Infrastructure Financing through Islamic
Finance in the Islamic Countries
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sukuk. While Nigeria has no dedicated laws for Islamic finance, the Islamic financial sectors are
accommodated for under conventional finance laws. The Banks and Other Financial
Institutions Act (BOFIA) 1991, Central Bank of Nigeria (CBN) Act 2007, Investment and
Securities Act (ISA) 2007, National Insurance Commission (NAICOM) Act 1997, and Insurance
Act 2003 empower the regulatory bodies to develop regulations for the Islamic finance
industry.
In Indonesia, Islamic Banking Act Number 21, 2008 governs Islamic banking, and Sukuk Act
Number 19, 2008 provides the legal foundations of issuing sukuk in the country. However,
there is separate takaful law and the sector is regulated under the Insurance Act Number 40
2014 which governs the insurance industry in the country. The banking law in Saudi Arabia
(Royal Decree No. M/5 dated 22/02/1386H / 11/06/1966) and The Capital Markets Law
(Royal Decree No. M/30 dated 2/6/1424H / 31/7/2003) does not explicitly refer to Islamic
finance. However, the Law on Supervision of Cooperative Insurance Companies (LSCIC 2003)
mentions that insurance service offerings should be in accordance with Islamic law.
Since infrastructure projects are complex and Islamic finance is relatively new, the contractual
framework for Shariah-compliant project financing may not be well-known. If each financial
institution involves lawyers and other stakeholders structuring these contracts, it increases
the costs of structuring and discourages Islamic financial institutions from investing in
infrastructure projects. In this regard, a standardized Shariah-compliant contract template for
project financing (similar to the standardized contracts issued by the UK government for
infrastructure projects) can be developed which can be used by different Islamic financial
institutions. These standardized contracts would reduce the costs of transactions and mitigate
the legal ambiguities of complex transactions.
Another issue that affects Islamic finance is tax laws. As Islamic financial products are based on
sale, leasing and partnership contracts which have tax implications, these products can turn
out to be more costly compared to their conventional counterparts. COMCEC (2016)
recommends changing or accommodating tax laws to level the playing field of Islamic banking
and conventional banks and also tax neutrality issues arising in sukuk issuances. In Malaysia,
the tax regime has not only been changed to level the playing field with conventional finance
but some tax incentives have been instituted to encourage the use of sukuk. For example,
issuers of sukuk can get tax deductions of the issuing costs incurred by SPVs and stamp duty
exemptions on instruments used to issue sukuk. Similarly, the tax laws have been changed in
the UK to level the playing field of Islamic finance with their conventional counterparts.