Infrastructure Financing through Islamic
Finance in the Islamic Countries
45
lessee at the end of the contract is called ijarah wa iqtina or ijarah muntahia bittamleek. Ijarah
wa iqtina combines sale and leasing contracts and uses hire-purchase principles. After the
completion of payments during the contract period, the lessee assumes the ownership of the
asset.
Musharakah is a partnership between parties in which financial capital and
labour/management act as shared inputs in a project and profit is distributed among partners
at an agreed upon ratio. The loss, however, is distributed according to the share of the capital.
Mudarabah is a silent partnership in which financial capital is provided by one or more
partner(s) ( rab ul mal ) and the work is carried out by the other partner(s) (mudarib ). While
the financiers and the managers of the project share the profit at an agreed upon ratio, the loss
is borne by the former according to their share in the capital. Being a sleeping partner, the
financiers (rab ul mal) do not have any say in the management of the firm.
Wakala is an agency contract by which a person/entity represents another person/entity to
perform certain duties. The compensation structures for performing the specified duties can
be varied.
Tawarruq is used when a client needs cash. The financial institution buys a certain commodity
and then sells it to the client at a mark-up with the price payable in the future. The client
assigns the financial institution as an agent to sell the commodity back to a broker on spot and
transfer the proceeds of the sale to the client.11
3.3. Islamic Infrastructure Financing: Framework and Contracts
There are two key relationships that are important with regards to using Islamic finance for
financing infrastructure projects as shown in Chart 3.1. The first relates to Islamic
perspectives on the PPP arrangement. Once a structure for the PPP arrangement is
determined, the second issue of raising funds in a Shariah compliant manner to finance the
project needs to be resolved. These are discussed below.
3.3.1. Islamic Perspectives on Infrastructure Contracting
As indicated in Chapter 2, World Bank (2017c) identifies three broad parameters that can
describe PPPs. The first relates to the types of assets involved in terms of whether they are
new (greenfield) or existing (brownfield). Second are the functions that the private party is
responsible for in the PPP arrangement, which are identified as design, build or rehabilitate,
finance, maintain and operate. Accordingly, PPPs can take various structures that include
management and operating contracts, leasing, concessions, build-operate-transfer (BOT),
design-build-operate (DBO), joint ventures, and partial divestiture of public assets (Delmon
2010: 14; World Bank 2018i). The final feature of the PPP contract relates to how the private
party is paid, and this payment comes from the revenue of the project assets in the form of
fees/tariffs from either the government or service users or both. Depending on the type of PPP
contract used, the private entity project company will enter into a contract with the
government to implement the project. In cases where an asset is involved, a concession
agreement will determine the terms of the relationship between the government and the
private sector project company.
11 Although tawarruq is used by the industry, the OIC Fiqh Academy prohibited organized tawarruq in a resolution in 2009.