Challenges of Climate Finance in Developing Countries and the Pivotal Role of Islamic Climate Finance

Abstract

This study aimed to identify the key challenges hindering the flow of climate finance in developing countries, and demonstrating the pivotal role of Islamic finance instruments in addressing these challenges. A descriptive, analytical, and exploratory methodology was adopted to achieve the study’s objectives.

The study examined the economic, political, and institutional challenges limiting the flow of climate finance in developing countries, while also exploring the significant potential of Islamic finance to support climate action through both profit-driven and socially responsible approaches.

The study found that Islamic climate finance takes the form of two complementary models. The first involves profit-based Islamic financial instruments designed to generate returns in compliance with Sharia principles. The second focuses on philanthropic finance tools rooted in Islamic values of justice and solidarity, targeting the most vulnerable communities. Additionally, the study identified key obstacles to climate finance in developing countries, including high public debt, reliance on debt-based financing instruments for climate projects, weak institutional capacities, and lack of active participation from the private sector.

The study recommended developing Islamic banking products specifically tailored to finance climate change mitigation projects, channeling Zakat and Waqf funds into climate adaptation projects, and creating Sharia-compliant climate risk insurance products.