Infrastructure Financing through Islamic
Finance in the Islamic Countries
2
increasing trend of involving the private sector through PPP arrangements. While Malaysia has
involved the private sector to fund infrastructure projects extensively, Saudi Arabia and Sudan
have taken initiatives to engage the private sector relatively more recently.
The size of the Islamic financial sector in the sample countries is also varied. Whereas Sudan’s
whole financial system is Islamic, in Saudi Arabia, Islamic banking is more than 50% of the
banking assets and the corresponding figures of Islamic banking share for the other countries
are 30% for Malaysia, 5.6% for Indonesia and 0.28% for Nigeria. The results show that the
Islamic banking sector has played a relatively small role in financing infrastructure projects in
all countries studied. Islamic banks in the sample OIC countries invested an average of 4.3% of
their assets in infrastructure related sectors. The reason for low involvement in infrastructure
investments may be due to the liability structure of banks which mainly constitutes liquid
short-term deposits and the high regulatory capital requirements for long-term investments.
The Islamic nonbank financial institutions are relatively small in size and contribute little to
the infrastructure sector in the sample OIC member countries. The takaful sector constitutes a
small share of the Islamic financial industry and appears to not contribute much towards
infrastructure investments. For example, the takaful sector in Sudan constitutes only 2.3% of
financial sector assets and does not directly invest in the infrastructure sector. Malaysia and
Saudi Arabia have a large pension and sovereign wealth funds that have investments in the
infrastructure sector along with other sectors. While no specific information is available on the
Islamic component of these funds in Saudi Arabia, in Malaysia the two key pension funds have
significant Shariah compliant investments.
In all countries in the sample, the Islamic capital market has been used to raise funds to either
cover government budget needs and/or infrastructure projects. The option of using sukuk for
infrastructure development appears to be attractive, even in countries where the share of the
Islamic banking sector is small (such as in Indonesia, Nigeria and the UK). Malaysia has robust
Islamic capital markets and has raised significant funds for infrastructure development over
the years by issuing sukuk. Islamic social finance can potentially be an alternative source for
providing social infrastructure services. In some sample countries such as Malaysia and Saudi
Arabia, the legal and regulatory framework limits the contribution of these sectors. While waqf
has been used in some countries to provide health and education services, Indonesia has
developed innovative models of using zakat to provide electricity to the poor.
The key issues and policy recommendations that can increase Islamic finance provisions for
infrastructure projects at different levels are presented below.
Infrastructure Related Strategy and Policies
The huge needs for infrastructure development on the one hand and the large financing gaps
that most countries face on the other hand require developing appropriate strategies and
plans to identify the pipeline of sustainable and viable infrastructure projects that can
contribute to economic growth and poverty alleviation. The case studies show that while some
countries have long-term visions and then incorporate infrastructure development plans to
achieve them, other countries have medium/short term plans to develop infrastructure
projects. It is recommended that governments develop longer-term strategies and then
prepare medium and short-term plans specifically for infrastructure development by
incorporating sustainability perspectives in all projects to achieve SDGs. An independent