Islamic Finance, the SDGs & Impact Investing
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UNGA - IRTI/IDBG-UNDP IICPSD OIC Side event on Islamic Finance and Impact Investment New York, USA September 2017
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Islamic Finance, the SDGs & Impact Investing
- 1. Islamic Finance, the SDGs & Impact Investing Senior Vice President Mahmoud Mohieldin September 20170
- 2. 1 The 2030 Development Agenda 21
- 3. The 2030 Development Agenda: Ending Poverty, Preserving the Planet, While Leaving No One Behind 8 2
- 4. Progress on the MDGs in OIC Countries Success on some MDGs offset by underachievement in other vital areas OIC countries have improved access to Water and Sanitation Maternal and Infant Mortality, Undernourishment goals remained unmet by most OIC countries * * World Bank analysis (2015) showing the number of countries that have met the above MDGs 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Water Sanitation 1990 2015 0 5 10 15 20 25 30 35 Maternal Mortality Infant Mortality Met Unmet 3
- 5. OIC Countries are Committed to the SDGs Countries Reporting Progress at the High Level Political Forum 4 Voluntary National Reviews % of VNR Of which are OIC % of OIC 2016* 22 27% 6 11% 2017 43 23% 10 17% *Togo presented its VNR twice, so it is counted twice, once for 2016 and once for 2017 2017 2017 2017 2017 2017 2017 2017 2017 2017 2017 2016 & 2017 2016 2016 2016 2016 2016 4
- 6. 2 Financing for Sustainable Development 25
- 7. A LARGE POOL OF PRIVATE CAPITAL IS YET TO BE CATALIZED WITH JUDICIOUS USE OF SCARCE PUBLIC AND CONCESSIONAL RESOURCES Finance for the SDGs Will Need to come from Multiple Sources 6
- 8. 3 Role of the Islamic Finance in supporting the 2030 Development Agenda 7
- 9. Islamic Finance: A pro-development financial system •Economic and Social Justice •Inclusive Growth • Entrepreneurship • Redistributive Instruments (Zakaat, Qard-al-Hassan, Waqf, Sadaqaat, etc) • Economic Institutions • Property Rights • Contracts • Trust • Rules of Markets • Business Ethics • Prohibition of Interest, • Promotion of Exchange and Trade • Information Asymmetry (gharar) Risk Sharing Corporate Governance and Leadership Economic Development Financial Inclusion 8
- 10. Helps Islamic financial institutions to be more resilient to particular shocks May help to diffuse risk in the financial system Helps achieve empowerment of marginalized groups Helps access funds used for nutrition, healthcare and education Islamic Finance Supports a Number of Sustainable Development Objectives Helps attract investment in infrastructure Can be leveraged to attract private funding and form private public partnerships (PPPs) Financial stability 1 Financial inclusion 2 Social impact 3 Infrastructure development 4 Helps widening the range of products and services available to businesses and households Helps improving access of the underserved to financial services 9
- 11. Global Infrastructure Finance Islamic Finance (Sovereign direct borrowing, sovereign sukuk etc) Islamic Finance for PPP Infrastructure Investment and PPPs • Islamic finance for infrastructure development is a niche segment in the global PPP space: • Sovereign direct borrowing, sovereign sukuk can be leveraged to attract private funding and form PPPs. • It can be leveraged to cover the global infrastructure financing gap of nearly US$ 1 trillion every year: • annually, the world spends approximately US$ 9 trillion in infrastructure across all the different assets classes • by 2030, the world will need US$ 60 – 70 trillion additional infrastructure capacity 10
- 12. Further work is needed! • Stronger legal institutions that sanctify property rights and the honoring of contracts; • Regulation of Islamic finance across countries with a focus on standardization; • Adjustments in tax regulation to eliminate the debt bias in taxation ; • Incentives for academic institutions to deliver more research and innovation; • Active participation of national authorities into sukuk markets to finance their public and private investments. 11
- 13. 4 Islamic Finance and Impact Investing 12
- 14. Impact Investing Defined as investments which seek both financial and social impact returns Initially focused on equity investments managed by small PE/VC fund managers with social intent There has recently been a shift in investment focus from microfinance and base of pyramid innovations towards affordable housing and green energy There is an increasing interest in blended finance 13
- 15. Islamic Finance and Impact Investing The special features of Islamic finance give it the potential to significantly enhance growth and reduce poverty: Partnership and equity- style financing Profit and loss sharing Emphasis on tangibility Socially responsible investment There is significant scope for Islamic finance to expand into focusing on impact investing. As is the case with the potential for Islamic finance to play a similar role as conventional finance, but with fewer risks, there is potential for Islamic finance to play a role in impact investing. Innovative mechanisms for Islamic finance are being developed, especially for issues such as forced displacement and humanitarian crises. Having a clear avenue for impact investors to get involved would be useful The regulatory environment needs to play a more enabling role. • The focus of impact investing is on outcomes whereas Islamic finance focuses on the instrument. This is another aspect which deems them compatible. • This merging would essentially tie conventional and Islamic giving 14
- 16. 5 The Role of the World Bank Group 15
- 17. WBG Areas of Action to Support the 2030 Agenda IMPLEMENTATIONDATA FINANCING Country engagement model; Draw on strength of entire WBG to provide integrated solutions Domestic resource mobilization; leveraging private sector; addressing needs of regional and global public goods Ensure availability of household budget surveys in 78 poorest countries every three years; data revolution; statistical capacity building WBG action on the SDGs has been articulated along these three focus areas 16
- 18. • Issuance of first green sukuk in the world in Malaysia this year • Issuance of various Islamic Finance instruments, incl. sukuk, which have raised $700M in 2015 • Doraleh Container Terminal Project, Djibouti • The World Bank Global Islamic Finance Development Center, Istanbul • Technical Assistance to various governments • Knowledge hub in Malaysia • Knowledge products Examples of WBG Support for Islamic finance • Financing package for Iraqi power company for $375 million • Establishment of the IFC Sukuk Company, which issued $100M in trust certificates in 2015 • Queen Alia Airport Project, Jordan • Hajj terminal and Madinah airport in Saudi Arabia and • Provision of a $427M Islamic finance- compliant investment guarantee for infrastructure projects • Political risk insurance worth $450M in 2015 The WBG is working with partners to leverage the potential of Islamic finance and has introduced investment projects that use Islamic financing across the world Different parts of the WBG support Islamic finance 17
- 19. World Bank Group Impact Investing Instruments Sources: World Bank Group Treasury, Press Release from 03/09/2017 Impact investing instruments have social impact-linked goals, similar to Islamic finance. Some instruments have the potential to be Islamic finance compliant. World Bank Group examples include: The SDG Bonds: Equity-linked bonds that link returns to the performance of companies advancing global development priorities IFC’s Social Bond Program 18
- 20. SDG everyone: Equity - index linked bonds • Bonds that for the first time directly link returns to the performance of companies advancing global development priorities set out in the 2030 Agenda • The equity-index linked bonds raised a total of EUR163 million from institutional investors in France and Italy • World Bank Group Treasury anticipates coming to market with similar issuances that would attract a range of investors across the world Sources: World Bank Group Treasury, Press Release from 03/09/2017 19
- 21. Index Methodology The index composition follows a 3-step methodology to select companies from the overall investment universe (developed country companies assessed by VigeoEiris): Source: World Bank Group Treasury Step 2 - SDGs Methodology Selection of companies contributing to the SDGs a significant part of their activity dedicated to sustainable products or a leading sustainable behaviour in their sector Exclusion of companies with a VigeoEiris ESG score below the regional average involved in alcohol, armament, gambling, nuclear, pornography or tobacco, or in critical controversies about the environment, human and labour rights that are part of the most intensive carbon emitters unless they have a robust energy transition strategy Step 1 – ESG Control Step 3 – Financial Filters Final selection based on suitability for equity index investing liquidity filter (Avg Daily Volume for 1 and 6 months above 10 million USD or EUR) low volatility filter (50 stocks w/ lowest volatility meeting diversification constraints) geographical and sectorial diversification (max 25% stocks from the same sector; min 10% and max 50% stocks from the same region - Europe, America, Asia) equally-weighted volatility control (10% volatility cap for USD; 8% for EUR) adjustment factor (3% p.a.)
- 22. IFC’s Social Bond Program Sources: IFC Social Bond Program Presentation, 2017 Projects will generally involve support for low-income populations, in the areas of: Smallholder farming More affordable health, education, utilities or housing services Goods and services Access to telecommunication and payment platforms Lending to financial intermediaries; proceeds of which must be on-lent to women-owned enterprises Bond Structure 21
- 23. Senior Vice President Mahmoud Mohieldin September 2017 Thank You worldbankgroup.org/sdgs Follow us on twitter @WBG2030 Mahmoud-Mohieldin on mmohieldin@worldbank.org 22
- 24. SDGs Financial Inclusion Financial Stability Social/Environmental Impact Infrastructure Development End poverty everywhere X X End hunger, achieve food security and improved nutrition and promote sustainable agriculture X X X Ensure healthy lives and promote well-being for all at all ages X X X Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all X Achieve gender equality and empower all women and girls X X Ensure availability and sustainable management of water and sanitation for all X X Ensure access to affordable, reliable, sustainable and modern energy for all X Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all X X Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation X Reduce inequality within and among countries Make cities and human settlements inclusive, safe, resilient and sustainable X X Ensure sustainable consumption and production patterns Take urgent action to combat climate change and its impacts X Conserve and sustainably use the oceans, seas and marine resources for sustainable development X Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss X Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels X X Strengthen the means of implementation and revitalize the global partnership for sustainable development X X Annex 1: Contribution of the financial and social sectors to the achievement of the SDGs 23
- 25. Annex 2: Zakah can fill poverty gaps in 20 Muslim countries (1) Country name (2) Survey year (3) GDP PPP Current USD (Billion) (4) Muslim pop. (%) (5) Adjusted GDP PPP USD (Billion) (6) Domestic Zakah (Billion USD) (7) Incoming remittances (Billions USD) (8) Domestic savings rate (% of GDP) (9) Zakah considering Remi-ttances (% of GDP) (10) resource shortfall under $1.25 per annum as % of GDP (11) Does Zakah cover (10)? Albania 2008 26.45 79.9 21.13 0.38 1.50 1.60 1.44 0.01 y Algeria 1995 129.75 98 127.16 2.29 1.12 28.11 1.77 0.14 y Azerbaijan 2008 76.73 99.2 76.12 1.37 1.55 64.89 1.82 0.01 y Bangladesh 2005 163.73 89.6 146.70 2.64 4.31 18.06 1.62 5.58 n Benin 2003 9.14 24.4 2.23 0.04 0.06 5.98 0.44 5.78 n Burkina Faso 2003 12.09 59 7.13 0.13 0.05 4.51 1.06 9.83 n Cameroon 2007 39.77 17.9 7.12 0.13 0.17 18.53 0.32 0.26 y Comoros 2004 0.63 98.3 0.62 0.01 0.01 0.00 1.77 8.89 n Cote d'Ivoire 2008 34.30 36.7 12.59 0.23 0.20 17.85 0.66 2.05 n Djibouti 2002 1.24 96.9 1.20 0.02 0.01 4.87 1.75 1.49 y Egypt 2005 333.22 94.6 315.22 6.30 5.02 15.71 1.90 0.04 y Gabon 2005 17.84 9.5 1.69 0.03 0.01 58.35 0.17 0.03 y Gambia 2003 1.46 95 1.38 0.02 0.06 11.05 1.72 5.42 n Guinea 2007 9.78 84.4 8.25 0.15 0.15 9.68 1.52 6.71 n Guinea-Bissau 2002 1.26 42.2 0.53 0.01 0.02 0.00 0.76 8.21 n Guyana 1998 1.54 7.2 0.11 0.00 0.01 16.94 0.13 0.88 n Indonesia 2009 965.57 88.2 851.63 8.52 6.79 33.76 0.89 0.39 y Iran 2005 643.50 99.4 639.64 11.51 1.03 41.09 1.79 0.02 y Iraq 2007 94.97 99 94.02 1.69 0.00 0.00 1.78 0.09 y Jordan 2006 26.14 98.2 25.67 0.46 2.88 0.00 1.77 0.01 y Kazakhstan 2007 169.63 56.4 95.67 1.72 0.22 43.84 1.02 0.00 y Kyrgyz Republic 2007 10.62 86.3 9.17 0.16 0.71 0.00 1.55 0.02 y Malaysia 2009 384.88 60.4 232.47 4.18 1.13 36.03 1.09 0.00 y Maldives 2004 1.20 98.4 1.18 0.02 0.00 46.15 1.77 0.02 y Mali 2006 12.67 92.5 11.72 0.21 0.21 14.75 1.67 8.20 n Morocco 2007 127.85 99 126.57 2.28 6.73 23.37 1.81 0.06 y Mozambique 2008 18.89 22.8 4.31 0.08 0.12 1.57 0.41 13.62 n Niger 2007 9.25 98.6 9.12 0.16 0.08 0.00 1.77 8.31 n Nigeria 2004 224.62 50.4 113.21 2.04 2.27 0.00 0.91 8.26 n Pakistan 2005 340.26 96.3 327.67 5.24 4.28 15.21 1.55 0.91 y Senegal 2005 18.21 96 17.48 0.31 0.79 14.09 1.74 3.05 n Sierra Leone 2003 2.72 71.3 1.94 0.03 0.03 0.00 1.28 16.10 n Suriname 1999 2.02 15.9 0.32 0.01 0.00 11.25 0.29 0.61 n Syrian Arab 2004 70.02 92.2 64.56 0.97 0.86 20.20 1.39 0.02 y Tajikistan 2004 8.77 84.1 7.38 0.13 0.25 0.61 1.51 1.70 n Togo 2006 4.96 12.2 0.61 0.01 0.23 0.00 0.22 6.42 n Turkey 2005 781.24 98 765.62 14.55 0.89 16.49 1.86 0.04 y Uganda 2009 39.81 12.1 4.82 0.09 0.75 12.52 0.22 3.10 n Yemen 2005 46.13 99.1 45.71 0.82 1.28 0.00 1.78 0.87 y Source: Mohieldin et al. 2011 24
Notes de l'éditeur
- The resulting 2030 Agenda, with its associated 17 goals, has the motto of: Ending Poverty, Preserving the Planet, While Leaving No One Behind.
- Now, this is what we know about the progress on the MDGs in the OIC (keeping in mind the caveat on data quality and robustness) : There are great successes in some areas (such as access to Water and Sanitation) and a clear lack of progress in some other, critical areas (such as the reduction of Infant Mortality goal, for example, that none of the countries in the region has met). What this tells us is not necessarily that countries focused on one priority goal (versus another one), but more about the need to continue the work, the “unfinished business” of the MDGs, and to look into aspects that go beyond the initial 8 MDGs, expanding the global goals to broader areas (and “softer” ones too, like Governance).
- Islamic Finance can also play a greater role in the years to come, helping to close the infrastructure funding gap and foster more PPP arrangements.
- Risks Dana Gas exposes some of the risks associated with the absence of established regulation and standardization both within and across countries. In the absence of a centralized national Shariah board, such as the regulatory body in Malaysia, Islamic borrowers seek the advice of trained scholars to approve contracts. The areas that require attention include: the need for stronger legal institutions that sanctify property rights and the honoring of contracts; regulation of Islamic Finance across countries with a focus on standardization of approaches; adjustments in tax regulation to eliminate the debt bias in taxation -- which simultaneously discriminates against the equity-based financing that Islamic Finance provides; incentives for academic institutions to deliver more research and innovation in Islamic financial services and products; and lastly, the active participation of national authorities into Sukuk markets to finance their public and private investments.
- Impact Investing: In 2007, the term “impact investing” was coined at The Rockefeller Foundation’s Bellagio Center, putting a name to investments made with the intention of generating both financial return and social and/or environmental impact. Impact investments are investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors' strategic goals. The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education. Core Characteristics of Impact Investing: Intentionality: An investor’s intention to have a positive social or environmental impact through investments is essential to impact investing. Investment with Return Expectations: Impact investments are expected to generate a financial return on capital or, at minimum, a return of capital. Range of Return Expectations and Asset Classes: Impact investments target financial returns that range from below market (sometimes called concessionary) to risk-adjusted market rate, and can be made across asset classes, including but not limited to cash equivalents, fixed income, venture capital, and private equity. Impact Measurement: A hallmark of impact investing is the commitment of the investor to measure and report the social and environmental performance and progress of underlying investments, ensuring transparency and accountability while informing the practice of impact investing and building the field. How do impact investments financially perform? Impact investors have diverse financial return expectations. Some intentionally invest for below-market-rate returns, in line with their strategic objectives. Others pursue market-competitive and market-beating returns, sometimes required by fiduciary responsibility. Most investors surveyed by the GIIN in 2016 pursue competitive, market-rate returns. According to the Global Impact Investing Network, the market for impact capital, currently sized at $77.4 billion, could grow over the next decade to $2 trillion, or 1% of global invested assets. Governments, foundations, banks, pension funds, private equity funds, amongst others, have a growing portfolio of impact investments (examples below). Many impact investors choose to invest through funds whose social, environmental, and financial goals match their own. Managed by the GIIN, ImpactBase is the online global directory where investors go to find impact investment products.
- The WBG articulated its approach to the 2030 Agenda around three critical pillars to achieving the SDGs, each based on commitments that we have made in recent years. These are: Data & evidence; financing; and implementation.
- Last year, the World Bank Group Global Knowledge and Research Hub joined a Technical Working Group with Bank Negara Malaysia and the Securities Commission supporting the Malaysia Green Finance Program, leveraging from our experience and expertise in green financing. The program aims to encourage investments in green or sustainable projects through the development of green Islamic finance markets initially in Malaysia, and subsequently, in the ASEAN region. Today, the program has supported the launch of the first green sukuk in the world on June 27, 2017. The sukuk is a green Islamic bond where the proceeds are used to fund a specific environmentally sustainable infrastructure project, such as the construction of renewable energy generation facility. Green sukuk have the potential to further broaden this market as well as to help bridge the gap between the conventional and Islamic financial worlds. The sukuk should be attractive to conventional investors if they offer reasonable risk-adjusted returns and are properly marketed. A sukuk that meets those criteria and provides funding for an environmentally sustainable project could be particularly attractive to environment-focused investors for two principal reasons.
- Offers investors an opportunity to finance IFC projects that aim to address access to essential services, income generation etc. to underserved target populations The program incorporates the four core components of the Green Bond Principles as recommended by the Social Bond Guidelines: I.Use of proceeds -Investments in companies that source directly from smallholder farmers; provide utilities that provide for low-income households; offer affordable health services, education, or housing to low-income people, lending to financial intermediaries with the requirement that the proceeds of IFC’s loan be on-lent to women-owned enterprises II.Process for project evaluation and selection -selected from IFC’s loan portfolio by specialists III.Management of proceeds –proceeds segregated and invested by IFC’s Treasury in accordance with IFC’s liquid asset management investment guidelines IV.Reporting -On an annual basis, IFC will publish the list of projects which have received funding from social bond proceeds in the previous year. Subject to confidentiality approvals Eligible Projects will generally involve investments in: Companies that source directly from smallholder farmers Utilities (e.g. Electricity, gas, water) that provide low-income households with better access to services Companies that provide health or education services, or housing to low-income populations in more affordable ways Companies that provide goods and services to low-income populations Companies that provide access to telecommunication and payment platforms in markets that include the low-income segment Lending to financial intermediaries with the requirement that the proceeds of IFC’s loan be on-lent to women-owned enterprises