Infrastructure Financing Through Islamic Finance in the OIC Member Countries
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Infrastructure Financing through Islamic Finance in the Islamic Countries COMCEC COORDINATION OFFICE March 2019 Infrastructure Financing through Islamic Finance in the Islamic Countries COMCEC COORDINATION OFFICE March 2019 This report has been commissioned by the COMCEC Coordination Office to Professor Dr. Habib Ahmed. Contributions to the country case studies in Chapter 4 have been made by the following researchers: Dr. Rifki Ismal (Indonesia), Mr. Ahmad Mohammad Barau (Nigeria), Mr. Naif Alsagr (Saudi Arabia) and Mr. Elhadi Idris Habbani (Sudan). Views and opinions expressed in the report are solely those of the authors and do not represent the official views of the COMCEC Coordination Office (CCO) or the Member Countries of the Organization of Islamic Cooperation (OIC). The designations employed and the presentation of the material in this publication do not imply the expression of any opinion whatsoever on the part of the COMCEC/CCO concerning the legal status of any country, territory, city or area, or of its authorities, or concerning the delimitation of its political regime or frontiers or boundaries. Designations such as “developed,” “industrialized” and “developing” are intended for statistical convenience and do not necessarily express a judgement about the state reached by a particular country or area in the development process. The mention of firm names or commercial products does not imply endorsement by COMCEC and/or CCO. The final version of the report is available at the COMCEC website*. Excerpts from the report can be made as long as references are provided. All intellectual and industrial property rights for the report belong to the CCO. This report is for individual use and it shall not be used for commercial purposes. Except for purposes of individual use, this report shall not be reproduced in any form or by any means, electronic or mechanical, including printing, photocopying, CD recording, or by any physical or electronic reproduction system, or translated and provided to the access of any subscriber through electronic means for commercial purposes without the permission of the CCO. For further information, please contact: COMCEC Coordination Office Necatibey Caddesi No: 110/A 06570 Yücetepe Ankara, TURKEY Phone : +90 312 294 57 10 Fax : +90 312 294 57 77 Web : www.comcec.org *E-book : http://ebook.comcec.org ISBN : 978-605-7519-15-3 Table of Contents List of Tables ............................................................................................................................................................. v List of Charts ............................................................................................................................................................vi List of Figures ....................................................................................................................................................... viii List of Abbreviations .............................................................................................................................................ix Executive Summary ................................................................................................................................................ 1 1 Introduction .................................................................................................................................................... 7 1.1. Infrastructure Definition, Features and Role in Development.................................................. 7 1.1.1. Infrastructure and Development ........................................................................................................... 8 1.2. Brief Overview of Global Infrastructure Needs and Financing Gaps .................................... 10 1.3. Aim, Objectives and Research Methods .......................................................................................... 14 1.3.1. Methodology ................................................................................................................................................. 15 1.4. Overview of the Study ............................................................................................................................ 16 2 Infrastructure Financing .......................................................................................................................... 18 2.1. Special Features of Infrastructure Financing................................................................................ 18 2.1.1. Project Phase and Contractual Structures ...................................................................................... 18 2.1.2. Public Private Partnerships (PPPs) .................................................................................................... 20 2.1.3. Structure and Stakeholders in Infrastructure Projects ............................................................. 20 2.2. Products and Approaches for Infrastructure Financing ........................................................... 22 2.2.1. Project Financing ........................................................................................................................................ 23 2.2.2. Modes of Infrastructure Finance ......................................................................................................... 24 2.2.3. Features and Risks in Infrastructure Financing ........................................................................... 25 2.2.4. Development Levels and Infrastructure Planning....................................................................... 27 2.3. Sources of Infrastructure Finance ..................................................................................................... 28 2.4. Factors Affecting Financing Long-term Infrastructure Projects ............................................ 32 2.4.1. Infrastructure Policy Framework ....................................................................................................... 32 2.4.2. Legal and Regulatory Framework ...................................................................................................... 33 2.4.3. Institutional Arrangements and Procurement Processes and Procedures ...................... 34 2.4.4. Project Related Factors ............................................................................................................................ 36 2.5. Infrastructure Needs and Financing Gaps in the OIC Member Countries ........................... 36 3 Islamic Finance for Long-Term Infrastructure Financing ........................................................... 43 3.1. Introduction .............................................................................................................................................. 43 3.2. Islamic Financial Contracts .................................................................................................................. 44 3.3. Islamic Infrastructure Financing: Framework and Contracts ................................................ 45 3.3.1. Islamic Perspectives on Infrastructure Contracting ................................................................... 45 3.3.2. Structures of Islamic Infrastructure Financing ............................................................................. 46 i 3.3.3. Shariah Compliant Project Finance .................................................................................................... 51 3.3.4. Islamic Syndication and Co-financing ............................................................................................... 52 3.4. Islamic Financial Industry: An Overview ........................................................................................ 53 3.5. Islamic Banking Sector and Infrastructure Financing ............................................................... 55 3.6. Islamic Capital Markets/Sukuk and Infrastructure Financing ............................................... 59 3.7. Islamic Nonbank Financial Institutions .......................................................................................... 64 3.8. Social Sectors ............................................................................................................................................ 66 3.9. International Initiatives........................................................................................................................ 68 3.10. Islamic Financial Industry and Infrastructure Investments ................................................ 69 4 Country Case Studies................................................................................................................................... 71 4.1. Indonesia .................................................................................................................................................. 71 4.1.1. Indonesian Financial Sector and Islamic Finance: An Overview .......................................... 71 4.1.2. Current Status and Projected Investment in Infrastructure Sectors .................................. 73 4.1.3. National Level Policies and Framework for Infrastructure Development ....................... 76 4.1.4. Legal and Regulatory Framework for Infrastructure Investment........................................ 78 4.1.5. Roles of Islamic Finance in Infrastructure Financing ................................................................ 81 4.1.6. Conclusion and Recommendations ...................................................................................................