Islamic financial instruments have potential to support energy transition

Islamic financial instruments are considered to have the potential to support the financing of the energy transition through social funds, such as zakat and wakaf, for clean energy projects. In the context of the energy transition, the concepts of green zakat and green wakaf are beginning to develop. Both have different functions but complement each other to support the financing of projects that contribute to reducing carbon emissions and increasing public access to clean energy. The potential for Islamic social funds in Indonesia is considered very large, with zakat estimated to reach around Rp320 trillion per year, whilst the potential for wakaf reaches around Rp180 trillion per year. However, their utilisation is still relatively low, so there is ample room to optimise these funds to support sustainable development. Energy transition projects generally have high-risk characteristics with relatively low profit levels in the early stages. This condition means many renewable energy projects do not yet meet bank financing requirements or are not yet bankable. Here, Islamic philanthropic funds can act as a source of first-loss capital that helps reduce project risk through a blended finance scheme. Wakaf is considered more suitable for long-term financing, whilst zakat can be utilised to support community empowerment and capacity building in the early stages of a project. Besides Islamic social funds, commercial sharia financing instruments such as green sukuk have also developed in Indonesia, including through the issuance of retail green sukuk. However, these instruments still prioritise commercial aspects, so they are generally intended for projects that already have financial viability. Academics are encouraged to expand the use of Islamic social finance instruments for environmental projects through research and policy innovation. More research is needed on how the concepts of green zakat and green wakaf can be developed and implemented concretely in society, so they can support the financing of clean energy projects and sustainable development.