Islamic finance falling short in PPP space

At a conference held by the World Bank Group Thursday, officials discussed the challenge of tapping the $2trn market for Shariah-compliant finance to boost infra.

“Islamic finance is really designed for infrastructure,” Khaleel Ahmed, a chief investment officer at the International Finance Corporation, explained Thursday at a discussion hosted by the World Bank Group.

Walid Hejazi, a professor at the University of Toronto specialising in Islamic finance, echoed Ahmed’s sentiment.

“The hallmark of Islamic finance is that transactions have to be asset-backed and there has to be risk sharing,” Hejazi elaborated.

The discussion followed the release last fall of a World Bank report titled “Mobilizing Islamic finance for infrastructure public-private partnerships”. The report had a similar takeaway: Islamic finance has grown into a $2 trillion market, and Shariah-compliant financial structures represent a natural fit for infrastructure PPPs.

While the report does document several successful examples, including a $240 million power plant in Pakistan and an integrated health campus in Turkey, the story is not one of a thriving industry. As the report, co-authored with the Islamic Development Bank Group, acknowledges, Islamic financing “is not routinely used in PPPs”.

“It is still a relatively untapped market for PPPs,” Sara Ahmed, an operations analyst for the World Bank Group, said Thursday.

One complication is the legal structure, which differs between jurisdictions. Islamic financing structures often involve the transfer of ownership of an asset to comply with Islam’s ban on interest. This requires a suitable legal environment, Volkan Celen, a counsel for the Multilateral Investment Guarantee Agency, explained.

“In a given country, if there is no Islamic finance legislation such a transfer of ownership, which is done only for financing purposes, may be considered as a regular asset transfer,” Celen said. “It may create many legal and tax implications.”

The World Bank report makes a series of recommendations. They include standardising documentation and approaches, creating an enabling environment through a strong legal and regulatory framework, and multilateral development banks working together to set up Shariah-compliant infrastructure funds.

“Sometimes it may be the fear of unknown that can prevent project sponsors and conventional banks from exploring Islamic finance,” the report concludes. “Efforts are needed to familiarize practitioners with Islamic finance structures to finance infrastructure PPP projects.”