By Gokhan Ergocun and Bahattin Gonultas
TUNIS, Tunisa
Islamic Development Bank (IDB) Group President Bandar Hajjar on Monday called for using innovative methods to boost long-term investments in sustainable development.
Speaking at the 13th Global Forum on Islamic Finance held under the 43rd annual IDB meeting in capital Tunis, Hajjar said: "According to World Bank estimates, more than $10 trillion is invested in negative interest rate bonds; $24.4 trillion is invested in low-yield government securities; and $8 trillion is sitting in cash, waiting for better investment opportunities."
He said there was a $2.5 trillion gap in annual investments to meet sustainable development goals.
"Besides the scale of the amount required to fund the sustainable development, the major issue is that funds are required for a longer term."
Mentioning international organizations such as the International Monetary Fund, Organisation for Economic Co-operation and Development and Islamic Development Bank, he said various policy initiatives had been endorsed to mobilize the institutions and to address the potential detrimental effects of a prolonged underfunding of long-term investment.
Islamic finance, as experienced by many centuries based on risk-sharing principles and asset-backed financing, could provide a possible solution, he said.
"The risk and reward sharing nature of Islamic finance helps in aligning the interest of all parties and ensure a fair distribution of income among parties that ideally should promote investment for longer tenures."
Islamic financial services, which is still in its “infancy stage”, are growing incrementally over the past 20 years, surpassing $2 trillion marks in terms of total assets, he said.
Strong financial system needed
"For Islamic finance to be effective in addressing the long-term funding gap, the Global Report on Islamic Finance stresses the need to strengthen the financial system by developing a supportive legal, administrative and regulatory environments conducive to risk-sharing."
The roles of the private sector and capital markets are pivotal in mobilizing long-term financing by engaging long-term investors, he said.
He also said adequate policy interventions could make Islamic finance a catalyst to close the funding deficit for long-term investments.
IDB -- practicing Islamic finance for more than 40 years -- has embarked on a new initiative to reposition the bank in the changing development finance landscape in the wake of the 2030 global agenda for sustainable development goals, he said.
Michael Bennett, head of derivatives and structured finance at the World Bank, said, in 2017, the World Bank issued $55 billion of bonds, managed approximately $170 billion of assets and entered into over $160 billion notional amount of derivatives transactions.
“Virtually all of this activity was executed in conventional form, and, therefore, it is very clear [and will come as no surprise to anyone in this room] that the World Bank is fundamentally a conventional financial institution; not an Islamic one,” Bennett said.
He underlined that they believed the goals, principles and structures that underlie Islamic finance were fundamentally in line with their own objectives as an international development institution.
There are three clear areas of commonality between the World Bank’s mandate and Islamic finance, Bennett said.
Three commonality areas
"First, an emphasis on financial inclusion; second, a concern with the morality of an investment and not just its risk-adjusted returns and third, a focus on long-term investment as opposed to short-term trading."
Mentioning Global Islamic Finance Report's subject -- the focus on long-term investment --, he said that long-term finance was absolutely critical to building a more sustainable global economy.
"If you consider, for example, the 17 areas addressed by the sustainable development goals agreed at the United Nations in 2015, all of them require long-term investment.
“Achieving these goals, which cover areas like infrastructure, health, education and climate change, will require trillions of dollars of spending annually, and it simply doesn’t make sense to finance on rolling, short-dated basis investments that have long return periods.
"Islamic finance provides us with a multiplicity of real asset-based structures that facilitate long-term investment. But equally importantly, Islamic finance provides us with a robust ethical framework that encourages investors to focus on the long-term through its discouragement of speculation and its requirement that finance be linked to the real economy.
“In other words, Islamic finance provides both a product toolkit and a mindset conducive to long-term investment.”
Representatives of 57 member states, senior government officials and ministers of finance, economy, planning and international development are attending the five-day meeting in Tunis.
On the sidelines of the meeting, several events have been organized from April 1-3, which deal with a wide range of issues, such as women empowerment, youth, preventing blindness, sustainable development, efficient water usage, global partnerships and Islamic bonds. The governing board of the bank will meet on April 4-5.
