Towards Establishment of Reciprocal Relationship between Islamic Finance and Sustainable Finance: Policy Recommendations from a Regulatory Perspective

Abstract

This paper explores to derive policy implications for promoting sustainability in Islamic finance from a viewpoint of regulations. The consideration is based on comparative analysis between conventional finance and Islamic finance. At the point of this writing, standard setting bodies on Islamic finance (SSBIFs hereinafter) are less vocal in the attempts to accommodate ESG factors and/or SDGs in financial practices than their counterparts on conventional finance (SSBCFs hereinafter).

However, the Islamic doctrine has fundamental affinity with the idea of sustainable development especially in terms of social issues. There are valuable lessons in the Islamic finance which regulators in the conventional finance can learn. Their potential importance is increasing, given the prevailing call to modify the extreme capitalism which widened economic disparities across social classes through the global pandemic.

Against the backdrop, this paper presents two recommendations. One is aimed at SSBIFs to stimulate internal discussion and, based on the outcome, to disseminate the findings and thoughts more openly. The other is aimed at both SSBIFs and SSBCFs to enhance collaboration with each other. Their realization would not only contribute to the further development of Islamic finance but also bring positive externality to the conventional finance.

In this respect, 1) classification of sustainable activities, 2) disclosure on relevant quantitative and qualitative data, and 3) introduction of capital charge on banks' assets exposed to ESG risks would be most pertinent.