This chapter examines the contribution that Islamic Finance (IF) could play to finance lasting water-related investments globally. Building on recent evidence, it explores the untapped potential of IF financing sources and instruments for water, identifying promising applications for water investments and options to scale them up to contribute to improve water security. The chapter also analyses the extent to which IF could potentially contribute to improving the viability and quality of financing for water-related investments. It looks at the challenges that may constrain this potential and at practical limits in the application of IF values and principles when financing water.
Financing Water Security
Models and Approaches for Investments that Last
Abstract
The Islamic Finance (IF) market has grown substantially over the years. The IF industry was valued at USD 3.4 trillion as of 2023 (IFSB, 2024[1]), while it was representing USD 200 billion in 2000. This growth has been observed in both Muslim-majority countries, such as Saudi Arabia, Malaysia and the UAE, and other jurisdictions including the UK, Luxembourg and Hong Kong.
Despite this steady growth, water investments still represent a marginal share of IF. For instance, water represents 0.2% of Islamic Banking investments according to the Prudential and Structural Islamic Financial Indicators (PSIFI) dataset of the Islamic Financial Services Board (IFSB). Similarly, the share of water in Islamic development finance is around 2.3%, including hydro-electric powerplants and agricultural water resources (classified under the energy and agriculture sectors, respectively) according to the Total Official Support for Sustainable Development (TOSSD) dataset.
This is due to some obstacles to the expansion of IF in the water sector, which include relatively limited market size, depth and liquidity in some countries, regulatory fragmentation across jurisdictions, limited awareness and understanding of IF mechanisms and lack of reporting and data for its application to water investments.
Opportunities to leverage IF for water investments include strengthening policy frameworks, international coordination and standardisation, leveraging promising Islamic finance instruments, mobilising private investment, and strengthening data systems and reporting.
Harnessing the potential of Islamic finance for water is promising, not only due to the substantial volume of capital available, but also because of the underlying principles and specificities of financing models which can – to some extent – be source of inspiration of durable water financing models, including PPPs and innovative financing structures, most specifically with regards to asset-backed finance, risk sharing, financial resilience, transparency and accountability.
Expected benefits for OECD countries and partners
OECD member countries and partners would benefit from harnessing Islamic finance for investment in water for various reasons:
Islamic finance represents a rapidly growing pool of investable assets (growing by around 10% per year), representing an increasing share of the global financial system. Their deployment extends beyond Muslim-majority countries. This growth creates opportunities to mobilise capital for water infrastructure and water security projects, especially in countries with pressing water challenges.
Its underlying principles align closely with responsible finance, as Islamic finance prohibits investments in harmful sectors and promotes ethical, socially responsible practices, which can be applied to financing water conservation, wastewater treatment and equitable access to water resources.
It offers innovative financial structures, including asset-backed instruments, profit-and-loss sharing mechanisms and risk-resilient financing, that can be adapted to support water infrastructure projects, water utilities and resilient water management.
It constitutes a novel source of financing and alternative financing tools well suited to the structural characteristics of water-related investments, which are typically long-term and capital intensive.
Islamic Finance (IF), which refers to financial practices, institutions and instruments that comply with Shariah1 principles, has been growing steadily across multiple sectors and geographies for the past two decades, with further growth potential and increasing demand for this type of financial services in both Muslim and non-Muslim countries. There is significant potential for mobilising IF for impact-driven investment, although the water sector has yet to fully benefit from this type of financing.
The values underlying IF include improving societal welfare, shifting the emphasis away from an exclusive focus on the creditworthiness of the borrower to one that examines the value creation associated with investments and resulting economic and societal benefits, as well as providing a safety net for the poor and most vulnerable. Furthermore, IF’s partnership-based and equity-focused approach and its links to real economic activities make it also consistent with impact-driven investment approaches.
3.1.1. Islamic finance by regions, types of assets and sectors
IF has undergone substantial and sustained growth over the past two decades, emerging as a resilient and expanding component of the global financial system. Between 2000 and 2023, total Islamic financial assets increased from approximately USD 200 billion to more than USD 3.4 trillion (IFSB, 2024[1]), with average annual growth often surpassing 10% (FiCS, 2025[2]). This growth has been observed in both Muslim-majority countries, such as Saudi Arabia, Malaysia and the UAE, and in non-Muslim jurisdictions including the UK, Luxembourg and Hong Kong, where regulatory frameworks have been adapted to attract Shariah-compliant investment (FiCS, 2025[2]). The robust growth of the Islamic finance industry is driven by increasing demand for Shariah-compliant financial products and services, expanding Islamic banking services and supportive government regulations.
The global IF industry is composed of four main branches: Islamic banking, Islamic capital market instruments (also referred to as sukuk), Islamic funds and insurance. Islamic banking, providing Shariah-compliant banking and asset management services, constitutes the largest segment. Islamic capital markets, also referred to as sukuk,2 is the second largest. Islamic banking (70%) and sukuk (25%) together account for nearly 96% of the industry, according to IFSB data. Islamic funds3 and Islamic insurance, including takaful4 account for the remaining 4% and less than 1%, respectively, as shown in Table 3.1 based on IFSB (Islamic Financial Services Board) data.
Regionally, IF institutions in the Gulf Cooperation Council (GCC) countries account for 53% of global IF assets, with most of these assets concentrated in Islamic banking. They are followed by institutions in East Asia and the Pacific countries, which hold 22%, driven mainly by operations in Southeast Asia, particularly in Indonesia and Malaysia. The remaining Shariah-compliant assets in the world are distributed across IF institutions in the Middle East and North Africa (MENA) region (13%, excluding GCC countries), Europe and Central Asia (13%, spanning from the UK to Kazakhstan), South Asia (3%, driven by Bangladesh and Pakistan) and Sub-Saharan Africa which holds less than 1%.
The uneven distribution of Islamic finance across regions conceals significant regional disparities among IF branches. In particular, the MENA region (excluding GCC countries) has a significantly underdeveloped sukuk market despite having the second largest Islamic banking market in the world. In contrast, Europe and Central Asian countries have been directing more investments in sukuk rather than Islamic banking.
Note: East Asia and the Pacific countries include Australia, Brunei Darussalam, China, Indonesia, Japan, Malaysia, Philippines, Republic of Korea, Singapore and Thailand.
Europe and Central Asia countries include France, Kazakhstan, Kyrgyzstan, Russian Federation, Serbia, Tajikistan, Türkiye, Uzbekistan, Germany, Ireland, Luxembourg and United Kingdom.
Gulf Cooperation Council (GCC) countries include Bahrain, Kuwait, Saudi Arabia and the United Arab Emirates.
Middle East and North Africa (MENA [except GCC]) countries include Algeria, Egypt, Iran (Islamic Republic of), Iraq, Jordan, Lebanon, Libya, Morocco, State of Palestine, Syrian Arab Republic, Tunisia and Yemen.
South Asia countries include Afghanistan, Bangladesh, Sri Lanka, Maldives, Pakistan and India.
Data are mostly taken from primary sources (regulatory authorities’ statistical databases, annual reports and financial stability reports, official press releases and speeches, etc.) and from the IFSB’s Prudential and Structural Islamic Financial Indicators (PSIFIs) database. In the absence of primary data, third party data providers have been consulted.
Source: (IFSB, 2024[1]).
Household consumption, real estate, manufacturing, construction, and trade have been the main drivers of growth in the IF industry in recent years. In 2021, household consumption accounted for 47% of the financing provided by Islamic banks globally, according to data from the IFSB. Figure 3.1 illustrates that “other financing of households” is the leading sector in all major markets for Islamic banking, such as Saudi Arabia, UAE, Malaysia and Indonesia, except Qatar. Real estate is the second-largest sector benefitting from Islamic banking services, accounting for up to 18% of the total, followed by manufacturing and trade, each with a 6% share.
Accessibility of underlying tangible assets in these sectors facilitates the use of IF mechanisms. Indeed, a core characteristic of IF is its connection to the real economy through the incorporation of real assets in financial transactions. IF contracts often involve transfer of ownership of underlying assets, which are more readily available in sectors like household consumption, real estate, trade and manufacturing.
The share of water investments within Islamic banking remains marginal, namely 0.2% of the total, according to IFSB’s Prudential and Structural Islamic Financial Indicators (PSIFI) dataset on Islamic banks. As a result, the share of water does not appear on the figure below, as it is basically insignificant compared to other sectors. Further analysis of the nexus between Islamic banking and water financing appears later in the chapter.
Note: This graph depicts the sectoral distribution of each sector within the total financing of Islamic banks. Data is reported quarterly in the IFSB’s PSIFI database as submitted by the regulatory and supervisory authority of each respective jurisdiction in national currency. It includes data on financing from Islamic banks. Due to data limitations, some countries, including Iran, Türkiye and Egypt are excluded from the analysis of the total. It is noteworthy that Iran is a significant player in Islamic finance, accounting for 38% of global Islamic finance assets in 2022 (ICD, 2023[3]).
Definitions: “Islamic bank”: Full-fledged Islamic bank that is fully Shariah-compliant. “Other financing of households”: Personal/consumer finance and credit cards. For some jurisdictions this category includes real estate too. “Other sectors”: Sectors of other service activities (export); electricity, gas, steam and air-conditioning supply; public administration and defence with compulsory social security; agriculture, forestry, hunting, fishing, mining and quarrying; accommodation and food service activities; administrative and support service activities; activities of households as employers; human health and social work activities; professional, scientific and technical activities; education; information and communication; arts, entertainment, and recreation; other or public sector activities; and activities of extraterritorial organisations and bodies combined.
Source: Authors’ calculations based on the Islamic Financial Services Board’s (IFSB) Prudential and Structural Islamic Financial Indicators dataset on Islamic banks (PSIFIs, 2023[4]).
3.1.2. Islamic finance and its potential for impact-driven investment
IF holds strong potential, in principle, for contributing to develop impact-driven investment due to its foundational principles. Key principles of IF include risk- and reward-sharing, the prohibition of speculative investments and a requirement for asset-backing (see Table 3.2). The prohibition of interest (riba) and speculation fosters transparency in financial contracts by using clearly defined mark-up payments rather than fluctuating interest rates as well as promoting fairness between parties. IF also redefines relationships between financial actors, encouraging partnerships rather than conventional borrower-lender dynamics to establish more equitable risk- and reward-sharing arrangements (OECD, 2020[5]). This partnership is generally provided through the transfer of ownership of underlying assets used to structure the financial agreement. Shariah principles also prohibit investments in sectors such as alcohol, gambling and weapons, aligning closely with the practices of ethical finance and Socially Responsible Investment (SRI) portfolios, which also ban these sectors.
Note: *Zakat, one of Islam’s five pillars, requires Muslims with sufficient means to redistribute 2.5% of their wealth to those in need annually.
**Sadaqah is voluntary charitable donations aimed at supporting vulnerable populations.
Source: (IsDB Institute, 2024[6]).
IF instruments are globally relevant as they are applied in various jurisdictions in the world and can be combined with conventional financing mechanisms, making them well-suited for impact-driven investments (ADB, 2022[7]). As evidenced by the data on geographical allocation in Figure 3.2, IF is not limited to countries with a predominantly Muslim population and is applied in a diversity of regions globally. It can also operate alongside conventional financial mechanisms, provided that specific Shariah-related requirements are met.
Source: (FiCS, 2025[2]; UNDP, 2016[8]).
In practice, however, the contribution of IF to investment in long-term socio-economic and environmental outcomes remains limited. The global IF industry commits very marginal resources to impactful investments (OECD, 2020[5]). As of 2021, Shariah-compliant investments in green finance were estimated at approximately USD 20 billion (ADB, 2022[7]), representing only 0.7% of the global IF market value, which stood at USD 3.1 trillion for the same year (IFSB, 2022[9]). Similarly, the share of IF in development finance remains modest despite significant efforts from the IsDB to leverage its potential. For example, in 2021, IF accounted for 2% of total flows in Official Development Assistance (ODA) and other officially-supported flows, according to the Total Official Support for Sustainable Development (TOSSD) dataset5 (OECD, 2020[5]). Further analysis on Islamic development finance6 directed towards water investments is provided later in the chapter.
Furthermore, the relatively early stage of development of the IF industry poses challenges to its ability to effectively address environmental and social issues. Since its emergence in the 1970s, IF has experienced steady growth. However, its relatively limited maturity constrains its ability to scale financing for impact-driven investments. Indeed, the sector faces relatively lower market depth and liquidity compared to conventional finance, limiting its capacity to attract substantial investment. This also hampers the adoption of international standards, as varying legislative approaches across jurisdictions create barriers to growth. These regulatory inconsistencies indirectly hinder the convergence of IF with social and environmental investment standards (Ahmed, 2017[10]) such as the Principles for Responsible Investment (PRI) and standards of the TCFD. However, developments are promising for the future and some of these issues should be resolved gradually, as the industry develops and matures.
Despite this, some Islamic finance instruments are increasingly used to support long-term socio-economic and environmental priorities. The total amount of development finance provided by the IsDB for these purposes increased from USD 7.7 billion in 2019 to USD 8.3 billion in 2023 according to TOSSD data (or to USD 12 billion in 2023 according to IsDB (IsDB, 2024[11])). In the past years, green sukuk have effectively financed projects across sectors, from renewable energy in Malaysia to green infrastructure in Indonesia, aligning with environmental standards and Shariah principles. In 2019, the IsDB completed its first-ever Green Sukuk issuance, raising EUR 1 billion with a five-year term. Proceeds were earmarked for a broad range of green projects across IsDB’s 57 member countries. Islamic social finance instruments, such as zakat and waqf, support targeted social investments that address poverty and inequality. Furthermore, Islamic microfinance and takaful offer targeted support to underserved populations, focusing on health and economic resilience. For instance, Islamic microfinance has been applied to expand access to water services for vulnerable populations, as demonstrated in the Indonesia Urban Water, Sanitation and Hygiene (IUWASH) project in Kudus, Indonesia (see section below on public-private partnerships) and through models integrating Islamic social finance instruments with microfinance schemes (see section on Islamic social finance). In addition, a joint initiative by the IsDB and UNDP, the Global Islamic Finance and Impact Investing Platform (GIFIIP) acts as a collaborative platform to mobilise private sector capital and support market-based financing solutions for socio-economic and environmental priorities (see section on Islamic blended finance). Launched in 2016, GIFIIP is producing research on the contribution of IF to impact-driven investments and disseminate this research through workshops (including on developing national green sukuk programmes for countries such as Pakistan and Uzbekistan under its Green Sukuk Initiative) (UNDP, 2024[12]).
Countries like Malaysia and Indonesia have pioneered the development of green sukuk, Islamic funds and supportive regulatory frameworks and policies (ADB, 2022[7]). After the launch of the Sustainable and Responsible Investment (SRI) Sukuk Framework by the Securities Commission Malaysia in 2014, Malaysia issued the first green sukuk in 2017 for the energy sector, followed by Indonesia’s sovereign green sukuk in 2018, a five-year issuance raising USD 1.25 billion. Alongside these capital market activities, Malaysia’s Central Bank introduced the Value-based Intermediation (VBI) framework7 in 2017 to align Islamic banking with responsible and value-driven practices. VBI has since expanded to the takaful sector within Malaysia’s advanced IF ecosystem (LSEG and RFI, 2023[13]).
In the GCC, the adoption of impact-driven investment frameworks in IF has been slower compared to Southeast Asia but is steadily accelerating, even though some corporations are renegading on their commitments. This progress is driven by national commitments to achieve net-zero emissions by 2050 and increasing client demand for responsible investment solution (S&P Ratings, 2024[14]; CFA Institute, 2019[15]; ICD and LSEG, 2023[16]). Following the first corporate green sukuk issuance by Majid Al Futtaim in 2019, Al-Rajhi Bank, the largest Islamic commercial bank, introduced a syndicated Shariah-compliant sustainability financing facility in 2022, while Qatar Financial Centre (QFC) launched the region’s first Sustainable and Sukuk Bond Framework the same year (LSEG and RFI, 2023[13]). Oman’s Capital Market Authority also recently issued draft regulations for SRI instruments, covering social, green and blue sukuk (LSEG, 2023[17]).
Finally, the potential of IF in contributing to tackle environmental challenges is increasingly acknowledged, including in international fora. At the 2022 G20 Summit in Indonesia, a high-level panel explored the role of sukuk in green finance, with IF highlighted as an essential tool to diversify financing mechanisms and increase resources for impact-driven investment. Another prominent high-level discussion during the summit focused on IF and digitalisation (IsDB, 2022[18]). Similarly, COP28 in Dubai featured discussions on leveraging IF to support long-term environmental and socio-economic objectives. (GEFI, 2024[19]). In 2024, following announcements at COP28, the International Capital Market Association (ICMA), the IsDB and the London Stock Exchange Group (LSEG) released a guide for green sukuk issuance (ICMA, IsDB and LSEG, 2024[20]).
3.1.3. Islamic finance for water: state of play
The share of the water sector in Shariah-compliant investments is currently very low when compared to other sectors. According to recent data, Islamic banking, the largest segment of the IF industry, commits only very marginal resources to water-related investments. Likewise, Islamic development finance,8 including private IF mobilised through public interventions, is underutilised for water. This section assesses the current allocation of IF to the water sector and evidences its largely untapped potential.
Islamic banking
Islamic banking, the dominant segment of the IF industry, allocates very marginal resources to water-related investments. In 2021, financing from Islamic banks to the water supply, sewage and waste management sector represented only 0.2% of total financing, as shown in Figure 3.3. In Malaysia, for example, only 1.5% of the net-zero and green financing by Islamic banks was allocated to water security and wastewater management in 2022, according to the Association of Islamic Banking and Financial Institutions Malaysia (AIBIM) (AIBIM, 2022[21]). However, it is worth noting that some water-related investments may be classified under other sectors, such as hydropower being counted under energy or agricultural water supply and irrigation under agriculture.
Note: This graph depicts the sectoral distribution of each sector within the total financing (millions in USD, 2024 prices) of Islamic banks.
Data are reported quarterly in the IFSB’s PSIFI database as submitted by the regulatory and supervisory authority of each respective jurisdiction in national currency. It includes data on financing from Islamic banks.
“Islamic bank”: Full-fledged Islamic bank that is fully Shariah-compliant.
“Other financing of households”: Personal/consumer finance and credit cards.
“Other or public sector**”: Only Sudan and Palestine include one additional category among sectors. For Sudan, this category is labelled as “other” without further explanation. For Palestine, it is marked as “public sector,” which refers the finance granted to the Palestinian National Authority, local authorities and other non-financial public sector entities.
Due to data limitations, some countries, including Iran, Türkiye and Egypt are excluded from the analysis. It is noteworthy that Iran is a significant player in Islamic finance, accounting for 38% of global Islamic finance assets in 2022 (ICD, 2023[3]).
Source: Authors based on the Islamic Financial Services Board’s (IFSB) Prudential and Structural Islamic Financial Indicators dataset on Islamic banks (PSIFIs, 2023[4]).
Water is not prioritised by investors and banks within Islamic banking due to several factors. These include the perceived low profitability of water-related investments, the complexity of IF instruments, the nascent stage of the IF industry and limited regulatory frameworks. For many Islamic banks and Islamic windows of conventional banks, water investments are viewed as high-risk and low-return; such projects are typically small-scale, yield returns over the long term and require substantial upfront capital (OECD, 2022[22]). These challenges are further developed in the last section of this chapter. Besides, some of the sectors receiving the largest share of investment from Islamic banking (including, for instance, manufacturing, construction and transport) are water-intensive industries, which can affect both the quantity and quality of water through abstraction, pollution and land degradation.
The Islamic commercial finance sector has the opportunity to align with ethical and responsible objectives. Frameworks such as the Maqasid Matrix (LSEG, 2023[17]) and the Maqasid al-Shariah Index (Asutay Mehmet and Harningtyas, 2015[23]) embed ethical principles at the core of IF and hold promise in aligning their financing with responsible objectives, including potentially linked to water security. Maqasid al-Shariah, which encompasses the higher objectives of Shariah, including the protection of life, aims to ensure that IF products align with broader environmental and social impact goals. By embedding these frameworks into institutional operations, IF providers can deliver equitable and impactful financing solutions for critical sectors such as water, health and education. This could be fostered by harmonised reporting standards, targeted capacity-building initiatives for financial institutions and policy incentives to encourage widespread adoption.
A survey9 conducted for this chapter indicates that commercial Islamic banks and banks with Islamic windows tend to favour murabaha10 over other instruments for responsible investments. For example, murabaha has been utilised to finance water-related investments in a water PPP in Indonesia (see section on PPPs later in the chapter) and has also been employed to structure sukuk for large-scale water infrastructure financing, as seen in Air Selangor’s Sukuk Murabaha Programme (see section on Sukuk below).
Islamic Development Finance
Water also accounts for a very limited share of Islamic development finance which consist of Shariah-compliant official flows11 and private finance mobilised by official interventions.12 The bulk of Shariah-compliant official flows goes to the Industry, Mining and Construction sectors (almost 31%), the Agriculture, Forestry and Fishing sectors (almost 25%), the Banking and Financial services sectors (14%) and the Transport and Storage sectors (almost 10%) in the period of 2019-2023 (see Figure 3.4). As for Islamic banking, sukuk and other types of assets, the share of water in Islamic development finance is marginal, representing only 1.2% of the total (and 2.3% when including hydro-electric powerplants and agricultural water resources classified under the energy and agriculture sectors, respectively) according to the TOSSD dataset.13 Yet, it is important to note that some additional investments in water could potentially be classified under other sectors, such as water for irrigation under the Agriculture, Forestry and Fishing sector.
Note: TOSSD data encompasses Official Development Aids (ODAs) and Other Official Flows (OOF), combined with private finance mobilised through official intervention.
Total volume indicates the sum of transactions labelled as Islamic finance in the TOSSD data.
The Islamic Development Bank (IsDB) accounts for 98% of the total Islamic financial commitments in the dataset. The remaining 2% is provided by the Arab Bank for Economic Development in Africa.
“Other sectors”: Sectors of tourism; general environment protection; commodity aid and general programme assistance; business and other services; other social infrastructure and services; humanitarian aid; other multisector activities; and communications combined.
Source: Author based on the TOSSD dataset (TOSSD, 2025[24]), 2025.
The main water sub-sectors financed by Islamic development finance (or officially-supported Shariah-compliant flows14) include large sanitation systems, agricultural water and hydroelectric power plants, showing different allocation compared to conventional ODA flows for water. Together, these sub-sectors represent about 74% of total water-related investments financed by official IF flows and mobilised private IF, highlighting a strong focus on large infrastructure projects. These main sub-sectors are followed by waste management and large water supply and sanitation systems. Figure 3.5 illustrates the entire sub-sectoral distribution, encompassing water supply and sanitation combined with hydroelectric power plants and agricultural water resources, which are generally categorised under energy and agriculture. This allocation differs significantly from that of conventional ODA flows for water. The analysis of ODA flows for water over the period 2002-2018 reveals a dominant share of large water supply and sanitation systems (21% of total), followed by basic drinking water supply and sanitation (10%) and agricultural water resources (6%) as the third-largest sub-sector (OECD, 2022[22]).
Note: TOSSD data encompasses Official Development Aids (ODAs) and Other Official Flows (OOF), combined with private finance mobilised through official intervention.
Total volume indicates the sum of transactions labelled as Islamic finance in the TOSSD data.
This figure encompasses all sub-sectors within the water and sanitation sector, as well as hydroelectric power plants from the energy sector and agricultural water resources from the agriculture sector, given their classification as water-related investments.
The Islamic Development Bank (IsDB) accounts for 98% of the total Islamic financial commitments in the dataset. The remaining 2% is provided by the Arab Bank for Economic Development in Africa.
Source: Authors’ calculations based on the TOSSD dataset (TOSSD, 2025[24]), 2025.
Between 2019 and 2023, Pakistan received the largest share of Shariah-compliant development finance for water-related projects, amounting to USD 180 million (20% of the total) for the Mohmand Dam and Hydropower Project (TOSSD, 2025[24]). Lebanon and Uganda also featured prominently, each receiving USD 87 million (10% of the total). In terms of regional distribution, 56% of Islamic development financing for water-related investments during this period was allocated to Sub-Saharan Africa, benefiting countries such as Uganda, Côte d’Ivoire, Senegal, Guinea, Benin and Mauritania. This was followed by South and Central Asia (26% of total), driven primarily by Pakistan and the MENA region (11% of total), with Lebanon as a key recipient.
The IsDB is the principal provider of Islamic development finance, including flows channelled to water investments, according to the TOSSD data, committing over USD 879 million to 391 SDG-related development projects from 2019 to 2023 (98% of total financing), followed by the Arab Bank for Economic Development in Africa with USD 17 million for two projects (2% of total financing) from 2019 to 2023.
While IsDB stands out as the most active IF provider for environmentally and socially aligned investments, the share of financing channelled to water-related investments have been fluctuating over the years, depending on demands from member countries. Whilst the water, sanitation and urban services sector accounted for 12.5% of total funds approved by IsDB since its foundation in 1975, the sector represented only 1.9% and 1.3% of the total funds approved in 2022 and 2023, focusing on projects in three countries: Mauritania, Guinea and Djibouti (IsDB, 2024[11]). Despite this trend, water financing is gaining prominence in the bank’s strategic priorities. The IsDB demonstrated its commitment to water security by supporting resilient water investments at COP28 and COP29 and by co-convening the 12th meeting of the Roundtable on Financing Water in 2025. For example, during COP29 in Baku, the Bank signed a landmark agreement committing USD 1.2 billion in financing to support Kazakhstan’s water infrastructure and enhance its environmental resilience. Until 2024, this represented the largest water-focused investment in the history of the IsDB (IsDB, 2024[25]).
Most Islamic public development banks (PDBs) operate as national development banks, such as the Al-Amanah Islamic Investment Bank of the Philippines, which specialises in financing pilgrimages to Mecca (FiCS, 2025[2]). However, several major MDBs and DFIs have progressively incorporated Islamic finance instruments and established partnerships with Islamic PDBs to enhance their financing for Muslim-majority countries. In 2009, the IFC, as part of the World Bank Group, became the first non-Islamic institution to issue a sukuk, raising USD 100 million for term funding in the Middle East. In 2024, the IFC also committed a USD 240 million Islamic Equity Bridge Loan, structured as a murabaha15 financing, to ACWA Power to support Uzbekistan’s renewable energy sector (IFC, 2024[26]). Blended with ACWA Power’s equity contributions, this initial murabaha financing helps attract additional private finance for the investment. Throughout the 2010s, major MDBs, including the Asian Development Bank (AsDB), the African Development Bank (AfDB) and EBRD, signed Memorandums of Understanding with IsDB to establish investment funds targeting Muslim-majority countries. For instance, EBRD launched a USD 120 million investment fund to support the development of SMEs in Egypt, Jordan, Morocco and Tunisia (FiCS, 2025[2]). In 2009, the AsDB and the IsDB jointly established the “Islamic Infrastructure Fund”, a Shariah-compliant private equity vehicle, originally capitalised at USD 500 million. The Fund was conceived to mobilise public and private equity, including from Islamic finance investors to finance infrastructure projects in 12 common member countries across Asia. By 2020, the Fund had deployed USD 165 million in Shariah-compliant equity investments across sectors such as power, transport, water supply, waste treatment, telecommunications and social infrastructure (ADB, 2020[27]).
Islamic finance offers a broad array of instruments with the potential to support investments with long-term environmental and socio-economic benefits, including water-related investments. The requirement for IF instruments to be linked to real assets presents both opportunities and challenges for water investments. For instance, Shariah-compliant public-private partnerships (PPPs) may differ structurally from conventional models, and PPPs that combine conventional and Islamic financing tranches require specific measures, such as common security pools to mitigate risks associated with asset ownership transfers to IF providers and agreed-upon penalty fee structures to ensure alignment. Similarly, Islamic social finance instruments, while promising for water-related investments, come with specific implementation challenges, as each instrument serves a distinct purpose and requires tailored mechanisms for allocation and management. This section explores the potential of IF tools and instruments for mobilising financing for water investments, focusing on green sukuk, public-private partnerships, Islamic social finance and blended IF.
3.2.1. Green sukuk
Green sukuk: a market in expansion
Often referred to as “Islamic bonds,” sukuk are investment certificates that represent partial ownership of tangible assets, usufructs or services, distinguishing them from conventional bonds, which are debt instruments (Abdul Aziz and Gintzburge, 2009[28]). As mentioned earlier in the chapter, sukuk is a significant component of the IF industry, constituting 25% of the global market, second only to the Islamic banking sector (IFSB, 2024[1]).
Sukuk are classified into two primary categories, based on their commercial features: asset-backed and asset-based. In asset-backed sukuk, investors have direct ownership of the underlying assets, bear the associated risks and have limited recourse to the issuer. By contrast, under asset-based sukuk, investors do not own the assets but rely on the issuer’s creditworthiness, with full recourse to the issuer in case of default. (Hidayat, 2013[29]). The majority of sukuk in the market today are asset-based rather than asset-backed, reflecting a predominant trend16 (ICMA, IsDB and LSEG, 2024[20]). This distinction significantly influences the risk exposure and repayment conditions associated with sukuk.
The green sukuk market, as the Shariah-compliant counterpart of GSS bonds, have experienced strong growth, but the market remains concentrated in a few countries and institutions. International investor and ESG-focused investor demand has fuelled the growth of green sukuk, with 72% of issuances in 2021 taking place in global markets (e.g. the Eurobond market) (LSEG, 2023[17]). The primary drivers for green sukuk investments are alignment with environmental and social criteria (42% of the respondents to the Refinitiv Sukuk Survey 2022), followed by Shariah compliance (38%) (LSEG, 2023[17]).
After issuing the first SRI Sukuk in 2017, Malaysia accounted for 48% of global sukuk issuances in 2021-2022, confirming its position as a pioneer in the global sukuk market (IIFM, 2023[30]). Indonesia has taken the lead in terms of green sukuk issuance over the years, having issued 27% of the cumulative green sukuk over the period 2017-2022 (see Figure 3.6); this was driven primarily by sovereign issuance. Supranational issuance of green sukuk came close second over that period, with the IsDB alone issuing USD 5.1 billion (LSEG, 2023[17]). In the GCC region, green sukuk issuance has experienced a rapid increase lately, largely driven by client demand. By the second quarter of 2024, the GCC had reached USD 18.5 billion in issuance, accounting for 43% of the global green sukuk outstanding (USD 43 billion as of the first quarter of 2024) (Fitch Ratings, 2024[31]).
Note: “Others” include Bangladesh, Türkiye, Sudan and Nigeria. This figure is retrieved from LSEG Refinitiv’s report titled “Green and sustainability sukuk report 2022”.
Source: (LSEG, 2023[17]).
The current use of green sukuk for financing water
IF stakeholders recognise sukuk as a suitable instrument for financing water investments. A survey conducted for this research was shared among IF experts from various institutions, including commercial banks, multilateral development banks, government and regulatory bodies and research institutions.17 Sukuk emerged as one of the most relevant instruments in terms of the suitability of different IF instruments for investments in the water sector. All the respondents considered sukuk as highly suitable or suitable for water investments. Respondents from financial institutions particularly highlighted sukuk’s applicability for large-scale infrastructure projects, with some noting that sovereign sukuk could play a key role in leveraging finance for water investments at national level. As illustrated in Figure 3.7, sukuk is considered as a suitable instrument for financing water investments: indeed, 70% of the survey respondents consider it either highly suitable or suitable for financing water projects. This reflects the alignment of sukuk with water investments, given its focus on financing tangible assets, compatibility with long-term infrastructure needs and the convergence between ESG objectives and Shariah-compliant principles. In particular, green sukuk provide a structurally compatible instrument for financing water-related investments, combining long-term, asset-backed features with increasing investor interest and the eligibility of water infrastructure as a green use of proceeds. Most green sukuk to date have focused on energy and transport, with only a small share allocated to water, indicating an underexplored opportunity rather than an established trend (KFH and UNDP, 2024[32]).
Note: The OECD and IsDB carried out a survey aiming to map existing Shariah-compliant financial allocations to the water sector and identify strategies to scale up Islamic finance for water investments.
Sukuk can be issued using different Shariah-compliant structures, such as wakalah, ijarah, istisna or mudarabah, depending on the nature of the underlying assets and the project being financed.
Source: Authors’ own calculations based on the survey results, 2025.
The share of securities labelled “blue” or “water” remains low in both the sukuk and conventional bond markets, highlighting limited emphasis on the water sector, even among GSS bonds (as evidenced in Chapter 2). The IsDB, the second largest green sukuk issuer globally, allocated only 1% of its EUR 1 billion green sukuk issuance in 2019 to water projects, prioritising renewable energy instead (IsDB, 2020).
A substantial portion of IF for water-related investments currently flows through green sukuk, as opposed to “blue sukuk,” which is still at development stage and predominantly fund marine-focused projects like sewage treatment, ocean conservation and pollution prevention. This trend parallels advancements in the broader bond market (see Chapter 2). For example, Air Selangor, Malaysia’s largest government-owned water utility, issued as sukuk to fund water supply and management projects, as outlined in Box 3.1. Although not defined as blue sukuk, the funds are fully dedicated to water investments (Air Selangor, 2023[33]). As in the bond finance market, green sukuk often support cross-sectoral investments that include water projects. This can help offset the perceived high-risk profile of water investments and attract further capital. Another prominent example is the USD 1.6 billion green sukuk issued by Majid Al Futtaim Sukuk Company in the UAE, with proceeds directed to energy, water and real estate sectors.
The blue sukuk market remains an emerging subset within the green sukuk space, albeit in a nascent stage. Certain countries are beginning to pioneer blue sukuk, such as Indonesia, which leverages its experience in green sukuk issuance and its maritime position. Although innovative financing models like cash waqf-linked blue sukuk18 are being considered to support ocean-related investment (Mutmainah et al., 2022[34]), they have not yet been implemented in Indonesia (Bappenas and ICCTF, 2022[35]).
Pengurusan Air Selangor Sdn Bhd (Air Selangor) is Malaysia’s largest water services provider, supplying treated water to Selangor, Kuala Lumpur and Putrajaya. As a government-owned entity, Air Selangor is responsible for ensuring reliable water services to over 2.6 million accounts, covering both domestic (i.e. households) and non-domestic (e.g. businesses and institutions) users. It focuses on both maintaining existing infrastructure and expanding infrastructure to meet demand.
To fund its long-term infrastructure projects, Air Selangor launched a USD 2.3 billion Sukuk Murabaha1 Programme in 2020. Under the Programme, the total amount of capital raised by their Sukuk Kelestrian, an SRI sukuk, has reached USD 486 billion, as of September 2023. Although not formally labelled as a blue or green sukuk, the Sukuk Kelestarian illustrates the potential of IF to support large-scale investment in water infrastructure.
These proceeds have been mostly allocated to water supply (61%) and water management projects (17%). 50% of the total amount invested in water was allocated and utilised for CAPEX financing, while 28% was allocated and utilised for OPEX financing. Air Selangor plans to double the Sukuk Murabaha Programme to meet rising CAPEX needs, targeting an additional USD 2.3 billion.
This programme finances key projects, such as the Rasau Water Supply Scheme, which aims at significantly increasing water supply capacity in the Selangor region (constructing new water treatment plans) and supporting initiatives to reduce water losses (including installing smart water meters). Indeed, Stage 1 of the project expected to increase the plant’s capacity to 700 million litres per day of treated water, benefiting over 460 000 accounts, including households, businesses and institutions in Klang and Kuala Langat by December 2025. Stage 2 aims at reaching capacity of 1 400 million litres per day to serve 934 thousand accounts by 2028.
This project illustrated asset-based Sukuk, meaning investor returns are not fully dependent on the performance of the underlying water-treatment assets. Although asset revenues may support payments, Air Selangor can draw on other funding sources, resulting in lower asset-related risk for investors.
1. The issuer of sukuk murabaha holds the assets in trust on behalf of the certificate holders. Certificate holders purchase the goods, which are then sold to a third party at cost plus a profit margin, with payment deferred to a later date.
Source : (Air Selangor, 2023[33]; GWI, 2024[36]).
Challenges and opportunities to scale sukuk for water
Green sukuk has the potential to bring additional financing to water due to its large demand base. The demand for impact-oriented debt instruments is likely to rise in the future, driven by the pressing need for resilient infrastructure and solutions to environmental and social challenges. Green sukuk appeals to a broad investor base because it complies with Shariah and additionally with ESG criteria (as green bonds), thereby attracting international investors beyond those specifically focused on Shariah compliance. Furthermore, green sukuk offers opportunities for exposure to emerging markets such as Indonesia, Malaysia, GCC countries and Türkiye. The growing international interest in green sukuk, already supported by many non-Shariah-sensitive investors, could be amplified by advancing the standardisation of regulatory and legal frameworks.
Sukuk require greater transparency than conventional green bonds due to Shariah compliance and trustee oversight (Chambers, 2017[37]), making them potentially well-suited for water-related investments. Indeed, their regulatory framework enhances disclosure, which conventional bonds could emulate for better fund accountability. Clear asset management guidelines and regular reporting can further strengthen investor confidence. Trustees play a role in ensuring proper asset management and compliance. Given that the viability of water investment is linked to the proper use and maintenance of tangible assets, the transparency and governance embedded in sukuk frameworks can enhance accountability and safeguard long-term outcomes.
However, the requirement for underlying assets in green sukuk issuance can potentially be a challenge for water-related investments. Structuring such sukuk can be complex for both investors and issuers, as green sukuk must be backed by a minimum level of tangible assets to ensure tradability. In fact, depending on the water sub-sector, some types of water-related investments can sometimes be relatively less attractive to investors, compared to other sectors such as energy and real estate, regarding the portfolio of underlying assets, because water infrastructure assets are usually immovable and location-specific, therefore hardly tradable. The value of these underlying assets must meet or exceed the issue value (UNDP, 2021[38]). In addition, in the current GSS sukuk market, issuers need to identify assets that meet both impact-oriented and Shariah-compliant criteria, which can be challenging.
Harmonising and strengthening Islamic finance regulation and governance could help scale up green sukuk, including for water-related investments. Despite the positive trends in both supply and demand for green sukuk issuance, these standards require further alignment with global environmental standards to continue to attract more international investors (ADB, 2022[7]). Recent efforts, such as the 2024 guidance by IsDB, the International Capital Market Association (ICMA) and the London Stock Exchange Group (LSEG), aim to bridge ICMA Green Bond Principles with Shariah criteria, supporting the standardisation of green sukuk (ICMA, IsDB and LSEG, 2024[20]).
3.2.2. Public-Private Partnerships (PPPs) and parallel financing
Comparison between conventional and Islamic PPPs
Islamic PPPs differ from conventional PPPs through a number of contractual elements, particularly with regard to interest, asset ownership and risk sharing. As explained earlier, Islamic financial agreements are essentially asset-linked. To comply with Shariah law, Islamic PPPs use various types IF instruments structured around underlying assets. These financial instruments consist of sale transactions (e.g. istisna,19 Murabaha,20 sukuk), lease agreements (e.g. ijarah,21 sukuk) and equity-based partnerships (e.g. mudharabah,22 musharakah23). Although certain mark-ups and profit-sharing mechanisms apply, project finance associated with Islamic PPPs exclude interest. Instead of fixed interest rates, IF institutions usually define profit-sharing parameters, using variable benchmarks, like the Secured Overnight Financing Rate (SOFR), which are global benchmark reference rates used by major global banks for both short- and long-term financing in the global financial markets (World Bank, 2017[39]; Kannangara, 2024[40]). Alternatively, social discount rate (SDR) may be applied to capture the time value of social benefits, supporting equitable and long-term positive outcomes, in alignment with the ethical and developmental objectives of IF (Gassouma, Benhamed and El Montasser, 2023[41]). Furthermore, unlike conventional PPPs, Islamic financiers do not impose charges such as late payment or default fees, as Shariah forbids any fees or charges before completing a service or purchase (World Bank, 2017[39]).
Despite these differences, Islamic and conventional PPPs share significant structural and commercial similarities. IF financiers frequently structure products to resemble conventional debt and equity arrangements, enabling participation in projects with conventional financing and easing integration within existing frameworks. In infrastructure PPPs, including those related to water, which typically involve multiple financiers, this approach allows IF and conventional finance to operate within the same project (World Bank, 2017[39]). This coexistence of conventional finance and IF in the same project is called “parallel financing” (see sub-section on Parallel financing). Although separate documentations are required for Islamic and conventional tranches of a PPP arrangement, the legal framework around parallel financing seems to have developed enough to avoid excessive complexities. Additionally, even without an Islamic tranche, PPPs inherently demand elevated levels of transparency and risk management due to their partnership structure (Gundogdu, 2019[42]).
The use of Islamic finance in water-related PPPs
The use of IF instruments in water-related PPPs remains limited, despite some synergies between IF mechanisms and infrastructure PPP models. Indeed, the growing trend of using IF sources in PPPs has not been widely reflected in the water sector, with most green IF investments focused on the renewable energy sector (Kasri et al., 2024[43]).
Nonetheless, existing examples demonstrate the applicability of IF instruments in water-related PPPs, for both large- and small-scale projects. For large-scale water infrastructure projects, the Patrind Hydropower Project in Pakistan and the ACWA Power’s Red Sea Utilities in Saudi Arabia are illustrative examples. The Patrind Hydropower Project in Pakistan illustrates how the concessional component of a PPP can be effectively financed using Shariah-compliant assets and instruments (see Box 3.2 below) (IsDB, 2020[44]). The ACWA Power’s Red Sea Utilities project shows how cross-sector infrastructure PPPs can mobilise private capital for water-related investment, with USD 1.6 million raised through Islamic banks such as Al Rajhi Bank and Riyadh Bank, alongside the Saudi Sovereign Fund and Public Investment Bank. Although primarily focused on renewable energy, the project also includes the construction of water production and wastewater treatment plants (see Box 3.2).
For small-scale microfinance projects, the Indonesia Urban Water, Sanitation and Hygiene (IUWASH) project in Kudus, Indonesia demonstrates the effectiveness of Islamic microfinance in delivering essential water services to low-income communities through PPPs. Implemented between 2012 and 2013 as part of a wider five-year initiative, the project used a PPP model involving the local government, Bank Syariah Mandiri and USAID (Nughoro, 2014[45]). An Islamic microfinance product financed 3 750 new water connections for low-income communities. Overall, the project improved water and sanitation access for more than 400 000 people across multiple regions (USAID, 2016[46]).
Patrind Hydropower Project in Pakistan with IsDB’s USD 142 million Shariah-compliant contribution
Patrind Hydropower Project in Pakistan is an example of PPP project involving IF instruments in water-related sectors (hydropower). With a generation capacity of 147 MW, the project has been supplying electricity since 2014 to an estimated 1.6 million people, helping to meet Pakistan’s growing energy demand. It was supported by K-Water & Daewoo E&C with lending from the ADB, International Finance Corporation (IFC), IsDB and Export-Import Bank of Korea (KEXIM). The total cost of the project was USD 632 million, with the IsDB contributing USD 142 million through Shariah-compliant financing.
ACWA Power closed USD 1.59 billion for Red Sea Utilities Project
The Red Sea Project in Saudi Arabia, encompassing the design, construction and operation of utilities infrastructure, is one of the most significant Islamic PPP. The project, which focuses on renewable energy for power generation, water production, wastewater treatment and district cooling, is a collaborative effort involving ACWA Power (Saudi Arabia), SPIC Huanghe Hydropower Development Company (China) and Saudi Tabreed Cooling Company. This consortium secured financing from a group of Saudi and international banks, including Al Rajhi Bank, APICORP, Bank Saudi Fransi, Riyadh Bank, Saudi British Bank, Saudi National Bank and Standard Chartered Bank. The project was procured as an independent PPP, with Saudi Arabia’s sovereign wealth fund, the Public Investment Fund (PIF), providing a guarantee for the 25-year offtake agreement through its ownership of the Red Sea Development Company (TRSDC).
Source: (PPIB, 2017[47]); (Red Sea Global, 2020[48]).
Parallel financing
Parallel financing (or co-financing) refers to the use of both Shariah-compliant and non-Shariah-compliant financing resources for a specific purpose. This approach has been tested in various countries, sectors (such as transportation and energy) and contexts, including infrastructure PPP projects, showcasing the effective coexistence of conventional finance and IF (World Bank, 2017[39]).
In many projects, including PPPs, Islamic and conventional financing mechanisms coexist, but the extent to which parallel financing is used in the water sector remains unclear. There are notable examples, albeit limited. One such example is Saudi Arabia’s Shuqaiq Independent Water and Power Plant PPP, which secured a total of USD 1.9 billion in financing, including an Islamic tranche led by Riyadh Bank, a commercial bank based in Saudi Arabia. Developed by a consortium of multiple companies, the project was designed to provide electricity and water to the Abha and Jazan regions (IJGlobal, 2007[49]), allowing to increase daily water production to 430 000 cubic meters in 2019 (Shuqaiq 3). The project received the Distinction Award at the Global Water Awards 2020 from Global Water Intelligence (GWI) for its scale, the blend of international and local investors, and its highly competitive tariff (GWI, 2020[50]).
Similarly, in Qatar, commercial Islamic banks and windows have played a significant role in financing desalination projects for over a decade. For instance, multiple desalination plants in Doha’s Ras Abu Fontas industrial area have benefitted from both Islamic and conventional financing arrangements, as outlined in Box 3.3. These examples illustrate the viability of parallel financing for large-scale water projects yet underline the need for better documentation and analysis of its application in the water sector.
It is important to note that parallel financing is applicable only under certain conditions related to alignment with Shariah such as asset ownership and prohibition of default fees. The asset ownership requirement in IF presents a complex but essential consideration when structuring parallel financing, as ownership entails both risks and advantages, such as enhanced financial security. Islamic financiers typically hold respective shares of ownership (legal or beneficiary) in underlying assets, which conventional financiers might view as a risk factor. In the event of a default in a parallel financing project, providers of Islamic facility may find themselves in a relatively advantageous position compared to their conventional counterparts, due to their ownership rights over certain assets. This challenge can be mitigated through a common security pool, ensuring equitable treatment among all financiers (both Islamic and conventional). For instance, in an ijarah24 (leasing) arrangement for a dam construction, Islamic financiers typically hold ownership of the underlying asset (e.g. water reservoir, power generation equipment, land rights). Should the project default, these financiers agree to transfer their assets into the common security pool, allowing for their liquidation alongside other assets to ensure equitable treatment among all parties involved.
In accordance with Shariah, which requires that fees or charges are applied only when an actual service has been delivered, some Islamic financing institutions refrain from imposing certain fees commonly found in infrastructure finance transactions, such as commitment fees, late payment fees and default fees (World Bank, 2017[39]). This creates a difference in financing structures, where conventional lenders impose these fees, but Islamic financiers do not. However, to prevent moral hazard in joint financing projects, some Islamic finance providers collect these fees but donate them to charity (World Bank, 2017[39]). In cases like water desalination projects, these charitable funds can support water and sanitation projects, including in underserved areas, thus enhancing the impact of the investment.
Domestic Islamic banks and conventional banks with Islamic windows in Qatar have played a pivotal role in financing desalination projects. Since the establishment of the first desalination plants at Ras Abu Fontas in 1981, the Qatari government has continually expanded the units to increase water production capacity. In 2008, the Ras Abu Fontas A1 desalination plant, designed to produce approximately 205 000 cubic meters per day, was financed through a combination of a commercial term loan and an Islamic tranche.
In 2013, the Qatar Electricity and Water Company (QEWC) secured a USD 450 million financing package to support the USD 500 million Ras Abu Fontas A2 desalination plant, with a capacity of roughly 165 000 cubic meters per day. The financing included a conventional debt tranche provided by Qatar National Bank (QNB) Group and an Islamic financing tranche arranged by Barwa Bank, Masraf Al Rayan and Qatar Islamic Bank.
The Islamic tranche also featured hedging facilities, with Qatar Islamic Bank acting as the Islamic Facility Agent and Islamic Security Trustee. This project exemplifies a parallel financing through conventional and Islamic tranches for large-scale water infrastructure development.
3.2.3. Islamic social finance and philanthropy
Islamic social finance has the potential to enhance equitable access to water and sanitation, particularly in areas where commercial capital is either unwilling or unable to engage. Grounded in principles of social justice and redistribution, instruments such as zakat, waqf and sadaqah can be used to finance basic services for underserved populations. These mechanisms are particularly relevant in low-income and fragile contexts, where demand for concessional resources is high and repayment capacity is limited. While their application to the water sector remains limited in scale and largely fragmented, these instruments offer a pathway to mobilise domestic resources and strengthen community-level service delivery.
Islamic social finance: definition and state of play
Islamic social finance, also referred to as redistributive IF, includes mechanisms aimed at supporting poverty alleviation, wealth redistribution and intergenerational solidarity (ADB, 2022[7]). It encompasses traditional Islamic institutions that also serve as powerful financing mechanisms, including zakat (mandatory almsgiving), waqf (endowments), sadaqah25 (voluntary charitable giving) and qard hasan26 (benevolent zero-interest loans), which primarily provide funding to unbanked populations (Kuanova, Sagiyeva and Shirazi, 2021[53]). It also includes contemporary Islamic not-for-profit microfinance institutions (IRTI, 2019[54]).
Zakat, one of Islam’s five pillars, requires Muslims with sufficient means to redistribute 2.5% of their wealth to those in need annually. Zakat is typically a direct wealth transfer between individuals, raising discussions regarding its potential use for public goods, such as infrastructure or educational and healthcare facilities. Waqf, traditionally the endowment of immovable assets for social benefit, has evolved to include forms such as equity and cash waqf,27 broadening its scope to encompass movable assets. Sadaqah involves voluntary charitable donations aimed at supporting vulnerable populations, while qard hasan, provided by Islamic financial institutions, offers zero-interest loans to individuals in need.28
Interest in Islamic social finance is growing. Reported funds for qard hasan and zakat grew from USD 0.5 billion in 2012 to USD 1.5 billion in 2022 (ICD and LSEG, 2023[16]). Islamic social finance offers significant yet underutilised potential for advancing SDG 6. These instruments can make meaningful contributions to water-related investments that, while less commercially attractive for some water sub-sectors, yield substantial social impact. Available analyses and estimates provide insights into this financial potential at national and global levels. For instance, annual global zakat contributions are estimated between USD 200 billion and USD 1 trillion29 (BAZNAS and UNDP, 2017[55]). Cash waqf, a waqf subcategory, is expected to reach USD 13 billion per year in Indonesia alone (World Bank, INCEIF and ISRA, 2019[56]). Case studies demonstrate the compatibility of most of Islamic social finance instruments with water-related investments. However, the impact of these financing resources on water is currently far from having reached its full potential.
Zakat’s potential for water investments
Zakat holds significant potential as a catalyst for supporting long-term socio-economic and environmental objectives, including related to water, if effectively mobilised to meet the needs of the most vulnerable. As one of the five pillars of Islam, zakat is mandatory, akin to a tax – this has sparked debate about whether its collection and allocation should be managed by the state for optimal poverty alleviation (Iqbal, 2000[57]). Traditionally used to address poverty, zakat has increasingly demonstrated its potential to contribute to various social and environmental outcomes. For example, the National Board of Zakat for the Republic of Indonesia (BAZNAS), in collaboration with UNDP and UNICEF, has shown how zakat can meet Shariah requirements while supporting investment in water (see Box 3.4). Indonesia, home to the world’s largest Muslim population, is among the countries with the highest estimated potential for zakat, estimated at 3.8% of GDP (World Bank and ISDBG, 2016[58]), which is equivalent to USD 32 billion per year (BAZNAS and UNDP, 2017[55]).
Zakat can also be pooled with other Islamic social finance tools to address water-related needs. For instance, in Indonesia, Zakat, Infaq and Sadaqah (ZIS) funds30 are increasingly mobilised to help bridge the financing gap in WASH services for the low-income and vulnerable households with support from multi-stakeholders WASH working groups, formed by Bappenas (Indonesia National Planning Agency), facilitating the collaboration between the central and regional governments, the National Board of Zakat (BAZNAS), UNICEF and various zakat institutions (see Box 3.4). However, the use of zakat remains fragmented and lacks transparency, limiting its full potential globally.
Effective zakat governance is essential for ensuring that zakat funds are allocated transparently, efficiently and in line with Islamic principles, thereby enhancing their impact. Strong governance frameworks are needed to direct zakat resources towards water projects that serve the most vulnerable populations, particularly in regions affected by water scarcity (Muhammad et al., 2024[59]). Sound administration includes clear project selection criteria, independent audits and transparent reporting, all of which help build donor confidence and mobilise further contributions. In Indonesia, for instance, zakat institutions place emphasis on standardised financial reporting and transparent disclosure of zakat distribution. This includes the publication of clear financial statements and the provision of accessible information on project funding and outcomes (Firmansyah and Devi, 2017[60]). In addition to addressing immediate needs, this approach supports long-term objectives such as community ownership and capacity development.
Waqf’s and cash waqf’s potential for financing water
Waqf has the potential to be expanded for water-related investments, even though data on its contribution to such investments is limited. Waqf can serve various societal causes and can take many forms, providing greater flexibility than zakat31 in terms of structure and purpose (OECD, 2020[5]). Historically, waqf has supported various societal needs, including public drinking water, as seen in the first water-focused waqf asset in early Islam and the widespread waqf-funded fountains during the Ottoman Empire (Abid and Miakhil, 2024[61]). Public fountains were financed through waqf arrangements, ensuring access to drinking water in urban areas.
Modern waqf structures have evolved, often governed by boards of trustees and funded through diverse resources, including cash and equity, known as cash waqf, with returns reinvested to support waqf initiatives (World Bank, INCEIF and ISRA, 2019[56]). Thus, cash waqf enhances the flexibility of traditional waqf instruments which generally rely on real estate assets.
As a result, assessing its current global financial potential is challenging. The International Waqf Fund (IWF) allocated around 24% of its yearly returns to water and sanitation projects in Sri Lanka, South Sudan and Iraq, which benefited approximately 7 000 people through the construction of wells and water purification plants (IWF, 2024[62]). Similarly, in 2021, 17% of the IWF resources funded water and sanitation projects in China, Indonesia and Pakistan (IWF, 2022[63]). The Humanitarian Relief Foundation, a waqf-based organisation founded in Türkiye, has constructed close to 15 000 water wells in 44 countries over the past 22 years (IHH, 2024[64]). The IsDB has not yet allocated its Awqaf Properties Investment Fund specifically for water-related projects but has supported smaller-scale initiatives that integrate waqf resources for water. In 2015, the IsDB allocated USD 3.5 million to the Towfiq Welfare Society Waqf to advance educational and health activities in Somalia. This waqf has implemented Water Development Programs in the region, providing potable water for both human and livestock needs through artesian boreholes and hand-dug wells (IsDB and APIF, 2019[65]).
Due to its small ticket size, cash waqf can be combined with other Shariah-compliant financial instruments, contributing to its growing use in recent decades. In Indonesia alone, voluntary cash waqf contributions are estimated to reach USD 13 billion annually (World Bank, INCEIF and ISRA, 2019[56]). The Waqf Agency of Indonesia has proposed cash waqf linked sukuk (CWLS) structures to support impact-driven investments, particularly ocean-related, which is gaining recognition in the country (Mutmainah et al., 2022[34]) and could be expanded to investments in water. In Malaysia, experts and academics have explored waqf-based takaful (insurance) models using public donations to address flood risks (Che Mohd Salleh et al., 2020[66]; Ishak and Zaini, 2024[67]).
BAZNAS and local authorities collaborate on water and sanitation in Kendel Village, Indonesia
In 2018, BAZNAS partnered with local authorities to construct toilets for 40 households in Kendel village, Boyali, Indonesia, a community of around 7 000 people. Prior to BAZNAS’s involvement, the local government had constructed a water tank to pump water from a nearby river. This collaboration between BAZNAS and the local government led to a decline in diarrhoea incidents and a reduction in open defecation practices, significantly improving the well-being of the targeted households. The project highlights the effectiveness of zakat, not only to address poverty and hunger but also to improve access to clean water and sanitation.
Mobilising alms fund for financing WASH services in Indonesia: Zakat, Infaq and Sadaqah (ZIS)
Since 2016, Islamic alms, including Zakat, Infaq and Sadaqah (ZIS) Funds, have emerged as a key financing mechanism for WASH services for the poor in Indonesia. Annual Zakat funding in Indonesia is estimated at approximately USD 27.8 billion, with Amil Zakat Institutions channelling these funds towards WASH financing. Key stakeholders include BAZNAS (National Board of Zakat), Badan Wakaf Indonesia (Indonesia Waqf Board), other Zakat Amil institutions (LAZ), Bappenas (Indonesia National Planning Agency), UNICEF and the WASH working group.
The project has resulted in the construction of over 10 000 latrines and supported more than 500 households in building toilets. Additionally, an Index for Sustainability of Clean Water and Sanitation and Technical Guidelines for ZIS utilisation in safe WASH were developed. The initiative underscores the significant potential of Zakat funds in financing WASH, with support from the national Islamic scholar council (MUI) for the broader use of ZIS in WASH and the involvement of multiple stakeholders.
Qard hasan’s potential for water investments
Qard hasan, an interest-free or benevolent loan, can potentially be deployed to finance small-scale water investments and promote equitable access to financing. This type of loan requires no monetary return. Indeed, the borrowers are only required to repay the principal amount, depending on their financial capacity (Iqbal and Shafiq, 2015[70]). As such, it enhances financial inclusion by providing financing to low-income individuals.
The use of qard hasan is limited within the Islamic banking sector, with only a small number of banks offering this instrument, partly due to its zero-return nature (Leins, Seele and Vogel, 2016[71]). Beyond Islamic commercial banks, institutions like IsDB provide qard hasan loans, particularly to finance working capital for low-income groups (IsDB, 2021[72]). NGOs (e.g. Islamic Relief Worldwide, LAZ Daarut Tauhiid), non-profits and microfinance institutions (e.g. Bait at Tamwil Muhammadiyah, Amanah Ikhtiar Malaysia) also utilise qard hasan to support small-scale entrepreneurs and low-income households.
Qard hasan is well-suited for small-scale or household-level water investments, supporting financial inclusion through its non-profit structure. However, it is not appropriate for large-scale infrastructure due to limited cost recovery (benevolent nature). As a complementary tool, it can help fill affordability gaps, while sukuk or blended waqf models offer more scalable financing options. For example, under its Rural Development Scheme, Islami Bank Bangladesh Limited, a commercial bank focused on poverty alleviation, provides qard hasan micro loans of up to USD 130 to support improvements in water, sanitation and rehabilitation services for rural communities in Bangladesh (Farooqi, Qamar and Chachı, 2017[73]). Qard hasan, which are generally used by microfinance institutions, can be pooled at national level to fund water-related investments, supporting the poorest households lacking access to clean water (Iqbal and Shafiq, 2015[70])
3.2.4. Islamic blended finance
Blended finance approaches that combine Islamic commercial and social finance present opportunities to scale up investment in water. Although still at an early stage, these models have the potential to improve credit profiles and attract private capital to complex or underfunded projects.
Definition of Islamic blended finance and distinction with conventional blended finance
Similarly to conventional blended finance,32 which catalyses private capital through public finance, Islamic blended finance seeks to mobilise commercial IF through Islamic social finance. Islamic blended finance is defined as “an optimal mixture of Islamic social funds like zakat, waqf, sadaqah, qard hasan and grants, alongside philanthropic funds and commercial Islamic financial instruments to generate financing for SDGs” (Khan and Badjie, 2022[74]). While conventional blended finance relies on instruments such as grants, repayable grants and guarantees to catalyse private capital, Islamic blended finance can use Shariah-compliant alternatives, including waqf, sadaqah, zakat, qard hasan or kafalah (Khan and Badjie, 2022[74]). Islamic blended finance can thus offer a pathway to ensure alignment with both financial viability and social impact objectives, making it potentially a viable mechanism for financing impact-driven (including water-related) investments.
State of play in the use of Islamic blended finance
Despite its potential, Islamic blended finance remains an emerging field with limited empirical literature and data availability (Badjie, 2019[75]). Since the mid-2010s, the IsDB has increasingly used Islamic social finance as a mechanism to de-risk impact-driven investments (Ascarya, Suharto and Husman, 2022[76]). This has spurred further exploration of blended finance approaches that combine philanthropic and commercial IF instruments to support long-term socio-economic and environmental objectives. Academic interest in the intersection of Islamic social and commercial finance has grown in recent years, particularly since 2020 (Maulina, Dhewanto and Faturohman, 2023[77]).
Due to the lack of comprehensive data, the analysis of Islamic blended finance remains largely case specific. One notable example is the establishment of an Islamic blended finance facility in 2021 by the IsDB in collaboration with donor institutions.33 Indeed, the IsDB provided USD 200 million in murabaha34 financing, blended with philanthropic contributions from the Gates Foundation, to cover the financing costs of polio vaccines for Pakistan (Khan and Badjie, 2022[74]). Another example is the IsDB’s USD 5 million blended murabaha line of credit35 which combine concessional resources with commercial, Shariah-compliant financing to make SME lending more affordable. The example demonstrates how blended Islamic instruments can help mobilise additional financing for essential services (Khan and Badjie, 2022[74]).
Islamic blended finance for water
Given the limited use of conventional blended finance for water investments and the marginal allocation of IF to water, the application of Islamic blended finance in the water sector is likely to be very marginal. No comprehensive empirical study is assessing its scale and impact. However, existing examples highlight its potential. One such case is the collaboration between the National Board of Zakat (BAZNAS) in Indonesia, a local bank and the UNDP, where zakat and Corporate Social Responsibility (CSR) funds were combined to finance micro-hydro power plant projects. These funds were further supplemented by contributions from the Global Environment Facility (GEF). This initiative not only enabled renewable energy generation but also improved water access and energy security for over 5 000 people across 900 households (Kasri et al., 2024[43]). The structured integration of concessional and commercial funds in this case illustrates how Islamic blended finance can be leveraged to close financing gaps in water-related investments. Furthermore, the Global Islamic Finance Programme (GIFP), led by WWF, aims to mobilise over USD 1.6 billion in Islamic blended finance for nature-based solutions, including water-related investments (see Box 3.5). The pilot phase in 2025 will test the Programme in five countries, providing further insight into the viability and scalability of Islamic blended finance in environmental and water projects.
In the context of the Global Islamic Finance Programme (GIFP), WWF, in collaboration with Islamic windows of major international commercial banks, including HSBC Amanah and Standard Chartered Saadiq, as well as the Securities Commission Malaysia, seeks to mobilise over USD 1.6 billion to scale up capital investments in nature-based solutions. The programme operates under two distinct financing strategies.
Under the Return First Strategy, GIFP aims to mobilise USD 1.5 billion in Islamic commercial capital, based on an initial “anchor” investment of approximately USD 150 million. This blended base is meant to catalyse further financing via concessional seed capital, upstream capital, securities, guarantees, market-based equity and debt participation. The leveraged funds are intended to target bankable projects with attractive market returns, for instance wastewater treatment.
Under the Impact First Strategy, GIFP will deploy USD 50 million in grant funding to leverage USD 150 million in Islamic social finance, supporting projects with lower commercial viability. It utilises a range of Islamic social finance instruments such as cash waqf, non-cash waqf, philanthropic donations, social impact sukuk and outcome-driven qard hasan.
GIFP states that the impact metrics that will be linked to investment financing with metrics related to water security. The potential share of water-related investments within GIFP could be assessed as the programme progresses. The results from its pilot phase in 2025 across Tunisia, Türkiye, Pakistan, Malaysia and Indonesia will help draw lessons for expanding the application of blended IF for environmental investments, including water.
Source: (WWF, 2024[78]).
Blended parallel financing for water
Islamic concessional finance (which includes grants and low-margin loans) can be blended with other funding sources to attract commercial investment in impactful projects, including for water. The Lives and Livelihoods Fund (LLF) is a good illustration. Capitalised by the IsDB, the Abu Dhabi Fund for Development and several philanthropic partners, the Fund finances projects across health, agriculture and infrastructure, including small-scale water systems (Pericoli, 2020[79]). By 2021, the LLF’s portfolio had reached USD 1.4 billion, of which approximately 14% was allocated to basic infrastructure, notably water supply and sanitation initiatives (LLF, 2022[80]) in countries such as Bangladesh, Côte d’Ivoire and Guinea.
A study suggests that, in Nigeria, despite the nascent and relatively small status of the IF industry (with only approximately USD 700 million in Shariah-compliant assets according to some estimates), parallel blended financing could be a powerful tool for catalysing commercial funds for water (Musa, Kolley and Aassouli, 2021[81]). In this structure, the Nigerian government could issue a green hybrid sukuk, combining ijarah (lease) and istisna (construction) contracts, through a special purpose vehicle (SPV), with the proceeds directed to water service providers. The AfDB could supply non-Shariah-compliant aid and technical assistance directly to these providers, while the IsDB could extend a qard hasan (benevolent, zero-interest loan) to the government. In parallel, the government would channel budgetary support to the water service providers, who would in turn share a portion of their revenue from water sales. Waqf institutions could complement these resources by offering a kafalah, an Islamic guarantee that covers the obligor’s payment obligations in the event of default (see Figure 3.8) (Musa, Kolley and Aassouli, 2021[81]).
Despite its steady growth, Islamic finance (IF) continues to face limitations in terms of market size, depth and liquidity in some countries, reducing its ability to finance, at scale, investments related to the environment and water in particular. Regulatory fragmentation across jurisdictions create uncertainty for investors, particularly in the green sukuk markets, hindering cross-border transactions (ADB, 2022[7]; OECD, 2020[5]).
This section examines key barriers that hinder the expansion of IF for water-related investments and potential solutions to overcome them. It explores the main challenges to scale up IF for water and analyses potential solutions to overcome these barriers. It also seeks to assess to what extent IF mechanisms can be a source of inspiration for financing water mechanisms focusing on long-term viability and equity.
3.3.1. Main challenges to scale up Islamic finance for water
The relatively limited maturity of the IF industry in certain jurisdictions constrains its capacity to scale financing for water-related investments. Compared to conventional finance, IF faces challenges in some countries such as reduced market depth and liquidity. The size of the IF industry varies significantly across jurisdictions and limited access to Shariah-compliant capital can constrain its development in some countries. Despite its steady growth since the 1970s, the global market value of the IF industry stands at USD 3.4 trillion in 2023 (IFSB, 2024[1]) compared to an estimated USD 34 trillion for the global financial services sector (The Business Research Company, 2025[82]; Benchmark International, 2024[83]). Additionally, the development of IF varies widely across countries, with less mature markets struggling to align with both ESG and Shariah objectives. For instance, Malaysia (e.g. SRI Sukuk Framework, 2014) and Indonesia have been pioneers in responsible IF markets, while alignment in the GCC (e.g. Qatar Financial Center Sustainable Sukuk and Bonds Framework, 2022), MENA and Central Asia (e.g. Bangladesh Bank’s Policy on Green Bond Financing, 2022) began later (LSEG and RFI, 2023[13]). This uneven progression poses substantial barriers to expanding IF’s role in addressing critical water challenges.
Limited standardisation
Variations in how IF contracts are structured across jurisdictions, driven by differing regulatory frameworks and country-specific Shariah compliance requirements, create challenges for both issuers and investors, especially within the green sukuk segment (World Bank, 2017[39]). Limited standardisation in the structuring of IF contracts, such as green sukuk issuance, particularly with respect to ESG requirements, can complicate cross-border transactions, heighten liquidity risks for investors and reduce the overall attractiveness of IF instruments. While these challenges affect all sectors, high-risk, low-return areas like water investment are especially vulnerable to the lack of unified Shariah standards.
International standard-setting bodies, including the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the IFSB, are developing global Shariah standards for IF practices. However, evolutions are slow and continue to generate regulatory uncertainty. For example, the adoption of AAOIFI’s Sharia Standard 62 on sukuk issuance which favours asset-backed sukuk over asset-based sukuk36 (distinction explained earlier in the chapter) may impact institutions’ sukuk issuance volume due to differences in asset-related risks and repayment structures. Such regulatory shifts may lead to market fragmentation or pose challenges for financial regulators (S&P Ratings, 2024[84]). Although these standards are still under discussion, their eventual adoption could shape the future of IF and its role in responsible finance, including for water investments.
Lack of awareness and expertise on IF instruments
Limited awareness and understanding of IF mechanisms hinder their broader use, in particular to finance impact-driven investments, including for water security. Despite growing international recognition and demand of certain IF products such as sukuk, many global investors and issuers erroneously view IF as exclusively relevant to Muslim-majority countries, overlooking its potential as a flexible and inclusive financing approach for diverse contexts (Di Mauro et al., 2013[85]). This misconception restricts its adoption in global markets and limits its contribution to addressing universal challenges, such as water financing.
A lack of expertise in structuring IF instruments, including green sukuk, further constrains their use for water-related projects (ICMA, IsDB and LSEG, 2024[20]). This knowledge gap impedes the development of effective instruments and limits investors’ confidence in their benefits. Without targeted capacity-building efforts and awareness-raising initiatives, the potential of IF to mobilise substantial resources for long-term socio-economic and environmental objectives will remain untapped (OECD, 2020[5]).
The absence of sustained dialogue between the IF community and water sector actors hinders mutual understanding and project alignment. Strengthening dialogue and collaboration between IF providers and stakeholders from the water sector can support the expansion of IF for water investments, which can be particularly impactful in water-stressed regions.
The theoretical convergence between Islamic finance principles and environmental and social goals can unintentionally dilute efforts to embed formal ESG frameworks into IF practices. As Shariah principles already emphasise ethical, social and environmental responsibility, some stakeholders view ESG requirements as redundant, reducing the incentive for their explicit adoption. This has contributed to the absence of standardised ESG methodologies across Islamic financial institutions and to inconsistent application of responsible investment criteria in investment decisions.
Instruments complexity and transaction costs
Ensuring Shariah compliance for financial instruments increases transaction costs and time. Structuring Shariah-compliant products, particularly asset-backed and asset-based instruments, requires extensive legal, financial and religious oversight (Hidayat, 2013[29]; Manjoo, 2014[86]). These complexities hinder the broader adoption of IF and its potential to scale financing for water-related investments (for which transaction costs are already relatively high). However, some experts argue that the cost difference between Islamic and conventional PPPs is less about structural factors and more about financing contracts and the commercial considerations of project sponsors.
Furthermore, aligning ESG criteria with Shariah principles can sometimes be a challenge. Identifying assets that meet both ESG and Shariah compliance criteria increases transaction complexity and limits the pool of projects eligible for green sukuk. This dual compliance requirement poses a barrier to the broader adoption of IF for water financing.
Islamic social finance instruments (e.g. zakat, waqf, qard hasan) require clearer regulation and policy direction to be channelled toward targeted water-related investment. Realisation of this potential is hindered by weak governance, limited transparency and insufficient technical and data-management capacity within zakat and awqaf institutions, many of which operate outside formal government frameworks. While qard hasan is more embedded within institutionalised Islamic finance, in particular Islamic banks, the absence of standardised regulations leads to inconsistent application across financial institutions. Strengthening governance, data systems and allocation mechanisms at the national level is therefore essential to shift these tools from traditional charitable disbursement to effective, impact-oriented financing (OECD, 2020[5]). Moreover, Islamic social finance tools are predominantly administered at the national level, limiting cross-border mobilisation; only a few international applications, such as the International Federation of Red Cross’s global zakat initiative for water projects, currently exist (OECD, 2020[5]; IFRC, 2019[87]).
Lack of data and reporting
Limited reporting on the performance and impact of investment, including for water, funded through IF instruments hinder their effective deployment. The IF industry has faced challenges in developing accounting and reporting frameworks. This has delayed the industry’s transition towards impact-driven practices and has contributed to higher transaction costs for both borrowers and investors, particularly in capital markets instruments (ADB, 2022[7]). Furthermore, this lack of data impedes evaluation of their effectiveness and areas for improvement (OECD, 2020[5]), and the promotion of successful cases of water investments to encourage the development and scaling-up of similar models. Without reliable data, stakeholders struggle to assess returns on investment or social and environmental impacts, both essential for securing investor trust. This lack of transparency limits the incentives in scaling up impact-driven investments, as potential contributors cannot verify how funds are allocated or whether projects meet intended objectives.
Ownership of assets
Some countries restrict the transfer of ownership of specific asset types to private entities due to national security concerns, which can limit the use of IF for water-related PPPs. A similar constraint arose in Türkiye’s hospital PPPs, such as the Konya Integrated Health Campus and the Manisa Hospital, where an ijarah structure was initially considered. Under a standard ijarah, the Islamic financier (in this case the IsDB) would take ownership of the assets and lease them to the Ministry of Health, with ownership reverting to the Ministry upon completion of repayments. Because hospitals are classified as nationally sensitive assets, this ownership transfer rendered ijarah unsuitable. The project was therefore restructured using an istisna contract, under which an SPV appointed by the financier oversees procurement and construction and delivers the completed asset to the government. This adjustment preserved Shariah compliance while ensuring that asset ownership remained with the state (World Bank, 2017[39]). Similar considerations may occur for other types of PPP financing in the sector. In China, concerns over asset transfers to private stakeholders may explain the reluctance of local governments to sell stakes in tap water projects to private companies (Leflaive, Dominique and Alaerts, 2022[88]). However, given that IF structures frequently involve transfer of asset ownership to finance providers, these restrictions may create greater challenges compared to conventional PPPs. Addressing these ownership constraints requires legal frameworks and national policies that balance security considerations with the need to attract private financing.
3.3.2. Opportunities to unlock Shariah-compliant funding and financing models for water at scale
Literature and experts point to the following options for further mobilising Islamic finance for impact-driven investments, including in the water sector. These recommendations draw also on insights shared during the 12th meeting of the Roundtable on Financing Water.
Strengthening policy frameworks, international coordination and standardisation
The definition of national strategies can play a key role to shape the growth and direction of IF by establishing regulatory frameworks, introducing incentives and setting clear impact objectives. These strategies typically incorporate targeted policies, economic incentives and institutional frameworks aimed at leveraging Islamic finance instruments and integrating environmental and social considerations into financial practices. For example, Malaysia’s Value-Based Intermediation (VBI) framework, developed by Bank Negara Malaysia (Malaysian Central Bank), demonstrates how governments can steer IF institutions towards embedding responsible and value-based principles in their operations (OECD, 2020[5]; Bank Negara Malaysia, 2018[89]), encouraging them to incorporate impact assessments into investment decisions, enhance transparency and promote financial instruments that generate positive social and environmental outcomes (LSEG and RFI, 2023[13]).
Advancing standardisation for structuring IF products could help align IF with long-term socio-economic and environmental objectives, including related to water. International standard-setting bodies, such as AAOIFI, IFSB37 and the General Council for Islamic Banks (CIBAFI), could play a key role in developing harmonised standards for IF products, including tailored guidelines for green sukuk issuance (Ismail and Shaikh, 2017[90]). These standards could include specific provisions for their application to water investments. Such provisions could define both ESG and Shariah compliance eligibility criteria for water projects, specify the types of water infrastructure that qualify for financing (e.g. wastewater treatment plants, water supply networks, irrigation systems). Additionally, these standards could outline reporting requirements to ensure that funds are used effectively for water-related objectives. Including such targeted provisions would enhance transparency, facilitate investor confidence and help scale up the use of IF for financing water investments.
Central banks also have a critical role to play in setting sector-specific standards to scale IF for water investments, in line with international standard-setting organisations. In May 2022, CIBAFI issued a Sustainability Guide for Islamic Financial Institutions, providing a framework for integrating responsible and value-based considerations into IF operations. Building on such initiatives, the Central Bank of Jordan incorporated sectoral guidance aligned with CIBAFI principles into its Green Finance Strategy for 2023-2028, aiming to expand impact-driven Islamic finance instruments (CBJ, 2023[91]). Other central banks are also developing frameworks to enhance IF for environmentally focused investments, though not specifically targeting water. For instance, the Central Bank of Bangladesh introduced the Sustainable Finance Policy for Banks and Financial Institutions in 2020. While the policy is not exclusively focused on IF, it remains relevant as IF accounts for 21% of the country's banking sector (IFSB, 2024[1]). The framework sets a minimum target for direct impact-driven finance as a share of total loan disbursements, requiring banks to allocate 15% of their portfolios to impact finance, including a minimum of 2% for green finance (Bangladesh Bank, 2020[92]).
Regional and national taxonomies for impact finance should give greater priority to water alongside other environment-sensitive sectors. The ongoing evolution of taxonomies presents an opportunity to strengthen water’s position within such classifications. For example, the Regional Arab Taxonomy for Sustainable Finance, currently under development, places greater emphasis on water compared to the EU Sustainable Finance Taxonomy (UNESCWA, 2022[93]). Incorporating precise technical screening criteria for water activities ensures that taxonomies channel investment into high-impact areas.
Additionally, fostering collaboration among international finance institutions, international organisations, governments and other relevant stakeholders can support the mobilisation of IF for water investments. Current literature and international discussions on leveraging IF for the environment tends to overlook water security. Given the scale of the global water crisis, it is essential to integrate water-related challenges into the agenda of MDBs such as IsDB, ADB and World Bank working on scaling up IF in their environmental objectives. The triennial OIC Water Reports38 could serve as a platform to introduce a dedicated chapter on the role of IF in water finance, ensuring ongoing analysis and visibility. Such reporting could be reinforced through collaboration with MDBs, highlighting funding and financing mechanisms that integrate IF structures.
Furthermore, robust collaboration between Arab and OECD Development Assistance Committee (DAC) donors could help support the use of IF instruments such as zakat, waqf, sukuk and Islamic microfinancing to support impactful investments (OECD, 2020[5]). Both Arab and DAC donors have an opportunity to demonstrate leadership in this area, leveraging their expertise to promote effective implementation. Certain donors could play a key role in driving this engagement forward by drawing on past experiences and best practices. DAC members could combine their conventional finance with Islamic forms of financing to deliver economic infrastructure and large programmes (OECD, 2020[5]).
Leveraging promising financing instruments
As evidenced in Chapter 2, Islamic finance instruments and models offer opportunities to scale up water investments through diverse mechanisms.
Green sukuk, which align with both ESG and Shariah-compliance principles, have emerged as key tools for mobilising capital for impact-driven projects, though their application in water remains limited. Malaysia’s Sukuk Kelestarian and Indonesia’s sovereign green sukuk illustrate how these instruments can attract both Shariah-sensitive and impact-driven investors to finance large-scale water infrastructure. The survey conducted by the OECD and IsDB, aimed at mapping existing Shariah-compliant financial allocations to the water sector and identifying strategies to scale up Islamic finance for water investments, indicates that experts consider sukuk a highly suitable Islamic finance instrument for water investments (see Figure 3.7).
PPPs incorporating IF provide a structured framework for integrating IF into water infrastructure projects, as demonstrated by Saudi Arabia’s ACWA Power Red Sea Utilities project, which has leveraged IF for desalination and wastewater treatment. Parallel financing, which blends Islamic and conventional financial instruments, has also been effective in expanding capital availability for large-scale water projects, such as Qatar’s Ras Abu Fontas desalination initiatives. Islamic blended finance, which combines Islamic commercial finance with philanthropic resources such as zakat, waqf and qard hasan, has been used to support water projects. Governments and MDBs could expand the application of waqf assets, including cash waqf mechanisms, to establish pooled Shariah-compliant funding systems specifically designed for water-related projects. Furthermore, effective mobilisation of zakat for water financing requires clear governance, transparency, impact measurement and Shariah compliance. These are essential to avoid fragmentation and underutilisation of these funds. While these instruments and models present strong potential, expanding their role in water investments will require regulatory harmonisation, frameworks’ standardisation and the development of dedicated Islamic financial products tailored to water security challenges.
In particular, the impact of zakat, waqf and sadaqah could be amplified by enabling project pooling and cross-border mobilisation, particularly for reaching the populations most in need. Currently confined within national borders, these funds, estimated globally at USD 200 billion to USD 1 trillion, could achieve greater reach and effectiveness through coordinated pooling, harmonised regulations and international cooperation. Initiatives like the UNHCR’s 2019 Refugee Zakat Fund demonstrate how global frameworks can channel resources to the most vulnerable, a model that could be adapted for water-related investments (OECD, 2020[5]; UNHCR, 2019[94]). Another illustration is from Indonesia, where Bappenas (Ministry of National Development Planning) and BAZNAS (National Board of Zakat), in collaboration with UNICEF, directed zakat toward WASH services and small-scale infrastructure (Bappenas and UNICEF, 2022[69]), creating a model that integrates Islamic social finance with national development planning and demonstrates potential for sustained investment in essential services. Expanding similar models in other countries could be impactful. Moreover, to enhance its impact, guidelines and policies on zakat collection, management and disbursement are essential. National policy frameworks on zakat or management of Zakat Infaq Sadaqah (ZIS) funds (explained in the previous sections on the topic) could integrate water.
Furthermore, MDBs and international organisations should consider establishing a Qard Hasan Water Fund to provide Shariah-compliant concessional financing for water infrastructure projects, predominantly funded by higher-income regions to support lower-income economies. Given the long-term, low-return nature of water investments, which limits commercial appeal (OECD, 2022[22]), such a fund would offer zero-interest or highly concessional loans and grants, thereby mitigating financial risks and enhancing access to affordable capital. This mechanism would promote financial inclusion and ensure the viability and affordability of essential water services, while enabling high-income countries to support impactful investment. Integrating this mechanism within existing MDB-led water initiatives would enhance its impact, ensuring alignment with broader resilience and development efforts.
Public-Private-Philanthropic Partnerships (4P) provide a structured framework for enhancing multi-stakeholder collaboration in water investments, bridging the gap between government initiatives, private sector financing and philanthropic contributions. The growing interest of philanthropists in water-related projects underscores the need for effective governance mechanisms to ensure that funds are allocated efficiently and deliver meaningful impact. Recognising this need, in collaboration with McKinsey and Company, the World Economic Forum’s Giving to Amplify Earth Action (GAEA) initiative seeks to strengthen such partnerships by harnessing the complementary strengths of diverse stakeholders. GAEA offers a promising framework for 4P models in water investments by integrating financial resources with impact-driven strategies. Key areas of focus include freshwater conservation through expanded rainwater harvesting, improvements in irrigation efficiency such as the scaling up of drip irrigation and land restoration efforts aimed at safeguarding critical ecosystems like wetlands and mangroves (Neo and Pacthod, 2023[95]). IsDB is also exploring the integration of philanthropic resources into PPPs.
Mobilising private investments
Greater private sector involvement would help attract additional capital into the sector and spur innovation (OECD, 2020[5]), particularly in financing mechanisms as well as in operational and managerial approaches, and scale IF for water investments. Showcasing successful examples of private sector engagement in water PPPs and other financing models through dedicated international platforms and publications can be impactful. These platforms, supported by governments, MDBs and other public development banks, international and regional organisations can raise awareness and encourage the replication of effective approaches. Governments can leverage Islamic blended finance to strengthen private sector participation in water investments by integrating Islamic social finance with commercial IF instruments. Establishing government-backed matching funds that co-finance water projects in partnership with Islamic financial institutions could provide additional incentives for private sector engagement while ensuring the viability of investment.
Governments can support efforts to scale IF for water by strengthening the enabling environment through targeted legal, regulatory and economic policy measures. Legal and regulatory enhancements can include the recognition and support of Islamic financial instruments, the creation of dedicated supervisory units within financial authorities, the adoption of international Shariah-compliant standards (e.g. AAOIFI, IFSB) and the development of tailored guidelines for impact-driven Islamic finance instruments. Economically, governments can introduce fiscal incentives, such as tax neutrality and issuance cost deductions. They can also provide concessional financing and risk mitigation tools such as guarantees to incentivise private investment. Moreover, measures like reasonable offtake agreements and partial asset ownership can further attract private sector participation (World Bank, 2017[39]). For instance, sovereign guarantees and offtake agreements provided by the Kingdom of Saudi Arabia enhance the investment attractiveness of the water sector, where the Saudi Water Partnership Company (SWPC) plays an active role in public-private partnerships in the country (KPMG, 2021[96]).
International banks with Islamic windows could act as catalysts for integrating responsible finance into IF and advancing standardisation, thereby supporting the development of water investments. These institutions are well positioned to design and promote harmonised parallel financing frameworks that combine Islamic and conventional financial models, fostering collaboration among diverse financial actors. This, in turn, can enhance the appeal of water investments to private investors by better articulating their economic value and return potential. It can also help close knowledge and implementation gaps, encouraging broader private sector engagement in water-related projects through IF mechanisms. For instance, banks such as HSBC, Standard Chartered and BNP Paribas are amongst the largest commercial banks with Islamic tranches.
Strengthening data systems and harnessing technology
Strengthening data systems, including data collection, data management frameworks, monitoring platforms and impact tracking is essential for ensuring accountability and optimising the use of IF resources for water investments. Impact-focused organisations (e.g. CBI) and regulatory bodies (e.g. Securities Commission Malaysia) could collaborate to develop robust mechanisms for monitoring the allocation and utilisation of proceeds from green sukuk, ensuring alignment with intended objectives and maximising impact. Public development banks, international organisations such as the OECD (OECD, 2020[5]) or the Organisation of Islamic Cooperation (OIC) and international standard-setting bodies such as the IFSB could enhance these efforts by advancing data collection and reporting systems to effectively track Islamic social finance flows and their contributions to SDGs. Establishing standardised reporting frameworks for member states would increase transparency and enable stakeholders to evaluate the effectiveness of IF in addressing water-related challenges.
Harnessing technology can contribute to improve the efficiency and impact of IF in supporting viable water investment. IF institutions and governments can deploy fintech solutions to optimise the effectiveness of Islamic social finance, particularly in microfinance initiatives targeting water supply and sanitation. Digital platforms and tools can enhance fund distribution, increase transparency and strengthen monitoring, helping to track whether resources are effectively directed to the communities most in need. For instance, BAZNAS partnered with several Islamic fintech companies to use smartphone applications for zakat collection, expanding the reach and efficiency of Islamic social finance in addressing essential services (Hudaefi et al., 2020[97]).
3.3.3. Islamic finance: a source of inspiration for improving the long-term viability and quality of financing water?
This sub-section analyses the extent to which Islamic Finance could potentially contribute to improving the long-term viability and quality of financing for water-related investments. Rooted in risk-sharing, asset-backed financing and ethical considerations, IF principles seem well-aligned with the characteristics of investments in water security. This sub-section explores how IF can potentially be a source of inspiration for strengthening the viability and quality of water investments, beyond IF.
Enhanced transparency and accountability
IF can be a source of inspiration in terms of transparency and accountability requirements for investment (World Bank, 2017[39]). These attributes are important to attract investments in water, as they can enhance investor confidence, which is sometimes lacking in the water sector (due to risk-return profiles and revenue streams which are not always clear). In IF contracts, accountability and contractual transparency between the parties of a contract are strengthened for two key reasons. First, adherence to Shariah principles is foundational, necessitating strict compliance with its rulings (Bank Negara Malaysia, 2019[98]). Second, the risk-sharing nature of IF inherently demands higher standards of information symmetry between parties (OECD, 2020[5]). The rigorous accountability and transparency frameworks inherent to IF, rooted in its risk-sharing principles, can serve as a valuable model for structuring investments in water. Indeed, providing visibility to investors can incentivise them to make long-term pledges and provide appropriate financing instruments (Farnault and Sarr, 2024[99]). Achieving these outcomes relies on enhanced transparency, robust monitoring and accountability measures.
Financial resilience
IF has proven to have a higher resilience to financial shocks than conventional finance. This could be an asset for financing water investments, which requires long-term capital and robust risk management. Indeed, empirical evidence highlights the resilience of IF compared to conventional finance, particularly during periods of financial crisis. During the peak of the 2008 Global Financial Crisis, banks with Islamic windows, offering both conventional and Shariah-compliant financial services, demonstrated greater capacity to provide financing through their Islamic windows (Hasan and Dridi, 2010[100]; Farooq and Zaheer, 2015[101]). This resilience is attributed to the relatively higher asset quality of IF contracts which place assets at the centre of financial agreements. Enhanced cautiousness in choosing assets while structuring financial instruments ensures greater liquidity during times of crisis, a critical feature for financing long-term water projects. Additionally, risk-adjusted return analyses indicate that IF instruments, particularly sukuk, outperformed their conventional counterparts in terms of financial performance (risk-adjusted returns) during the COVID-19 pandemic (Hasan et al., 2022[102]). For instance, sukuk is naturally less exposed to external financial market shocks and fluctuating interest rates since it is interest-free and can be linked directly to the returns from underlying assets. These features position IF as a reliable and resilient financing option for addressing global water challenges.
Blended finance and risk sharing
Islamic blended finance could potentially offer innovative approaches to addressing some limitations of conventional blended finance mechanisms for water-related investments. In conventional blended finance, private actors often depend on debt-based instruments, which may not meet the principles of equitable risk-sharing or effectively address the needs of underserved regions. In contrast, Islamic blended finance leverages Shariah-compliant instruments, such as sukuk, musharakah39 and mudharabah40 which prioritise profit-and-loss sharing, asset-backed structures and social equity. These features reduce reliance on interest-based financing while ensuring more balanced risk distribution among stakeholders. Additionally, OECD DAC reports indicate that only 9% of blended finance facilities target low-income areas (Khan and Badjie, 2022[74]). Therefore, incorporating Islamic philanthropic resources like zakat and waqf into blended finance frameworks, while leveraging their capacity to reach out vulnerable people, could generate additional concessional funding, particularly for water projects in communities with limited access to conventional financial markets.
Public-private partnerships: asset-backed finance and risk sharing
IF offers valuable insights for designing PPPs for the water sector, particularly through its emphasis on asset-backed structures. While Islamic and conventional financiers share similar requirements for project viability, IF aligns financial returns with asset performance rather than relying on fixed interest payments, thereby preventing excessive risk transfer to borrowers. More balanced risk-sharing is a core feature of IF contracts, particularly in equity-based structures such as musharakah40 and mudharabah41, where profits and losses are distributed proportionally among stakeholders rather than being borne solely by project developers. In particular, Shariah-compliant financing often ring-fences specific assets to safeguard investors and ensure equitable treatment among stakeholders. Although tangible assets are typically preferred, usufructs can also be used as underlying assets to structure Shariah-compliant contracts. Revenues from water tariffs, user fees or other payment streams can also be ring-fenced in certain contexts (World Bank, 2017[39]).
In IF, asset ownership, whether tangible or intangible, is a standard requirement, offering a structured approach to achieving a fair distribution of risks and rewards in water investments. Integrating asset-backed mechanisms into conventional water PPP models could enhance risk and reward sharing between public and private actors by linking financial returns directly to the performance of underlying infrastructure (World Bank, 2023[103]; World Bank, 2017[39]). This would prevent the use of additional public financing to meet the requirements of the partnership when revenue generation is lower than expected. Asset-backed structures would reduce speculative risks and encourage long-term commitments from financiers by ensuring that funds are allocated to productive and revenue-generating assets (Manjoo, 2014[86]). Furthermore, they could introduce greater discipline in project selection and management, as financing would be contingent on the presence of viable assets with clear revenue streams (World Bank, 2023[103]). These elements could improve financial viability in water PPPs, particularly in emerging markets where credit risk and investment uncertainty remain significant barriers to private sector participation.
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← 1. Shariah refers to Islamic law, and Shariah-compliant finance, that adheres to Shariah, is referred to as Islamic finance.
← 2. Sukuk are known as the counterpart of bonds in conventional finance. While conventional bonds are debt instruments, Sukuk are asset-backed or asset-based instruments: instead of earning interest (which is prohibited in Islam), investors receive a share of profits or returns generated by the underlying asset.
← 3. An Islamic fund is a pooled investment scheme structured to generate returns in accordance with Islamic principles, ensuring that all activities and underlying assets comply with Shariah law (Md Husin, Aziz and Iqbal, 2024[108]). Islamic investment funds allocate most of their assets to equities, followed by investments in commodities and money market instruments (IFSB, 2024[1]). Islamic funds strictly adhere to Shariah principles, which prohibit investments in the conventional finance sector, interest-based instruments and industries such as gambling, tobacco and alcohol. Additionally, Shariah compliance excludes the inclusion of speculative instruments, such as hedges and derivatives, from the portfolio.
← 4. Takaful, a form of Islamic insurance, is a mutual guarantee in return for the commitment to donate an amount in the form of a specified contribution to the participants’ risk fund, whereby a group of participants agree among themselves to support one another jointly for the losses arising from specified risks. Conventional insurance providers can be owned by a third-party entity which can collect the profit stemming from the difference between the total premiums and aggregate claims paid to policy owners. Whereas, in takaful, a company is co-owned only by the policy holders and profits (or losses) are shared among the participants of takaful.
← 5. However, limitations in data collection, including those within the TOSSD framework, present challenges to accurately measuring the share of Islamic finance.
← 6. In this report, the term “development finance” is used broadly to encompass public and private financing for development objectives, including financing provided by development finance institutions and private capital mobilised through public interventions. It further covers financing through multilateral and bilateral mechanisms
← 7. The Value-based Intermediation (VBI) framework is an approach introduced by The Malaysian Central Bank (Bank Negara Malaysia) aimed at aligning the practices of Islamic financial institutions with environmental, social and governance (ESG) considerations. VBI encourages financial institutions to align their activities with Maqasid al-Shariah (higher objectives of Shariah) and the SDGs by incorporating sustainability assessments into investment decisions, enhancing transparency and promoting financial instruments that generate positive social and environmental outcomes (LSEG and RFI, 2023[13]).
← 8. In this report, the term “development finance” is used broadly to encompass public and private financing for development objectives, including financing provided by development finance institutions and private capital mobilised through public interventions. It further covers financing through multilateral and bilateral mechanisms.
← 9. Due to the limited number of responses, the full results of the survey are not presented in this note, as they may not offer a representative picture. However, selected insights from certain set of responses are included where relevant.
← 10. Murabaha is a sale contract whereby one party sells a particular asset on a selling price which is the sum of the cost price and an agreed profit margin.
← 11. Official flows encompass both Official Development Assistance (ODA) and Other Official Flows (OOF). OOF differs from ODA primarily in its concessionally, as it includes financial flows with a grant element of less than 25% (OECD, n.d.[104]).
← 12. The TOSSD dataset defines mobilised private finance by official interventions as flows from private stakeholders where a direct causal link to an official intervention can be demonstrated. Official interventions include entities such as state and local government agencies, their executive bodies and public sector corporations in which the government holds a majority ownership of more than 50% (TOSSD, 2023[105]).
← 13. The Total Official Support for Sustainable Development (TOSSD) framework captures global official (Official Development Assistance and Other Official Flows) and officially supported (mobilised private finance through official intervention) flows aimed at promoting long-term development in developing countries, categorising these by financial arrangement types, such as Islamic finance, blended finance and export credits (TOSSD, 2023[105]). The TOSSD dataset may have two main limitations. First, since its establishment in 2019, the dataset is still evolving and aims to incorporate a broader range of donors. Second, for IF, potential under-reporting persists, as Islamic flows are classified by the provider without independent verification. Despite this, TOSSD data facilitates tracking of IF in water as either official finance or officially supported private finance. Importantly, no officially supported private IF was directed to water from 2019 to 2023.
← 14. Official flows encompass both Official Development Assistance (ODA) and Other Official Flows (OOF). OOF differs from ODA primarily in its concessionally, as it includes financial flows with a grant element of less than 25% (OECD, n.d.[104]).
← 15. Murabaha is a sale contract whereby one party sells a particular asset on a selling price which is the sum of the cost price and an agreed profit margin.
← 16. The prospective adoption of the Shariah Standard 62 of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), one of the most prominent international standard setting bodies on sukuk issuances alongside IFSB, could lead a transition from asset-based sukuk to asset-backed sukuk (S&P Ratings, 2024[84]).
← 17. The survey conducted by the OECD and IsDB gathered insights from 13 Islamic finance experts affiliated with financial and research institutions. While the sample size is limited, the findings offer indicative perspectives that could inform future research and would benefit from validation through broader data collection.
← 18. Cash Waqf Linked Sukuk (CWLS) is an innovative government-issued sukuk structure that mobilises capital through one or more waqf funds (endowments). These waqf funds are channelled into sovereign CWLS sukuk to finance public investments with social and environmental goals. The Indonesian government pioneered this model in 2020, directing proceeds to health facilities. Building on this approach, CWLBS focuses specifically on supporting marine and coastal ecosystems and the communities that depend on them (Mutmainah et al., 2022[34]).
← 19. Istisna is a sale contract on whereby manufacturer agrees to produce (construct) and deliver a specific asset in the future and where the sale price may be spot payable, amortized or deferred.
← 20. Murabaha is a sale contract whereby one party sells a particular asset on a selling price which is the sum of the cost price and an agreed profit margin.
← 21. Ijarah is a lease contract whereby one party leases the usufruct of a specified asset to another for a specific rent and period.
← 22. Mudharabah is a limited partnership whereby one partner (the capital owner) provides capital and the other partner undertakes a business activity (the manager).
← 23. Musharakah is a partnership whereby all the partners contribute capital in cash or in-kind for a business venture.
← 24. Ijarah is a lease contract whereby one party leases the usufruct of a specified asset to another for a specific rent and period.
← 25. Sadaqah is voluntary charitable donations aimed at supporting vulnerable populations.
← 26. Qard hasan refers to benevolent loans with zero-interest, provided to individuals in need.
← 27. Cash waqf is a form of waqf based on cash contributions instead of immovable assets such as land and real-estate property.
← 28. Some institutions may charge a nominal service fee on qard hasan loans, though this is a point of debate in terms of compliance with zero-interest requirements.
← 29. Since zakat can be distributed directly to beneficiaries, accurately estimating its scale and impact presents significant challenges (OECD, 2020[5]). Furthermore, the estimated potential of zakat varies significantly due to differing assumptions about the percentage of gross domestic product (GDP) used in calculations. This variation stems from the complexity of estimating zakat, which is closely tied to challenges in estimating total wealth. Key factors contributing to this complexity include debates over defining zakatable assets in today's intricate financial system (e.g. corporate zakat, financial securities, cryptocurrencies), alongside traditional assets subject to zakat, such as agricultural products, livestock, gold and silver. Existing literature offers a broad range of theoretical and empirical studies on zakat estimation, many of which rely on GDP-based calculations. Prominent methodologies suggest that zakat’s potential lies between 1% and 4.3% of GDP (Shaikh and Ahmed, 2019[106]).
← 30. Different from zakat, sadaqah and infaq are on a voluntary basis. Sadaqah encompasses charitable acts in a broad sense and does not necessarily involve material or financial contributions, whereas infaq, meaning "spending," typically refers to material or financial donations to others. The term Zakat, Infaq, Sadaqah (ZIS) combines these obligatory and voluntary forms of giving. In Indonesia, ZIS funds, which pool these contributions, are managed by BAZNAS.
← 31. Zakat is subject to strict annual distribution rules, with funds limited to some beneficiary categories defined in the Qur’an, notably focusing on the lowest-income households. The definition of Waqf is more flexible and allows broader use, including for sectors such as education, health and infrastructure (Ismail and Shaikh, 2017[90]).
← 32. Blended finance refers to the strategic use of development finance to attract additional sources of funding, primarily from commercial investors, to support the achievement of the SDGs in developing countries (OECD, 2018[109]).
← 33. Abu Dhabi Fund for Development, Gates Foundation, King Salman Humanitarian and Relief Centre, Qatar Fund for Development (LLF, 2022[80]).
← 34. Murabaha is a sale contract whereby one party sells a particular asset on a selling price which is the sum of the cost price and an agreed profit margin.
← 35. Line of credit is a form of flexible loan, generating financing of flexible amount of credit up to a certain limit instead of a fixed lump-sum amount.
← 36. Asset-backed sukuk and asset-based sukuk constitute the two major groups of sukuk in IF capital markets. They differ in the legal ownership transfer of underlying assets and the role of assets as source of repayment.
← 37. AAOIFI and IFSB have issued before a joint guidance on Shariah governance (AAOIFI and IFSB, 2023[107]).
← 38. Published by the Statistical, Economic and Social Research and Training Centre for Islamic Countries (SESRIC).
← 39. Musharakah is a partnership whereby all the partners contribute capital in cash or in-kind for a business venture.
← 40. Mudharabah is a limited partnership whereby one partner (the capital owner) provides capital and the other partner undertakes a business activity (the manager).