Islamic Finance and Green Economy: Exploring the Role of Sharia-Based Instruments in Sustainable Development Financing

Abstract

This study aims to explore the role of Sharia-based financial instruments in supporting sustainable development financing within the framework of the green economy. The study adopts a qualitative content analysis approach, utilizing data from official sustainability reports of Islamic financial institutions (IFIs), green sukuk issuance frameworks, and regulatory guidelines from jurisdictions such as Indonesia, Malaysia, and the GCC. Supplementary academic and industry literature was also reviewed to support the thematic analysis. The findings reveal that Islamic finance through its core principles such as prohibition of harmful activities, asset-backing, and risk-sharing aligns naturally with environmental sustainability objectives. Green sukuk have emerged as a flagship instrument, successfully mobilizing capital for renewable energy, climate adaptation, and green infrastructure. Furthermore, equity-based contracts like musharakah and mudarabah show potential in financing environmentally responsible ventures. However, challenges remain, including regulatory fragmentation, low investor awareness, the lack of harmonized ESG-Sharia frameworks, and a limited pipeline of green Sharia-compliant projects. The novelty of this paper lies in its integrated analysis of Sharia principles and green finance taxonomies, highlighting the dual compliance nature of Islamic green instruments. The study is limited by its qualitative scope and reliance on secondary data, which may not capture all institutional dynamics in green finance implementation. The research implies the need for greater collaboration between Islamic and global sustainability standard-setters, as well as the development of Sharia-compliant ESG frameworks. The paper contributes to expanding the discourse on ethical finance and environmental responsibility in the Islamic finance domain