Sustainability in Islamic Banks 

In the past few decades, the effects of climate change have become more evident, causing significant harm to both the natural environment and socio-economic systems (Liu et al., 2015; Sun et al., 2020). According to UNEP (2023), the world suffered at least $2.8 trillion in loss and damage from climate change between 2000 and 2019, equivalent to approximately $16 million per hour. Given these alarming developments, sustainability has become a critical topic among stakeholders across various sectors. The financial sector, including Islamic finance, is no exception, as it plays a crucial role in channeling Sharia-compliant funds toward sustainable business operations.

Currently, the Islamic finance sector is predominantly driven by Islamic banks, which account for 69.3% of global Islamic finance assets (IFSB, 2023), with an annual growth rate of approximately 11% in 2022 (IFDR, 2023). However, despite this growth, the sector has not seen significant improvement in recent years, highlighting the need for thorough evaluation and improvement to enhance Islamic banks’ performance. Gaining public trust is key to the progressive development of Islamic banks. Unlike conventional banking, which has long been established and deeply integrated into mainstream economic systems, Islamic banking emerged later and has not experienced growth proportional to the global Muslim population. The 2008 financial crisis demonstrated the resilience of Islamic banking, yet there remains a need to build greater trust in its distinct principles among Muslim communities.

Islamic banks operate based on fundamental Islamic principles, including the prohibition of interest (riba), uncertainty (gharar), and unethical investments in sectors such as alcohol, gambling, and tobacco. However, merely adhering to these basic prohibitions is insufficient for Islamic banks to establish a competitive advantage over conventional counterparts. To remain relevant and progressive, they must go beyond formality and embrace a more substantive approach.

The renowned scholar Imam Al-Ghazali introduced the concept of maqasid sharia, which outlines five essential human needs: religion, life, intellect, offspring, and wealth. These principles encourage Islamic banks to consider broader ethical and social responsibilities, including environmental protection and social welfare. Consequently, Islamic banks should position themselves as leaders in ethical and socially responsible financial practices.

To transform into truly sustainable institutions, Islamic banks can implement several strategic initiatives. First, they can adopt environmentally friendly measures such as paperless banking and reducing electricity and water consumption. Additionally, they can engage in carbon-offsetting programs, such as tree-planting initiatives. However, these efforts may be perceived as symbolic since Islamic banks, as service-based institutions, are not classified as carbon-intensive industries (Furrer et al., 2011).

Second, governance-level transformations are crucial. Islamic banks can introduce performance measurements linked to sustainability indicators and establish dedicated sustainability committees to oversee environmental and social concerns. Such governance mechanisms can help align institutional objectives with sustainability strategies and drive meaningful change.

Third, product development plays a vital role in integrating sustainability into Islamic banking. Banks can offer specialized financing products at lower rates to clients implementing climate-friendly strategies, such as investing in energy efficiency programs or transitioning to renewable energy sources. By incentivizing clients to reduce their carbon footprint, Islamic banks can indirectly contribute to global emission reductions. Moreover, sustainability considerations can be embedded into core business processes, such as due diligence, advisory services, and risk monitoring, ensuring that climate-related risks and opportunities are systematically addressed.

These initiatives require a strong commitment of time and resources. In the short term, Islamic banks may need to allocate substantial financial resources to develop sustainability-driven products and services. However, in the long run, this strategic shift can provide them with a significant competitive advantage, aligning their operations with the growing global emphasis on sustainability.

Ultimately, Islamic banking should not focus solely on financial growth but also prioritize social welfare, environmental conservation, and ethical business practices in accordance with Islamic principles. As global attention to sustainability intensifies, Islamic banks must integrate these values into their core operations rather than engaging in superficial efforts. By doing so, they can meet stakeholders’ expectations and secure a larger market share, ensuring long-term success and sustainability.

Contributor: Yunice K. Tumewang