DIFC Authority releases white paper on 'Islamic Financing for Infrastructure Projects'

The paper highlights the tremendous potential for Shari'ah-compliant financing of infrastructure projects in the GCC and globally, and notes that increasing the Shari'ah-compliant share of such projects would help meet an infrastructure funding demand that ranges from $535bn over the next decade to as much as $2 trillion by 2020.

DIFC has made a substantial, long-term commitment to supporting Islamic finance by providing a supportive business, legal and regulatory environment that encourages growth and innovation in the industry. These efforts include creating a unique "Shari'ah-systems" model of regulation and a legislative regime that provides certainty and clarity regarding Islamic financial transactions. The whitepaper is another example of this commitment.

"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," said Farhan Al Bastaki, Executive Director Islamic Finance at the DIFC Authority.

"The paper comes at a time when governments are increasingly looking to the market - through public-private partnerships and otherwise - to help fund enormous infrastructure requirements. At the same time, Islamic finance continues to grow at double-digit rates and increasingly entering the mainstream global financial sector as an important asset class," he said.

"As well, it is important to note that encouraging a larger role for Islamic infrastructure financing provides benefits both to those seeking new sources of funding and investors hungry for larger and more liquid Islamic securities markets," Al Bastaki said.

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 $100m 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 Shari'ah-compliant sources of infrastructure financing also is driven by its low share in overall Islamic financing. Only 22% of the $40bn in Shari'ah-compatible financing within the GCC has gone into infrastructure projects, while 11% of the $14.9bn in sukuks issued in the GCC during 2008 was used for infrastructure.

The study provides a summary of the various Shari'ah-compliant financing structures; it examines challenges to increased Islamic financing of infrastructure projects; and it offers possible solutions.

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, said, "The level to 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 Shari'ah requirements on the one hand, and can satisfy the needs of investors and issuers on the other.

Some of the Shari'ah-compliant equity and debt funding structures the paper mentions includes the mudarabah and musharakah equity instruments and the murabahah (cost-plus or mark-up sale), bai-muajjal (price-deferred sale), istisna/salam (object deferred sale or pre-paid sale) and ijarah (leasing) debt instruments.

But the report also identifies a number of hurdles to the increased adoption of Shari'ah-compliant structures. These include a lack of regional and global standardisation, and legal regimes that don't directly address Islamic project finance structures, thereby creating uncertainty in the case of default or other contingencies. As well, the majority of Islamic financing is debt-based, and short-term focused, therefore, making them inappropriate for long-term infrastructure financing.

Some of the proposed changes to increase the Shari'ah-compliant share of total infrastructure funding include an Islamic concession law that would allow granting the use of public assets to private enterprises for a specified period of time. Also, a stable legal and regulatory environment is crucial to giving investors confidence that their rights will be protected. The paper also encourages governments to issue sukuks to raise funds for investment in infrastructure assets.