Jakarta, 25 June 2024—The United Nations Development Programme (UNDP) Indonesia, the Indonesian Association of Sharia Fintech (AFSI), and the ITB School of Business and Management held the dissemination event of the feasibility study on Sustainability-linked Financing (SLF). The study aims to examine how SLF in the Islamic fintech sector drives positive environmental and social impacts while providing financial returns for investors.

The event also marked the ceremonial occasion of the Statement of Intent (SoI) between UNDP Indonesia and AFSI.

Nila Murti, Acting Head of Innovative Financing Lab, UNDP Indonesia said, “Since 2021, UNDP has become the lead technical agency in the implementation of the Accelerating SDGs Investment in Indonesia Joint Programme funded by the Joint SDG Fund, which aims to accelerate efforts to achieve the SDGs through the utilisation of innovative financing instruments. This leads us to explore sustainability-linked finance.”

Islamic fintech has emerged as a strong player within the fintech universe. Its market size was USD138 billion in 2022/2023 and is projected to grow to USD306 billion by 2027 (Global Islamic Fintech Report 2023). Indonesia ranks the third leading country worldwide for Islamic fintech, highlighting its ongoing expansion and noteworthy global influence. The timely introduction of SLF would be significant. By transaction volume, Indonesia ranks among the top 5 OIC and global fintech markets.

Sustainability-linked financing is a relatively recent financial instrument designed to unlock capital and enhance the borrower’s environmental, social, and governance (ESG) goals by incentivising the achievement of sustainability targets. The growth of this instrument is driven by the ever-increasing need to finance sustainable development initiatives and reduce the risks of economic instability. The rise of SLF marks a significant milestone in the global business landscape, promoting a paradigm shift toward more holistic approaches to capital allocation aimed at accelerating sustainability objectives.

Simultaneously, Islamic fintech offers convenient, quick, and accessible solutions for sustainable businesses and is ready to contribute to this effort. There are notable parallels between ESG concepts and Sharia principles, making SLF an ideal solution. SLF allows financial markets to amplify and be rewarded for their ESG commitments. In 2021, the Ministry of Cooperatives and Small and Medium Enterprises recorded 67 million MSMEs in Indonesia. Over half of them are led or operated by women entrepreneurs (Kominfo, 2023). However, 75 percent of MSMEs reporting need more access to financing (MPR RI, 2024). Given that women play a massive role in the growth of MSMEs and Indonesia's business sector landscape, the study opens the door for financing and investment opportunities that integrate gender equity aspects throughout the targets embedded in the SLF application. In addition, with Indonesia’s vulnerability to climate change and disaster risks, the country requires mitigating the threats that may impair its social and economic landscape.

The study also explores the Indonesian context of SLF through interviews with financial institutions and experts, regulators, government, religious organisations, private sector, and academia. It covers concepts, frameworks, roadmap, and interrelationships based on stakeholders’ perspectives. Fundamental and regulatory provisions of Islamic fintech, which enables different Sharia-compliant contracts, are also elaborated to rationalise SLF and ESG.

Ronald Wijaya, Chairman of AFSI, stated, “We hope the results of this study can provide a clear roadmap for the development of Islamic digital finance in Indonesia, strengthen the Islamic fintech ecosystem, and ultimately improve financial inclusion in Indonesia.”