Infrastructure Financing through Islamic
Finance in the Islamic Countries
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Power, transport and water are considered key inputs for economic activity and the provision
of these at lower costs can reduce production and transport costs that lead to economic
growth. Furthermore, infrastructure enables market access and can also have a competition-
enhancing effect. By providing basic services, infrastructure can raise the productivity of both
human and physical capital and encourage more private investment which increases jobs and
income levels (Egert et. al 2009, Grimsey and Lewis 2004: 20, UNEP 2016: 6).
Overall, infrastructure investments improve the comparative advantage of economies by
promoting domestic and international trade and increasing efficiency. For example, transport
infrastructure significantly increases economic efficiency directly by reducing costs and
indirectly by lowering the need to hold large inventories (Henckel and McKibbin 2010). As
development takes place with the support of infrastructure, economies move up the value
chain, and the requirements of infrastructure need to change to support changing production
patterns and structures.
Empirical studies generally support the positive role of infrastructure in promoting growth
and reducing poverty. World Bank (1994: 2) estimates that a 1% growth in the stock of
infrastructure is associated with a 1% increase in gross domestic product (GDP). Using data
from 121 countries over the period of 1960-2000, Calderon and Serven (2004) find a positive
relationship between larger infrastructure assets and growth. They also find a close
association of better infrastructure quantity and quality with improvements in income
equality. They estimate that if the Latin American countries were to have similar infrastructure
quantities and qualities as the region’s leaders, the long term per-capita growth would
increase by 1.1% to 4.8% annually and Gini coefficients would decline between 0.02 to 0.10.
For East Asian economies, the gains of catching up with the infrastructure of median countries
would be even larger with increases in growth ranging from 3.2% to 6.3% per annum and a
decrease of Gini coefficients between 0.05 to 0.13. Similarly, Calderon (2009) finds that if all
African countries were to have the infrastructure stock and quality of the region’s leader
(Mauritius), economic growth would increase by 2.2% per annum on average. In an empirical
study done on 76 advanced and emerging economies, Seneviratne and Sun (2013) also find
that better quantity and quality infrastructure improves income equality.
While there is general agreement on the positive role of infrastructure on growth, the
importance of the type of sectors and their impact on the economy can vary at different stages
of development. It is likely that the impact of additional overall investment in the sector on the
economy would be lower in developed countries that have a higher infrastructure stock
relative to those with lower stocks (Estache and Garsous 2012). In a study on different states
in India, Misra (2015) shows that social infrastructure (health and education) has a greater
impact on development than economic infrastructure (water, electricity and roads), which
implies that the former should be given more attention in developing economies. With the
growth of economies, however, the share of certain infrastructure sectors such as transport,
energy and telecommunications would increase (World Bank 1994: 2-3).
Moving forward, in the era of the Paris Accord on Climate Change and Sustainable
Development Goals (SDGs), the notion of sustainable infrastructure will become increasingly
important. The sustainability features of infrastructure projects relate to their quality in terms
of their impact on poverty reduction and environmental sustainability. The SDGs that would be
directly impacted by the availability of economic and social infrastructure are shown in Table
1.2. Whereas SDG 9 (Industry, innovation and infrastructure) directly deals with building a