Infrastructure Financing through Islamic
Finance in the Islamic Countries
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Tawarruq (Commodity Murabahah)
Tawarruq (or commodity murabahah) can be used by the Funding Company to provide cash
funds to the Project Company. The Funding Company buys a commodity from a broker and
sells it to the Project Company at a mark-up payable in the future in instalments. The Project
Company then sells the commodity to another broker and gets the cash. However, in practice,
organised tawarruq is used whereby the Funding Company acts as an agent for the Project
Company and sells the commodity and delivers the payment to the latter. Chart 3.5 shows the
structure of an organized tawarruq operation.
Chart 3.6: Tawarruq Structure for Infrastructure Finance
Source: Adapted from Ahmed (2009a) and Khaleq et al (2012).
3.3.3. Shariah Compliant Project Finance
The structuring of Islamic project financing requires fulfilling both Shariah principles and
project-specific financing requirements. The latter will depend on various factors such as the
asset’s types and the kinds of contracts used. For example, for brownfield projects a simple
sale and leaseback ( ijarah) structure can be employed and for greenfield projects a
combination of istisna and ijarah can be used (Clifford Chance 2013; GIFR 2016).
Furthermore, the financing has to adhere to the principles of project financing such as limited
or nonrecourse financing. Similar to conventional financiers, Islamic financial institutions
would also consider the financial merits of the project, including the strength of the security
package and risk mitigants to make decisions to invest. Given the complexities of
infrastructure financing, however, some issues may arise in applying Islamic modes for
financing projects. Some of these issues are discussed below.
Under the traditional istisna contract, the financiers would agree to develop the infrastructure
by using the contractor and then would sell it to the project company. By doing so, however,
the financier takes on the performance risk of the contractor along with the credit risk of the
project company. Due to this reason, this form of istisna contract is rarely utilized and instead
other methods such as sub-contracting and procurement structures are used. Under the
procurement arrangement, the financiers and project company sign an agency contract that
Funding Company Project Company
Broker Y
Murabahah
4
3
2
1
1-Purchase of commodity by Funding Company
2-Sale of commodity at mark up
3-Sale of commodity by Project Company
4-Payment of price of commodity in installments
Broker X
Commodity purchase