Islamic Finance As a Driver for Enhancing Economic Sustainability and Innovation in the GCC

The green transition and fluctuating oil prices are creating an uncertain financial future for members of the Gulf Cooperation Council (GCC), countries such as Kuwait and Qatar which remain critically dependent on oil revenues. This, combined with a “new age of economic devastation, calls for an alternative financial system” to promote greater regional resilience, according to this paper which proposes that Islamic green finance, if regulated effectively, may hold the answers.

To withstand potential future crises precipitated by fossil fuel price shocks, supply chain disruptions, slowing demand for oil and international monetary tightening, GCC countries must urgently diversify their economies. “Focusing on non-oil sector investment and embracing sustainable and inclusive economic frameworks” is key, states author Salah Alhammadi.

The paper explores the potential of Islamic green finance to enhance diversification, economic stability, innovation and sustainable development in the GCC. Unlike conventional finance, Islamic finance emphasises ethical practices and socio-economic justice. Islamic banks pursue the same profit objectives as conventional banks but Islamic finance prohibits charging interest and focuses on wealth redistribution through profit- and risk-sharing arrangements.

Over the last decade, Islamic finance has grown significantly, demonstrating resilience even during the Covid-19 pandemic. Between 2020 and 2021, the global Islamic financial services industry expanded by 11.3% reaching an estimated US$3.06tn in 2022. This expansion marks its growth from a “niche offering to a significant part of the international financial system”.

The paper’s content analysis indicates that Islamic finance offers a “pathway to more stable and equitable economic growth” and provides a robust approach to mitigating global crises.

However, the author stresses that the development of “specialised regulatory, risk management and corporate governance frameworks” tailored to the unique features of Islamic finance are necessary to maximise its sustainable potential and long-term viability.

According to Alhammadi, Islamic finance “provides a viable alternative to traditional debt-based financing”, balancing a welfarist paradigm with the goals of profit-making and institutional stability, guided by maqasid al-shari’ah principles. These refer to the overarching ethical framework that governs decisions in the Islamic capital market.

Strategically integrating Islamic finance within the ESG ecosystem offers the region various tools to meet social and environmental  goals and align with global sustainability trends.

Green sukuk, shariah-compliant bond-like securities, are proposed as an instrument for funding green infrastructure, sustainability-linked technology and renewable energy projects. The values-based guidelines of Islamic finance enable the wholesale exclusion of environmentally or socially harmful activities from financing.

Islamic finance can also enhance financial inclusion by directly funding social welfare projects or combining microfinance with Islamic financial practices. For instance, access to credit for SMEs and under-served communities can be expanded through mechanisms like zakat, the religious obligation to give 2.5% of one’s income to those in need.

Profit- and loss-sharing arrangements, such as mudarabah and musharakah,, can also be used to provide affordable upfront financing while catalysing economic development and innovation.

Meanwhile, risk-pooling Instruments like takaful insurance along with benevolent measures such as sadaqa (voluntary gift) and qard al-hasan (interest free loans), can be used to promote economic stability, enhance crisis resilience, and provide emergency relief.

Finally, the paper indicates further research is needed into the sustainability impact of specific Islamic finance instruments, both in the GCC and on a broader global scale.