Investing in financial inclusion for climate resilience and adaptation: the role of Islamic financial services

Briefing papers
May 2019
Margherita Calderone, Lena Weingartner and Mohammed R. Kroessin

The UN Climate Summit in September 2019 will present a significant opportunity to transform the international response on climate change resilience and adaptation. It will also provide a key space to promote innovative sources of finance and financial instruments to support climate adaptation and resilience. While there is a growing consensus recognising that financial inclusion has manifold benefits, including enhancing financial stability and building resilience, there also needs to be a realisation that, if the international pledge to foster financial inclusion and support resilience is serious, Islamic financial products must be supported to ensure that Muslim populations are not excluded from the formal financial system.

This briefing note aims to feed into the Climate Summit by examining the opportunities for investing in Sharia-compliant financial products.  Jointly developed by ODI and Islamic Relief Worldwide (IRW), it is based on an extensive literature review and on the research team’s participation in discussions at a roundtable in February 2019 on the role of Islamic financial services in financial inclusion for climate change resilience and adaptation.

Findings 

  • There is a growing consensus that financial inclusion can have a range of benefits, including for climate resilience and adaptation. Financial inclusion rates tend to be low in Muslim-majority countries: more needs to be done to develop financial services and instruments that are tailored to the context.
  •  In scaling-up Islamic financial services, more effort is needed to identify new tools and complement grant funding with different financing approaches. Greater experimentation in product delivery could help in driving down costs, while further product development could contribute to wider acceptance of Sharia-compliant financial services as instruments of financial inclusion and resilience.
  • There is also a need to further develop relationships and partnerships to connect private and public actors, as well as linking Islamic finance players and donors with mainstream climate resilience and disaster risk management.