Islamic finance fills climate funding gaps
Arab banks can lead global resilience efforts
Sukuk and waqf unlock sustainable solutions
As climate-related disasters escalate and traditional funding mechanisms prove increasingly inadequate, the call for innovative financial approaches has never been more urgent. The global climate finance deficit is not merely a technical or logistical concern—it is a structural challenge that demands unconventional solutions. For policymakers, development finance institutions, and banking leaders—especially in the Arab world—this challenge presents a rare opportunity to reassert the strategic value of Islamic finance in advancing sustainable, inclusive economic models.
The recent 51st Annual Meeting of the Islamic Development Bank (IsDB) in Algiers came at a moment of profound reckoning. From wildfires devastating communities to floods displacing entire populations, the climate crisis is no longer a looming threat—it is a daily reality. In the developing and resource-dependent economies that make up much of the Global South, the consequences are particularly acute. For many of these nations, including several across the Arab region, climate resilience is no longer an aspirational goal. It is a matter of economic stability, social cohesion, and in some cases, national survival.
Climate Vulnerability in Numbers
The Intergovernmental Panel on Climate Change estimates that 3.6 billion people—nearly half the world’s population—reside in regions highly vulnerable to climate impacts. Between 2010 and 2020, these areas recorded fatalities from floods, droughts, and storms at rates 15 times higher than in less exposed regions. This sobering reality has exposed the inadequacy of conventional finance in addressing climate adaptation, especially in fragile economies.
It is worth emphasizing that many countries facing the brunt of climate change are caught in a dual bind: they are both resource-dependent and still developing. This combination makes them particularly susceptible to shocks and severely limits their fiscal flexibility in mounting effective, long-term climate responses. The Arab region is no exception. From water scarcity in the Gulf to rising temperatures in the Levant and increasing desertification in North Africa, Arab economies are under growing ecological and financial strain.
A Misalignment of Finance and Risk
Current climate adaptation finance is grossly insufficient. Traditional channels, such as bilateral concessional financing or development aid, are neither stable nor scalable. Their political nature often makes them vulnerable to global economic cycles and donor fatigue. Moreover, their design frequently lacks the flexibility needed for localized, community-driven resilience programs.
This mismatch has created chronic underfunding of critical resilience initiatives, from sustainable water infrastructure to food security programs. The IsDB estimates that its member countries require between $75 and $90 billion annually until 2030 to meet adaptation and resilience targets. Yet, actual adaptation-related financial flows to these countries amount to just $23.9 billion per year—a funding gap of nearly 68%.
Multilateral development banks (MDBs), including the IsDB, are playing a vital role in bridging this divide. In 2023, MDBs jointly delivered $125 billion in public climate finance, with 60% channeled to low- and middle-income countries. The IsDB alone approved $1.15 billion for a flagship project in Kazakhstan to improve water security through sustainable irrigation. The project is expected to increase crop yields by 30% and directly benefit over 1.3 million people. While impressive, such efforts still only scratch the surface of what is needed to build true climate resilience across the Global South.
Islamic Finance: A Strategic Imperative, Not an Alternative
Islamic finance offers a uniquely structured and ethically grounded framework that aligns naturally with sustainability principles. Unlike conventional models, Islamic finance emphasizes asset-backing, equitable risk-sharing, and social welfare—principles that are especially pertinent to climate adaptation. Its tools are well-suited to long-term, infrastructure-heavy projects that are critical for building climate resilience.
The IsDB has demonstrated how Islamic finance instruments can be effectively deployed at scale. Through its sustainability framework, the Bank has mobilized over $6 billion by issuing Sukuk (Islamic bonds). These instruments have attracted a diverse investor base, including non-Muslim institutional investors, further underscoring the mainstream viability of Islamic finance.
Moreover, newer instruments are expanding the sector’s relevance. Cooperative insurance (takaful), charitable endowments (waqf), and faith-based crowdfunding platforms are gaining traction in the Muslim world as vehicles for financing localized adaptation initiatives. These instruments can fill a significant gap left by traditional finance, particularly in funding smaller, community-driven projects that often fall outside the scope of large development programs.
The Role of Arab Financial Institutions
Arab banks and financial institutions are uniquely positioned to lead the global integration of Islamic finance into the climate agenda. With a shared linguistic, cultural, and legal framework, and a combined financial base that exceeds $4.5 trillion, the Arab Islamic finance ecosystem has the scale, depth, and authenticity to champion a sustainable development paradigm that is both homegrown and globally respected.
However, to move from potential to impact, Arab institutions must rethink their approach to climate finance. Passive engagement or reliance on MDB-led initiatives will not suffice. Instead, banks should consider:
Structuring climate-aligned Sukuk portfolios that fund green and resilience-oriented projects in agriculture, water, and infrastructure.
Establishing regional climate finance facilities backed by Shariah-compliant instruments to provide concessional lending to vulnerable sectors.
Investing in fintech platforms that can facilitate crowdfunding for local adaptation projects, especially in rural and underserved areas.
Collaborating with central banks and regulators to create enabling environments for climate-related disclosure, impact assessment, and financial innovation.
Developing blended finance models that combine philanthropic waqf funds with commercial investment capital to de-risk climate ventures.
Such strategies require not only capital but institutional courage and vision. Arab central banks, development agencies, and financial regulators must work in concert to support Islamic financial institutions in this shift. Policy incentives—such as climate risk-weighted capital requirements or green Sukuk tax exemptions—can accelerate market adoption and expand the pool of available capital.
Measuring What Matters
Beyond mobilizing capital, the success of climate finance must ultimately be evaluated by real-world outcomes. Are vulnerable populations more protected? Is agricultural productivity increasing in drought-prone areas? Are coastal cities better fortified against rising sea levels?
To answer these questions credibly, Arab financial institutions must invest in robust monitoring and evaluation frameworks. Transparency and accountability are not only governance best practices—they are prerequisites for attracting and sustaining investor confidence, particularly in the nascent field of Islamic climate finance.
Results-based financing models, where disbursements are tied to verified outcomes, can help ensure that funds are not only allocated but also effective. Policy-based financing, where funding supports regulatory and institutional reforms, can further enhance long-term resilience and capacity.
A Regional Imperative
The Arab world stands at a pivotal juncture. On one hand, it faces disproportionately high risks from climate change. On the other, it holds untapped financial instruments deeply aligned with the values of sustainability, equity, and shared responsibility. Islamic finance is not merely a religious or ethical alternative; it is a strategic lever that can be deployed in service of both climate resilience and economic renewal.
While global climate finance remains under pressure, Arab financial leaders have an opportunity—and indeed a responsibility—to act. With institutional alignment, capital mobilization, and a results-driven approach, Islamic finance can become a cornerstone of the global climate solution.
Recommendations for Arab Banking Leaders
Embed climate finance into core banking strategies, aligning product portfolios with resilience and sustainability objectives.
Create joint initiatives with MDBs, such as co-financed green Sukuk programs, to leverage global expertise and scale local impact.
Invest in institutional capacity-building, ensuring that teams are equipped to design, manage, and evaluate Islamic climate finance mechanisms.
Establish cross-border partnerships, particularly with other Muslim-majority countries, to share best practices and co-develop innovative tools.
Advocate for supportive policy frameworks, working with regulators to develop standardized guidelines for green and Islamic finance integration.
As the financial implications of climate change become more severe, the window for action narrows. For Arab banks and policymakers, leadership today will define resilience tomorrow. Islamic finance is ready for the task—if we are.