Finance is continuously changing and with many Islamic banks reanalyzing their strategies, one sector remains untapped. Renewable energy including hydropower, solar and wind energy, as well as biofuels continues to ramp up, and investors are urging Islamic lending institutions to create financial mechanisms to exploit an almost non-existent area.
Venture capital and private equity investment in renewable energy rose 19% in 2010 to $5.5 billion
In a report released by the United Nations Environment Program "Global Trends in Renewable Energy Investment 2011," venture capital and private equity investment in renewable energy rose 19% in 2010 to $5.5 billion. And solar was the main catalyst with early-stage venture capitalists investing $930 million. This is an important figure particularly in the Middle East and North Africa (MENA) region where solar energy is garnering a great deal of attention with projects like Abu Dhabi's Masdar City and the German-led Desertec Industrial Initiative (DII) that expects to transport solar energy from the Sahara throughout the MENA region and Europe. Additionally, the Shams Power Co. also announced the financial close of the $600 million Shams 1 – one of the world's largest concentrated solar power (CSP) projects and the first of its kind in the Middle East.
The UK-based Islamic investment bank Gatehouse Bank Plc offers investors a long-term opportunity to inject capital in sustainable-oriented companies that offer technology, products and services throughout the water industry
Other areas besides solar include water projects. One Islamic bank diverted part of its real estate holdings into trade finance which led to the first Shari'ah-compliant water-focused investment strategy. The UK-based Islamic investment bank Gatehouse Bank Plc offers investors a long-term opportunity to inject capital in sustainable-oriented companies that offer technology, products and services throughout the water industry.
Another opportunity in the water field can be found in desalination. Saudi Arabia is a world-leader in the technique of removing brine (salt) from seawater in order to make freshwater. Dr. Bekele Debele of the Worldbank, MENA region, said desalination is being looked at as an emerging solution to the region's growing water gap. "Between 1950 and 2000 per-capita renewable water resources declined by more than 75%," he said, adding that Saudi Arabia was looking to convert all of its seawater desalination plants to renewable energy by 2019. The technology is energy and cost intensive with potential projects needing capital from various investors and lenders. With several national utilities looking to get onboard as well as many private companies, this could be a prime opportunity for Islamic financiers.
MENA's power industry could attract a capital investment of up to $525 billion from the private sector over the next five years
According to the Arab Petroleum Investment Corp., MENA's power industry could attract a capital investment of up to $525 billion from the private sector over the next five years. And with the renewable energy surge in the power sector, it isn't farfetched to think that many new green projects will emerge. It is also becoming easier to get onboard these solutions with innovative government structures being implemented to ease renewable energy integration.
Most recently, Islamic banking saw the release of a new sukuk for the financing of climate change investments and renewable energy projects. The Climate Bonds Initiative, the Clean Energy Business Council of MENA, and the Gulf Bond and Sukuk Association launched the Green Sukuk Working Group to help market and develop the best practices to promote the issuance of green Sukuk. Aaron Bielenberg of the Clean Energy Business Council said "There are a significant and growing number of projects, for example renewable energy in the Middle East, that are ideally suited to Sukuk investors. This group will help investors more easily identify Shari'ah-compliant, clean energy investment opportunities."
There is an urgent need to mobilize finance for both renewable energy and climate adaptation projects in both the Middle East
Other banks had already begun venturing into the sector especially after suffering an indirect blow from the economies of Muslim countries that were affected by the global economic crisis. Nick Silver of the Climate Bonds Initiative said, "There is an urgent need to mobilize finance for both renewable energy and climate adaptation projects in both the Middle East and in other developing Muslim countries such as Bangladesh and Pakistan. Green Sukuk are ideally suited for the financing of many of these investments."
The renewable energy sector paid off for Bahrain-based Arcapita Bank, one of the first Islamic financiers to venture into the green market. Arcapita's European arm Arcapita Ltd. created a joint venture (JV) with Englefield Capital and RWE npower (formerly RWE Innogy) in 2004. In 2007 Arcapita divested its one-third share of JV Zephry Wind Power LLC saying that it had been one of the firm's most profitable investments.
If Islamic lending institutions can find a way to create financial mechanisms specifically tailored to their lending standards, the alternative/renewable energy sector could prove to be a catalyst for exponential growth
Islamic banking has yet to reach its full potential being overshadowed by conventional banking; however, many believe that Shari'ah-compliant financial mechanisms could surge if there is a larger focus in areas outside the Middle East and Malaysia – possibly even tapping into African markets like northern Nigeria and Kenya. This can also be said for renewable energy with many projects still looking for investments to meet the financial close. If Islamic lending institutions can find a way to create financial mechanisms specifically tailored to their lending standards, the alternative/renewable energy sector could prove to be a catalyst for exponential growth.
Business Islamica
2 October
