Social aspect is missing in Islamic finance: S&P

The Islamic finance industry could contribute to a sustainable financial system by further developing existing parallels between Sharia principles and environmental (E), social (S), and governance (G) factors, S&P Global Ratings said in a recent report.

"The 'E' and 'G' factors seem to us to be more visible in Islamic finance than the 'S', owing to the presence of green sukuk and an additional layer of governance in Islamic finance," S&P Global Ratings global head of Islamic finance Mohamed Damak wrote in the report titled,"Islamic Finance and ESG: The Missing S”.

"The 'S' factor has historically been less visible. That is because Islamic banks, as issuers themselves, do not appear to focus on their own social performance. It is not because of a lack of instruments or products," he added.

Socially responsible products do exist in Islamic finance and their size is reportedly substantial, the report said. These include “Waqf”, consisting of a donation of an asset or cash for religious or charitable purposes with no intention of reclaim. These products could make a difference when it comes to socially responsible financing.

At the same time, S&P believes it will require a proper governance framework for their use in order to reach this objective.

"Therefore, in our opinion, the Islamic finance industry is slowly realizing that it could contribute to a sustainable financial system. We think that the contribution will remain limited, though, at least in the short term," Damak added.

According to S&P, the size of the global Islamic finance industry is estimated at around $2.1 trillion at year-end 2018. Though there are no estimates on the total size of the “Waqf” assets and “Zakat” flows, it is reportedly substantial, the report added.