Infrastructure Financing through Islamic
Finance in the Islamic Countries
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economically sustainable manner. In some countries, government-linked financial institutions
(GLICs) such as sovereign wealth funds or government pension funds also hold equity stakes
in infrastructure project-related GLCs. Governments and infrastructure-linked GLCs also raise
funds from the capital markets, including by issuing sukuk.
The study suggests the establishment of a National Islamic Infrastructure Bank (NIIB) that can
mobilize funds from the private sector. The initial equity of NIIB can come from the
government and GLICs, and, once established, it can raise more funds from other institutional
investors by issuing sukuk and arranging syndicated financing. NIIB can also provide advisory
services to facilitate increasing the financing of infrastructure by the private sector.
6.2. Issues and Policies at the Private Sector Level
The country case studies show that even though Islamic banking is the largest sector in the
Islamic financial industry, they invest relatively less in the infrastructure sector (ranging from
8.4% in Indonesia to nil in Nigeria). The reasons for not investing in long-term projects include
the shorter-term and liquid liabilities and higher capital requirements attached to long-term
investments. While traditionally banks have used syndicated financing for projects that Islamic
banks can also use, one option to encourage Islamic banks to contribute more to infrastructure
projects would be to distinguish between deposits and restricted investment accounts. Unlike
deposits, investment accounts tend to be longer term and the investors bear the risks of
investments. These features make them more suitable for investments in infrastructure
projects. The model separating deposits and investment accounts has been implemented in
Malaysia under the Islamic Financial Services Act 2013 and reflects the principles of Islamic
finance in a more appropriate way.
The Islamic nonbank financial institutions sector is relatively small. While certain countries
have takaful operators, most of the other nonbank financial institutions such as pension funds
and sovereign wealth funds are conventional or partly Islamic. Thus, the contribution of
Islamic nonbank financial institutions in providing Shariah-compliant funds for infrastructure
projects is small. Other than encouraging the establishment of Islamic nonbank financial
institutions, it is suggested that the government initiate a Shariah-compliant infrastructure
fund in which both Islamic and conventional nonbank financial institutions can place funds.
This Fund can be managed by the NIIB as mentioned above.
The capital markets can be used to raise funds from different investors by both public and
private entities to finance infrastructure projects. The country case studies show that there are
two ways in which governments have raised funds by issuing sukuk. In some countries such as
Indonesia, Saudi Arabia and Sudan, the governments have issued sukuk to raise funds to cover
their budgetary expenditures, which is also used in infrastructure sectors. In other cases such
as Indonesia, Malaysia and Saudi Arabia, governments and GLCs have issued project-specific
sukuk.
Although capital markets can play an important role in the mobilizing of funds for
infrastructure projects, the development of the sukuk market in OIC member countries is
varied. For example, among the countries included in this study, Malaysia and Saudi Arabia
have a large sukuk sector and countries such as Nigeria and Sudan have issued very few sukuk.
There is, therefore, a need to further develop the sukuk market by providing an enabling legal
and regulatory environment and a supportive market infrastructure. Since issuing sukuk is