As Islamic finance continues upsurge, new tool helps harness it for developing-country infrastructure

The global Islamic finance industry recently crossed the $2 trillion mark in assets and is expected to reach around $3.5 trillion by 2021. We suspect many of the readers of this blog have followed—even loosely—the rise of this industry, given its role in financing infrastructure.

As the principles of Islamic finance are grounded in the values of social justice and betterment of humankind, its increasing use for infrastructure PPP projects that maintain a net positive social and environmental impact is timely: the World Bank estimates that investments of 4.5 percent of GDP can enable developing countries to achieve the infrastructure-related Sustainable Development Goals while staying on track to limit global warming by no more than to 2°C.

What’s new?

Here’s a quick run-down of recent developments that are important to the industry—and to the provision of infrastructure services that reach more people worldwide.
 

• Islamic finance expansion in Africa – Last September, Moody’s published Islamic Finance — Africa: Robust performance and strong sukuk issuance support Islamic banking in Africa, (available with subscription from Moody’s) which describes the growth of Islamic finance on the African continent, predicting an especially productive 2020. The report highlights the resilience of Islamic banks, even in the face of challenging operating environments in many African countries, suggesting these banks will continue to perform well—likely even better if the operating environment improves. However, to unlock the option of Islamic financing, African countries need to adapt their financial systems and legal frameworks to welcome this parallel financing system and identify projects that can be financed with Islamic finance and the appropriate structures.
   
• The G20 and Saudi Arabia – Last month, Saudi Arabia began its presidency of the G20 with a strong interest and emphasis on infrastructure. Saudi Arabia’s agenda for its presidency focuses heavily on clean energy, water management, and technology in infrastructure. Saudi Arabia is one of the best-versed countries in the world on Islamic finance and has an impressive track record on shari’ah-compliant infrastructure. For example, the capacity of the Madinah airport increased from 5 million to 8 million passengers per year through a shari’ah-compliant PPP. Their presidency and agenda represent a global opportunity to shed light on and learn best practices of Islamic finance for infrastructure PPPs
   
• China’s Belt and Road Initiative – The Belt and Road Initiative’s regional investment program covers more than 100 countries, focusing on transportation and energy infrastructure. With several participating countries being predominantly Muslim and having interest and/or experience in Islamic finance—including Bangladesh, Egypt, Kazakhstan, Lebanon, Pakistan, and Uzbekistan—this program provides promising opportunities for the Islamic banking sector.

What’s even newer?

With this enormous momentum in mind, the World Bank—collaborating again with the Islamic Development Bank Group—just launched a reference guide that aims to build the capacity of PPP units worldwide to mobilize Islamic finance for much-needed infrastructure projects across the developing world.

The Reference Guide: Islamic Finance for Infrastructure PPP Projects builds on the 2017 report Mobilizing Islamic finance for Infrastructure PPPs. The 2017 report established the what of Islamic finance and infrastructure PPPs: What are they? What are they used for? It built capacity and awareness among both infrastructure development practitioners and developing countries on tapping into Islamic finance as an additional resource to meet the infrastructure service gap.

The new reference guide delves deeper on the how of Islamic finance and infrastructure PPPs, which we believe has been a major impediment to its deployment , as we described in our last blog. It takes steps towards operationalizing Islamic finance for infrastructure PPPs through:
 

• Case studies showcasing instances where Islamic finance has been applied—often alongside conventional finance—as an additional source of financing for a PPP project. These case studies demonstrate the use of the different Islamic finance structures, breaking down the accompanying legal arrangements and thoroughly explaining how they interact with conventional financing.
   
• Legal templates, developed with experienced legal practitioners, for the main agreements for the structures used for Islamic finance PPPs described in the reference guide (including those in the case studies).

Our hope is that—with these practical tools in-hand, investors and PPP units worldwide can build even more capacity to enter shari’ah-compliant infrastructure PPPs and share in Islamic finance’s vast potential.  The reference guide will take a bit of a road show at important regional events through the year to ensure the word gets out.

We’re looking for feedback and suggestions. Does the reference guide meet your needs? What are your experiences with Islamic finance? Would you like to see the reference guide (and its earlier companion piece) featured online or in-person somewhere in particular? Feel free to leave us comments below.

Related Posts
 

Scaling the use of Islamic finance for infrastructure: MDBs can help
 

How Islamic finance can boost infrastructure development
 

Can Islamic finance unlock funds for development? It already is
 

A timely report on mobilizing Islamic finance for PPPs
 

Tapping into Islamic finance for infrastructure development

 

This blog is managed by the Infrastructure Finance, PPPs & Guarantees Group of the World Bank. Learn more about our work here.