Investments in infrastructure and development capital financing being made in DFID / CDC /PIDG geographies by institutions operating on Islamic finance principles are still limited in scope.
The Islamic Development Bank Group is the main donor and agent encouraging other institutions to get involved in the process, through various initiatives. The major undertakings initiated by the Islamic Development Bank include:
- Deep Dive Initiative (DDI), a strategic partnership framework with the World Bank (WB), aimed at scaling-up development assistance in common member countries;
- Arab Financing Facility for Infrastructure (AFFI), also with the World Bank (WB), designed to support the development of high-quality infrastructure in Arab countries in a bid to boost the region’s economic and social growth;
- Islamic Infrastructure Fund (IIF) established with the Asian Development Bank (ADB) in the form of sharia-compliant equity to contribute to “facilitation of mobilization of public and private sector equity funds and attracting foreign investment” in the twelve common member states.
Two main groups of obstacles to further investment in these geographies can be identified: i) those connected with the economic, legal, and political environment in the countries in question,
and ii) those resulting from the nature of Islamic finance itself.
The former include:
- Political and legal barriers, such as counterparty risk and uncertain political environment;
- Financial obstacles, such as foreign exchange risks and return rates;
- Limited capacity and lack of experience of governments;
- Contract and tender-level risks, related to lengthy and costly procurement processes and red-tape.
Specific to the nature of Islamic finance are:
- Lack of alignment between conventional legal frameworks and Islamic regulations;
- Legal/regulatory framework issues resulting from the asset-based nature of Islamic finance for taxation, ownership rights and bankruptcy laws;
- Standardisation problems;
- Lack of awareness and understanding of sharia-compliant finance.
Information on the types and amounts of investments in infrastructure and development capital financing being made in DFID / CDC / PIDG geographies by institutions operating on Islamic
finance principle is scarce, with the richest source of practical information being the Islamic Development Bank. The majority of publications available are of theoretical nature, exploring the
potential of Islamic finance in infrastructure and development capital financing rather than evaluating existing projects. This may be because this type of financing has only become
operational – and consequently given attention – relatively recently. Consequently, no global, regional, or country-level exhaustive data are available.