The role of Islamic finance in advancing the green economy: Evidence from OIC countries

Economics Study Program, Faculty of Economics and Business, Universitas Muhammadiyah Yogyakarta, Yogyakarta, Indonesia, 55183

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Abstract

This study explores the role of Islamic finance in advancing green economy outcomes across 26 Asian member countries of the Organization of Islamic Cooperation (OIC). While Islamic finance is inherently aligned with ethical and sustainable values, empirical evidence on its environmental impact remains scarce. This research examines whether the development of Islamic financial systems, as measured by Islamic banking assets and green sukuk issuance, is linked to enhanced environmental performance, as indicated by carbon emissions at the country level. Using a panel data regression model, we estimate the effect of Islamic financial variables on carbon emissions while controlling for GDP per capita (in constant US dollars), the Financial Development Index, and population size. The model also incorporates country-specific fixed effects to address unobserved heterogeneity across nations. Preliminary findings suggest a negative relationship between Islamic financial development and carbon emissions, indicating that Islamic finance may contribute to the green transition in OIC countries. The issuance of green sukuk, in particular, appears to be a promising instrument for channeling capital toward environmentally sustainable projects. These results highlight the potential of Islamic finance not only as a faith-based alternative to conventional finance but also as a complementary tool in achieving climate-related goals in the Global South, particularly in Asia.