Islamic financing of PPP projects is becoming more common for a number of reasons, including: the creation of Islamic banks (such as the Islamic Development Bank) that are able to provide Islamic financing products for PPP projects, the reduced availability of non-Islamic financing in the aftermath of the Global Financial Crisis, and the increasing number of infrastructure PPP projects being procured in the Middle East which have, in effect, acted as a catalyst for the use of Sharia-compliant project financing.
Islamic financing of PPP projects can provide a complete financial solution or it can be used in combination with other sources of non-Islamic finance.
Any Islamic financing will have to comply with the following Islamic Sharia principles in table B1.
TABLE B1: Islamic Sharia Principles
|
Islamic Principle |
Meaning |
|
Riba |
The prohibition of interest. As a consequence, interest cannot be earned on agreements. |
|
Gharar |
Prohibition against uncertainty. In practice, this means that under any relevant agreement, the subject matter, price and time of delivery of the subject matter to the receiving party must be determined at the outset. |
|
Maisir |
Prohibition against gambling/speculation. This means that agreements in which the investment return cannot be quantified in advance, and is simply inferred, are not permitted. |
|
Sharing of profit and risk |
A transaction’s profits should be real and represent a genuine return for the sharing of profit and risk within that transaction. Profits should not be pre-determined. |
|
Prohibition against gambling, alcohol, drugs |
A transaction cannot be entered into which involves gambling, alcohol or drugs. |
|
Sharia Law compliance |
A transaction must be ethical and comply with local Sharia Law which may be different across regions/countries. |
There are a variety of Islamic financing solutions that can be used to finance a PPP project. Primary financial products and secondary agreements will support each solution. The main primary financial products are:
- Traditional Istina’a;
- Procurement Istina’a; and
- Ijara
The principle secondary agreements include:
- Services agreements; and
- Purchase agreements
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