[#There is tremendous potential for Shariah-compliant financing of infrastructure projects in the GCC and globally, said a study.
[#Increasing the Shariah-compliant share of such projects would help meet an infrastructure funding demand that ranges from $535 billion (Dh1.93 trillion) over the next decade to as much as $2trn by 2020, said the study.
The Dubai International Financial Centre Authority yesterday released the latest in its series of whitepapers called: "Islamic Financing for Infrastructure Projects".
The whitepaper highlighted that infrastructure projects are ideal for Islamic financing, in part because of Islamic finance’s preference for equity-based and asset-backed projects, as well as because many infrastructure schemes benefit the wider community, which fits well with the moral underpinnings of Islamic finance.
An example is the recently listed $100 million International Finance Corporation Hilal Sukuk on Nasdaq Dubai and the Bahrain Stock Exchange, the proceeds of which will fund infrastructure and health projects in Yemen and Egypt.
Farhan Al Bastaki, Executive Director Islamic Finance at the DIFC Authority, said: "The paper comes at a time when governments are increasingly looking to the market – through public-private partnerships and otherwise – to help fund enormous infrastructure requirements. At the same time, Islamic finance continues to grow at double-digit rates and increasingly entering the mainstream global financial sector as an important asset class."
The potential for Shariah-compliant sources of infrastructure financing also is driven by its low share in overall Islamic financing. Only 22 per cent of the $40bn in Shariah-compatible financing within the GCC has gone into infrastructure projects, while 11 per cent of the $14.9bn in sukuks issued in the GCC during 2008 was used for infrastructure.
The study provides a summary of the various Shariah-compliant financing structures; it examines challenges to increased Islamic financing of infrastructure projects; and it offers possible solutions.
The report also identified a number of hurdles to the increased adoption of Shariah-compliant structures.
These include a lack of regional and global standardisation, and legal regimes that do not directly address Islamic project finance structures, thereby creating uncertainty in the case of default or other contingencies. And the majority of Islamic financing is debt-based and short-term focused, therefore making them inappropriate for long-term infrastructure financing.
International Monetary Fund’s Director for the Middle East and Central Asia, Masood Ahmed, yesterday said global investors’ interest in Islamic bonds will depend on the evolution of the legal framework surrounding the securities.
In 2009, nearly all sukuk issues were made by states and quasi-sovereign entities, and ratings agency Moody’s has said this helped issuance rise 40 per cent during the first 10 months of the year compared with 2008.
"There is a big move going on in the sukuk market towards more highly rated sukuk, and credit risk is becoming more an issue because some of the sukuk that have defaulted were unrated," said Simon Eedle, Managing Director at Global Islamic Banking at Calyon.#]