Infrastructure Financing through Islamic
Finance in the Islamic Countries
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AAOIFI (2015: 588) Standard Number 22 defines concession contracts as the “act of an
authorized party granting another party the right of utilizing, constructing or managing a
project for agreed upon consideration”. From an Islamic perspective, the standard permits the
use of concessions as long as the contracts do not contradict the rules and principles of Shariah
such as riba and gharar. This principle applies to the utilization, construction and management
concessions identified in the standard which incidentally cover the functions of design, build or
rehabilitate, maintain and operate that are included in PPP arrangements identified by World
Bank (2017c).
To avoid riba and gharar, the financing function of the PPP must be Shariah compliant. Since
the infrastructure projects involve real assets, the use of Islamic finance for their development
is compatible with the principles of linking financing to the real sector. However, the structure
of Islamic financing depends on the nature of PPP contracts that are used. For example, while a
combination of istisna and ijarah can be used when the project is greenfield, in case of
brownfield projects a sale and leaseback (ijarah) structure can be used (Clifford Chance 2013;
GIFR 2016).
3.3.2. Structures of Islamic Infrastructure Financing
As discussed in Chapter 2, the sponsors of the infrastructure project provide the equity to
establish the Project Company and then raise further funds in the form of debt or hybrid
structures to finance the completion of the project. There are two broad ways in which the
funds for infrastructure finance can be raised. First, financial institutions can invest in the
projects directly in form of equity or debt. Second, the Project Company can tap into the capital
markets to raise funds from the investors by issuing a security. Thus, investors in
infrastructure projects will have the option of either directly investing in a project or buying
project securities. To understand the mechanisms and structures of infrastructure financing,
the financiers are likely to create an SPV which is referred to as the Funding Company. When
using Islamic finance, one or more Islamic modes of financing identified will be used to
structure a product to raise funds. However, several other supporting contracts are usually
used to support the dominant contract. For example, a leasing contract would entail
undertaking to purchase/sell the asset, managing a contract whereby the Funding Company
assigns the Project Company to carry out the maintenance, and a collateral agreement that
identifies the security backing the financing.
As indicated in Chapter 2, three broad categories of contracts used for infrastructure financing
are equity, debt and hybrid. Table 3.2 shows the key features of conventional and Islamic
finance contracts used for infrastructure financing. Equity takes the form of ownership shares
in the project company (SPV) which would be the same in Islamic finance. However, the
conditions governing the ownership and control rights would be driven by the features of
mudarabah or musharakah contracts. For example, while in the former the shareholders will
not have control rights, in the latter all shareholders will have a say in managing the project
company. The other source of equity in infrastructure comes in the form of funds that raise
money from investors which is then invested in infrastructure projects. In an Islamic
framework, this will take a similar structure to fund managers acting as an agent (wakil)
managing funds for investors for a fee.
While debt-based financing in conventional finance primarily takes the form of interest-based
loans or bonds, in Islamic finance these are not permissible. Instead, the sale-based contracts