As sustainable finance continues its upward trend worldwide, green Sukuk has emerged as a corresponding instrument in the field of Islamic finance. According to accountancy firm Deloitte, the increase in the adoption of green Sukuk to finance renewables is attributable to a number of factors, including: the increase in renewable energy projects, particularly solar projects, low capital costs, favorable green energy policies and the fact that it is Shariah-compliant instrument.
Since Islamic law prohibits interest and therefore traditional, Western debt instruments, Sukuk has been created to link the returns and cash flows of debt financing to a specific asset being purchased. Unlike bond holders, Sukuk holders receive a portion of the earnings generated by the underlying assets.
With solar and green energy financing decisions affected by the continuing global credit crush impact such as banking regulatory capital requirements, corporates are actively seeking alternative financing sources such as green bonds or green Sukuk, Deloitte states. While solar energy continues to enter mainstream utilization in several Organization of Islamic Cooperation (OIC) countries, a report titled Can Sukuk become a driver of solar energy growth? analyzes 10 country cases in Asia (Malaysia, Indonesia, Pakistan), the Middle East (Kingdom of Saudi Arabia, United Arab Emirates, Bahrain, Jordan and Morocco) and Europe (Turkey and Kazakhstan) and finds that Islamic finance will be considered as one of the primary financing strategies in the year ahead.
Early movers
With global investment in renewable energy on the upward trajectory – growing from $200 billion in 2008 to $332 billion in 2018, according to Bloomberg NEF, new financing vehicles are increasingly adopted. The sustainable debt market itself has been going from strength to strength over the last couple of years. According to BNEF, issuance of sustainable debt products surged 26% to a record $247 billion last year, with issued green bonds amounting to $182.2 billion.
The new financing vehicles are being coupled with favorable policies in certain countries. Looking at the Gulf Cooperation Council (GCC) region, the markets have seen an ascending trend in recent years as all countries incorporated renewable energy targets in their National Determined Contributions (NDCs) under the United Nations Framework Convention on Climate Change, the report notes.
As one of the alternative finance techniques for green energy projects, Sukuk has been used in five renewable energy projects in Malaysia (as of December 2018), including three solar arrays developed by Norway’s Scatec Solar after issuing a 1,000 million ringgit (US $237 million) green Islamic bond. Meanwhile, Indonesia launched the world’s first sovereign green Sukuk bond worth $1.25 billion in February 2018, the proceeds of which will partially finance renewable energy projects.
Deloitte expects that the drive for more Sukuk and other Islamic financing structures such as Murabah, Ijarah and Mudaraba in greenfield projects will continue to play a major role in the solar industry investment landscape. The United Arab Emirates and the Kingdom of Saudi Arabia are tipped to lead in the GCC region, followed by Jordan, Egypt, Malaysia, Indonesia and Pakistan. “Other countries will follow suit as the market matures and become a driver of green economy in these regions,“ the report states.
Surveying industry
While the report argues that Islamic financing instruments will assume a key role in the industry, the results of an online survey carried out by Deloitte among business and finance leaders doesn't show the trend has yet taken on.
The survey found less than 20% of respondents were engaged in Islamic financing of a solar project, but 16.55% planned to explore in the near future. Only 7% of respondents thought that Islamic finance instruments like Mudarabah and Sukuk would be the ideal way to invest in solar projects, with 43% believing that Public Private Partnerships (PPPs) were the most suitable for financing projects, followed by traditional bank syndicates and public funding.
For those considering Islamic finance, equity-based (62.9%) and debt-based investments (28.78%) were considered by respondents to be the best options for investing in solar. A small number of respondents suggested that the diversified option between debt and equity could be a good method rather than investing solely in one type of financial instrument.
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