contribution of islamic finance to the 2030 agenda for ...€¦ · 1 contribution of islamic...
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Contribution of Islamic Finance to the 2030 Agenda for Sustainable
Development(with special reference to infrastructure finance)
Habib Ahmed Durham University Business School, UK
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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$3.4 trillion (conservative investment growth)
Infrastructure Investment Needs and Gaps 2015-2030
Gap
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Public PrivateDomestic •Government Revenue
(tax/duties)•Natural resource concessions•User fees•Public borrowing
•Domestic Private investments•Non-governmental organizations•Philanthropy/social responsibility
International•Official development assistance (ODA)•Climate Finance •Multilateral development banks (MDBs)•Sovereign wealth funds
•Foreign direct investment (FDI)•Multilateral infrastructure funds•Remittances•Foreign pension funds•International bank loans
Public-private partnership (PPP)
Blended Finance
Sources of Financing SDGs
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SDG Status & Infrastructure Investment Needs in Selected OIC MCs
Country GroupsMean SDG
Index
10 Highest Scoring Countries
80.8
44 OIC MemberCountries
50.1
10 Lowest Scoring Countries
32.9 0.050.0
100.0150.0200.0250.0300.0
129.7111.7102.5
37.4
283.4
216.8
55.422.0
US$
bill
ion
Projected Investment Gaps in Sustainable Infrastructure (2017-2030)
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• 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.
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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
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• 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
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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