Nigeria: Is Islamic Banking a Friendly System?

Before we conclude if Islamic banking is green banking-friendly or not, let us discuss what Islamic banking is and what is environment. Later we will discuss how Islamic banking can really be good for the environment.

i) Green banking

Green banking is like a normal bank, which considers all the social and environmental factors with an aim to protect the environment and conserve natural resources. It is also called as an ethical bank or a sustainable bank. They are controlled by the same authorities but with an additional agenda toward taking care of the Earth's environment/habitats/resources.

Ideal benefits of green banking:

. Basically ethical (green) banking avoids as much paper work as possible and rely on online/electronic transactions for processing so that you get green credit cards and green mortgages. Less paperwork means less cutting of trees.

. Creating awareness to business people about environmental and social responsibility enables them to do an environmental friendly business practice.

. Green (ethical) banks adopt and implement environmental standards for lending, which is really a proactive idea that would enable eco-friendly business practices which would benefit our future generations.

. Green banking as a concept is a proactive and smart way of thinking with a vision for future sustainability of the earth.

Practices of green banking: Green banking means promoting environmental-friendly practices and reducing carbon footprint from banking activities. This comes in many forms like, i) using online banking instead of branch banking, ii) paying bills online instead of mailing them, iii) opening up CDs and money market accounts at online banks, instead of large multi-branch banks and iv) finding the local bank that is taking the biggest steps to support local green initiatives. Any combination of the above personal banking practices can help the environment.

ii) Islamic banking

Islamic banking is a system of finance based on the principles of Islamic laws where two of the main principles are sharing profit and loss and the other is the prohibition of collecting and paying interest.

All investment must reflect Islamic principles and so you can't invest in companies involved in alcohol, pork and gambling. Building on this, it could be argued that investing in ecological harmful projects is prohibited since Muslims believe that Allah has appointed humans are protectors of nature and investing in oil companies would conflict with this.

3. Global importance of green technology

Against the backdrop of current climate and environmental concerns that are the consequence of unsustainable economic activities, green technology emerges as a winning proposition. Green technology has strong potentials to stimulate economic growth while mitigating environmental degradation. There is a growing momentum in scaling up the green agenda on a global basis, with countries such as Denmark, South Korea, Finland and Germany already embarking on green technology movements in their respective countries. Since 2007, the worldwide market for green technology has grown on an average of 12% annually, and is now worth over EUR2 trillion. By 2025, it is forecasted to double to EUR4.4 trillion.

The global market for renewable energy namely wind, solar photovoltaic (PV) and biofuels has grown by more than 30% in the recent few years and is estimated to reach nearly $400 billion by 2021. Economies that have invested in the green technology sector are already reaping the benefits of the transition to green initiatives. In Germany Green technology companies contributed 11% of its GDP and employing 1.4 million workers. In the case of the solar energy sector, Malaysia is now one of the top producers in PV manufacturing and this industry has generated direct foreign investment of over RM12 billion and created over 10,000 skilled and well-paid jobs.

Some have aptly compared the green revolution to the industrial revolution, an era that had profoundly changed our civilization. Just as the transformative 19th-century innovations changed businesses, so too will green technologies alter industries, companies and societies for the environmental good, thus with these changes create new opportunities for businesses.

The shift towards a green economy affects all stakeholders like, decision makers, and policy formulators, companies and their customers. Increasingly, investors are emphasizing sustainability to the environment as an important investment criterion.

Now let us see how Islamic banking can be environment friendly or green banking friendly.

4. Potentials of Islamic Finance to support green technology

Islamic finance is seen as a 'greener' alternative; current economic systems (i.e. capitalism) put the human need for consumption above everything else. Nature is seen as a free good and so the cost of its extraction or use is not factored into the cost of production, thus encouraging its free exploitation.

In contrast, the Islamic principles which guide the economy include the notion that humans are trustees of nature who must ensure it is not harmed or unduly exploited. Furthermore, excess is consistently discouraged in favour of moderation and the welfare of the entire society is placed at the heart of every matter under consideration including finance.

Islamic banking is part of a system which values society as a whole; it is better placed to promote green finance initiatives such as developing water resources, dealing with global warming, promoting small-scale enterprises as well as encouraging women's participation.

Islamic finance contributes towards a diverse and robust financing ecosystem for green ventures. In the Quran, verses 11 to 14 of Al-Fajr emphasize the need to care for the environment and the forms of life that Allah has created on this earth that includes proper usage of natural resources. Prophet Muhammad (SAW) that mankind would be rewarded for efforts in improving greenery; making it incumbent on every Muslim to contribute towards such efforts.

The teachings of Islam basically promote preservation of natural resources and the need to respect all living things. Failure to do so would be detrimental, as stated in verse 41 of Al-Rum where severe destruction of the land and sea would come upon those who mistreat the environment. It is therefore crucial for everyone, including Islamic banks to consciously play their role towards ensuring environmental sustainability.

The role of Islamic banks extends beyond being a component of a financial system like seeking to enhance the general welfare of society. Environmental protection and sustainability should be part of the Islamic finance agenda to ensure the fulfillment and establishments of the spirit of Islamic tenets.

As the global economy is transitioning towards a low-carbon and more sustainable model, so the Islamic finance can contribute immensely towards greening of the world, engaging the necessary incentives and infrastructure in place.

5. Products and services of Islamic Finance for green banking

The greater use of equity-based models in Islamic financial solutions has been observed most contributing towards environment development. This includes participatory or equity based contracts such as Mudaraba and Musharaka that support entrepreneurial ventures. The adoption of these contracts is gradually increasing across the world over the time passes, but needs to be significantly increased. The nature of these contracts provides immense opportunities for Islamic banks to leverage on the 'green certified' SMEs to use participatory contracts which advocate profit and risk sharing between banks and the borrowers.

The sukuk market, which is a high growth segment in Islamic finance, also has an important role in supporting the growth of the green technology sector. The increasing role of the sukuk market in financing green and renewable energy projects, like installation of solar system to illustrates the appeal of Islamic finance towards the growing socially responsible investment, sustainable investments and ethical finance. There is strong compatibility between sukuk and funding of green projects, which usually require large capital outlays with long gestation periods.

6. Islam and social responsibility-environment

Ultimately, human beings are accountable to God additionally they are expected to act accordingly to other human being as well as care for the natural environment. Islam encourages the preservation of the natural environment as it is the crucial resource of life. Moreover, the sustainable development of the environment is imperative for the future generations. The Qur'an emphasizes that everything on Earth are created for humankind. Apart from the Earth being considered as a gift to all, human beings have the responsibility to preserve it. Such an expectation works in tandem with the human being playing his/her role as the guardian of Allah's resources on it. Not only that we should act fairly and with justice to other human beings, but to other species and the natural environment. Hence, it is generally a test to measure man's act of worship in its broadest sense.

From a business perspective, environment is concerned with organizations' impacts on living and non-living natural systems, including ecosystems, land, air, and water. As the custodians of the Earth (khalifah), human being relationship with the natural environment is to make sure that the Earth that is loaned to us will sustain and survive indefinitely. Man has been entrusted with the duty to be responsible and accountable to Allah as the Giver and the representative of the human race and the natural environment. Hence, every Muslims as well as Islamic business organizations are expected to embrace good ethical values, and perform social responsibility and justice to society, including caring for the natural environment.

In some countries like Malaysia, the initiative to promote greater environmental practice amongst public listed companies is evident through the introduction of the Corporate Social Responsibility (CSR) Framework, which covers marketplace, workplace, community and environment. Such a national effort has led to the increasing societal demand for businesses to act responsibly, including preserving the natural environment.

7. Is the rise of Islamic Finance good news for the environment?

Economic and ethical focus of fast expanding Islamic banks could be good news for green investments in clean energy sector according to experts. There is an increasing demand from different stakeholders that Islamic finance should also reflect the ethical, social and environmental aspects in their financing.

Even many non-Muslims are attracted to Islamic finance because they find it sound from economic and ethical perspectives. This could be positive news for the clean energy sector that in 2012 suffered a 14% drop in investment as Europe curbed green subsidies and the USA's attention was diverted from renewables to fracking.

Some analysts believe that Islamic finance will be good for the environment because it values more than just profits. Western banks are required by law to provide the best return on investment for their clients regardless of where that investment goes. Natural resources are a sacred trust and protecting them for future generations a primary responsibility. Economic growth is not (directly) a goal at all, though it may be desirable as a means to (say) poverty alleviation.

British throne Prince Charles said Islamic banking could provide the answers where conventional banking could not, given Islam's emphasis on a "moral economy". Where large Western banks have divested from oil and gas, it has generally taken place not because of 'green' reasons, but as a result of long term investment planning.