Infrastructure Financing through Islamic

Finance in the Islamic Countries

national infrastructure body such as the National Infrastructure Commission in the UK may be

better able to provide an independent and objective assessment of projects by taking into

consideration the long-term needs of the economy and identifying the ones that should be

prioritized for implementation of national development.

The second aspect of the national level policy framework for infrastructure development is to

have an institutional setup that can facilitate investments by the private sector. Setting up a

specific public agency or an independent authority with responsibilities for implementing PPP

projects could enable the involvement of the private sector in infrastructure development. The

PPP regime can be further strengthened by other supportive arrangements such as providing

advisory services to private sector stakeholders and guaranteeing the implementation of PPP

contracts by the government.

Legal and Regulatory Framework

Increasing the contribution of Islamic finance in infrastructure development would require

laws that can improve the legal regime governing PPP arrangements on the one hand and

instituting enabling laws and regulations that can promote the Islamic financial industry on the

other hand. While country case studies show different ways in which laws and regulations

related to PPP and concessions are implemented, providing a clear legal framework that can

mitigate uncertainties and encourage private sector financing using PPP is essential. The

development of the Islamic financial industry would require enabling Islamic financial laws for

different Islamic financial sectors (banks, nonbank financial institutions and capital markets).

These are needed for Islamic finance to have a legal basis to operate in the country and provide

different types of products that can be used for long-term infrastructure financing. Since

infrastructure projects are large and complex, investments using Islamic finance can be

enhanced by developing standardized templates of Shariah compliant contracts that can be

used in project financing as these can reduce transaction costs and legal risks.

Government and Government Linked Companies (GLCs)

While governments still play an important role in developing infrastructure projects, many

countries establish government-linked companies (GLCs) that are responsible for developing

and providing infrastructure services. The country case studies show that governments and

infrastructure-linked GLCs have raised funds by issuing sukuk in capital markets. In some

countries, government-linked financial institutions (GLICs) such as sovereign wealth funds or

government pension funds also provide financial resources for infrastructure projects. Some

GLICs provide equity in other infrastructure-related GLCs and also contribute to the sector by

investing in project related sukuk. To facilitate the mobilization of resources in a more

organized manner, this study suggests establishing a National Infrastructure Investment Bank

(NIIB) that can invest in projects by raising funds by issuing sukuk and/or arranging

syndicated financing. NIIB can also provide advisory services to facilitate increasing the

financing of infrastructure by the private sector.

Financial Institutions

While Islamic banks form the bulk of the Islamic financial sector, the case studies show that

their involvement in infrastructure projects has been relatively small with an average of 4.3%

of the total Islamic banking assets going to the sector in five countries examined in the study.