Revitalizing the Role of Islamic Social Finance in Achieving the SDGs: A Comprehensive Review

Abstract

The primary objective of Islamic social finance is to eliminate poverty and promote human welfare, aligning perfectly with the goals of the SDGs. A close examination of the SDGs reveals a strong correlation with Islamic social finance, emphasizing their close bond and comparability. Therefore, this study aims to investigate how Islamic social finance (ISF) sources can offer viable solutions to combat uncertainty, establishing a more economically balanced and just society - a shared aim with the SDGs. To achieve this objective, the study conducts an extensive literature review of existing and pertinent studies on social finance and Islamic social finance. This review assesses the current context, their contributions to the SDGs, and identifies limitations and gaps in both theory and practice. The research findings indicate that although the Shari’ah-based social financial system is relatively young, it has been gaining popularity by providing financial services to those who do not accept the interest-based conventional financial system. Consequently, there is significant demand for Shari’ah-based and interest-free financial services. ISF institutions play a crucial role in eradicating poverty, especially when compared to debt-based financial institutions that impose high interest rates on investments. The detrimental effects of debt and high interest rates are evident, leading to various financial, social, psychological, and moral problems. In this context, Shari’ah-based ISF emerges as a promising alternative source of financial support for impoverished populations in many Muslim-majority countries worldwide. The unique characteristics and strong moral values inherent in Islamic social finance underscore its potential to significantly contribute to poverty alleviation, financial development, and enhanced financial inclusion, all of which align with the overarching goals of the SDGs. These qualities position ISF as a key driver for expediting progress toward SDGs. However, despite its potential to yield positive social impacts, ISF faces numerous challenges that must be overcome to facilitate extensive interest-free financial inclusion through Islamic financial mechanisms. This study provides some policy recommendations to address these challenges and further enhance the effectiveness of Islamic social finance in supporting the attainment of SDGs.