Islamic Banks and Renewable Energy in MENA

Islamic banking involves activity that is consistent with the principles of sharia law. Sharia prohibits the fixed or floating payment or acceptance of specific interest or fees for loans of money. It is also prohibited to invest in businesses that provide goods or services considered contrary to Islamic principles. Many Islamic banks were formed in the late 20th century. Now Islamic banks are are increasingly looking to support renewable energy including
hydropower, solar and wind energy. Finance is a crucially important
component of building a green infrastructure and this is especially true
in the context of economic difficulty and political volatility we are seeing in the Middle East and North Africa (MENA).

As reported in an article titled “Tapping the Renewable Energy Market,” Islamic lending institutions that create financial mechanisms will benefit the growth of renewable energy. In the Middle East and North Africa (MENA) solar power projects are driving major new investment. With projects like Abu Dhabi’s Masdar City and the German-led Desertec Industrial Initiative (DII) it is expected that the region will be able to export energy throughout the region and into Europe. The Shams Power Co. alone is partnering in a $600 million investment to build one of the world’s largest concentrated solar power (CSP) projects.

Sustainable water projects are also garnering interest from Islamic banks. One bank in particular diverted part of its real estate holdings into trade finance which led to the first Shari’ah-compliant water-focused investment strategy.

Through the UK-based Islamic investment bank Gatehouse Bank Plc people can now invest in sustainable-oriented companies that offer technology, products and services throughout the water industry. Ocean water desalination is another area which offers tremendous potential for growth. Saudi Arabia is planning to convert all of its seawater desalination plants to renewable energy by 2019. This could attract more than half a trillion dollars in private sector investment over the next five years.

Recently, Islamic banking saw the release of a green financial certificates for the financing of climate change investments and renewable energy projects. The Climate Bonds Initiative, the Clean Energy Business Council of MENA, and the Gulf Bond and Sukuk Association launched the Green Sukuk Working Group to help market and develop the best practices to promote the issuance of green financial certificates.

There is good evidence to indicate that renewable energy investments are successful ventures for Islamic banks. Between 2004 and 2007, Islamic Financier, Bahrain-based Arcapita Bank made significant gains by investing in wind power, reportedly making it one of the most profitable investments in the firms history.

Islamic banking focused on cleantech like renewable energy could significantly contribute to regional sustainability and help to generate significant returns for investors.