Infrastructure Financing through Islamic

Finance in the Islamic Countries

Executive Summary

Infrastructure is key to the proper functioning of an economy, promoting economic growth

and alleviating poverty. Estimates on infrastructure investment needs show that most

countries will face huge financing gaps. While the cumulative global investment requirements

over the period of 2016-2040 is estimated to be USD 93.7 trillion, the global infrastructure

investments will be around USD 78.8 trillion, and, with current trends of investment, that will

leave a shortfall of investments of USD 14.9 trillion over the same period.

The status of overall

infrastructure and its quality in OIC member countries is relatively poor on average, compared

most of the other regional groupings. The investment requirements for a sample of 13 OIC

member countries for which data is available is estimated at USD 7.2 trillion during 2016-

2040. With current trends, however, the investments are estimated to be USD 5.6 trillion,

which will result in a deficit of USD 1.6 trillion for these countries. Since a sound infrastructure

framework will be key to the implementation of Sustainable Development Goals (SDGs), there

is a need to seek resources to fill this gap.

Given the features of infrastructure projects that are usually large and requiring huge

investments, the sector has been traditionally financed by governments. However, the large

financing needs and gaps coupled with budget deficits and increasing public debt impose limits

on governments in financing the sector. Since investments in the infrastructure sector will be

an important factor in achieving the SDGs in many OIC member countries, there is a need to

seek funds from alternative sources to fill financing gaps. In this regard, domestically the

private sector and the non-profit sector can be important sources of financing and externally

funding from multilateral developmental banks and institutions such as sovereign wealth

funds can potentially provide additions funds. With global Shariah compliant assets exceeding

USD 2 trillion in 2017, the Islamic financial industry has become large and systematically

important in several OIC member countries (IFSB 2018). In line with the ideological standing

of its ethical, social and legal ethos of promoting overall welfare (maslaha), the Islamic finance

industry can potentially play an important role in providing financing for infrastructure

projects which provide essential services, promote growth and alleviate poverty.

The aim of this research is to assess the role of Islamic finance in providing financing to the

infrastructure sector and suggest policy recommendations to enhance its contribution. The

study examines the overall environment for infrastructure financing and the role that different

stakeholders (such as government-linked companies, financial institutions, capital markets,

the social sector, and international multilateral institutions) can play in providing Shariah

compliant infrastructure financing. Using information from a sample of five OIC member

countries (Indonesia, Malaysia, Nigeria, Saudi Arabia and Sudan) and the United Kingdom, the

research presents the status of using Islamic finance and suggests policy recommendations to

further enhance the contribution of Islamic finance in the development of the infrastructure

sector.

The status of infrastructure in five OIC member countries and the UK examined in this

research is varied. While UK, Malaysia and Saudi Arabia have relatively good overall

infrastructure, its status in Nigeria and Sudan is relatively underdeveloped and Indonesian

infrastructure shows moderate development. In all the countries included in the study, the

government still plays an important role in infrastructure development. However, there is an

Global Infrastructure Hub and Oxford Economics (2018)