metadata: authors: 0: author: Aassouli,Dalal
1: author: Asutay,Mehmet
2: author: Mohieldin,Mahmoud
3: author: Nwokike,Tochukwu Chiara
count: Africa
docna: 0: docna: Green Sukuk, Energy Poverty, and Climate
            Change : A Roadmap for Sub-Saharan Africa
docty: Policy Research Working Paper
subtopic: Green Issues,Islamic Finance,Energy and Environment,Energy Demand,Energy and Mining,Science of Climate Change,Climate Change and Environment,Climate Change and Health,Global Environment
teratopic: Finance and Financial Sector Development,Energy,Science and Technology Development,Environment,Health, Nutrition and Population
abstracts: cdata!: The climate change challenge and the
            growth of the Islamic finance industry, together with the
            increase in socially responsible investing, could position
            green sukuk as a key instrument for financing clean energy
            and resilient infrastructure projects as well as
            shorter-term energy efficiency projects. Expansion of a
            green sukuk market could promote environment-friendly
            projects and improve livelihoods, helping Islamic finance
            achieve its moral objectives. A roadmap shows how policy
            makers could create a green sukuk market in Sub-Saharan Africa.
repnme: repnme: Green Sukuk, Energy Poverty, and Climate
            Change : A Roadmap for Sub-Saharan Africa
display_title: Green Sukuk, Energy Poverty, and
            Climate Change : A Roadmap for Sub-Saharan Africa
listing_relative_url: /research/2018/12/30705738/green-sukuk-energy-poverty-climate-change-roadmap-sub-saharan-africa
topicv3: Energy and Extractives m1326595 507,Climate Change m1326829 567,Environment, Natural Resources and Blue
            Economy m1327391 566,Islamic Finance m1327451 324,Green Finance m1504566 3813
publishtoextweb_dt: 2018-12-18T00:00:00Z
historic_topic: Finance and Financial Sector Development,Energy,Science and Technology Development,Environment,Health, Nutrition and Population
no_of_pages: 38
author_keys: 0: author_key: 435192
1: author_key: 1383604
model_extractions: WPS8680 Policy Research Working Paper 8680 Green Sukuk, Energy Poverty, and Climate Change A Roadmap for Sub-Saharan Africa _Dalal Aassouli Mehmet Asutay Mahmoud Mohieldin Tochukwu Chiara Nwokike_ Office of the Senior Vice President 2030 Agenda, UN Relations and Partnerships December 2018
Policy Research Working Paper 8680

# **Abstract**

The climate change challenge and the growth of the Islamic finance industry, together with the increase in socially responsible investing, could position green _sukuk_ as a key instrument for financing clean energy and resilient infrastructure projects as well as shorter-term energy efficiency projects. Expansion of a green _sukuk_ market could promote environment-friendly projects and improve livelihoods, - helping Islamic finance achieve its moral objectives. A road map shows how policy makers could create a green sukuk market in Sub-Saharan Africa.

This paper is a product of the Office of the Senior Vice President, 2030 Agenda, UN Relations and Partnerships. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/ research. The authors may be contacted at jverbeek@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# Green Sukuk, Energy Poverty, and Climate Change: A Roadmap for Sub-Saharan Africa

Dalal Aassouli, Mehmet Asutay, Mahmoud Mohieldin, and Tochukwu Chiara Nwokike Key words: Green sukuk, Energy poverty, Climate change, Sub-Saharan Africa JEL Classification: F34, G00, O16
|1.<br>Introduction ................................................................................................................. 5|
|---|
|2.<br>Debt Capital Markets, Climate Finance, and Financial Stability ................................ 7|
|The Green Bond Market ............................................................................................. 7|
|Types of green bonds .................................................................................................. 8|
|Size of the market ..................................................................................................... 10|
|Challenges facing green bonds ................................................................................. 11|
|Debt Capital Markets and Financial Stability ........................................................... 11|
|3.<br>Islamic Finance and Sustainable Development: The Potential of Green_Sukuk_....... 12|
|Benefits of Islamic Finance ...................................................................................... 12|
|Types of Islamic Financial Instruments .................................................................... 13|
|Size of the Market for Islamic Financial Assets ....................................................... 13|
|The Sukuk Market..................................................................................................... 14|
|Green Sukuk Initiatives............................................................................................. 16|
|4.<br>A Roadmap for the Development of Green_Sukuk_in Sub-Saharan Africa ............... 17|
|Regional Financial Integration in Sub-Saharan Africa ............................................. 17|
|Components of the Roadmap for Sub-Saharan Africa ............................................. 19|
|Operational pillars ..................................................................................................... 21|
|Pipeline of sustainable green projects ................................................................... 21|
|Impact demand ...................................................................................................... 21|
|Deep and liquid secondary market ........................................................................ 22|
|Financial innovation.................................................................................................. 22|
|Action areas .............................................................................................................. 25|
|Standardization ..................................................................................................... 25|
|Credibility ............................................................................................................. 27|
|Impact assessment ................................................................................................. 27|
|Enabling factors ........................................................................................................ 28|
|Support from development finance institutions .................................................... 28|
|Awareness ............................................................................................................. 29|
|Effective risk management tools ........................................................................... 29|
|Political commitment and willingness .................................................................. 30|
|5.<br>Concluding Remarks ................................................................................................. 30|
|References ......................................................................................................................... 32|
|Appendix ........................................................................................................................... 36|

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|Figure 1: Key principles of the green bond process ........................................................... 9|
|---|
|Figure 2: The green bond market, 2012–16 ...................................................................... 10|
|Figure 3: Issuance of green bonds, by region, 2007–16 ................................................... 11|
|Figure 4: Sovereign bond issuances in Sub-Saharan Africa, by country, 2004–13 .......... 12|
|Figure 5: Demand for and supply of_sukuk_, 2008–21 ....................................................... 15|
|Box 1: The Tadau Energy Green sukuk ............................................................................ 16|
|Figure 6: Regional financial integration instruments that could promote green_sukuk_in|
|Africa ................................................................................................................................ 19|
|Box 2: Differences between sukuk and thematic bonds ................................................... 19|
|Figure 7: Green_sukuk_as a responsible financing mode ................................................... 20|
|Figure 8: Roadmap for development of green sukuk ........................................................ 21|
|Box 3: Reform of fossil fuel subsidies .............................................................................. 22|
|Figure 9: Istisna’-ijarah structure for green sukuk ............................................................ 23|
|Figure 10:_Wakala_structure for green_sukuk_within the Union Economique et Monétaire|
|Ouest Africaine (UEMOA) ............................................................................................... 25|

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# **Abbreviations**

|AfDB|African Development Bank|
|---|---|
|BCEAO|Central Bank for the West African States|
|BOAD|West African Development Bank|
|BRVM|Bourse Régionale des Valeurs Mobilières|
|CBI|Climate Bonds Initiative|
|CFA|Communauté Financière Africaine|
|CFTA|Continental Free Trade Agreement|
|COP|Conference of Parties|
|ESG|environmental, social, and governance|
|LCBM|local currency bond market|
|OECD|Organisation for Economic Co-operation and Development|
|REC|regional economic community|
|SDG|Sustainable Development Goal|
|SRI|sustainable and responsible investment|
|SSA|Sub-Saharan Africa|
|UEMOA|Union Economique et Monétaire Ouest Africaine|
|UNFCCC|United Nations Framework Convention on Climate Change|

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# **1. Introduction**

On September 25, 2015, countries appropriated a set of 17 Sustainable Development Goals (SDGs) to end poverty, secure the planet, and ensure prosperity for all (World Bank 2018b). The SDGs are a call for action by all nations—poor, rich, and middle-income—to advance prosperity while protecting the planet (World Bank 2018a). The idea is that ending poverty must run inseparably from efforts to boost economic growth and address a range of social needs, including education, health, social protection, and job opportunities, while being mindful of environmental change and ecological security. For the goals to be reached, all stakeholders—governments, the private sector, civil society, and individual citizens—must be actively engaged (World Bank 2018ab).

Concurrently, efforts by the international community to take action on climate change led to the establishment of the United Nations Framework Convention on Climate Change (UNFCC), which has held annual Conferences of the Parties (COPs) since 1995. In 2015 the Paris Agreement was adopted and ratified by 178 countries, committing virtually all countries to undertake ambitious efforts to combat climate change and adapt to its effects. One of the key requirements of the climate agreement is energy transition to promote greater use of renewable energy.

Sub-Saharan Africa (SSA) is particularly vulnerable to climate change. Its suffers from energy poverty,<sup>1</sup> as well as severe flooding, coastal erosion, prolonged droughts, strong winds, crop damage, and biodiversity loss. Many case studies (IIASA 2014; UNEP 2016) present evidence of the direct link between energy access and socioeconomic benefits and rural poverty reduction in Africa.

A regional study by the World Bank suggests that less than 43 percent of the population of SSA had access to electricity in 2016, with almost two-thirds of the population (more than 600 million people) living without electricity (80 percent in rural areas) (World Bank 2018b). The investment required to implement renewable energy solutions is $1.4 trillion, an annual average of about $100 billion between 2016 and 2030 (IRENA 2016). More than 60 percent of the investment required to provide global universal access to electricity by 2030 is in SSA (OECD 2012).

Most investment can be mobilized by reallocating fossil fuel investments to renewable energies. But because funding from public and concessional sources is scarce, an engaged private sector will be needed to make significant investments in renewable energy technologies (World Bank and Climate Investment Funds 2015). Therefore, most of the international climate finance discussions emphasize the importance of using various instruments, such as derisking, to mobilize additional private sector financing.<sup>2</sup> Resources are also needed for capacity building to prepare and implement projects (Mohieldin and Verbeek 2018), put in place adaptation and mitigation measures, and develop financing instruments for climate resilient and low-carbon projects.

Traditional development financing sources include concessional public finance (domestic

> 1 A 2016 report by the Renewable Energy Policy Network for the 21st Century (REN21) shows that about 1.2 billion people (17 percent of the world’s population) live without electricity, with the vast majority in the Asia-Pacific region (44 percent) and SSA (53 percent).

> 2 This process is usually defined as blending whereby public resources are leveraged in order to mobilize additional private investments allowing for a larger investment to take place if one was to rely on public resources alone.

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tax revenue and international concessional assistance), market-related public borrowings (from public and private intermediaries) , and private finance . These financing modes are usually interest based and therefore do not comply with _shari’ah_ principles.<sup>3</sup> Islamic finance—as put forward at the Third International Conference on Financing for Development in Addis Ababa in July 2015—can both complement and provide an alternative to traditional sources of funding to realize the SDGs. The main asset classes in Islamic finance include Islamic banking (76 percent), Islamic equity and fund markets (3.3 percent), and _Takaful_<sup>_4_</sup> (1.3 percent), along with Islamic capital markets (IFSB 2018).

_Sukuk_<sup>_5_</sup> —the second-largest asset class in Islamic finance (about 20 percent of total Islamic financial assets in 2017 (IFSB 2018)—have played a key role in infrastructure financing for public and private projects (IIFM 2018). An estimated $73.1 billion worth of infrastructure _sukuk_ was issued by more than 10 countries between 2002 and the third quarter of 2015. Malaysia dominated the market (61 percent), followed by Saudi Arabia (30 percent) and the United Arab Emirates (7 percent) (MIFC 2015).<sup>6</sup> The well-established project _sukuk_ market, the depth of liquidity provided by domestic investors, and the long tenors available means that project _sukuk_ are often the financing instrument of choice for independent power producers in the Islamic world (IIFM 2018).

Green _sukuk_ could be an innovative way of financing green infrastructure. It has the potential to become a new asset class targeting both Islamic and socially responsible investors. The Saudi Electricity 2013 _sukuk_ —with a tenor of 30 years and an issuance size of $1 billion—demonstrated investors’ appetite for long-term infrastructure paper. The first issuances of green _sukuk_ , in Malaysia, demonstrated market acceptance of long-tenored green infrastructure _sukuk._<sup>7</sup> This paper attempts to show how Islamic finance could be positioned as an effective financing mode that embeds the concept of sustainability in infrastructure projects (specifically renewable energy projects) to achieve the SDGs, especially in the poorest countries in SSA. To do so, it provides a roadmap for the development of a green _sukuk_ market based on the success factors of existing _sukuk_ and green bond markets. The paper discusses how this roadmap can be deployed in SSA, by leveraging regional financial integration initiatives, particularly efforts by the Union Economique et Monétaire Ouest Africaine (UEMOA).

The roadmap tackles three key objectives—maintaining financial stability, meeting climate finance needs, and promoting Islamic financing—by leveraging regional financial

> 3 Islamic finance has great potential in SSA, which hosts a growing share of Muslims. A report by the Pew Research Center projects the share of the world’s Muslims living in SSA to increase from 16 percent in 2015 to 27 percent in 2060, surpassing the Middle East and North Africa as the region with the second-largest Muslim population (after Asia Pacific) in the next 20 years (Pew Research Center 2017).

> 4 Takaful is Islamic and Sharia compliant form of insurance. A cooperative system of reimbursement or repayment in case of loss.

> 5 Sukuk structures are based on Islamic legal contracts and depend on the size of the projects financed, the obligors’ risk appetite, and the nature of the underlying assets. As sukuk involve a transfer of assets (in the form of a true sale or a sale of beneficial ownership) to the issuing entity, a trust or a special purpose vehicle is often used.

> 6 The _sukuk_ market in Malaysia is unique in that retail investors are prepared to put resources into greenfield ventures (Ho and Wong 2017).

> 7 Issues included the 16-year green _sukuk_ by Tadau Energy (Edra Power) in 2017, the 18-year green _sukuk_ by Quantum Solar Park (Semenanjung Sun BHD) in 2017, and the 18-year green _sukuk_ by Mudajaya Group Berhad (Sinar Kamiri) in 2018.

6
integration initiatives. By contributing to mainstreaming and building green infrastructure, this paper also demonstrates how such innovation in infrastructure financing could foster the universalization of Islamic financing in sectors and regions with development financing gaps. The paper discusses how social innovation can be associated with environmental responsibility and economic viability in order to promote responsible and universal Islamic finance.<sup>8</sup> The paper is structured as follows. Section 2 discusses the role of debt capital markets in meeting climate finance needs and promoting financial stability. Section 3 describes the potential of green _sukuk_ and its impact on sustainable development. Section 4 provides a roadmap for the development of green _sukuk_ in SSA. Section 5 provides concluding remarks.

# **2. Debt Capital Markets, Climate Finance, and Financial Stability**

International mobilization to tackle climate change reflects efforts to implement the 2030 agenda on sustainable development and the Paris climate change agreement. The SDGs give a central place to environmental issues through the implementation of objectives directly related to the preservation of the planet that take into account the equilibrium of the ecosystem and the well-being of humans. SDG 7 (on clean and affordable energy) is directly linked to the development of renewable energies and to guaranteeing inclusive access to reliable, sustainable, modern, and affordable energy services.

Green energy projects are capital intensive, requiring long investment horizons. Barriers— including higher upfront costs, higher perceived risk, and longer investment timelines than fossil fuel–based alternatives—constrain private investment in clean energy infrastructure (OECD 2014).

The financial industry can play a critical role in building a stable and prosperous economy when it is managed with accountability. Capital markets are a key segment of this industry. Their role is to mobilize the resources needed to finance projects and activities by connecting investors and issuers, whether private, public, or semi-public. Bond markets complement banks and stock markets in deepening the financial market of an economy, which directly affects economic growth (Thumrongvit, Kim, and Pyun 2013). In developed bond markets, institutional investors (banks, pension funds, insurance companies) dominate the investor base. In contrast, in emerging markets, banks and financial institutions are the largest investors (IOSCO 2011).

The global bond market is estimated at $90 trillion (CBI 2016a). It has the potential to bridge the climate finance gap by mobilizing debt financing from a wider investor base than only banks. Institutional investors generally seek stability and yield. Historically, they have shown a strong appetite for long-term debt and project financing with proven and stable cash flow (Norton Rose Fulbright 2012).

# **_The Green Bond Market_**

For more than a decade, the World Bank Treasury has been developing innovative financial instruments to connect investors with the purpose of particular financings. It has done so

> 8 Social innovation implies social equity, inclusion, and the meeting of the needs of vulnerable groups without compromising the well-being of future generations.

7
by creating products such as green bonds and focusing on project impacts when communicating with investors about all World Bank bonds (World Bank 2018b).

In 2007 and 2008, it introduced green bonds, in response to the growing demand for investment opportunities that incorporate environmental, social, and governance (ESG) criteria and have sustainable impact. As part of its Strategic Program for Development and Climate Change, the World Bank worked with Skandinaviska Enskilda Banken AB to develop the concept of green bonds. The concept is based on five pillars: simplicity, governance, credibility, traceability, and transparency.

A green bond is a bond that provides funding for green projects, such as renewable energy, low-carbon transport, and other low-carbon projects that can contribute to climate change adaptation or mitigation. It is an investment vehicle that integrates the fiduciary element of fixed-income instruments with an awareness of mitigation and adaptation to the climate, thus providing investors with climate-related investments. Green bonds have the same characteristics as traditional bonds but with obligations on the use of proceeds.

# **_Types of green bonds_**

The Climate Bonds Initiative (CBI) distinguishes four categories of green bonds:<sup>9</sup>

- Green use of bond proceeds: A debt obligation with recourse to the issuer that ring-fences proceeds in a subaccount to ensure traceability.

- Green use of proceeds revenue bonds: An obligation without recourse to the issuer; recourse is to the financial flows arising from the project in which the proceeds of the issue of the bond are invested.

- Green project bonds: A project bond with direct exposure to the risk of the project without recourse to the issuer; proceeds are allocated to one or more specific projects.

- Green securitized bonds: A bond collateralized by one or more specific eligible projects and assets.

The CBI also distinguishes labelled green bonds from unlabeled ones. Labelled green bonds are bonds whose proceeds are earmarked for green projects and designated accordingly (CBI 2016). Unlabeled green bonds meet certain criteria, such as investing in projects with lower CO2 emissions, but do not meet all the characteristics of green bonds, such as the segregation of funds and direct financing of green projects. Figure 1 summarizes the key principles of the green bond process.

> 9 https://www.climatebonds.net/market/explaining-green-bonds.

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# **Figure 1: Key principles of the green bond process**

<!-- Start of picture text --> Governance : Determine the Traceability :<br>Define criteria process for Compliance Segregation of Transparency :<br>selecting the /Credibility : issue funds into Provide impact<br>for eligible<br>projects to be Second Opinion a separate reporting<br>green projects financed account<br><!-- End of picture text --> Green bonds have become popular in many jurisdictions, and the market has grown to attract municipalities, corporations, and multilateral development banks. The European Investment Bank, the International Finance Corporation, the African Development Bank, and the Asian Development Bank as well as municipalities and municipality-linked public entities in France, Norway, South Africa, Sweden, and the United States have issued green bonds. The main investors are pension funds and other institutional investors, but some green bond issues have also been tailored for retail investors.

Since the COP 21 in Paris, green bonds have been considered an investment option that can help countries meet their financial commitments on climate change. The International Energy Agency (IEA) estimates that transitioning to a low-carbon economy compatible with the objective of maintaining a rise in temperatures of no more than 2°C will cost $500 million a year by 2020 and $1 trillion annually between 2020 and 2050 (IEA 2014) Growing investor comfort with simple green bonds allowed the World Bank Group to develop green growth bonds—green bonds linked to an ethical equity index. In March 2017, the World Bank Treasury, working with BNP Paribas, launched a pioneering indexlinked bond to support the SDGs that is linked to an equity index developed by Vigeo Eiris and Solactive (World Bank 2018b). The index has been curated to offer a framework for equity investment in projects to assist with the achievement of the SDGs. It includes 50 companies that, based on an analysis by Vigeo Eiris, incorporate global ESG standards, are not involved in contentious activities or dangerous controversies, are not among the most intensive carbon emitters (unless they have a robust energy transition strategy), and contribute to the SDGs through their behavior and participation in sustainable investment products (World Bank 2018b). The first World Bank SDG–linked bonds linked to this index raised about $200 million through capital-protected notes issued in two tranches, with 15- to 20-year maturities.

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underlying Islamic finance could increase financial sector stability (Ahmed et al. 2015). The philosophies of sharing risk and linking finance to the real economy would limit the amount of debt that can be created as it cannot exceed the value of the physical asset. The barring of derivative instruments for speculation would make the system comparatively resilient and stable (Ahmed et al. 2015).

Immediately after the global financial crisis, Islamic banks were more resilient and attained higher credit and asset growth than conventional banks (Hasan and Dridi 2010). Islamic banks were evaluated more positively by rating agencies in the postcrisis era. In the period preceding the crisis (1995–2007), Islamic banks had higher capitalization and liquidity reserves tan conventional banks, demonstrating more stability (Beck, Demirgüç-Kunt, and Merrouche 2010).

There is concern that the Islamic financial sector is imitating its conventional counterpart and could encounter similar problems (Ahmed et al. 2015). In particular, Islamic financial institutions seem to be using mainly debt-based contracts; the use of equity-based modes is minimal (Khan 2010; Asutay 2012; Mansour, Ben Jedida, and Majdoub 2015). Expanding the role of Islamic finance in equity-based capital markets would require increasing its share in both stock and _sukuk_ (bond) markets.

# **_Types of Islamic Financial Instruments_**

Islamic financial instruments can be divided into three categories (ISRA 2016; Asutay 2015):

- Exchange-based contracts, including sale-based contracts ( _murabahah_ [mark-up sale]); _istisna’_ [manufacturing sale]; and _salam_ [forward sale]) and lease-based contracts ( _ijara_ ).<sup>13</sup>

- Agency contracts ( _wakalah_ )

- Partnership contracts ( _musharakah_ and _mudarabah_ ).

_Sukuk_ can be structured based on several types of contracts. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) distinguishes 14 _sukuk_ structures. The most frequently used are _murabahah_ , _ijara_ , _wakalah_ , _istisna’_ , _musharakah_ , _mudarabah,_ and _salam_ .

# **_Size of the Market for Islamic Financial Assets_**

Islamic financial assets increased at an annual rate of 17 percent between 2009 and 2013 and are estimated to have surpassed $2 trillion in 2014 (The Economist 2014). This rapid increase explains their increasing significance as an alternative mechanism in infrastructure financing (World Bank 2013).

The outstanding performance of the Islamic finance industry between 2009 and 2013 reflects the impressive growth of the Islamic banking sector, which dominates the global portfolio of Islamic financial assets (accounting for 80 percent of total assets in 2013).

> 13 In a _musharaka_ contract, two or more parties agree to contribute to the capital of the partnership (in cash or kind) and share profits and losses. In a _mudaraba_ contract, the investor or capital provider ( _rabb ul Mal_ ) contributes money and the manager ( _mudarib_ ) provides work in exchange for a share of the profits. The investor bears all the losses.

13
Expansion of the Islamic banking sector took place through the establishment of new institutions as full-fledged stand-alone banks, the creation of subsidiaries, and the opening of Islamic banking window operations by conventional banks. It led to the widening of the range of financial services offered (IFSB 2014).

Islamic finance is still in its infancy stage in Africa. Egypt and Sudan are established markets, but few initiatives have emerged in North, East, or West African countries.

Islamic financial products accounted for about 15 percent of total financial assets in SSA at the end of 2014, and _sukuk_ represented 5 percent of the region’s Islamic financial assets (IMF 2016). The region accounts for only 1 percent of global Islamic finance assets.

# **_The Sukuk Market_**

_Sukuk_ are defined as certificates of equal value representing undivided ownership shares of tangible assets, usufructs, and services or (in the ownership of) the assets of particular projects or special investment activity (AAOIFI 2008). Bond markets in traditional finance are customarily debt based. In contrast, _sukuk_ can take various forms, including partnership based ( _musharakah_ and _mudarabah_ ). The risk-sharing features of these instruments can potentially enhance the stability of the financial markets (Ahmed et al. 2015).

The _sukuk_ market is one of the fast-growing segments of the Islamic finance industry, having grown at a compound annual growth rate of 5.8 percent for the period 2012-2016 (ICD-TR 2017). _Sukuk_ accounted for 19.5 percent of global Islamic finance assets at the end of 2017 (IFSB 2018).

Since the first _sukuk_ issuance, in 1990, by Shell Mds Bhd in Malaysia, the market has developed significantly, with new entrants from non-Islamic sovereigns and corporates and increasing cross-border transactions. _Sukuk_ have increasingly become an important source of funding for a few countries in Asia, Europe, and Africa. The total amount of _sukuk_ outstanding in 2017 reached $434.8 billion (IFSB 2018), and global _sukuk_ issuance is expected to reach $395.5 billion by 2020 (ICD-TR 2015). Figure 5 shows the evolution of demand for and supply of _sukuk_ since 2008, with projections through 2021.

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The market also witnessed the beginning of thematic issuances, such as socially responsible _sukuk_ ( _e.g._ the _sukuk_ by the <mark>International Finance Facility for Immunisation</mark> (IFFIm)),<sup>14</sup> which could influence future developments of the _sukuk_ market and direct efforts toward Islamic finance. These thematic issuances may mark the launch of a themed _sukuk_ market similar to the thematic bond market, where issues that focus on water, vaccines, microfinance, green banking, women, and similar themes have been developed to meet specific investor and financing needs.

# **_Green Sukuk Initiatives_**

A few green initiatives were launched in recent years. They include the following:

- The 2012 _sukuk_ of the Australian companies Solar Guys International and Mitabu, worth $100 million, for the financing of a 50-megawatt photovoltaic project in Indonesia, the first phase of the Indonesian program “One Solar Watt per Person”

- The 2012 _sukuk Orasis_ instrument for the financing of solar energy projects in France

- The 2012 establishment of a Green Sukuk Working Group in the United Arab Emirates (by CBI, the Clean Energy Business Council of the Middle East and North Africa, and the Gulf Bond and Sukuk Association), which aims to design transactions in compliance with the climate bonds standards and facilitate the development of a green _sukuk_ market through standardization and awareness.

In 2014 the Malaysian Securities Commission developed a framework for sustainable and responsible investment (SRI) _sukuk_ that encompass environment and social elements to facilitate the financing of various sustainable and responsible investment initiatives. It addresses five areas: utilization of proceeds, eligible SRI projects, disclosure requirements, appointment of independent experts, and reporting. Eligible projects under the SRI framework include natural resources, renewable energy and energy efficiency, community and economic development, and _waqf_ property/ assets.

The Kazanah RM 1.27 billion (USD 320.8 million) _sukuk_ program and the Tadau Energy green certified _sukuk_ were established under the SRI _sukuk_ framework. These initiatives, remain limited, however. They need to be expanded, with the support of governments and development finance institutions.

# **Box 1: The Tadau Energy Green sukuk**

<mark>On July 27, 2017, Tadau Energy Sdn Bhd (Tadau Energy), a subsidiary of Edra Power Holdings Sdn Bhd, a China-owned holding, issued RM 250 million of SRI</mark> _<mark>sukuk</mark>_ <mark>, the first green</mark> _<mark>sukuk</mark>_ <mark>issued in Malaysia. The</mark> _<mark>sukuk</mark>_ <mark>have a tenure of 2–16 years and have been assigned a long-term rating of AA3 by RAM Rating Services Berhad. Proceeds from the Tadau</mark> _<mark>sukuk</mark>_ <mark>will be used to finance the construction and maintenance of solar photovoltaic (PV) plants with a total capacity of 50 Mega Watt in Kudat (the Sabah Project). Tadau has two 21-year power purchase agreements with Sabah Electricity Sdn Bhd (SESB) to design,</mark>

> 14 The IFFIm _sukuk_ were based on the _murabaha_ structure. The issuance proceeds were allocated for immunization programs in the world’s poorest countries through GAVI, the Vaccination Alliance.

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<mark>construct, own, operate, and maintain the plants. The</mark> _<mark>sukuk</mark>_ <mark>were issued under a framework jointly developed by the Securities Commission, Bank Negara Malaysia, and the World Bank Group.</mark> <mark>Several incentives were put in place to attract green issuers:</mark>

- <mark>Tax deduction until the year of assessment (2020) on the issuance costs of the</mark> _<mark>sukuk</mark>_ <mark>were approved, authorized by, or lodged with the Securities Commission.</mark>

- <mark>Tax incentives were provided for green technology activities in energy, transportation, building, waste management, and supporting services activities.</mark>

- <mark>Financing incentives under the Green Technology Financing Scheme were provided, with the allocation of RM5 billion through 2022.</mark>

<mark>Tadau Energy’s green</mark> _<mark>sukuk</mark>_ <mark>framework has been certified by the Oslo-based Centre for International Climate and Environmental Research (CICERO), which rated it “dark green,” its highest rating, granted to projects and solutions that correspond to the long-term vision of a low-carbon and climate-resilient future.</mark> In principle, the conformity of _sukuk_ with _shari’ah_ according to the _maqasid_<sup>15</sup> theory implies that social outcomes should be an integral part of the outcomes expected to be produced. _Sukuk_ should be qualified as green if it finances green projects (renewable energy, green transport, energy efficiency, and so forth). Transparency and impact measurement should standardize and facilitate the granting of the green label to _sukuk_ (Aassouli 2016).

**4. A Roadmap for the Development of Green** **_Sukuk_ in Sub-Saharan Africa**

This section proposes a roadmap for the development of a green _sukuk_ market and shows how the roadmap can be deployed in SSA by leveraging regional financial integration initiatives.

# **_Regional Financial Integration in Sub-Saharan Africa_**

SSA has been heavily dependent on external grants and concessional loans for funding capital spending and government deficits; only a few countries have access to global capital markets (Mu, Phelps, and Stotsky 2013). Since the global financial crisis, SSA countries have increasingly tapped international investors as an additional source of sovereign financing. Doing so has tremendous potential benefits, allowing countries to supplement low domestic savings, further diversify the investor base, extend the maturity profile of debt profiles, and help address declining access to concessional financing (Battaile, Hernandez, and Norambuena 2015).

> 15 _Maqasid_ means objective, principle, intention, end, _telos_ (in Greek), or finality (Ibn ‘Ashur 2014). _Maqasid_ are based on multidimensional and ethical considerations, including environmental ethics, that lead to overall human well-being. The science of _maqasid al shari’ah_ aims to analyze the purpose behind the rules and prescriptions of Islamic law. Chapra (2000) states that _maqasid al-shari’ah_ implies human well-being in the sense that whatever economic and financial action is taken, human well-being must be sought. Auda (2008) describes the _maqasid_ as the group of divine intentions and moral concepts that Islamic law is based on, such as justice, human dignity, free will, social cooperation, chastity, magnanimity, and facilitation. He argues that _maqasid_ are the most important intellectual means and methodologies for Islamic reform and renewal.

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African markets are generally small and unsophisticated, which creates inefficiencies and barriers to raising competitive financing. To develop domestic markets, countries have formed regional economic communities (RECs) with different regional agendas. Fourteen RECs are in operation, with all 47 SSA countries belonging to at least one.<sup>16</sup> Only four African RECs engage in regional financial integration (the process of broadening and deepening financial links within a region) (Wakeman-Linn and Wagh 2008).<sup>17</sup> They include the East African Community (EAC), the Common Monetary Area, the Union Economique et Monétaire Ouest Africaine (UEMOA), and the Economic Community of Central African States (CEMAC) (Frey and Volz 2013). The development of green _sukuk_ could build on these trends and further enhance regional financial integration while mitigating climate change, reducing energy poverty, and promoting Islamic finance.

Development of green _sukuk_ in SSA could build on four forms of regional financial integration (figure 6):

- **Currency unions:** Green _sukuk_ could leverage currency unions in Africa to foster regional integration to tackle climate change.

- **Regional exchanges:** Listing of green _sukuk_ on regional exchanges would promote credibility and transparency.

- **Regional/subregional multilateral development banks:** Regional and subregional multilateral development banks could implement green _sukuk_ programs. The African Development Bank (AfDB) already has a green bond program.

- **Subregional central banks:** Subregional central banks, such as the Central Bank for the West African States (BCEAO) and the Bank of Central African States (BEAC), could promote the tradability of green _sukuk_ through preferential regulatory treatment and their qualification under international regulations such as Basel III.

> 16 The 14 RECs are the Communauté Economique et Montaire de l’Afrique Centrale (CEMAC), the Community of Sahel-Saharan States (CEN-SAD), the Common Monetary Area (CMA), the Commission de l’Ocean Indien (COI), the Common Markets of Eastern and Southern Africa (COMESA), the East African Community (EAC), the Economic Community of Central African States (ECCAS), the Economic Community of West African States (ECOWAS), the Intergovernmental Authority on Development (IGAD), the Southern Africa Customs Union (SACU), the Southern African Development Community (SADC), the <mark>Union Economique et Monétaire Ouest Africaine</mark> (UEMOA), the Union du Maghreb Arabe (UMA), and West African Monetary Zone (WAMZ)

> 17 Other regional integration initiatives include the Continental Free Trade Agreement (CFTA), The which aims to (a) expand intra-African trade through better harmonization and coordination of trade liberalization and facilitation regimes and instruments across RECs and across Africa in general, (b) create a single market for goods and services, (c) enhance competitiveness at the industry and enterprise level, and (d) resolve the challenges of multiple and overlapping memberships (https://au.int/en).

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**Figure 6: Regional financial integration instruments that could promote green** **_sukuk_ in Africa**<sup>**18**</sup>

<!-- Start of picture text --> RFI Initiatives in Africa<br><!-- End of picture text --> <!-- Start of picture text --> Currency unions<br><!-- End of picture text --> <!-- Start of picture text -->  West African CFA<br>franc<br> Central African CFA<br>franc<br><!-- End of picture text --> <!-- Start of picture text -->  CFA green sukuk<br> Rand green sukuk<br><!-- End of picture text --> <!-- Start of picture text --> Regional exchanges<br><!-- End of picture text --> <!-- Start of picture text -->  BRVM (UEMOA)<br> BVMAC (Central<br>Africa)<br><!-- End of picture text --> <!-- Start of picture text -->  Listing: green<br>segment<br> Clearing and custody<br> Sustainability index<br><!-- End of picture text --> <!-- Start of picture text --> Regional/sub-regional<br>MDBs<br><!-- End of picture text --> <!-- Start of picture text -->  AfDB/Africa 50<br> BOAD<br> EADB<br> BDEAC<br><!-- End of picture text --> <!-- Start of picture text -->  Green sukuk<br>programs<br> Technical assistance<br> Credit enhancement<br><!-- End of picture text --> <!-- Start of picture text --> Sub-regional Central<br>Banks<br><!-- End of picture text --> <!-- Start of picture text -->  BCEAO<br> BEAC<br><!-- End of picture text --> <!-- Start of picture text -->  Regulatory treatment<br> Tax incentives<br><!-- End of picture text -->

# **_Components of the Roadmap for Sub-Saharan Africa_**

Green _sukuk_ can be used to tackle the three dimensions of sustainable development: energy security, energy poverty, and environmental responsibility. _Sukuk_ and thematic bonds share a key principle: the link to the real economy (although they differ in other ways, see box 2). This principle—one of the pillars of Islamic finance—requires the allocation of the issuance proceeds to predefined activities or projects. This traceability obligation promotes accountability and requires transparency.

# **Box 2: Differences between sukuk and thematic bonds**

Although they share similar financial characteristics, _sukuk_ and thematic bonds differ in several ways:

- Thematic bonds are concerned with the allocation of receipts from the issue to predefined projects with social or environmental impacts, whereas _sukuk_ applies to any type of activity in accordance with the principles of _shari’ah_ . Assessment of social and environmental impacts is still not developed in the Islamic finance industry in general and the _sukuk_ market in particular.

- Thematic bonds represent debt securities of the issuer to their holders, whereas _sukuk_ represent ownership (legal or usufruct) of the underlying assets.

- _Sukuk_ must be backed by a minimum of tangible assets in order to be tradable, and the value of the underlying assets must be greater than or equal to the value of the issue.

> 18 _BOAD:  West African Development Bank; BRVM: Regional Securities Exchange-West Africa; BCEAO: Central Bank for the West African States; MDBs: Multilateral Development Banks; BVMAC: Regional Securities Exchange-Central Africa; AfDB: African Development Bank; EADB: East African Development Bank; BDEAC: Development Bank of the Central African States; BEAC: The Banks of Central African States_

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Infrastructure Hub Project Pipeline, a database of future and current government infrastructure projects that allows projects to be tracked from conception to completion (https://pipeline.gihub.org/).

# _Deep and liquid secondary market_

A deep and liquid secondary market is important for the development of the _sukuk_ market in general and the green _sukuk_ market in particular. The liquidity of an instrument is generally measured by trading volume, trading frequency, bid-ask spreads, quote sizes, trade sizes, and price impact coefficients (Petrella and Resti 2017). Tight bid-ask spreads give investors an indication on the efficiency of a market; significant widening of the spread may be a signal of tension in the market.

_Sukuk_ investors face a liquidity risk arising from the underdevelopment of the secondary market, which reflects the buy and hold attitude of investors, the lack of _sukuk_ supply and new players in the market, the nontradability of certain _sukuk_ structures, and the underdevelopment of domestic fixed-income markets. Secondary market _sukuk_ volumes could improve as more and more African countries—home to a quarter of the world’s Muslims—enter the _sukuk_ market (Thomson Reuters 2017).<sup>19</sup> Larger issuances, a wider and more diversified investor base, maturity, and global interest rate volatility determine the perception of secondary market liquidity of a bond or a _sukuk_ (Nienhaus and Karatas 2017). Other factors that could foster the development of a vibrant, deep, and liquid secondary market for green _sukuk_ include preferential regulatory treatment, a transparent and well-established price discovery mechanism, and greater _sukuk_ supply.

# **_Financial innovation_**

Financial innovation consists of offering a diversified range of instruments that align the interests of Islamic and socially responsible investors while taking into consideration sustainability pillars when structuring the _sukuk._ It also consists of efficiently mobilizing climate finance funds, including fossil fuel subsidies (see box 3) and public, concessional, and philanthropic funds to attract private sector funds.

# **Box 3: Reform of fossil fuel subsidies**

The reform of energy subsidies is an important issue to consider when discussing energy transition because of their impact on budgets, economic growth, climate change, and income distribution. Subsidies make investment in the energy sector unattractive and widen the gap between rich and poor (IMF 2013). Eliminating these subsidies releases funds for green investment by stimulating demand for renewable energy. OECD analysis suggest that most countries would realize real income gains of 4 percent by unilaterally eliminating subsidies, in addition to a 10 percent reduction in greenhouse gas emissions by 2050 compared with a normal activity. India and Indonesia are taking the lead in reducing their subsidy bills below $500 billion by 2014 (IEA 2015). It is important to take into consideration the social impacts of their elimination, especially for the poor. Indonesia’s subsidy reform resulted in the reallocation of fossil fuel subsidies to education, health, and energy <u>projects.</u>

> 19 Côte d’Ivoire, The Gambia, Nigeria, d Senegal, South Africa, Sudan, and Togo have issued _sukuk_ ; Niger and Kenya are planning to do so.

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These projects are usually very localized and target bottom of the pyramid populations, mainly in rural areas. The small size of their projects creates difficulties in access to financing.

In conventional markets, green bond issuers have aggregated and securitized small projects in order to access capital at a lower cost.<sup>20</sup> Assets that could be securitized include mortgages on green buildings, loans for energy efficiency upgrades, and cash flows arising from solar and wind assets, although they do not allow the secondary market tradability of the _sukuk,_ as they represent receivables. In the case of green _sukuk_ , a _wakala_<sup>_21_</sup> enables governments to pool small projects like biomass, clean cooking energy, or solar energy and to benefit from the economies of scale to provide competitive and inclusive financing. Microfinance institutions, such as Grameen Shakti in Bangladesh, which aims to popularize solar home systems is another potential example. _Wakala sukuk_ can be backed by a portfolio of mixed assets (tangible and intangible) that can grow over time, giving issuers flexibility in selecting the underlying assets.

The West African Development Bank (BOAD) could implement a CFA _wakala sukuk_ program targeting small-scale renewable energy projects member of UEMOA.<sup>22</sup> UEMOA is part of the Economic Community of West African States (ECOWAS), whose mission is to promote economic integration among member countries in various areas, including energy and infrastructure. UEMOA is fostered by regional institutional arrangements that facilitate the integration of its financial markets, including the Central Bank of West African States (BCEAO), BOAD, and BRVM.

The CFA is used by eight West African countries (Benin, Burkina Faso, Guinea-Bissau, Côte d’Ivoire, Mali, Niger, Senegal, and Togo). It is pegged to the euro and guaranteed by the French Treasury. Many African issuers are issuing bonds in CFA in order to gain regional market share by promoting intraregional trading.

BOAD is the first non-sovereign issuer in the regional capital market, which remains the preferred area for its resource mobilization. It has an investment-grade rating (BBB by Fitch, Baa1 by Moody’s).

Regional development banks can play a key role in pooling and blending financial resources for climate finance. Climate finance, energy, and economic and financial

> 20 Examples of conventional green asset-back securities include the following (CBI 2016):

>  Hannon Armstrong issued $100 million worth of low-carbon asset-backed securities in December 2013. The securities were backed by cash flows from 100 individual wind, solar, and energy efficiency projects, all with investment-grade credit profiles.

>  SolarCity issued $54.4 million worth of securities in 2016, backed by cashflows from power purchase agreements for the electricity generated by a bundle of residential rooftop PV installations of about 5,000 of their customers.

>  Renovata America, a financing provider of the California-based Property Assessed Clean Energy (PACE), issued $217.5 million of securities in February 2016, backed by 9,252 PACE loans levied against residential properties in 27 California counties.

> 21 Wakala is used in Islamic finance to describe a contract of agency or delegated authority pursuant to which the principal (muwakkil) appoints an agent (wakeel) to carry out a specific task on its behalf.

> 22 BOAD provides UEMOA members with assistance to support their development efforts. Social actions of BOAD related to energy poverty and climate change include the facilitation of access for rural populations to microfinance and modern power services, the financing of hydro-agricultural development, and environmental protection. BOAD has mapped out an environmental and climate strategy for 2015–19 and established a dedicated department in charge of environment and climate finance. It is an observer at the <mark>United Nations Framework Convention on Climate Change</mark> (UNFCCC).

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If one considers the environmental criteria related to carbon emissions, for example, nuclear energy can be considered green. However, it creates the risk of catastrophic accidents and other side effects, such as waste treatment. The CBI excludes nuclear energy and fossil fuels from its climate bonds taxonomy. It also distinguishes labelled green bonds from unlabeled green bonds, which have a wider market. Unlabeled green bonds meet certain criteria, such as lower CO2 emissions, but do not meet all the characteristics of green bonds, such as segregation of funds and direct financing of green projects.

Few market players considered the IFFIm _sukuk_ issued by GAVI or the _sukuk Ihsan_ issued by Khazanah as green. CBI’s standard taxonomy for qualifying climate bonds includes energy, energy efficiency, transport, water, waste management, land use, and adaptation infrastructure. Each category comprises various subcategories. The energy category includes renewables, distribution/management, energy storage, and products and technology that support smart-grid and data centers using renewable energy.

Many standards have been issued _._ Multilateral development banks’ green bonds principles have enhanced transparency and understanding of the instrument.<sup>26</sup> The standards issued by Malaysia’s Securities Commission for SRI _sukuk_ have been used as principles of the _sukuk ihsane_ .

These frameworks usually distinguish five criteria that should be considered to qualify as a green bond:

- Categories of eligible projects (such as renewable energy and energy efficiency)

- Selection process

- Rules governing the management and allocation of the issuance proceeds

- Communication and impact measurement

- Conformity assessment through third-party certification.

Additional clauses are integrated in legal documentation to ensure the traceability of the proceeds. Issuance proceeds are ring-fenced in a sub-portfolio to be allocated to green eligible projects.

# _Incentives_

Incentives can help promote investment and tradability and enhance cost-effectiveness for investors and issuers. They can include tax incentives and preferential regulatory treatment. Tax incentives can be provided to investors or issuers. Examples include tax neutrality, stump duty exemption and reductions in withholding taxes. Preferential regulatory treatment increases demand for government or supranational paper. Basel III, for example, limits the capacity of banks to extend long-term financing. Limits are even stricter for green financing, which triggers additional risks. Preferential regulatory treatment by central banks could include the qualification of green _sukuk_ as High-Quality Liquid Assets

> 26 These principles were published by a consortium of 13 major international investment banks on January 13, 2014. They aim to guide issuers on the process of issuing green bonds and encourage the growth and standardization of the green bond market. At the end of 2015, more than 70 Financial Institutions were adhering to the principles of green bonds.

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(HQLAs),<sup>27</sup> their eligibility for central banks reserve management,<sup>28</sup> and the possibility of their use as collateral.

# _Credibility_

The development of reporting and impact monitoring and assessment tools will enhance the credibility of green _sukuk_ issuances. Multidimensional indicators should be used to assess the achievement of social and environmental objectives. As mentioned, Green bonds, for example, require a third-party opinion, which is important in the process of selecting investors. Investors who do not have dedicated internal teams can rely on these third-party opinions.

The _shari’ah fatwa_ adds another layer to the compliance process in the case of _sukuk_ . One option could be to combine both certifications, assuming that the assessment of _shari’ah_ compliance also requires sustainability assessment based on _maqasid_ . A transaction that fails the sustainability compliance is not _maqasid_ compliant and therefore does not qualify as _shari’ah_ compliant. Some scholars may argue that sustainability assessment is beyond the scope of _shari’ah_ compliance. However, in the _maqasidi_ approach, environmental and social risks are by default embedded in the _shari’ah_ risk. Therefore, third-party certifications on environmental and social impacts should be a component of the _shari’ah_ compliance certification.

# _Impact assessment_

Impact measurement and transparency increases investors’ confidence about the sustainability impact of the instruments they invest in. Development of environmental and social impact indicators can increase the transparency of green _sukuk_ and therefore attract a wider base of “ethical” investors. This could be done through the development of sustainability reporting and sustainability rating<sup>29</sup> methodologies. The expected impact consists mainly of increased access to clean energy, reduction in greenhouse gas emissions, and improvement in air quality. Other indicators could include reductions in respiratory diseases, deforestation, soil erosion, and degradation of biodiversity.

Several initiatives have focused on results-based financing and instruments that link financial flows with measurable performance in the field, leading to the development of scorecards. One is the Global Alliance for Banking on Values (GABV) initiative, an alliance of banks concerned about the impact of their financing. Its scorecard incorporates qualitative and quantitative criteria to measure the economic, social, and environmental impact of banks. The objective is to measure how banks can and should have a positive impact through the deployment of capital and resources. The main elements of the grid are (a) quantitative factors (financial viability, axis on the real economy); (b) qualitative factors (strategic direction, implementation, identifiable results); and (c) the Oikocredit initiative, which has developed a grid that integrates ESG criteria and identifies the strengths and weaknesses of organizations and monitors and monitors their social performance. The grid uses five main criteria: scope and inclusion (15 percent); benefits and well-being of clients

> 27 The Basel Committee’s criteria for being considered an HQLA include the credit rating, issuer type, and maximum price changes over a 30-day period.

> 28 Central banks usually restrict their reserve management to government and highly rated instruments. Adding green _sukuk_ to the list of eligible instruments would help promote the market while providing a signal of the government’s mobilization to mitigate climate change. The Central Bank of Morocco purchased $100 million of the World Bank’s green bonds in November 2016 for its reserves management. The AAA rating of the paper made the investment attractive. 29 Among the rating agencies that specialize in environmental performance are Innovest (United States), EIRIS (United Kingdom), and SAM (Switzerland). Green _sukuk_ dedicated methodologies should enhance the evaluation of their environmental impact performance.

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(40 percent); social and governance performance (30 percent); environment (5 percent); and responsibility to the community and employees.

A group of four international banks active in the green bond market, African Development Bank, Deutsche Bank, Swiss Finance Institute, and the European Investment Bank proposed a harmonized framework for impact reporting on green bonds. Its template proposes a portfolio-based report on the volume of green bond proceeds allocated to renewable energy and energy efficiency projects. Impact metrics include annual greenhouse gas emissions reduced, annual energy savings, and renewable energy capacity added.

# **_Enabling factors_**

# _Support from development finance institutions_

Development finance institutions play an important role in promoting green finance because of their mandates and status, especially in emerging economies, where they serve as enablers for the private sector and can leverage and pool resources in order to allocate them to development projects. Development finance institutions promote economic development and investments in critical infrastructure and broaden access to financial services. They include multilateral development banks; bilateral institutions; regional institutions; national development banks; and national, regional, and international funds.

Multilateral development banks (MDBs) have key attributes that enable them to raise funds in financial markets at competitive prices. They include (a) the high rating (AAA), which allows them to borrow at very low interest rates on capital markets; (b) the preferred creditor status, which ensures the multilateral development banks a priority of payment in case of difficulty of the debtor; and (c) the multiplier effect, which allows multilateral development banks to use their capital base to multiply the funds allocated to development.

MDBs played a key role in promoting thematic bond issuances through inaugural issuances.<sup>30</sup> They used a private placement format, which reduces disclosure requirements and simplifies the execution process of the _sukuk_ issued.

Support from development finance institutions can take various forms, including technical assistance and capacity building, credit-enhancement mechanisms<sup>31</sup> to improve the credit quality of the _sukuk_ issued, co-financing and grants to national governments, and concessional financing.

Africa received about $14 billion in project finance from Islamic sources between 2005 and 2012, of which $10 billion was provided by Islamic development finance institutions. Eighty percent of the funding provided was allocated to projects in North Africa (Faye, Triki, and Kangoye 2013). In SSA, where the majority of sovereigns are non-investment grade (see appendix), a _shari’ah-_ compliant guarantee on green project finance structures could make the transactions bankable and accessible to a wider range of investors (ICIEC 2016).<sup>32</sup> It could promote the development of a liquid _sukuk_ market in the region, where

> 30 The World Bank, the European Bank for Reconstructions and Development, the AfDB, and KfW dominated early issuances, providing a positive signal to the market and promoting corporate issuances.

> 31 Credit enhancement can take the form of a partial credit guarantee that enables uplifting the credit rating of the issued paper, a co-guarantee with another multilateral development banks, etc.

> 32 ICIEC is a member of the Islamic Development Bank group. It carries a credit rating of Aa3 and provides _shari’ah_ - compliant credit and political risk insurance for member countries

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the only deep and liquid domestic debt market is the Bond Exchange of South Africa (Deutsche Bank 2013). All UEMOA member states are eligible for the AfDB’s African Development Fund (ADF) concessionary window (REN21 2014); they are also members of the Islamic Development Bank (ISDB). Only Benin, Burkina Faso, Mali, Niger, and Senegal are members of Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC).

# _Awareness_

Islamic financing and environmental responsibility share a common enabling factor: awareness. Awareness promotes sustainable behaviors and societal accountability by engaging investors, financial institutions, public institutions, and civil society on sustainable development issues.

Mobilization of institutional savings requires the implementation of a dedicated communication strategy. The key message is the long-term benefits of environmental and social responsibility and the need for their embeddedness at various stages of the decisionmaking process instead of their perception as something that is “nice to have.” Changing this perception would help transform traditional _sukuk_ investors into impact investors and attract nontraditional _sukuk_ investors, such as conventional SRI investors. Awareness can be based on ethical financial education and awareness campaigns on green investments and environmental risks; support to financial institutions in integrating social and environmental factors into the supply of investment and financing instruments and technical assistance and capacity building; and the establishment of a national entity to promote awareness of ethical, social, and environmental issues.

The development of green _sukuk_ requires two levels of awareness. The first is individual awareness of ethical investing and environmental responsibility. Faith-based awareness initiatives can directly affect behaviors and social practices.<sup>33</sup> The second level of awareness is organizational. It requires industry-level mobilization. A green finance technical working group could provide a platform for the exchange of ideas by representatives of Islamic finance industry practitioners, academia, regulators, investors, international donors, and development finance institutions on green issues and assist in policy development and financial innovation.

# _Effective risk management tools_

Integrating social and environmental considerations into financing and investment decisions requires appropriate risk management tools, which will improve the risk perception of low-carbon projects, particularly in emerging economies.

A study by the World Bank shows significant differences across country groupings in SSA and distinguishes four nonoverlapping groups of countries: oil exporting, lower-middleincome, low-income, and fragile countries (Battaile, Hernandez and Norambuena 2015). This classification is important to consider when designing risk management tools to attract

> 33 The relationship between religion, environmental responsibility, and business ethics has been the object of many dialogues within or across religious groups. Initiatives include the following:

>  The interfaith declaration a code of ethics on international business for Christians, Muslims, and Jews

>  The statement from theologians, ethicists, and religious leaders in support of fossil fuel divestment and clean energy reinvestment by faith communities

>  The Islamic Declaration on Global Climate Change

>  Green churches and green mosques.

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private sector investment and institutional investors. The study highlights several risks related to international bond issuance in SSA: foreign exchange risk, the need to meet very large bullet repayments, debt sustainability, and financial instability.

Development of green _sukuk_ also requires dedicated ESG guidelines and risk management frameworks. A good example in the conventional markets are the Equator Principles, a risk management framework adopted by financial institutions for determining, assessing, and managing environmental and social risk in projects.

# _Political commitment and willingness_

Development of a financial sector requires an enabling environment, created by establishing the necessary legal foundations and regulative framework. The experience in economic and financial liberalization period since the 1990s shows the importance of political willingness and commitment for the development of financial sector.

As an emerging sector, Islamic finance needs the necessary enabling environment. Some aspects of the existing legal framework and regulatory environment can be instrumental for the development of Islamic finance, but the peculiarities of Islamic contracts require certain legal and regulative changes. Such changes may include taxation-related amendments as well as regulatory frameworks that can address the risks peculiar to Islamic financing. The objective should be the creation of a level playing field for Islamic finance.

Some countries have adopted reactive policies to respond to the needs of Islamic finance industry. Other jurisdictions have taken a proactive stance. Most Organization of Islamic Cooperation countries and most non-Muslim majority countries can be classified under the first category.

Malaysia has been proactive, adopting a top-down industrial policy under the direct guidance of the political authorities and the state. Political commitment and willingness were instrumental in the creation of an integrated and sophisticated Islamic finance ecosystem with a particular legal and regulatory environment. The Malaysian model is considered best practice in the development and expansion of Islamic finance.

Thanks to strong political commitment, Islamic finance has expanded to about 30 percent of the financial sector in Malaysia. Regulatory guidelines for SRI and green _sukuk–_ type classes have extended the Islamic financial instruments to assist with the attainment of the SDGs, which has immediately resulted in the issuance of social impact and green _sukuk_ in the country.

The Indonesian and Turkish governments have also been proactive. Indonesia’s government recently expressed its political commitment by providing a comprehensive strategic roadmap that resulted in an integrated Islamic finance industry and emphasized Islamic social finances, including a _hajj_ fund, _zakah_ management, and _waqf_ administration.

# **5. Concluding Remarks**

Mitigating climate change and achieving the SDGs by 2030 requires national, regional, and international partnerships and collaborations, as well as the development of alternative segments of modern finance. Islamic finance should take advantage of this international mobilization to promote its Islamic potential and values and universalize its model.

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Inclusive access to energy is critical if SSA countries are to achieve the SDGs. These countries must focus on green projects, which should be included in national development plans and regional agendas. Green _sukuk_ can help bridge the gap in financing so that such projects can be implemented.

Islamic capital markets should be an important source for project financing. A social, ethical, and environmental addition to the _sukuk_ market can develop necessary capacity to mobilize resources for the attainment of the SDGs development.

Implementation of the green _sukuk_ roadmap provided for SSA requires national commitments, political willingness, and international public-private partnerships. Communication and awareness-raising efforts are needed to attract investors seeking investments with social and environmental impact. Development of a green _sukuk_ market requires good governance, expertise, and awareness when dealing with ethical and sustainability issues.

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