SIBs enable governments, government agencies, development organizations, and donors to partner with private investors to raise funds to finance programs with social impact.

A social impact bond (SIB), or a ‘pay-for-success’ bond, is a public-private partnership that funds social projects and services through performance-based contracts. They were first introduced in the United Kingdom in 2010 to address recidivism—a relapse in criminal behavior.

Social impact bonds are fast becoming a popular financing instrument, with an estimated 60 organizations raising in excess of $200 million since 2010. What is the landscape for Shariah-compliant social impact bonds?

Unlike conventional bonds SIBs do not necessarily have a fixed rate of return, but they are similar to conventional bonds in that: a) they raise funding through the debt market, and b) they carry risk of below-market, average, or above-market returns, depending on the alignment of the project or programs’ results with predetermined performance metrics.

Such bonds are proving highly effective among investors. In 2010 there were only 22 SIBs. To date, 60 have been launched in 15 countries worldwide, raising over $200 million, according to UK-based NGO Social Finance. A 2014 report by KPMG says SIBs make up the broader $21 trillion of assets allocated to Socially Responsible Investments.

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Examples of social impact bonds launched include:

USA: South Carolina Nurse-Family Partnership Pay for Success Project: Launched in February 2016, the project will support first-time, low income mothers to have healthy pregnancies and provide a better childhood for their children. With a tenure of four years, the SIB has raised $30 million, and will seek to impact 3,200 first-time, low income mothers. Investors include the Boeing Foundation, the Duke Endowment, as well as Medicaid, in addition to other endowments and private investors.

UK: It’s All About Me (IAAM): Launched in September 2013, the program aims to place children in local authority care in permanent homes with trained adoptive families. With a tenure of 10 years, it has already raised over $3 million and aims to place 650 children in permanent homes. Investors include Big Society Capital and Bridges Ventures, while funders (guarantors) are comprised of various local authorities and the UK Government’s Cabinet Office Social Outcomes Fund.

SUKUK

Regular interest-bearing bonds issued for commercial purposes are not Shariah-compliant. However, there is an Islamic counterpart: sukuk. Sukuk are similar to regular bonds, except instead of debt obligations for investors, they represent shares of ownership in a tangible, underlying asset.

The issuance of the first Shariah-compliant bond came in 1990 from Shell in Malaysia, which sold a 125 million Malaysian ringgit sukuk. However, the instrument did not gain favor in the 1990s, chiefly due to a lack of market familiarity and regulatory framework.

It wasn’t until the early 2000s that the sukuk market started to pick up. In 2001 a Malaysian company, Kumpulan Guthrie, issued the world’s first global corporate sukuk, and in the following year the government of Malaysia issued the world’s first rated U.S. dollar global sovereign sukuk.

In 2001 the market was valued at just over $1 billion of sukuk issued. In 2012, $139.2 billion in sukuk were issued, according to Thomson Reuters data. However, according to the Bahrain-based standard-setting body, the International Islamic Financial Market (IIFM), this figure dropped significantly to $60.7 billion in 2015, due to Malaysia withdrawing its issuance of short-term local currency sukuk.

SHARIAH-COMPLIANT SOCIAL IMPACT BONDS

Until recently, sukuk were generally only issued to fund large infrastructure, construction and real estate projects. However, in recent years, several SRI and social impact sukuk have been issued. These include:

Khazanah Ihsan Sukuk: The first and only SRI sukuk issued in 2015 by Khazanah Nasional Berhad, the sovereign wealth fund of Malaysia. It was valued at 100 million Malaysian ringgit ($24 million) as part of a 1 billion ringgit ($240 million) sukuk program.

The sukuk will be used to fund schools and improve the accessibility of quality education in Malaysia through a public-private partnership with the Ministry of Education.

Similar to conventional social impact bonds, it adopts a ‘pay-for-success’ model, which measures the success of the intervention according to predetermined performance indicators.

Crucially, however, the sukuk is different from other social impact bonds in that if at maturity performance indicators are met, sukukholders will forego or contribute up to 6.22 percent of the nominal value due, which in effect will reduce the yield to 3.5 percent per annum, according to Khazanah. If performance indicators are not met, sukukholders will receive up to the nominal value due. It received an AAA rating by Malaysian credit rating agency, RAM Rating Services Berhad, the highest possible rating.

The International Finance Facility for Immunization (IFFIm) Sukuk: In partnership with the World Bank and Gavi, the Vaccine Alliance, the IFFIm issued two sukuk to support health and immunization programs around the world.

The first was a $500 million sukuk issued in 2014, and represented the first time an issuer had accessed the international sukuk market to raise funding for a purely charitable purpose. Unlike the Khazanah Ihsan Sukuk however, this issue paid a competitive rate of return to sukukholders.

The second sukuk was issued in 2015 with a value of $200 million and is also expected to pay a market rate of return to sukukholders. Both sukuk are backed by sovereign donors, and it therefore came as no surprise that the credit agency Moody’s assigned an Aa1 rating to both sukuk,, the highest possible credit rating.

SRI SUKUK OPPORTUNITIES AND CHALLENGES

While the Khazanah Ihsan and IFFIm sukuk represent significant innovation and progress in Islamic finance, and align very closely with core Islamic finance objectives for the betterment of society, they are the only known socially oriented sukuk in the world today.

Why does the Islamic finance SRI field rank behind its conventional counterpart?

Sulaiman Moolla, an Islamic finance specialist who worked for the team that structured the first IFFIm sukuk, believes it is down to a lack of investor education and understanding, with Islamic investors not realizing the potential of SRI sukuk.

According to Moolla, this potential is huge. “If you couple the synergies of the global sukuk markets and the proceeds from the donations of hundreds of millions of individuals, there is much that could be done in building regular and consistent cash flows to tackle global issues,” said Moolla.

“SRI sukuk can be used as investment instruments, offering risk diversification, but also as CSR policy tools to help organizations meet their societal needs,” he added.

”I think there is a huge opportunity within the Islamic charity and awqaf sectors. Healthcare is another area, where they can be used, for example, in the prevention of diseases or to develop healthcare systems.”

While the Shariah-compliant SRI field is still in its initial stages, such opportunity can only lead to optimism that Islamic finance can fulfill its core mandates of achieving genuine and global social impact.

SUGGESTED ROADMAP Understand which sukuk structure is most suitable for your intervention and your investors: While some investors will be satisfied with below, or zero, market returns on their investments, as part of their CSR component or benevolence, others will expect above average and competitive rates of return. Partnering with the right institutions and backers is critical: Having solid guarantors and issuers is crucial in order to obtain high credit ratings, which in turn is crucial in raising funds. Build awareness of the nature of the sukuk: This is critical in order to allay the concerns of investors- Islamic and conventional-who may be unaware of the risks and expected returns of the sukuk.

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