Background

The United Nations Development Programme (UNDP) is a key UN agency committed to eradicating poverty and reducing inequalities in over 170 countries and territories. Its mission includes assisting countries in developing effective policies, leadership capabilities, and partnerships, while also enhancing institutional capacities to achieve sustainable development. UNDP's work spans critical areas such as poverty alleviation, governance, resilience, environmental sustainability, energy, and gender equality. The Global Islamic Finance and Impact Investing Platform (GIFIIP) was established by the Islamic Development Bank (IsDB) and UNDP’s Istanbul International Center for Private Sector in Development (ICPSD) in 2016.[1] Engaging the private sector, governments, and key stakeholders operating in the Islamic finance and impact investing markets, the platform aims to promote market-based solutions to sustainable development challenges by creating a collaborative working space among these actors. The platform envisions to position Islamic finance and impact investing as a leading enabler of the Sustainable Development Goals (SDGs) implementation through private sector engagement. In addition to providing various Shariah-compliant impact investing tools and instruments, it enables access to Islamic capital for enterprises and strategizes to foster thriving Islamic finance and impact investing business ecosystem.

Financing the Sustainable Development Goals (SDGs) poses a major global challenge as substantial investments are required in areas such as education, healthcare, and infrastructure. Developing countries such as Afghanistan face huge financing gaps due to limited resources and access to capital, particularly in the aftermath of the pandemic. The scale of funding and technical support required to achieve the ambitious 2030 Agenda for Sustainable Development necessitates a collaborative effort among governments, multilateral development agencies, and the private sector. Innovative financing mechanisms are crucial for mobilizing diverse sources of funding to tackle the challenges of achieving the SDGs.

Islamic finance, which is based on principles of financial stability, inclusion, and shared prosperity, is a powerful and non-traditional way of financing the SDGs. Islamic finance also shares similarities with impact investing in terms of both being value-based investment mechanisms with a focus on positive environmental and social impact. Within its philosophical framework, Islamic economics essentializes socio-economic development, and within such a human-centric development-oriented paradigm, Islamic finance is envisaged to play a crucial role in mobilizing resources and supplying the necessary funding. Parallel to this mechanism and the country context of Afghanistan, UNDP ICPSD has provided technical assistance services to the UNDP Afghanistan CO in various work streams since 2021. The provided services include workshops and capacity development activities aiming to overcome the operational limits of financial and private sector actors and intervening in developmental issues faced by local and disadvantaged communities, including MSME support, local infrastructure restoration, and development projects.

Rationale

Afghanistan has experienced decades of conflict and political instability, all of which have left lasting impacts on its economic foundations. These conditions have weakened infrastructure, limited access to formal financial services, and eroded public confidence in financial institutions. As the country looks ahead, there is a growing recognition that rebuilding the financial sector must be approached seriously and strategically in ways that are inclusive, locally relevant, and culturally appropriate. The economic landscape of Afghanistan has been profoundly affected by political instability, international sanctions, and systemic inefficiencies within its financial and banking sectors. The cumulative decrease in real GDP has reached 27.2 percent since 2020, underscoring the economy's precarious condition. Additionally, total banking assets have decreased by 10.5 percent from 2022 to 2023, with non-performing loans (NPLs) accounting for 24.3 percent of total loans, indicating systemic challenges.[2] Despite these challenges, Afghanistan possesses considerable potential for the implementation of Islamic finance, as over 99 percent of its populace identifies as Muslim.[3] A growing global market for Islamic financial systems is projected to reach $6.7 trillion by 2027.[4] Afghanistan has the opportunity to establish a financial sector that is inclusive, ethical, and resilient, in accordance with the nation's cultural and religious values, through the implementation of Islamic finance. Rather than relying on conventional models, there is a need to develop financial solutions rooted in local values and responsive to the needs of the population.

Islamic finance has rapidly evolved over the last few decades, with centers being established across regions in the Middle East, Southeast Asia, Europe and North America. In the Middle East, the first International Conference on Islamic economics was held in 1976, which led to the establishment of the International Center for Reseach in Islamic Economics (ICRIE) in 1977 (which was changed to the Islamic Econommics Research Center (IERC) in 1985) and the launch of an Islamic economics educational programme at Umm Al-Qura University in Makkah. In the United Arab Emirates, the Dubai International Financial Center (DIFC), and in Malaysia, the International Center for Education in Islamic Finance (INCEIF) was established as a university. INCEIF has a central role in developing talent to sustain market competitiveness and meet future challenges in the Islamic finance industry. Under Bank Negara, the establishment of the Islamic Banking and Finance Institute of Malaysia (IBFIM) and the International Shariah Research Academy for Islamic Finance (ISRA) focuses on providing high quality education and training in Islamic finance. In Kazakhstan, the Astana International Financial Center (AIFC) established in 2018, aims to become a strategic center of Islamic finance within Central Asia by promoting Shariah-compliant financial products. In the UK, the Institute of Islamic Banking and Insurance (IIBI) plays a crucial role in promoting Islamic financial literacy.

The UNDP through its technical expertise and its platforms such as the Global Islamic Finance and Impact Investing Platform (GIFIIP) is well-positioned to support the establishment of the Afghanistan Center of Excellence in Islamic Finance, leveraging its international network and expertise to aid in policy formulation, fundraising, and building global partnerships. A Center of Excellence in Islamic Finance, tailored to Afghanistan's unique needs, could play a pivotal role in aligning with broader international efforts to support economic stability and development through sustainable and inclusive financial practices.

Objectives

Given the economic situation and financial sector challenges, to address the critical gaps in financial ecosystem and align with its socio-economic context, establishing the ACEIF is important for Afghanistan. The ACEIF is expected to focus mainly on developing innovative solutions to meet the needs of the industry and to ensure the growth of Islamic finance in compliance with policies and regulatory standards. The ACEIF will strengthen Afghanistan’s financial ecosystem and support the development of a robust regulatory framework, skills and capacity for the development of Islamic finance. The acute shortage of professionals trained in Shariah-compliant finance, further worsened by the migration of skilled experts, threatens the sector’s viability. The ACEIF will bridge this gap by providing structured training programs for banking, microfinance, and regulatory staff and faculty, in addition to development initiatives to ensure a steady supply of qualified experts. By developing local expertise, the ACEIF will guarantee a sustainable stream of qualified professionals to bring back public trust and certainty to financial sector. The ACEIF will be a platform to launch focused awareness campaigns, build capacity, and simplify the technical language of financial products to solve the knowledge gap and awareness issue in both supply and demand side with regard to Islamic finance and financial products. Additionally, the ACEIF will act as hub for knowledge production and dissemination by offering specialized programmes in different modalities to enhance the economic empowerment activities for underserved groups especially women businesses, and potential economically viable sectors, to enhance financial inclusion with the broader societal development objectives. The ACEIF will run in line with international standards and have an open and autonomous management style. This will guarantee credibility, accountability, and operational effectiveness, while fostering international partnerships to integrate Afghanistan into global financial networks.

Vision

Through capacity building, research, and technical support for country implementation models of Islamic finance, the Afghanistan Center of Excellence for Islamic Finance (ACEIF) strives to be a leading Center. It aims to empower Afghanistan’s financial sector by serving local financial institutions and equipping finance professionals with the skills and insights needed to implement best Islamic finance solutions for Afghanistan context.

[1] Global Islamic Finance and Impact Investing Platform (GIFIIP)

[2] United Nations Capital Development Fund. (2023). Interoperability of financial services providers: Afghanistan. Retrieved from https://www.uncdf.org/article/8271/interoperability-of-financial-services-providers-afghanistan

[3] Muslim population (Swedish Committee for Afghanistan https://swedishcommittee.org/religion/)

[4] Hasan, S., & Mohamed, S. (2024, February 26). Navigating uncertainty: Global Islamic finance assets expected to exceed $6.7 trillion by 2027.