by Greget Kalla Buana, Islamic Finance Specialist at UNDP Indonesia  

Being among the leading countries in adopting the SDGs, Indonesia has the opportunity to be a global leader. With population totalling over 260 million individuals, the country today is a dynamic developing nation full of potential. Nevertheless, the SDGs are all encompassing requiring vast resources and remaining a huge financing challenge given low government revenues, decreasing Overseas Development Assistance (ODA), and lagging international private finance. As a result, this leaves a global financing gap at $2.5 trillion. The financing landscape in Indonesia demonstrates a unique trend where domestic private finance by far accounts for the largest current financing, comprising 48 percent of aggregate financing for the SDGs.  

On the other hand, Indonesia has the largest ummah or Muslim communities in the world. Islamic finance then becomes an important component of the domestic private finance. It has been viewed as an up and coming force, even in Southeast Asia. In line with that, UNDP Indonesia has explored synergies between many forms of Islamic finance instruments and the SDGs. A step change in the logic of how money flows into real economy is perceived as an urgent need. It is a call for innovative financing towards supporting the SDGs.

Innovative financing in its core is supposed to be a strategic lever for development. UNDP Indonesia acquired rich and in-depth knowledge and experience on such alternatives in the past as a successful crowdfunding campaign, a partnership with Musi Banyuasin Regency on the implementation of Sovereign Wealth Fund as well as with Angel Investment Network Indonesia on SDG Impact Fund, and a social enterprise-investor matchmaking programme called Connector.id.

UNDP Indonesia’s work on Islamic finance is basically part of a broader focus on how new forms of resources can be utilized to support the SDGs. The most recent approach is agreement with Baznas, the national zakat agency, on channelling zakat funds for SDGs in 2017. Baznas marks for the first time anywhere in the world, a zakat organisation formally contributes to support the SDGs. Following the initiative, two reports were published: The Role of Zakat in Supporting the Sustainable Development Goals and Unlocking the Potential of Zakat and Other Forms of Islamic Finance to Achieve the SDGs in Indonesia. 

Baznas contributed $350k in zakat funds to the implementation of four micro hydro power plants in two districts in Jambi Province of Sumatra. The provincial state-owned Bank Jambi also contributed $281k to the partnership. The micro hydro power plants depict a productive model of zakat disbursement while the source of fund give an example of blending Islamic finance mechanism. The projects are part of Global Environment Facility (GEF) to support renewable energy in Indonesia. In the same locations, UNDP Indonesia will also support virtual zakat through branchless banking, which is highly encouraged by the Financial Services Authority (OJK) to promote financial inclusion. The funds collected will be distributed for local economic development.

Under the Islamic finance scope, UNDP Indonesia has been supporting the Ministry of Finance in its issuance of the first sovereign Green Sukuk by helping identify government programmes related to climate change mitigation. To finance these green projects, the Government has released Green Sukuk in Q1 2018. All mentioned examples are efforts, not just to unlock the private financing, but also to connect the dots for the SDGs. These efforts are being consolidated into a niche service, which sits at the core of UNDP delivery system through the establishment of an Innovative Financing Lab. The lab is a pioneer SDG platform that seeks to create collaborative and experiential space to develop SDG financing solutions that services UN, Government, private sector, and other partners in Indonesia and across the region.