Infrastructure Financing through Islamic
Finance in the Islamic Countries
30
development assistance (ODA) and multilateral development banks (MDBs) are in the range of
USD 40-60 billion.
Chart 2.2 shows the relative size of different institutional investors globally. The largest three
institutional players are banks which hold 33.5% of the total global assets of USD200 trillion
followed by investment companies (24.2%) and insurance and pension funds (22.1%). The
extent to which different institutional investors can contribute to the infrastructure sector
depends on their balance sheet structures and risk appetite. The features of investment
horizon, risk appetite and considerations that different financial institutions have been shown
in Table 2.4 below.
Chart 2.2: Assets under Management of Institutional Investors (USD trillion)
Source: McKinsey (2016: p. 16).
Even though the banking sector has the largest assets under management, Table 2.4 shows it is
difficult for them to invest in large infrastructure projects due to the features of their balance
sheet. Given the nature of deposits that are liquid, it becomes difficult for banks to commit
large amounts of funds in infrastructure projects that are, by their nature, long-term and
illiquid. Larger banks would invest in infrastructure as an asset class but do so using
syndications. Since other institutional investors such as life insurance, pension funds,
sovereign wealth funds, endowments and foundations have relatively longer-term investment
horizons, they are well suited to invest in infrastructure projects.
In terms of the instruments used for financing long-term infrastructure, there is a difference
between providing direct financing versus raising funds from capital markets. Direct financing
either in the form of equity or debt makes investments illiquid, which can increase the risks
and costs. However, if capital markets are used to raise the funds by issuing tradable securities,
it would encourage financial institutions to invest in infrastructure projects. For example, if
tradeable project bonds are issued to raise funds, banks and other institutional investors
would also invest in infrastructure projects since, in case they need liquidity, they will be able
to sell the securities on the secondary market.
40.2
29 26.5
10.9
6.3 3.4 2.7 1
33.5%
24.2%
22.1%
9.1%
5.3%
2.8% 2.3%
0.8%
-5%
5%
15%
25%
35%
0
5
10
15
20
25
30
35
40
45
Banks Investment
Companies
Insurance
Companies &
Private Pensions
Public Pensions &
Superannuation
Plans
Sovereign Wealth
Funds
Infrastrucure
Operators &
Developers
Infrastrucure &
Private Equity
Funds
Endowments &
Foundations
USD (trillion)
AUM ($ trillion) Percentageof total