Infrastructure Financing through Islamic
Finance in the Islamic Countries
43
3 Islamic Finance for Long-Term Infrastructure Financing
3.1. Introduction
Islamic law covers various aspects of life including economic dealings in a comprehensive way.
Other than providing legal rules, Shariah also provides moral principles relating to economic
activities and transactions. The overall objectives of Shariah are to enhance welfare ( maslaha)
and prevent harm (mafsada). It defines the founding concepts of an economic system such as
property rights, contracts, the objectives of economic activities and principles that govern
economic behaviour and the activities of individuals, markets, and the economy. A hallmark of
Islamic teachings is establishing justice which, in an economy, would entail eradicating “all
forms of inequity, injustice, exploitation, oppression and wrong doing” (Chapra 1992: 209).
While property rights in Islam are deemed sacred and gainful exchange and trade by mutual
consent are encouraged, Shariah provides rules that govern its use and exchange. A key
element related to the distribution of wealth is the obligation to pay alms (zakat) when
ownership of wealth is greater than a threshold level.
Islamic economists argue that an economic and financial system based on the Islamic ethos can
bring about equity, stability and growth in the economy. The economic activities that can
produce these results are governed by certain principles and rules. Other than avoiding
exploitative practices and prohibited activities such as alcohol, pork products, gambling, etc.,
the key features of the Islamic financial system include risk-sharing and materiality in terms of
links with the real economy (El Hawary et al. 2004: 5). The emphasis on the promotion of
economic activities in a just and equitable manner implies that Islamic finance has the great
potential to contribute to economic development. As many infrastructure projects benefit the
community at large, financing these projects by the Islamic financial sector would be in
compliance with its ideological standing (Miller and Morris 2008). The social and ethical
values and risk-sharing and asset-backed financing features are reflected at the transaction
level in the use of specific nominate contracts.
In this chapter, the ways in which Islamic finance can be used to finance infrastructure projects
are presented. As discussed in Chapter 2, infrastructure projects are large and complex,
involving different functions and contract types. The functions include design, build,
rehabilitate, finance, maintain and operate (see Table 2.1). Various forms of public-private
partnerships can be organized depending on what function is taken by the private sector.
However, the key focus in this chapter is the function of finance and the role that the Islamic
financial industry can play in providing financing to infrastructure projects. The principles of
Islamic finance naturally fit well with the features of infrastructure projects as identified by
World Bank et. al. (2017) and shown in Table 3.1.
This chapter first presents the basic features of Islamic financial contracts and the ways in
which these can be used in infrastructure projects, and then it presents the roles that different
sectors of the industry play in contributing to the development of infrastructure projects. For
each financial sector, the potential and the forms in which investments can be made are
presented followed by one or two case studies and the identification of the prospects and
challenges that the sector faces in financing infrastructure projects.