How Islamic banking is becoming a force for green investment in Africa
By Edward Githae
The global search for ethical investment frameworks is revealing an increasingly consequential alliance. Islamic finance and Environmental, Social, and Governance investing share principles that, taken together, reshape how Africa finances its development.
Global Islamic finance assets reach $3.88 trillion in 2024, growing 14.9 per cent year on year, according to the Islamic Financial Services Board (IFSB). Industry projections suggest the market approaches $9.7 trillion by 2029. For African economies facing acute infrastructure and climate financing gaps, the convergence of Sharia-compliant finance and ESG investing moves from theory to practice.
“Islamic finance fundamentally links finance to real economic activity and shared risk,” says Dr Bello Lawal, Secretary-General of the IFSB, in remarks accompanying the board’s 2024 stability review. “Those principles align naturally with sustainability objectives that prioritise long-term value over short-term returns.”
Parallel ethical architectures
Islamic finance operates under Sharia principles that prohibit interest (riba), excessive uncertainty (gharar), and investment in activities considered harmful, including alcohol, gambling, tobacco, and weapons. ESG investing emerges from socially responsible investment movements, applying environmental, social, and governance criteria to capital allocation.
Despite distinct origins, the overlap is substantive. Both frameworks emphasise harm avoidance, transparency, accountability, and long-term value creation. Islamic finance’s insistence on asset-backed transactions and profit-and-loss sharing mirrors ESG concerns about financial stability and stakeholder capitalism.
Empirical evidence suggests this ethical alignment does not undermine performance. MSCI analysis covering December 2012 to June 2024 finds that companies with higher ESG ratings consistently outperform lower-rated peers within the MSCI ACWI Islamic M-Series Index.
“Strong governance and sustainability characteristics reinforce resilience,” note MSCI researchers in their 2024 factor performance review. “This holds even within universes constrained by Sharia compliance.”
The sukuk–ESG nexus
The convergence is most visible in green and sustainability sukuk: Islamic bonds structured to finance environmentally and socially beneficial projects while remaining Sharia-compliant. A 2024 joint report by the London Stock Exchange Group, Islamic Finance Council UK, and the Global Ethical Finance Initiative shows green and sustainability sukuk issuance reaching $11.9 billion in the first nine months of 2024, an 18 per cent increase year on year.
Saudi Arabia’s Public Investment Fund issues a $3 billion green sukuk to support renewable energy infrastructure under Vision 2030. Indonesia positions itself as a pioneer, launching sovereign green sukuk in 2018 and returning to the market with a 30-year green sukuk, extending the maturity profile of sustainable Islamic instruments.
In April 2024, the International Capital Market Association (ICMA), the Islamic Development Bank, and the London Stock Exchange Group publish joint guidance on aligning sustainable sukuk with global green and social bond principles. “Harmonisation reduces friction for issuers and investors alike,” says Bryan Pascoe, ICMA’s Managing Director. “Clear standards are essential for scaling sustainable finance across jurisdictions.”
Because sukuk represent ownership interests in tangible assets rather than debt obligations, they suit infrastructure financing. Malaysia’s Cagamas issues sustainability sukuk to fund affordable housing, while Dubai Islamic Bank and First Abu Dhabi Bank channel sukuk proceeds into renewable energy and low-carbon projects.
Africa’s untapped potential
The timing matters for Africa. The continent faces an annual infrastructure financing gap of $130–170 billion, according to the African Development Bank. Yet Africa’s participation in Islamic finance remains marginal relative to its demographics.
Africa is home to an estimated 636 million Muslims, roughly 53 per cent of the continent’s population, based on population studies cited by White & Case. Despite this, Moody’s reports that Sub-Saharan Africa, while hosting about 16 per cent of the world’s Muslim population, accounts for around 1 per cent of global Islamic banking assets.
Issuance begins to accelerate. Nigeria, South Africa, and Egypt collectively issue $3.0 billion in sukuk between 2023 and 2024, according to Fitch Ratings. Nigeria leads, raising ₦1.09 trillion through six sovereign sukuk since 2017, all earmarked for road infrastructure.
Kenya’s market remains nascent. “Islamic finance in Kenya grows at close to 20 per cent a year, but it represents only about 2 per cent of the financial sector,” says Tego Wolasa, Head of Islamic Banking at Absa Bank Kenya, speaking to CNBC Africa in August 2024.
Kenya’s Capital Markets Authority approves the country’s first sukuk in September 2023: a Sh3 billion issuance by Linzi Finco Trust to finance affordable housing. The bond lists on the Nairobi Securities Exchange, with proceeds allocated to more than 3,000 institutional housing units.
Elsewhere, regulatory momentum builds. Uganda enacts Islamic banking legislation in 2024, enabling the launch of Salaam Bank. Tanzania introduces takaful regulations and sukuk guidelines, culminating in the country’s first private-sector sukuk. South Africa positions itself as a hub for Islamic finance fintech.
Structural constraints
Progress remains uneven. In Kenya, amendments to the Finance Act address tax neutrality, yet comprehensive Islamic banking and capital markets legislation remains stalled.
Liquidity management poses a persistent challenge. Sharia principles restrict participation in conventional interbank markets and interest-bearing government securities, limiting short-term funding options. Without Sharia-compliant liquidity instruments, profitability and competitiveness suffer.
Human capital gaps add pressure. Research by the International Centre for Education in Islamic Finance finds that 42 per cent of Islamic banks in Africa operate without certified Sharia compliance officers.
Strategic opportunities
Despite constraints, the Islamic finance–ESG nexus offers near-term opportunities.
Infrastructure financing remains the most immediate. Sukuk’s asset-backed structure aligns with renewable energy, transport, water, and housing projects. Financial inclusion expands through digital Islamic banking platforms that reach populations reluctant to engage with interest-based finance.
Climate finance mobilisation accelerates. S&P Global Ratings reports that green sukuk account for 63 per cent of sustainable sukuk issuance, reflecting alignment with energy transition priorities. “Sustainable sukuk are becoming a mainstream tool for funding climate objectives,” S&P analysts note.
For sovereigns, sukuk diversify debt profiles. Global sukuk issuance approaches $170 billion annually, with total outstanding volumes nearing $875 billion.
Policy choices ahead
The convergence of Islamic finance and ESG investing is emerging, not inevitable. Outcomes depend on regulatory clarity, institutional capacity, and execution.
African policymakers face immediate choices. Will they establish dedicated Islamic finance frameworks, as Uganda and Tanzania do, or continue treating Sharia-compliant products as exceptions? Will they develop sovereign sukuk programmes, as Nigeria does, or rely solely on traditional funding?
Financial institutions decide whether to invest in Islamic banking capabilities or cede the market. “First movers capture trust and market depth early,” Wolasa says.
International investors weigh higher initial transaction costs against long-term positioning. A Standard Chartered survey shows 87 per cent of Islamic banking leaders remain optimistic about sector growth, with Africa among the most promising regions.
Africa holds leverage: a large Muslim population, vast infrastructure needs, and proximity to major Islamic finance centres. Used strategically, the Islamic finance–ESG nexus becomes a distinctly African pathway to sustainable development, mobilising values-driven capital while delivering measurable social and environmental outcomes alongside financial returns.
This analysis forms part of Ethical Business’s ongoing coverage of ethical finance frameworks and their application to African development challenges.
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