A white paper on “Islamic Financing for Infrastructure Projects”, released by The Dubai International Financial Centre Authority last week, highlighted the tremendous potential for Shariah-compliant financing of infrastructure projects in the GCC (Gulf Cooperation Council) and globally.
The paper notes that increasing the Shariah-compliant share of such projects would help meet an infrastructure funding demand that will range from $535 billion over the next decade to as much as $2 trillion by 2020.
“The level at which Islamic finance will participate in funding future infrastructure projects will depend on its ability to develop innovative securities (including sukuk structures) and other instruments that meet the legal and Shariah requirements on the one hand, and can satisfy the needs of investors and issuers on the other,” said the paper’s author Habib Ahmed, professor and Sharjah Chair in Islamic Law & Finance with the Institute of Middle Eastern & Islamic Studies, School of Government & International Affairs at Durham University in the UK.
“This paper is an important contribution to the policy and market discussions regarding both infrastructure finance and the broader Islamic finance industry, and reflects DIFC’s dedication to developing Islamic finance as one of its primary areas of focus,” says Farhan Al-Bastaki, executive director Islamic finance at the DIFC authority.
The whitepaper highlights that infrastructure projects are ideal for Islamic financing, in part because of Islamic finance’s preference for equity-based and asset-backed projects, as well as because many infrastructure schemes benefit the wider community, which fits well with the moral underpinnings of Islamic finance. An example of this latter point is the recently listed $100 million International Finance Corporation Hilal Sukuk on NASDAQ Dubai and the Bahrain Stock Exchange, the proceeds of which will fund infrastructure and health projects in Yemen and Egypt.
The potential for Shariah-compliant sources of infrastructure financing also is driven by its low share in overall Islamic financing. Only 22 percent of the $40 billion in Shariah-compatible financing within the GCC has gone into infrastructure projects, while 11 percent of the $14.9 billion in sukuk issued in the GCC during 2008 was used for infrastructure.
The study provides a summary of the various Shariah-compliant financing structures; it examines challenges to increased Islamic financing of infrastructure projects; and it offers possible solutions.