The Role of Islamic Finance in the Growth of the Circular Economy

Reversing climate change impact will require tackling energy-related CO₂ emissions and non-energy-related CO₂ emissions and the Circular Economy (CE) approach offers a holistic solution. RE financing is deemed riskier because the technology is still emerging and RE capital intensity is high. These characteristics make RE face constraints in finance flow to the sector. For developing countries and low-income energy consumers, the lack of financing for RE is magnified due to their high credit risk. Similar financing challenges exist for the non-energy related circular businesses. The finance-real economy link principles and embedded sustainability outcomes provide a natural fit between Islamic finance and CE. This study investigates empirically how Islamic finance's development impacts energy efficiency. Another part of the research looks at how Islamic finance can use a suite of financing instruments to support circular businesses to access funding. The empirical results suggest that developing the Islamic financial system leads to energy inefficiency in the studied countries. Additionally, the study illustrates how the Qatari economy's electricity and mobility sectors as well as agriculture and water supply system provide an opportunity for regeneration, virtualizing, exchanging, optimizing, sharing, and closing the loops to achieve CE growth. Further, the study concludes that Islamic finance can use compassionate contracts, equity-like, and risk-sharing financing modes to support circular businesses motivated by the holistic objective of Maqasid(higher objectives of Sharīʿah). Finally, to close the loops toward renewable energy in a CE, the study proposes the Community Green Waqf (CGW) financing model, which blends agencies of the community, the private sector, and the philanthropic sector to drive RE project’s viability and uptake in rural communities.