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Islamic Finance Standards for a Post-COVID World

05 Dec, 2021

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Text of a speech by Dr. Sami Al-Suwailem, Acting Director General of IsDB Institute, during the 16th AAOIFI-IsDB Annual Conference, in Bahrain on 1 December 2021. The theme of the conference was ‘Solidifying the Foundations of Islamic Finance for the Post-COVID World through the Development of Robust Standards and Regulatory Frameworks’.

بسم الله الرحمن الرحيم

I am honored today to participate in the AAOIFI-IsDB 16th Annual Conference addressing the foundational standards of the Islamic finance industry in a post-COVID world. On behalf of the Islamic Development Bank Group, I would like to welcome all of you to this landmark event. We at the Group are proud of our productive and fruitful relationship with AAOIFI and other major standard-setting organizations of the Islamic finance industry. We greatly commend their vital endeavors to guide the industry and bring it to world-class standards.

Distinguished Guests:

The COVID crisis made it clear that without social solidarity and collective action, the safety and stability of economies across the globe will be under severe pressure. In fact, most economic challenges can be classified as “Social Dilemmas”: these are situations in which cooperation is necessary for achieving optimal outcomes, but in which deviations from the group may result in selfish, short-term, gains. This shows why moral and social values are essential for superior economic performance. From this perspective, the COVID crisis and the Climate Change crisis are of the same nature, albeit with different magnitudes and timescales.

Excellencies, Ladies and Gentlemen: 

We are familiar with the saying: “Insanity is doing the same thing over and over again and expecting different results.” We cannot keep doing what we used to do in the pre-COVID world and expect results pertinent to the very different world of the post-COVID age. We need to break the old barriers and venture into the new era with open minds and brave hearts.

Since we are meeting today to discuss foundational standards, we need to ask: What are the standards that we need to institutionalize social values so that we can contain and minimize the chances for a similar crisis in the future?

It is good to remember that we are not the only ones to ask such questions. Socially Responsible Investments (SRI) today exceed $35 trillion in size worldwide1, which is more than 10 times the Islamic financial industry. The SRI industry developed several measures to quantify and standardize social responsibility and sustainable investing, including the well-known Environment, Social Responsibility, and Governance (ESG) rating. ESG rating is increasingly becoming a mainstream tool for scoring corporations worldwide. This is a good opportunity for the Islamic financial industry to adopt the ESG framework.

Credit rating is essential, no doubt, but it is time to expand our horizon and bring the industry to the next level of responsibility towards our societies and the environment.

To be sure, there are challenges facing ESG rating, and these need to be addressed. In particular, there is yet to emerge a universal framework for ESG standards. Different rating agencies have different methodologies to measure and quantify ESG practices2.  But this means there is an opportunity here for standard-setting bodies like AAOIFI to contribute towards the convergence onto a set of clear ESG measures, at least for the Islamic finance industry.

As experts note, accounting standards took time to evolve and to be established; similarly, ESG standards will take some time before they become established. The COVID crisis is a golden opportunity to speed up the process.

Moving forward, it would be helpful if AAOIFI and sister infrastructure organizations of the industry team up with regulators and rating agencies to develop and formulate a unified framework for ESG disclosure and reporting requirements. With this framework in place, Islamic financial institutions can gradually adopt ESG standards, and show the world that they are committed towards the prosperity and welfare of their communities.

Ladies and Gentlemen: 

With this, I conclude my remarks today. Thank you for listening.

والسلام عليكم ورحمة الله

 


1 Global Sustainable Investment Review 2020, p. 9.

2 https://hbswk.hbs.edu/item/what-does-an-esg-score-really-say-about-a-company

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