Infrastructure Financing through Islamic
Finance in the Islamic Countries
53
2016: 262). In cases where the financing comes from both the Islamic and conventional
financing, there are some additional contractual requirements that need to be considered.
While typically Islamic finance involves the ownership of assets, the conventional lender
would not have such ownerships. Thus, when Islamic finance is used with conventional
finance, the part of the project asset that is financed by the former has to be identified. For
example, when using the istisna contract, the component of the asset that is built by Islamic
finance needs to be identified.
Not only does the Islamic finance tranche have to satisfy the requirements of project financing,
the financing also has to comply with the conditions of the other components of financing.
Even though the features of Islamic finance are different from conventional finance, in the case
of co-financing the conditions governing Islamic finance instruments and conventional
financial structures would have similar statuses and positions in the overall capital provided.
This is done by signing an inter-creditor agreement that evens out the contractual structures of
Islamic and conventional financing.
For example, the utilizations and prepayments have to be pro rata and all payment obligations
should have pari passu ranking across both Islamic and conventional tranches (Clifford Chance
2013). The financing of infrastructure projects is usually done in stages whereby the total
amount of financing is drawn down based in the completion of certain milestones. Thus,
Islamic finance and conventional finance components would have the same drawdown
profiles. In case of default, the inter-creditor arrangements will set out the process through
which the enforcement of the security interests and the sharing of the enforcement process
between the parties are done. For example, although Islamic finance derives its income from
the ownership of a certain component of the project asset, in case of a default they will not
have a claim over it. Instead, Islamic financiers would sell their part of the asset through the
purchase undertaking to the project company which would create a debt that is pari passu with
that of conventional financiers.
There are a few issues identified as hindrances for Islamic finance syndications. In
conventional finance, there are standardized templates that are used for syndicated finance
such as ones prepared by the Loan Market Association (MLA) in the United Kingdom and the
Loan Syndication Transaction Association (LSTA) in the United States (Khaleq et. al 2012: 6).
While the contracts used for Islamic finance syndications are based on these templates, these
are not standardized and are done independently by different stakeholders.
Unlike conventional syndicated loans that are usually made flexible to attract lenders, using
debt based structures for syndications such as murabahah and istisna can introduce some
restrictions. The rates of return for these contracts cannot be adjusted to market benchmark
rates and this can be an issue in longer term contracts. Furthermore, being debt contracts, they
cannot be sold at a discount. These constraints can be avoided if asset-based financing can be
used instead of debt-based modes.
3.4. Islamic Financial Industry: An Overview
Since the two broad sources of funding are financial institutions and financial markets, the
overall status of these sectors in OIC member countries relative to other country groupings is
first examined. Chart 3.7 shows that the overall financial sector development index is 0.23 for