Tapping into Islamic finance for infrastructure development

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Islamic finance assets represent only around 1% of the global financial market,[1] so how can tapping into these funds help close the $452 billion annual infrastructure finance gap in Emerging Markets and Developing Economies?[2] The percentage may be small now, but the Islamic finance market is growing at an impressive pace—and not just in Muslim-majority countries.

Based on estimates from a report jointly published by the Islamic Development Bank and the World Bank Group, Sharīʿah-compliant assets have grown exponentially in the past two decades, accumulating nearly $1.9 trillion in assets and spreading across 50 Muslim and non-Muslim countries around the world.[3]

The potential to deploy this financial instrument for global infrastructure development via Public-Private Partnerships (PPPs) was the topic of discussion at a conference this week in Kuala Lumpur, Malaysia, jointly sponsored by the World Bank Group (the Finance & Markets and Infrastructure & PPPs Global Practices) and Securities Commission Malaysia—a first collaboration between our two groups on a multi-year engagement involving Islamic finance and infrastructure financing.

Malaysia has extensive experience in using Islamic financial instruments to support infrastructure development—the data shows 61% of the world’s infrastructure sukuk was issued out of Malaysia[4] and the Global Infrastructure Investment Index 2016 ranks Malaysia as the second most attractive destination for infrastructure investment in Asia, and fifth in the world.

Joined by multilateral development bank (MDB) representatives—including the Islamic Development Bank and Asian Development Bank—development practitioners, policy makers, regulators, as well as stakeholders involved in Islamic finance and infrastructure we discussed the policy, regulatory and institutional interventions necessary to successfully attract and expand Islamic financing.

Pictured from left to right: Jose De Luna-Martinez (Lead Financial Sector Specialist, WBG), Abayomi A. Alawode (Head of Islamic Finance, WBG), Laurence Carter (Senior Director PPPs & Infrastructure, WBG), Tan Sri Dato’ Seri Ranjit Ajit Singh (Chairman, Securities Commission Malaysia), Datuk Ahmad Fairuz (Deputy Chief Executive, Securities Commission Malaysia), Zainal Izlan Zainal Abidin (Managing Director, Developing & Islamic Markets, Securities Commission Malaysia), and Dr. Walid Abdelwahab (Director of Infrastructure, Islamic Development Bank)


Islamic finance: a growing asset

Currently, the Islamic finance industry is growing at more than 15% per year.[5] This increase is driven by the growth in: Muslim population (currently estimated at 1.6 Billion);[6] Muslim economies; and the global integration of economies. It is also worth noting that 10 of the world’s 24 rapid growth markets have large Muslim populations.[7]

As the wealth of the Muslim nations has increased, so has the ability of companies, banks and governments to tap into this liquidity to help finance ‘big deals’—including those in economic and social infrastructure. Islamic finance presents a relatively untapped market for PPP financing.

But there is a more fundamental reason for the growth and appeal in Islamic Finance – during the 2008 global financial crisis, financial institutions and structures that were Sharīʿah-compliant performed far better than their conventional counterparts . Sharīʿah-compliant structures are characterized by transactions that are asset-backed or asset-based, and the “ring fencing” of assets or cash flows results in a far less leveraged financial system as well as enhanced transparency.

In the pure sense, the risk sharing that characterizes modes of Islamic finance ensures parties on both sides of the transaction maintain a continuing interest in the underlying venture. These features are attractive in many ways, but are in no way dramatic departures from that which characterizes many financial arrangements prevalent in Western financial systems. To this point, some of the well-known S&P shares are in fact Sharīʿah-compliant , using a set of filters that have been agreed upon by the S&P’s Sharīʿah scholars.[8]

Sharīʿah-compliant structures, as dictated by Sharīʿah law, prohibits the trading of debt. Therefore, the use of different types of bonds (sukuk, Islamic certificates of investment) allows for co-ownership of productive resources, known as the underlying assets. As a result, the income to sukuk-holders is generated by the actual underlying business activity, rather than lending, and hence is profit rather than interest.

Moving the ball forward on Islamic finance

The conference in Kuala Lumpur generated some very useful advice and an exchange of ideas on how to increase the role of Islamic finance as a reliable and sustainable source of funding for infrastructure projects in countries where it is most needed.

Advice from Malaysia’s experience included garnering the commitment of stakeholders within Islamic capital markets’ “ecosystem”—regulators, government, the private sector, academia, and Sharīʿah scholars; and over time creating a wide array of products and services that meet the need of investors.

It was clear that MDB’s have a significant role to play in mobilizing private sector capital—whether conventional or through Islamic finance—such as through PPPs, and can help advance the use of Islamic finance by continuing to develop tools, guidelines, training, and awareness. In fact, the World Bank Group and the Islamic Development Bank are working on a report on mobilizing Islamic finance and PPPs that will be coming out this summer, so stay tuned.

[1] UKIF, Islamic Finance Report, March 2012
[2] Infrastructure Investment Demands in EMDEs, World Bank, Sept 2015
[3] Global Report on Islamic Finance: Islamic Finance - A Catalyst for Shared Prosperity? World Bank; Islamic Development Bank Group. 2017.
[4] ISRA (International Sharīʿah Research Academy for Islamic Finance) figures covering period 2012 to 3Q2015
[5] Mastering Islamic Finance, Faizal Karbani, 2015
[6] With a disposal income of $4.8 Trillion and 62% of the population under the age of 30, according to Faizal Karbani in his book titled ‘Mastering Islamic Finance.
[7] Ernst & Young, World Islamic Banking Competitive Report 2012-13.
[8] Islamic Infrastructure Financing: Bridging the World, Walid Hejazi and Shahzad F. Siddiqui (draft, 2016)


Related Posts:

Islamic finance in Malaysia: Filling the gaps in financial inclusion
Can Islamic finance help fund large infrastructure projects in emerging markets?

Leveraging Islamic finance promotes growth and prosperity of small businesses



Aijaz Ahmad

Lead Specialist & Acting Practice Manager, Public-Private Partnerships Group, World Bank

Sara Ahmed

Partnership Specialist

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