Islamic finance can play key role in PPP delivery

 27 Nov 2017 - 9:38

By Satish Kanady / The Peninsula

The fast-growing Islamic finance industry can play a significant role in closing the infrastructure gap in the region and beyond, through public-private partnerships (PPP).

Given the potential of Islamic finance to support infrastructure development in emerging and developing countries, it is critical to address how to best deploy Islamic project finance in PPP delivery frameworks, noted latest

World Bank report on ‘Mobilising Islamic Finance for infrastructure PPPs’.  According to the World Bank document, shari‘ah -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.

The Gulf Cooperation Council has the largest share of shari‘ah-compliant assets, at 42 percent of the global total, followed by the remainder of the Middle East and North Africa region (excluding GCC) at 30 percent, and the rest of Asia at 22 percent.

These three regions together account for the bulk of the world’s Islamic finance assets, at 95 percent.

The World Bank data demonstrates that from 2008 to 2013, Islamic banking and Islamic deposits grew faster than their conventional equivalents in Qatar, UAE, Saudi Arabia, Malaysia, Indonesia and Turkey, indicating a growing number of people in these countries is using Islamic banks rather than or in addition to conventional banks.

In Qatar, for instance, Islamic banks’ combined assets grew by 19.3 percent compared to 16.5 percent recorded by the conventional banks during the period; and the deposits in Islamic banks surged by 37.4 percent, compared to 17.2 percent growth in conventional banks.

Developing countries in Asia will need to invest $26 trillion from 2016 to 2030, or $1.7 trillion per year, if the region is to maintain its growth momentum, eradicate poverty, and respond to climate change.

Without investments for climate change mitigation and adaptation, $22.6 trillion will be needed, or $1.5 trillion per year (baseline estimate). Of the $26 trillion estimate (including investments for climate change needs) over 2016–30, $14.7 trillion will be for power, $8.4 trillion for transport, $2.3 trillion for telecommunication, and $800bn for water and sanitation.

The $1.7 trillion annual estimate is more than double the $750bn.The infrastructure needs of Sub-Saharan Africa exceed $93bn annually.

Istisnā and ijārah are the most common forms of Islamic finance instruments used for large, longer-term financing arrangements, such as financing for power projects, infrastructure, and transport equipment.

These two instruments are used in combination most of the time—istisnā for the construction and procurement stage, and ijārah for the operation stage.

Many power, water, and transport projects have been financed through a combination of istisnā and ijārah structures.