The Interconnections Between Islamic Finance and Sustainable Finance

The report examines the systemic failures of conventional finance, specifically citing the Enron bankruptcy, the subprime mortgage crisis, and the Greek debt crisis, as evidence of the dangers of excessive leverage and opaque derivatives. It proposes Islamic finance as a sustainable alternative, grounded in Sharia principles such as the prohibition of riba (interest), gharar (uncertainty), and maisir (speculation). The author argues that the Islamic requirement for asset-backed financing and profit-loss sharing aligns financial incentives with the real economy, potentially preventing the types of market failures seen in conventional banking.

• Conventional financial crises, such as the Enron bankruptcy, the subprime mortgage debacle, and the European debt crisis, were driven by the manipulation of debt through complex structured finance products like 'synthetic collateralized debt obligations' and 'credit default swaps'.
• In the Enron case, JPMorgan Chase used a special-purpose vehicle called Mahonia Ltd in Jersey to disguise loans as 'prepay' commodity transactions, allowing Enron to report loan proceeds as 'cash flow from operating activities' and hide approximately $4 billion of debt as of December 31, 2000.
• The subprime mortgage crisis was exacerbated by 'shadow banking' and the use of synthetic CDOs, where investment banks like Goldman Sachs created products that allowed them to bet against the interests of their own investors through credit default swaps.
• Greece used cross-currency swaps engineered by Goldman Sachs to cosmetically reduce its reported debt and deficit ratios, enabling it to meet the Eurozone's Stability and Growth Pact criteria while continuing to borrow beyond its means.
• Islamic finance is a rapidly growing market, with assets valued at approximately $1.3 trillion in 2011 and projected to reach $1.8 trillion by 2013, characterized by an estimated annual growth rate of 20 per cent.
• The core principles of Islamic finance include the prohibition of riba (usury/interest), gharar (contractual uncertainty/ambiguity), and maisir (speculation/gambling), ensuring that transactions are ethical and transparent.
• Islamic finance requires that financing be asset-backed, meaning money is only a means of exchange and must be linked to real assets, which prevents the creation of purely speculative derivative instruments.
• The profit-loss sharing principle in Islamic finance aligns the interests of the financier and the entrepreneur, promoting long-term stability and requiring high levels of disclosure and transparency.
• Islamic finance prohibits the sale of debt, a mechanism the report suggests could have averted a major cause of the global financial crisis by removing the separation between the loan originator and the party holding the credit risk.
• Islamic financial institutions employ a Sharia governance system, including independent Sharia Committees, to review products and transactions, which helps prevent the governance failures and excessive executive compensation seen in conventional banks.

APA

Myers, T. A., & Hassanzadeh, E. (2013). The Interconnections Between Islamic Finance and Sustainable Finance. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/interconnections_islamic_sustainable_finance.pdf

Chicago

Myers, Thomas A., and Elham Hassanzadeh. The Interconnections Between Islamic Finance and Sustainable Finance. International Institute for Sustainable Development, 2013. https://www.iisd.org/system/files/publications/interconnections_islamic_sustainable_finance.pdf.

Wikipedia

{{cite report |last1=Myers |first1=Thomas A. |last2=Hassanzadeh |first2=Elham |title=The Interconnections Between Islamic Finance and Sustainable Finance |publisher=International Institute for Sustainable Development |date=July 2013 |url=https://www.iisd.org/system/files/publications/interconnections_islamic_sustainable_finance.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{myers2013interconnections, author = {Myers, Thomas A. and Hassanzadeh, Elham}, title = {{The Interconnections Between Islamic Finance and Sustainable Finance}}, institution = {International Institute for Sustainable Development}, year = {2013}, month = jul, url = {https://www.iisd.org/system/files/publications/interconnections_islamic_sustainable_finance.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }