Determining optimal islamic financing methods for small-scale sustainable energy investments regarding socio-economic welfare

Abstract

The aim of this study is to determine appropriate Islamic financing methods (IFMs) for sustainable energy investments to reach a wider community. Since energy investments are costly projects, their financing should be carried out in the most efficient way. Likewise, the provision of environmentally friendly energy resources is essential for a sustainable human-society-nature balance. As a human duty to prevent climate change, everyone should be aware of personal consumption according to ecologically friendly. In this context, the use of Islamic financing instruments can help spread sustainable energy investments, particularly across Muslim countries. In terms of small-scale investments, it would be significant for the sustainable energy investments to reach people with religious sensitivity, as Islamic financial institutions have a closer business relationship with both SMEs and end-users. To put it briefly, it is vital to make the most appropriate decision regarding sustainable energy investments, considering the economic limitations of countries and people. According to the analysis result of the MCDM based AHP method; Murabaha financing comes to the fore in small-scale energy investments. Accordingly, Murabaha (cost-plus) financing can be a good alternative to interest-bearing credits with a variable interest rate. Respectively, the second-best weighted IFM is found as Mudarabah which is a special type of partnership where one party is a financier, and the other is an entrepreneur. In reverse, the least suitable method has been found as Ijarah. Thus, the Islamic banking system should develop various business models for energy investments through these two most appropriate IFMs. So much so that, thanks to small-scale sustainable energy investments, both environmentally friendly carbon emissions will be reduced, and the country’s external energy imports will be reduced via the production of extra energy. As a result, shifting from anthropocentric to ecocentric lifestyle that is self-sufficient in terms of energy and compatible with the environment can be generated for the sake of sustainability.