Building Capacity for Green Economy: The Role of Islamic Finance

The subject of ethics has been widely debated in Islamic finance reflecting the importance of ethical considerations in environmental management. In recent decades, rapid growth in population, urbanisation, energy consumption and per capita income have increased the demand for natural resources causing substantial damage to the ecosystem. Sustainable development is concerned with human capabilities to manage natural resources so as to protect the environment and ensure future survival. Project funding by banks could strengthen guidelines for protecting the environment through investment in green or ethical projects. Ethical investments reduce the risk of environmental degradation by selecting green projects, including green technologies, suitable for the indigenous environment. Compliance with Islamic principles restricts Islamic financial institutions from financing enterprises that cause negative externalities. To this end, ethical investments should be integrated into the banking credit decision criteria to ensure that environmental protection is given priority in business decision-making. The paper maintains that investment in green projects represents new opportunities for Islamic banks to play an important role in sustaining development and responding to the challenges facing people worldwide.