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

Sara Ahmed and Ashraf Bouajina's picture



Using Islamic finance for infrastructure development attracted more attention recently in the quest to maximize finance for development.

At the recent World Bank-IMF Annual Meetings in Bali, the World Bank and the Islamic Development Bank (IsDB) co-hosted a symposium on Islamic infrastructure finance, building on the institutions’ strategic partnership. As we note in Mobilizing Islamic Finance for Infrastructure Public-Private Partnerships, the asset-backed, ring-fenced, and project-specific nature of Islamic finance structures and their emphasis on sharing risks make them a natural fit for infrastructure public-private partnerships (PPPs).

However, we see that concerns remain about using Islamic finance for infrastructure PPPs. At the Middle East and North Africa (MENA) PPP Forum in Dubai in September we fielded many questions from attendees that included PPP practitioners from the public and private sectors, leaders of MENA government PPP units, high-ranking ministerial representatives of Gulf Cooperation Council states, bankers, investors, and consultants.

Essentially, they can be reduced to two: How can we understand and access Islamic finance? And, how can we reduce its cost?We believe the World Bank Group, with the help of IsDB and other development partners, can address these issues and raise awareness around the attractiveness of Islamic finance by tackling two of the major impediments to its deployment: lack of awareness and capacity, and the higher cost of Islamic finance.

 
An opportune moment
 
We are currently experiencing a defining moment in development finance. Over the past several years, the international community has acknowledged the need to gather all stakeholders and potential sources of finance in service of development; see the UN Conference on Financing for Development in Addis Ababa in 2015, the adoption of the 2030 Sustainable Development Agenda, and the 2017 Hamburg principles. These efforts have been translated at the World Bank Group through the Maximizing Finance for Development approach.

Multilateral development banks (MDBs) can play a two-fold role in this approach: they’re best placed to demonstrate to developing countries the value of the private sector by playing a bridge-building role; and MDBs can improve the risk-return profile of individual investments through an array of instruments—improving project viability, building markets, and thus attracting commercial capital at a lower cost.

The role the World Bank Group is taking towards the private sector—catalyzing resources for governments, and at a higher level to create an enabling environment for their access—is exactly the same role Islamic finance needs the World Bank to undertake and what we are on our way to do.

Now is the time to not only bring awareness to Islamic finance as an additional—and relatively untapped—source of financing, but also to facilitate its use. There is a wide variety of Islamic finance structures, instruments, and actors to be explored that can work alone or combined with conventional financing in blended structures.

The Islamic Financial Services Board recently released the Flagship Islamic Financial Services Industry Stability Report 2018, which found that the Islamic capital market has grown 8.3 percent over the last year, with its total worth now surpassing the $2 trillion mark.

Building awareness and capacity

For Islamic finance to reach its potential, MDBs can render it more attractive and eventually scale its use by reassuring both client countries and commercial banks and reducing transaction costs. This means building awareness and capacity among stakeholders, and some degree of standardization in terms of both access to Islamic finance and instruments used.

The World Bank Group has been involved in Islamic finance and its use for infrastructure PPPs for quite some time now, and has a role to play in demonstrating its value. Lessons learned from projects financed under Islamic modes or with an Islamic tranche can address the concerns of conventional lenders and show with specificity how this is accomplished. In that vein, we are continuing to develop case studies to enhance the body of knowledge on experiences where Islamic finance for infrastructure PPPs has been successful.

Standardizing instruments, reducing costs

As project-related documents and contracts become standardized, the higher cost of structuring attributed to Islamic finance will even out, creating a more equal playing field for conventional and Islamic finance actors. This is why our team is developing a Reference Guide for Islamic Finance and Infrastructure PPPs, a road map of sorts.

While each transaction is unique and its documentation must be tailor-made, a base level of standardization can help Islamic finance practitioners understand the most common credit and legal aspects they are likely to encounter. Our reference guide will include a portfolio of standardized contracts and other documents to offer a starting point and framework.

Stay tuned for more on the reference guide, with its release expected in 2019. In the meantime, please feel free to leave us a note below to start a dialogue.
 


Related Posts:

REPORT: Mobilizing Islamic Finance for Infrastructure Public-Private Partnerships


How Islamic finance can boost infrastructure development


2018 Dubai MENA PPP Forum: Key takeaways

 
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
 

 

Comments

Submitted by Stanley on

A welcome source for PPPs. Streamlining ,the criteria of who will participate and under what terms is truly important. The negative and quite often misleading association of Islamic financing with ' War on terror' efforts must also be cleared. The standard International regulations on movement of money ,investment, tax obligations, and then oversight roles, must be stated clearly , so that geopolitics and other faith based interests volatile as they are do not in any way cause unnecessary turbulence in the World Financial systems, and Economies, particularly those who need this opportunity most.

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