Infrastructure Financing through Islamic
Finance in the Islamic Countries
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the lenders would have recourse to the project assets with limited or no recourse to the assets
or cash-flows of the sponsors of the project.
2.2.2. Modes of Infrastructure Finance
There are two broad ways in which the funds for infrastructure finance can be raised from the
private sector. First, financial institutions provide financing directly to projects in the form of
equity or debt. Second, the Project Company raises funds through capital markets by issuing
securities such as bonds. The contractual arrangements and the modes of financing that can be
used in each of these cases are complex and need to be clearly specified for different phases of
the project’s implementation. The modes of financing infrastructure projects can be broadly
classified as equity, debt and hybrid structures. The types of instruments and their features in
each of these categories are discussed below.4
Equity
Two categories of equity investment that represent ownership interests can be identified in
infrastructure projects. The first kind is unlisted equity provided by the project sponsors who
may be infrastructure management companies, project developers, private equity funds,
construction, and engineering companies who establish the project company in the form of an
SPV and provide the initial capital for an infrastructure project. Being project shareholders,
they take the risk of residual losses of the project. The second type is listed equity that raises
funds from the market that are used in infrastructure projects. Examples of instruments in this
category include listed infrastructure equity funds, utilities stocks, and other funds such as real
estate investment trusts (REITs). A key distinguishing feature of the two types of equity is that,
in the latter, the ownership interests can be sold on the market, something which cannot be
done in case of unlisted equity.
Debt
The goal of the project company is to use a finance structure that minimizes the overall costs of
the project. The finance costs are reduced by taking on debt since equity is more costly than
debt. Thus, debt constitutes a significant part of project financing. There are estimates that the
debt component of project financing can be in the range of 70% to 95% of the total. Higher
leverage, however, increases the risks and, as such, can increase the cost of borrowing (World
Bank 2017c: 41). Thus, from a public-policy perspective, the procuring authority has to ensure
that the project company is adequately capitalized.
As in the case of equity, debt can be raised either from financial institutions or capital markets.
While the former would be bank loans or syndicated loans, the latter can take various forms
such as a project bond or asset backed securities. As indicated, infrastructure projects are non-
recourse which means that creditors are paid from the revenue generated by the project. From
the lenders’ perspectives, the quality of the project assets will determine their willingness to
provide funds since their claims are secured by them. Although the costs of financing for
infrastructure projects will depend on the credit-rating of the assets, often the lenders may ask
for higher returns to mitigate the risks of a non-recourse lending structure.
4 For a detailed discussion on various instruments used for infrastructure financing see OECD (2015).