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A New Partnership Between Islamic Finance and Sustainable Energy

As Egypt works to ensure economic and energy sustainability, it will diversify its fuel sources and its financing initiatives. Historically, Egypt, like many developing countries, has depended on fossil fuels to power its transition to an industrialized society. Yet, increased energy prices have taken its toll on Egypt’s state finances, and the government’s recent decision to lift fuel subsidies has led to an inflationary wave, as companies pass higher transport and manufacturing costs on to consumers.

Amid this difficult situation, Egypt has received US$115.6 million from the IDB to reduce its dependency on fuel imports through solar energy products in a bid to shift the country’s focus to renewable and sustainable sources of energy. This interest-free financing will allow Egypt to invest in its potential without the risk of the compounded interest undermining any future gains.

Another benefit of the Shariah compliant financing of renewable energy is that it is free of conditions that might levy negative externalities on other areas of the Egyptian economy. Although Egypt recently received US$1.25 billion from the IMF as part of the three-year US$12 billion loan agreement, the IMF’s reform conditions have contributed to the deepening of the economic crisis as experienced by businesses and consumers. The IDB’s funding of solar energy products highlights the importance of coordinating Islamic financing initiatives with the recipient government’s future needs. Ideally, such a move will also encourage investment in the renewable energy sector and the potential for public-private partnerships toward additional development.

ADIB Egypt, one of the country’s most prominent Islamic banks, has concluded multiple Islamic financing transactions in the fields of drilling; petroleum and electricity, yet an expansion into renewable energy financing could diversify its portfolio and cement the role of Islamic banks in this area.

If Egypt emphasizes its commitment to sustainable energy and ratifies its long awaited Sukuk law, it could become a destination for a relatively new trend in Sukuk known as ‘green Sukuk’. Green Sukuk is Sukuk linked to environmentally sustainable assets. By 2022, Egypt hopes to achieve 20% of its electricity generation through renewable energy sources. If this objective is satisfied, it will offset the effect of raised fuel prices once Egypt completely lifts fuel subsidies in 2021. The IDB’s approval of the initiative to fund solar energy products in Egypt is a positive step to a more sustainable growth plan for Egypt’s future.

 

This report was first published in Islamic Finance News Volume 14 Issue 31 dated the 2nd August 2017.

 

Dr Walid Hegazy

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