1

Contribution of Islamic Finance to the 2030 Agenda for Sustainable

Development(with special reference to infrastructure finance)

Habib Ahmed Durham University Business School, UK

2

4027 19

7

93

5442

3951

0102030405060708090

100

Energy Transport Water &Waste

Telecom TOTAL Gap(aggressiveinvestment)

Gap(conservativeinvestment)

US$

trill

ion

Annual estimated gaps– US$2.6 trillion (aggressive investment growth)– US$3.4 trillion (conservative investment growth)

Infrastructure Investment Needs and Gaps 2015-2030

Gap

3

Public PrivateDomestic •Government Revenue

(tax/duties)•Natural resource concessions•User fees•Public borrowing

•Domestic Private investments•Non-governmental organizations•Philanthropy/social responsibility

International•Official development assistance (ODA)•Climate Finance •Multilateral development banks (MDBs)•Sovereign wealth funds

•Foreign direct investment (FDI)•Multilateral infrastructure funds•Remittances•Foreign pension funds•International bank loans

Public-private partnership (PPP)

Blended Finance

Sources of Financing SDGs

44

SDG Status & Infrastructure Investment Needs in Selected OIC MCs

Country GroupsMean SDG

Index

10 Highest Scoring Countries

80.8

44 OIC MemberCountries

50.1

10 Lowest Scoring Countries

32.9 0.050.0

100.0150.0200.0250.0300.0

129.7111.7102.5

37.4

283.4

216.8

55.422.0

US$

bill

ion

Projected Investment Gaps in Sustainable Infrastructure (2017-2030)

5

• Voluntary exclusion– 20% to 40% of the population avoid conventional microfinance– Preference for Islamic finance from 5 countries

• 45% of 5,071 respondents• 32.2% SMEs

• Providing Islamic financial services is – Financial inclusion issue at the

micro level– Development issue at the

macro level

Why Islamic Finance?

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• Legal requirements: Certain prohibitions apply at operational level– Activities and products (exploitation,

gambling, alcohol, pork, etc.)– Riba (includes interest, sale of debt)– Gharar—legal ambiguity and excessive

risk (includes derivatives)

• Moral/ethical overlay: Overall goals of Shariah—enhancing welfare (maslaha) and preventing harm (mafsada)

Islamic Finance: Principles

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Islamic Finance: Contracts• Key contracts

– Sale based—Murabahah, Istisna, Salam– Asset based—Leasing (Ijarah)– Equity based– Mudarabah, Musharakah– Agency based—Wakala– Interest free loans (qard hassan) or loans at

service charges

• Supporting contracts– Gift (hiba), guarantee (kafala),

mortgage (rahn), etc.

8

1451.1

37.7 106.4341.9

66.4

72.4%

1.9%5.3%

17.1%

3.3%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

1400.0

1600.0

Islamic BankingAssets

Takaful/RetafulAssets

Other IslamicFinancial

InstitutionalAssets

Value of SukukOutstanding

Islamic Fundsunder

Management

US$

bill

ion

Assets (US$ bn.) Assets Share (percentage of total)

Global Islamic Financial Assets 2016

9

• Social and ethical ethos, asset-linked and risk-sharing features of Islamic finance—conducive for financing SDGs and infrastructure projects

• Role of Islamic financial industry– Banks – Nonbank financial institutions– Financial markets

Islamic Finance, SDGs and Infrastructure Investments

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– Doraleh Container Terminal in Djibouti (US$ 422 million)

– Madinah International Airport in Saudi Arabia (US$ 1.14 billion)

• Islamic banks are small—usually participate in smaller tranches of syndications

• With growth of the sector, infrastructure projects are being fully financed by Islamic syndications

Islamic Banks and Infrastructure Financing

11

Islamic NBFI sector and contribution to infrastructure investments are very small

53.17

6.331.01 0.15

87.7%

10.4%1.7% 0.2%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

0

10

20

30

40

50

60

Mutual funds ETFs Insurance funds Pension funds

USD

(bn)

AuM (US$, bn.) Percentage of Total

Islamic NBFIs and Infrastructure Financing

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• Sukuk issuances for infrastructure is relatively small

• Some cases in sukuk used for infrastructure projects– Neelum Jhelum Sukuk,

Pakistan: PKR 100 billion for hydropower dam

– DanaInfra Retail Sukuk, Malaysia: MYR 2.5 billion for MRT project

– East Klang Valley Expressway Sukuk, Malaysia: MYR 1billion for expressway

42.9%

31.0%

4.1%

9.9%

4.5%2.4%

5.4%

Government Financial Services

Real Estate Transportation

Power & Utilities Telecom

Other

Sukuk and Infrastructure Financing

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• Islamic Banks– Syndicate financing of US$50million for Master Wind

Energy Limited, Pakistan for wind farm (wind turbines)• Sukuk

– Khazanah SRI Sukuk—variablereturns based on whether KPIsare met

• Islamic Social Finance– Establishment of 18 Waqaf an-

Noor clinics and a hospital by Jcorp, Malaysia (1.4 million treatments at minimum fee of MYR 5 only)

Islamic Finance and Sustainable Infrastructure

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1. National SDG Strategy and Infrastructure Policies

– Infrastructure plan—list of pipeline of projects– Financial plan how to finance sustainable

infrastructure projects (role of Islamic finance)

2. Legal and Regulatory Framework― Islamic financial laws (banking, NBFIs and capital markets)― Tax laws; Shariah compliant concession law; SRI related laws

3. Public-Private Partnerships― Raising awareness and developing Shariah

compliant contracts ― Standardization of documentations and

approaches

Recommendations-Government

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6. Products– Develop products for infrastructure as an asset

class– ESG embedded products – Risk-sharing investment accounts– Tradable and liquid sukuk structures

4. Capital Markets– Islamic capital market infrastructure – National level Shariah governance regime– Standardized sukuk structures– Liquid sukuk market

5. Financial Institutions– Increase the share of Islamic NBFIs– Promote the Islamic social finance sector

Recommendations-Financial Sector

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7. Multilateral Institutions– MDBs provide financing for infrastructure – Islamic infrastructure funds – Building capacity and human capital – Standardized Shariah compliant templates and

structures for sustainable infrastructure investments

8. Conceptual Outlook & Mind-set– Integrate ESG criteria in financing decision-

making– Move from short-term to long-term financing– Islamic finance: move from narrow legalistic

compliance to include broader goals of Shariah

Recommendations-Others