The recent successful conclusion of the Second Belt and Road Forum for International Cooperation in Beijing has generated considerable global interest and attention.
Attendance included the senior leadership of participating countries comprising the Belt and Road Initiative (BRI) as well as key stakeholders integral to the most ambitious cross-continental development and uplift program in history.
An estimated 64 billion U.S. dollars of investment deals were signed during this year’s forum, which is indicative that BRI-related projects are not only gaining momentum but enabling substantive multilateral cooperation among member nations.
An area of potential collaboration that remains yet to be operationalised, however, is Islamic finance (IF). Notably, Islamic finance is a system where the provision and structure of financial services is in line with the rules and principles of Shariah (Islamic legal code). Key tenets include the prohibition of the use of interest, absence of uncertainty in financial contracts and profit & loss sharing in financial transactions.
More importantly, a range of “sin” sectors of the economy that include alcohol, conventional financial services, gambling, smoking, weapons and pornography is studiously avoided.
It is within this context that Islamic Bonds (Sukuk) can play a central role in supporting and advancing the financing needs of BRI projects while also enabling mobilisation of capital for initiatives that will maintain a net positive impact socially for all countries.
The principles of Islamic finance are grounded in the timeless values of social justice and betterment of humankind that provides the broader moral arc for ethical and equitable business practices.
Given the prudent decision of the Chinese leadership to significantly expand environmentally sustainable and climate-friendly infrastructure projects, there is a distinct opportunity to unlock the combined synergies through the convergence of Islamic finance and funding of the BRI.
The ideal mechanism for this would be through Sukuk or, more specifically, Silk Road Green Sukuk.
Case for Silk Road Green Sukuk
Sukuk financing has demonstrably come of age as a preferred asset class of choice by institutional investors globally and by market participants in key regional blocs that encompass the BRI. Sukuk issuance per annum has consistently been hitting the 90-110 billion U.S. dollars range in recent years.
2017 saw the landmark green Sukuk issuance in Malaysia and a new milestone was reached in February 2018 with the 1.25 billion U.S. dollars Indonesian sovereign Sukuk.
What this means for China and BRI participating countries is that an alternative financing vehicle is available to issuers who are looking to diversify their investor base, while managing their balance sheet risk profile.
Silk Road Green Sukuk would be a natural fit not only due to the underlying financing structure, which would be asset-based and potentially aligned with a profit/loss mechanism, thereby risk-sharing, but also due to its adherence to the International Capital Market Association’s Green Bond Principles and/or compliance with the Climate Bonds Initiative.
More importantly Silk Road Green Sukuk will be contributing towards the financing of low-carbon and climate resilient infrastructure projects that has become a central plank of President Xi’s vision for BRI projects.
As the range and depth of BRI projects in Central Asia, West Asia & Southeast Asia and Africa widen and green financing is prioritised, the Silk Road Green Sukuk can emerge as a viable option within the existing set of conventional debt financing tools available. The formation of responsible economic bloc comprising the BRI countries will be setting new standards for other countries to emulate.
As the global economic architecture undergoes a long-awaited reordering, the BRI has demonstrated that the partnership-based growth plan is a “win-win” for all concerned parties. International collaboration and partnership will be essential for shared prosperity and growth, and it remains to be seen whether Islamic financial institutions will capitalise on the opportunity to work with key Chinese stakeholders and the Asian Infrastructure Investment Bank to make this a reality.
The Role of Islamic green finance must be considered as game changing not only within the ambit for funding of BRI projects but within international capital markets as the shift towards a more responsible and sustainable economy gathers pace globally.