islamic finance?
Continued from page 3
In developing
countries
such as Pakistan or
Bangladesh where
taxation is low and
state funds are
strained, the public-
private partnership
element can offer
a new avenue of
sustainable funding
for social investment
in key areas while
avoiding further
international
borrowing and
decreasing
dependence on
overseas aid
continued on page 4

4. 5©
14th
May 2014
COVER STORY
of clearly expressed demand from
investors,” said Bennett together with
his co-author Zamir Iqbal, the lead
investment officer with the quantitative
strategies, risk and analytics department
in the Treasury of the World Bank.
“As long as the Islamic finance market
remains driven principally by the concept
of negative screening, such demand
will remain latent. What is required for
such products to develop is for Shariah
compliant investors to make the same
transition as conventional SRI investors
and begin to demand products that
allow them to affirmatively express their
beliefs. In other words, what is needed is
for Islamic investors to become proactive
‘impact investors’.”
Perhaps social impact bonds
could be the final link needed
to connect the twin sectors of
Shariah compliant and socially
responsible investing – yoking
them together to drive
faster in harness than
either could progress
alone. — LM
Social impact bonds:
A new tool for Islamic
finance?
Continued from page 4
What is
required
for such products
to develop is for
Shariah compliant
investors to make
the same transition
as conventional SRI
investors and begin
to demand products
that allow them
to affirmatively
express their
beliefs
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