Infrastructure Financing through Islamic
Finance in the Islamic Countries
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Table 3.1: Principles of Islamic Finance and Features of Infrastructure Projects
Principles of Islamic Finance Infrastructure PPP Project
Returns should be linked to profits/earnings and be
derived from commercial risk taken by the financier.
Infrastructure PPP projects allow risk to be shared
among the parties involved in the project, including
financiers.
Islamic financiers are partners in a project. PPP projects allow Islamic financiers to become a
party to the project and not just a mere lender.
Transaction should be free from speculation or
gambling (maysir)
Infrastructure PPP projects are by nature free from
speculation or gambling.
Existence of excessive uncertainty in a contract is
prohibited
Project contracts are generally well defined with no
uncertainty (such as lump-sum, EPC contracts)
Investments related to prohibited goods and
activities such as alcohol, gambling, and weapons are
prohibited.
Infrastructure projects exclude these projects.
Source: World Bank et. al. (2017)
3.2. Islamic Financial Contracts
The basic framework of Islamic commercial law is permissibility ( ibahah), which suggests that
all transactions are permitted except what is prohibited by Shariah. Two broad categories of
prohibitions recognized by Islamic law are riba (literally meaning ‘excess’) and gharar (legal
ambiguity or excessive risk). While riba is usually translated into interest, it has wider
connotations such as the prohibition on the sale of debt. Gharar can include many aspects
related to deception, excessive uncertainty and contractual ambiguity in transactions.9 One of
the implications of gharar during contemporary times is the prohibition of derivative products
such as forwards, swaps and options.
Since interest is prohibited, Islamic finance uses various other permissible contracts to
structure financial products. The contracts used in practice can be broadly classified as sale,
leasing, partnership and agency. The basic features of the key contracts used in Islamic finance
are presented below.10
Murabahah is a cost-plus sale where the seller adds a profit component (mark-up) to the cost
of the item being sold. Bai-muajjal is a contract where the purchase is made on credit and the
payment for a good/asset is delayed. A variant would be a sale where the payments are made
in instalments. These contracts create debt and can have both short and long-term tenors.
Salam sale is a pre-paid or product-deferred sale of a generic good. In a salam contract, the
buyer of a product pays in advance for a good that is delivered at a later agreed upon date. The
contract is applied mainly in financing agricultural goods.
Istisna contract is similar to the salam contract with the difference being that, in the former,
the good/asset is produced according to the specifications given by the buyer. This contract
mainly applies to manufactured goods and real estate. Furthermore, in istisna, the payments
can be made in instalments over time with the progression of the production.
Ijarah is a lease contract in which the lessee pays rent for use of a usufruct. In ijarah the
ownership and right to use an asset (usufruct) are separate. It falls under a sale-based contract
as it involves the sale of usufructs. A lease contract that results in the transfer of an asset to the
9For a discussion on gharar see ElGamal (2001) and Al-Dhareer (1997).
10 For a discussion on Islamic modes of financing see Ayub (2007) and Usmani (1999).