Infrastructure Financing through Islamic
Finance in the Islamic Countries
47
such as murabahah and istisna that create debt are used in infrastructure projects. Note that
these structures can be used to raise funds from both financial institutions and capital markets
by issuing sukuk.
Table 3.2: Conventional and Islamic Finance Contracts for Infrastructure Financing
Contract
Categories
Conventional Finance Islamic Finance
Equity  Equity provided by sponsors
(ownership shares in the SPV)
 Infrastructure Equity funds
 Equity provided by sponsors (ownership
shares in the SPV) —can take the form of
musharakah or mudarabah
 Infrastructure equity funds—the fund
manager works as an agent (wakil) to
manage the funds
Debt  Loans with interest
 Interest-based bonds
 Sale-based instruments (murabahah and
istisna)
Hybrid  Various structures such as
convertible bonds, preferred
shares, mezzanine financing,
etc.
 While certain features such as convertibility
of debt to equity are allowed, other
structures such as preferred shares are not
permissible.
 Structures combining various contracts
such as istisna-ijarah , wakala-ijarah, etc.
Source: Author’s own.
The third category of instruments used for infrastructure financing is hybrid contracts. The
conventional financial sector uses various types of hybrid contracts such as convertible bonds,
preferred shares, mezzanine financing, etc. The acceptability of hybrid instruments from a
Shariah point of view will depend on their specific features. For example, while Islamic
principles would not object to a convertibility feature in a debt-based sukuk, preference shares
that pay a fixed dividend are not allowed. Most of the hybrid contracts in Islamic infrastructure
financing take the form of combining two or more Shariah-compliant contracts such as istisna-
ijarah, wakala-ijarah, etc. Some of the specific Shariah-compliant structures that are used in
financing infrastructure projects are discussed below.
Istisna
Since most infrastructure contracts involve the construction of physical facilities, istisna is an
appropriate contract that can be used for project financing. After the project specifications and
price are known, the Funding Company takes the responsibility to construct and sell the
project assets to the Project Company under the istisna contract. The former then signs a
parallel istisna contract with an EPC company to construct the assets according to the project
specifications. The difference in the prices paid to the EPC company and the sale price received
from the Project company is the profit generated from financing. The Project Company can pay
the price of the asset to the Funding Company in instalments over the tenure of the contract.
The basic structure of financing using the istisna mode is shown in Chart 3.1.
Since istisna contracts create debt, the financing yields fixed rates of returns. This can expose
the Funding Company to rate-of return risks for longer-term projects since the profit cannot be
adjusted if the market benchmark rates changes. Another problem of using the istisna is that
the debt receivables are not tradeable which makes the financing structure illiquid. These
issues can be resolved by structuring an istisna-ijarah structure which is discussed next.