"Après nous, le déluge" towards a shock theory of Islamic green finance

Despite considerable progress in the ratification and implementation of the 2030 United Nations Sustainable Development Agenda (SDG Agenda) and Paris Agreement under the United Nations Framework Convention on Climate Change (Paris Agreement) since 2015 the world has not committed enough resources to implement these two strategic agendas for humanity and achieve their crucial targets for the development of current and future generations. As the COVID-19 global pandemics started unfolding at the beginning of 2020, both the Paris Agreement and the 2030 Agenda were not on the track, and this was attributed to a large extent to the significant funding gaps for both agendas, especially for the most vulnerable countries. On the other hand, the recent economic crises (COVID-19 pandemics, 2008 global financial crisis) have profoundly disrupted the global economy and demonstrated the heightened vulnerability of the global financial and economic system to climate, health, financial or socioeconomic risks. Geopolitical events further challenged the foundations of the global financial architecture, in particular, due to unprecedented sanctions against Russia in the United States, the European Union, and allies, and the unexpected response of Russian authorities to these sanctions. In this context, the world is perceived as even more exposed in the short-term future to a major crisis, potentially far more reaching than the 2008 global financial crisis, a crisis that will arguably determine the fate of most vulnerable nations in the next decades. In this dual context of failed achievement of global agendas and heightened risks of major global financial shock, this paper addresses the positioning and potential evolution of the Islamic finance (IF) sector. In particular, the paper posits that despite solid growth in the last four decades, IF institutions have not adopted a clear strategy with regards to rapidly aligning with SDG and climate action agendas, or developing relevant mechanisms and policies to face external shocks of the magnitude expected with the unfolding global financial crisis and IF will therefore face an existential crisis when the major global financial shock occurs. The current global IF institutions are not equipped with the capabilities and resources to adopt packages of reforms radical enough to bring rapidly enough the sector back on track before the crisis hits. In consequence, the IF sector is likely to become marginalized in the short-term due to capital flight and institutional obsolescence and despite positive developments, sustainable or Islamic green finance remain constrained in their current infancy stage. The central idea of this paper is therefore that the best opportunity to develop a global Islamic green finance architecture that substantially contributes to building a better, greener, and more inclusive world lies in building a radically transformed Islamic economic system in the aftermath of the expected major shock forthcoming. Using the framework of shock theory, the paper argues that seven critical conditions (government stability, mass urban relocations, de-commoditization of consumption, state control over unsustainable industries, dematerialization of the economy through technology and state planning, large-scale reconstruction financing program tied to the mobilization of human capacities and natural resources and interventionist policy to salvage and consolidate the banking sector and transition to Islamic Green Finance) would best support this needed transition for the benefit of present and future generations.