HOW DOES ISLAMIC FINANCE PROMOTE THE SDGs: �INSIGHTS FROM THE INDONESIAN PUBLIC AND PRIVATE SECTORS

Presented in the 15^th ICIEF

Kuala Lumpur, 20 February 2024

Aimatul Yumna; Dian Masyita; M. Luthfi Hamidi; Greget Kalla Buana

^{Universitas Negeri Padang, Universitas Islam Internasional Indonesia, UNDP Indonesia}

Outline

1. Background
2. Research objectives
3. Data and methodology
4. Findings
5. Conclusions and implications of the study

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Background and Motivations

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• The Sustainable Development Goals (SDGs) are a set of 17 interconnected global objectives that serve as a "blueprint for achieving a more equitable and sustainable future". These goals were established by the UN General Assembly in 2015 and are meant to be accomplished by the year 2030.
• Achieving SDGs requires significant financial resources for executing the projects and initiatives across diverse sectors. Developing countries, in particular, can face significant financial constraints. The evidence of budget gaps, where the number of financial resources required to achieve these goals is less than the funds available from the government budget has become major constraints for many countries for achieving the SDGs (Lagoarde-Segot, 2020).
• Previous studies have discussed that Islamic Finance has the potential to play a transformative role in supporting the implementation of the SDGs. Despite that fact, or research has not addressed the initiatives taken by actors in the Islamic finance sector or their strategies for future use in support of the SDGs.

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Objectives

• The objective of this study is to obtain insights from the Indonesian public and private sectors on how Islamic finance may contribute to SDGs.
• The research questions:
1. Why Islamic finance needs to promote SDGs;
2. What have been done by Islamic finance practitioners in advancing SDGs in Indonesia;
3. What are the future strategies to enhance Islamic finance roles in promoting SDGs

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Qualitative Research methodology

• Triangulation Data :
• Primary data using Focus Group Discussion (FGD), including 26 representatives from 19 institutions ( government, corporate, social finance stakeholders)
• Secondary data official publications, guidelines, and policies that the government that have been released to support in the implementation of the Green Economy
• FGD procedures:
• Formal invitation to prospective respondents
• Three discussion online sessions lead by the moderator lasted for 2-3 hours per sessions
• Each participant has the chance to ask the speakers and other attendees for feedback at any time throughout the conversation. This seeks to create a lively discussion and make it clearer to identify a common theme or conclusion from the presentation that each participant has contributed.

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Qualitative Research methodology

• Three processes of data analysis
1. Data reduction : used to organize, deliberate, categorize, direct, reduce redundant data, and find themes or problems that emerge during discussion
2. Data inferencing and structuring to draw conclusion
3. Data presentation : The data will be presented with references to the FGD transcripts and recordings.

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Lists of respondents

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Lists of respondents

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Findings

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WHY DOES ISLAMIC FINANCE NEED TO PROMOTE THE SDGs

The similarity of values between Maqasid sharia and the SDGS. Maqasid al-Shariah, with its wide-ranging objectives, aligns with the broad goals of the SDGs, promoting social justice, economic equity, and environmental stewardship, which are at the heart of sustainable development.

1. Preservation of Life (Hifz al-Nafs), the first value, aligns with SDGs that focus on promoting wellbeing and health (SDG3), eradicating poverty and hunger (SDG1, SDG2), and ensuring clean water and sanitation (SDG6).
2. Preservation of Intellect (Hifz al-'Aql), as the second value, corresponds to quality education (SDG4) and reduced inequalities (SDG10)
3. Preservation of Offspring (Hifz al-Nasl), as the third value, reflects the focus of numerous SDGs that seek to ensure healthy lives and promote wellbeing for all ages (SDG3) and gender equality (SDG5).
4. Preservation of Wealth (Hifz al-Mal), as the fourth value, aligns with SDGs related to decent work and economic growth (SDG8), reduced inequalities (SDG10), and responsible consumption and production (SDG12)
5. Preservation of Faith (Hifz al-Din), as the fifth value, reflects the spirit of peace, justice, and strong institutions noted in SDG16.

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WHY DOES ISLAMIC FINANCE NEED TO PROMOTE THE SDGs

The potential use of Islamic social funds to finance SDGs.

1. Islamic finance has great potential to be used to overcome the problem of budget gap for SGDs financing. As mentioned by the respondent from National Secretariat of SDGs:

• "Even before the pandemic, the cost of achieving SDGs in Indonesia 2023 was very high. It was calculated USD 4.75 trillion, with a financing gap of USD 1 trillion” (Res-26)

2. The Integrated National Financial Framework (INFF) is a framework for integrating government budget and non-government budget to finance SDGs. In this scheme encourage collaboration with faith-based organizations, especially the National Zakat Organization and Zakat organizations to contribute to the SDGs.

3. SDGs financing hub and sustainable financing roadmap (Green sukuk, SDGs bonds, green taxonomy, ESG shares)

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WHY DOES ISLAMIC FINANCE NEED TO PROMOTE THE SDGs

• The Islamic mode of financing that encourages profit and risk sharing aims to distribute wealth more equitably in society, aligning with:
• SDGs No Poverty (Goal 1 and Decent Work and Economic Growth (Goal 8).
• Providing access financial services, leading to Reduced Inequalities (Goal 10).

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WHAT HAVE BEEN DONE BY THE PUBLIC AND PRIVATE SECTORS TO PROMOTE THE SDGs�

GOVERNMENT SECTORS

STRENGTHENING REGULATION AND INCENTIVES

• The Sustainable Finance Roadmap Phase I (2015 - 2019) which aims to increase the understanding and capacity of financial services sector players to shift towards a low-carbon economy.
• FSA Regulation No. 51/ POJK.03/2017 including: Responsible investment, Management of Social and environmental risk, Communicative information, Development of Priority sectors, Sustainable Business Strategy and Practice, Governance, Inclusive and Coordination and Collaboration.
• the Minister of Finance Regulation (PMK) Number 38 of 2023 to encourage the conversion of fossil-based vehicles to battery-based electric vehicles.
• The Sustainable Finance Roadmap Phase II (2021 -2025) was developed to become a foundation for the Financial Services Sector and a reference for relevant Ministries/Institutions in developing innovative financing initiatives. In this Phase II Roadmap, FSA is developing an ecosystem consisting of 7 components. These seven components include policies, products, market infrastructure, ministry/institution coordination, non-government support, human resources, and awareness.

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WHAT HAVE BEEN DONE BY THE PUBLIC AND PRIVATE SECTORS TO PROMOTE THE SDGs�

GOVERNMENT SECTORS

DEVELOPING SUSTAINABLE ISLAMIC FINANCE INSTRUMENTS

• Green sukuk : Indonesia is the world's largest issuer of green sukuk and a market leader for sovereign green sukuk, having issued USD6.9 billion in green sukuk since 2018. A broad range of climate-friendly initiatives, including the handling of waste, renewable energy, energy efficiency, sustainable transportation, and climate resilience, were funded with the proceeds raised from this Sukuk. As a guideline for Green Bond/Green Sukuk issuance, the government issued regulation no. 60/ POJK.04/2017 on Green Bond.
• Cash Waqf Linked Sukuk (CWLS) : Under the CWLS program, waqf arrangements are utilized to finance projects or activities with social or charitable objectives using the revenues from the sale of sukuk instruments
• Supportive actions from other government official : To support the government's goal of a green economy, the majority of Hajj Funds in Indonesia is invested in Sukuk as it provides secure and risk-free returns. However, the expert from the Hajj Fund Agency said that they actively encourage the government to use sukuk funds for sustainable projects, such as the use of green sukuk to develop Islamic and higher education facilities

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WHAT HAVE BEEN DONE BY THE PUBLIC AND PRIVATE SECTORS TO PROMOTE THE SDGs�

GOVERNMENT SECTORS

STRENGTHENING SOCIAL ROLES OF ISLAMIC BANKING SECTOR

• FSA encourages sharia banking to be able to contribute to the SDGs by strengthening its social functions and developing better synergy with other players in sharia ecosystem, especially with Islamic social sector such as
• Obtaining license as nadzir or amil
• Collaboration with existing social finance institutions for managing social funds
• Helping microbusiness sector by reducing profit/loss sharing margin for microfinancing

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WHAT HAVE BEEN DONE BY THE PUBLIC AND PRIVATE SECTORS TO PROMOTE THE SDGs�

GOVERNMENT SECTORS

ENCOURAGING THE DEVELOPMENT OF HALAL INDUSTRY

• The Halal food sector can generate sustainable food systems to combat hunger. By promoting humane, hygienic, and sustainable food production, it supports food security and also promotes good health and well-being. By promoting the halal lifestyle, the halal market will increase and lead to increased job opportunities and promote inclusive and sustainable economic growth.
• Supporting Micro and small medium enterprises and microfinance. One of the efforts that has been made by the Indonesia Hajj Fund is to channel the investment of Hajj funds into social impact investment for the microfinance program of Rp. 850 billion through non-bank financial institutions – Permodalan Nasional Madani (PNM) helps 10.5 million housewives get capital for small businesses. This microfinance funding is very useful for overcoming the economic impact of the pandemic (Res-10).

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WHAT HAVE BEEN DONE BY THE PUBLIC AND PRIVATE SECTORS TO PROMOTE THE SDGs�

PRIVATE SECTORS

ISLAMIC BANK ( Bank Muamalat Indonesia)

• Bank Muamalat as the first Islamic Bank Indonesia establishment of a zakat management institution, Baitul Maal Muamalat to conduct social function. Baitul Maal Mualamat, as carries out social functions using Islamic social funds to empower MSMEs through providing training, mentoring and financing using qard hassan scheme.
• As commercial institutions, sharia banks can play a significant role in economic growth through sharia microfinancing. Sharia banks can broaden access to finance, including the provision of microfinance services, thus enhancing financial inclusion. This can empower underprivileged communities and promote income and livelihood improvements aligning it with SDGs such as No Poverty and Reduced Inequalities.

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WHAT HAVE BEEN DONE BY THE PUBLIC AND PRIVATE SECTORS TO PROMOTE THE SDGs�

PRIVATE SECTORS

• ISLAMIC FINTECH
• Islamic fintech, in this FGDs represented by Alami Syariah, carries out several programs that support SDGs through peer-to-peer lending and the creation of new jobs.
• As mentioned by expert from Alami, this institution has distributed financing to MSMEs of more than 2 trillion in 34 provinces and connected 84,000 registered funds for 9,000 SME projects through peer-to-peer lending. Alami is also developing the sharia financing ecosystem by acquiring a rural bank and converting it into the Hijrah bank. Hijrah bank focuses on providing productive financing for MSMEs.
• ISLAMIC INSURANCE
• the expansion of takaful, an Islamic insurance concept, can contribute to enhancing social security, supporting good health and well-being. However, sharia insurance in Indonesia still faces challenges in optimize their roles in advancing SDGs since they still have problems related to limited quality of human resources with Islamic finance knowledge (Res-24).

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WHAT HAVE BEEN DONE BY THE PUBLIC AND PRIVATE SECTORS TO PROMOTE THE SDGs�

PHILANTROPY SECTOR

• ISLAMIC SOCIAL FINANCE INSTITUTION
• Rumah Zakat for example has developed their impact report based on the indicator of SDGs (Res-25)
• The Rumah Zakat has contributed to the achievement of 8 goals in the SDGs and 29 indicators, especially through village empowerment programs, such as villages without poverty, villages without hunger, improving the quality of village education, empowering village women, healthy and prosperous villages. Through these programs, Rumah Zakat succeeded in levelling up 15% of its beneficiaries from poverty.
• In addition, Dompet Dhuafa, as one of the largest zakat institutions in Indonesia, also has programs that directly contribute to achieving the SDGs. One of the programs currently being implemented is handling the impact of slow onsite disasters. Dompet Dhuafa focuses on handling because this risk has not been seriously handled by other zakat institutions even though Slow onsite disasters cause few deaths, but losses and damage are four times greater than disasters such as earthquakes (Res-11)

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WHAT ARE THE FUTURE STRATEGIES TO ENHANCE ISLAMIC FINANCE ROLES IN PROMOTING SDGs�

ACCELERATING THE DEVELOPMENT OF HALAL INDUSTRY

• The majority of the halal industry consists of MSMEs who need support for their business sustainability. The development of the halal industry will also stimulate the development of the sharia financial ecosystem ( Islamic banking, fintech and microfinance institutions)
• The halal industry's rapid expansion will stimulate economic growth through fostering employment opportunities and long-term, inclusive, and sustainable economic growth. Additionally, it can support better nutrition and food security, assisting in the fight against hunger.
• The principles underlying the halal industry promote responsible consumption and production practices, which can lead to sustainable resource use (SDG-12).
• The collaborations and partnerships of various stakeholders in fostering halal industry contributing towards achieving the SDG-17.

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WHAT ARE THE FUTURE STRATEGIES TO ENHANCE ISLAMIC FINANCE ROLES IN PROMOTING SDGs�

DEVELOPING INNOVATIVE ISLAMIC FINANCE INSTRUMENTS

Suggested innovative instruments : municipal sukuk and blended financing.

• Development of regional sukuk instruments used to fund sustainable development at the provincial level which can be utilized directly by the community, such as solar panels, healthcare facilities, and infrastructures.
• The use of a blended financing scheme which combines government funds and community funds originating from social and religious funds can be optimized for empowerment programs

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FOSTERING DIGITALIZATION FOR ISLAMIC SOCIAL FINANCE SECTOR for collection and distribution of donation through mobile app, crowdfunding and collaboration with other players of Islamic finance sector

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Conclusion and recommendations

• In order to achieve the SDGs in 2030, the synergy of various stakeholders is needed to support it. The government, the private sector (business world) and the community must work together to promote the sustainability agenda. The integration of steps between the business, philanthropic sector and government needs to be fostered and strengthened.
• The collaboration includes governments taking on the responsibility of creating and implementing national strategies and policies that align with the SDGs. It is also essential for governments to engage in effective governance mechanisms, such as transparent and inclusive decision-making processes, to ensure the participation and input of all relevant stakeholders.
• Furthermore, the Islamic financial sector has a role to play in mobilizing resources, financing for green initiatives and microfinance. Islamic social finance plays a crucial role in advocating for the implementation of the SDGs by working directly with communities, providing services, and monitoring progress towards the goals. Most importantly, supporting all actors in the halal ecosystem and accelerating the growth of the halal industry will encourage the achievement of SDGs in 2030.

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Thank you�aimatulyumna@gmail.com

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