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Circular Economy And Islamic Finance An Ijarah Way Forward

Youssef Aboul-Naja
By Youssef Aboul-Naja
8 years ago
Our economic system is built on a linear notion of ‘take-make-dispose’, where resources are extracted from the planet, goods are then produced, and eventually they are disposed; often for other products. The model has been working for us so far, yet it contains an inherent flaw which is that it assumes that our planet’s resources are infinite. Accordingly, such a model is not sustainable in the long-run, and will eventually break. Climate changes, environmental degradation, and landfills are all planet-stressing byproducts of this linear approach. YOUSSEF ABOUL-NAJA explores the relationship between the circular economy model and Islamic finance. [Publication Name: Islamic Finance News | Date: 16.September.2015 | Volume: 12 | Issue: 37 | Link: http://bit.ly/1NCBQGt]

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  1. SPECIAL REPORT Circular economy and Islamic inance : An Ijarah way forward Our economic system is built on a linear notion of ‘take-make-dispose’, where resources are extracted from the planet, goods are then produced, and eventually they are disposed; often for other products. The model has been working for us so far, yet it contains an inherent flaw which is that it assumes that our planet’s resources are infinite. Accordingly, such a model is not sustainable in the long-run, and will eventually break. Climate changes, environmental degradation, and landfills are all planet-stressing byproducts of this linear approach. YOUSSEF ABOUL-NAJA explores the relationship between the circular economy model and Islamic finance. CIRCULAR ECONOMY Diagram 1: The circular economy model By Youssef Aboul-Naja Sustainability Stefan Seidel, the deputy head of PUMA Safe Global, indicated that: “From a business and common sense point of view, it does not seem to make sense to grow cotton using large amounts of water, fertilizer and pesticides; go through complex ginning, spinning and weaving processes that require energy usage; and then pay for the disposal of the cotton at a landfill, where the material has no use other than filling up landfill space.” The antidote to this throw away-andreplace culture may lie within an idea incepted in the 1980s: the ‘circular economy’ model. Having gained traction in 2013, the circular economy model advocates for an economy that keeps “resources in use for as long as possible, [extracting] the maximum value from them while in use, then [recovering] and [regenerating] products and materials at the end of each service life.” In other words, a circular economy approach uncouples economic development from resource use; instead, it positively correlates efficient use of resources with economic development. This new perspective of economic development necessitates that we view products as services as opposed to goods owned. For example, when someone buys a washing machine, what they are really buying is the service as opposed to the actual product. This goes for other products, such as: vehicles, fridges, televisions, etc. Considering that products are to be viewed as services, the easiest way to implement a circular economy model is for manufacturers to retain ownership of the products and subsequently lease it to the end-users. Since manufacturers will be responsible for maintenance, they will be financially incentivized to produce durable goods. On the other hand, © Environment $ Society Economics customers only pay for what they use; this also implies that customers are financially incentivized to reduce waste. Many companies have already incorporated the circular economy model into their workflow and offerings which include, to name a few, automakers’ car-sharing programs, Xerox photocopying machines, soft drink machines, Desso’s carpetsharing program, IKEA’s secondhand goods service, Philips’s pay-per-lux model, etc. At this point, you are thinking, how does this relate to Islamic finance? The circular economy model embodies many elements from Islamic law, due to its ample social justice characteristics. For one thing, it promotes better resource utilization; Islamic law beseeches us to preserve wealth. Additionally, a circular economy approach will result in a less strenuous relationship with the environment; Islamic law maintains that: “Damage should be removed to the extent that is possible.” Finally, the circular model calls for risksharing schemes between suppliers and customers through the use of an operating lease. Of course, differing views will exist. One may argue that production companies are not interested in taking financial exposure on its clients; or that production 20 companies do not have the means in managing a leasing portfolio. In addressing such arguments, it must be emphasized that for a circular economy model to be realized, both the public and private sectors must cooperate to see through its success. To that extent, governments may introduce financial incentives to coax producers into taking financial exposure on its clients. As for managing a leasing portfolio, this is where leasing and Ijarah companies can play a pivotal role. Ijarah companies can lease the products from the manufacturers and subsequently sublease them to the end-users. Not only will that address the manufacturers’ shortcomings in managing a leasing portfolio, but Ijarah companies will also benefit by requiring less capital for operations as they will be leased, as opposed to buying, from the manufacturers. Islamic finance has often been criticized in its mimicking of conventional finance, that it is devoid of the Islamic economic spirit. Such criticisms have been founded on the premise that most Islamic banks shy away from business risk-sharing modes; they opt instead for more sale-based modes such as Bai Bithaman Ajil, Murabahah and Ijarah Muntahiya Bittamleek. But at the end of the day, banks are nothing more than facilitators; they provide services that its users request. Maybe the problem is not with Islamic finance, nor the Islamic banks, but with the way we perceive our products. “Sometimes a change in perspective is all it takes to see the light” (Dan Brown). Any public opinion or media appearance is the author’s independent personal opinion and should not be construed to represent any institution with whom the author is affiliated. Youssef Aboul-Naja is an Ijarah specialist at a supranational banking institution. He can be contacted at yaboulnaja@gmail.com. 16th September 2015