Islamic bond is a kind of financial bond form rising in Islamic countries. In recent years, a growing number of Muslim countries and areas began to be joining the ranks of islamic bonds, while green islamic bonds is a financing innovation way in the world, so that the sustainability and responsible for the sustainable development project investment under the framework of islamic bond, at the same time it also further strengthen the connection of traditional islamic bonds and bond markets.
In June 2017, the world's first Green Sukuk was issued. Tadau Energy issued bonds worth Rm250 million, which will be used for projects in Sabah Kudah. Proceeds from the green sukuk will be used for infrastructure projects with specific sustainable environmental benefits, such as the construction of renewable energy power generation facilities.
In 2016, the Global Center for Theory and Research of the World Bank, together with the Central Bank of Malaysia and the Securities and Exchange Commission, set up a technical working group to support green finance projects in Malaysia, drawing on its experience and expertise in green investment and financing. The project aims to encourage investment in green or sustainable projects through the development of a green Islamic financial market, which could be implemented initially in Malaysia and later in the ASEAN region. The bonds were issued under the auspices of the project.
Faris Hadad-Zeros, of the World Bank's Malaysian office, wrote that if the green sukuk offered a rate of return commensurate with risk and was properly marketed, it could attract many traditional investors. Green sukuk bonds meet these criteria and provide financial support for environmentally sustainable development projects, which is particularly attractive to environmentally conscious investors.
First, sukuk offers investors a high degree of certainty that their money will be used for a specific purpose. To comply with basic Shariah principles, funds raised through the issuance of sukuk must be used for identifiable assets or venture capital projects. Thus, if a sukuk is structured to fund a specific infrastructure project, such as a renewable energy project, it is almost impossible for investors' money to be diverted or used for other purposes.
Second, on the capital markets, there are more environmentally focused investment products on the asset side than on fixed income. Since most investors in environmental sustainability projects want to know how their money is being used, a bond in which the issuer meets only general obligations has limited appeal unless all of the issuer's activities meet the investor's environmental standards. Like a traditional fixed income security, green sukuk can help fill the gap of fixed income for environmental investors, and to a certain extent the proceeds from sukuk can also be used for environmental benefits.
On February 23, 2018, Indonesia issued a $1.25 billion five-year green sukuk with a coupon rate of 3.75%, becoming the first Asian country to issue a green bond in the international market.
Global green bond issuance reached $155.5 billion in 2017, according to the Climate Bond Initiative (CBI), the highest annual figure on record and up 78 percent from $87.2 billion in 2016. The top three economies are the United States, China and France.
Islamic bonds are called Sukuk, and as a part of Islamic finance, they have characteristics different from general bonds. Holders of sukuk have ownership, not claims, over the proceeds of the underlying assets, meaning sukuk bonds do not pay a coupon.
According to statistics, Asia needs 1.7 trillion US dollars in infrastructure investment every year, but the actual annual investment only covers 880 billion US dollars, far below the needs of the region. Sukuk could help bridge that gap. This innovative financial product could also be scaled globally.
