Contribution of Islamic Finance to the 2030 Agenda for Sustainable Development (with special reference to infrastructure finance)

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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 1

Infrastructure Investment Needs and Gaps 2015-2030 US$ trillion 100 90 80 70 60 50 40 30 20 10 0 40 27 19 Energy Transport Water & Waste 7 93 39 54 Telecom TOTAL Gap

2 Infrastructure Investment Needs and Gaps US$ trillion Energy Transport Water & Waste Telecom TOTAL Gap (aggressive investment) Annual estimated gaps US$2.6 trillion (aggressive investment growth) US$3.4 trillion (conservative investment growth) G a p Gap (conservative investment) 2

3 Sources of Financing SDGs Domestic Public Government Revenue (tax/duties) Natural resource concessions User fees Public borrowing Private Domestic Private investments Non-governmental organizations Philanthropy/social responsibility Public-private partnership (PPP) International Official development assistance (ODA) Climate Finance Multilateral development banks (MDBs) Sovereign wealth funds Blended Finance Foreign direct investment (FDI) Multilateral infrastructure funds Remittances Foreign pension funds International bank loans 3

Index 80.8 50.1 US$ billion 300.0 250.0 200.0 150.0 100.0 50.0 32.9 0.

4 SDG Status & Infrastructure Investment Needs in Selected OIC MCs Country Groups 10 Highest Scoring Countries 44 OIC Member Countries 10 Lowest Scoring Countries Mean SDG Index US$ billion Projected Investment Gaps in Sustainable Infrastructure ( )

5 Why Islamic Finance? 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 5

Islamic Finance: Principles Moral/ethical overlay: Overall

harm (mafsada) Legal requirements: Certain prohibitions apply

6 Islamic Finance: Principles Moral/ethical overlay: Overall goals of Shariah enhancing welfare (maslaha) and preventing harm (mafsada) 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) 6

Agency based Wakala Interest free loans (qard hassan) or loans at service

7 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. 7

8 Global Islamic Financial Assets 2016 US$ billion % Islamic Banking Assets 5.3% 1.9% Takaful/Retaful Assets Assets (US$ bn.) Other Islamic Financial Institutional Assets 17.1% Value of Sukuk Outstanding Assets Share (percentage of total) 3.3% 66.4 Islamic Funds under Management 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 8

9 Islamic Finance, SDGs and Infrastructure Investments Social and ethical ethos, asset-linked and risksharing features of Islamic finance conducive for financing SDGs and infrastructure projects Role of Islamic financial industry Banks Nonbank financial institutions Financial markets 9

Islamic Banks and Infrastructure Financing Islamic banks are small usually participate in smaller tranches of syndications With growth of the sector, infrastructure projects

10 Islamic Banks and Infrastructure Financing 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 Doraleh Container Terminal in Djibouti (US$ 422 million) Madinah International Airport in Saudi Arabia (US$ 1.14 billion) 10

11 Islamic NBFIs and Infrastructure Financing USD(bn) % % 1.7% % Mutual funds ETFs Insurance funds Pension funds AuM (US$, bn.) Percentage of Total 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% Islamic NBFI sector and contribution to infrastructure investments are very small 11

12 Sukuk and Infrastructure Financing 4.5% 2.4% 5.4% 9.9% 4.1% 31.0% Government Real Estate Power & Utilities Other 42.9% Financial Services Transportation Telecom 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 12

Islamic Finance and Sustainable Infrastructure Islamic Banks Syndicate financing of US$50million for Master Wind Energy Limited, Pakistan for wind farm (wind turbines) Sukuk Khazanah SRI Sukuk

13 Islamic Finance and Sustainable Infrastructure Islamic Banks Syndicate financing of US$50million for Master Wind Energy Limited, Pakistan for wind farm (wind turbines) Sukuk Khazanah SRI Sukuk variable returns based on whether KPIs are 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) 13

of projects Financial plan how to finance sustainable infrastructure projects (role of

Legal and Regulatory Framework Islamic financial laws (banking, NBFIs and capital

14 Recommendations-Government 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 14

15 Recommendations-Financial Sector 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 6. Products Develop products for infrastructure as an asset class ESG embedded products Risk-sharing investment accounts Tradable and liquid sukuk structures 15

infrastructure funds Building capacity and human capital Standardized Shariah

Conceptual Outlook & Mind-set Integrate ESG criteria in financing

16 Recommendations-Others 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 decisionmaking Move from short-term to long-term financing Islamic finance: move from narrow legalistic compliance to include broader goals of Shariah 16

CONTRIBUTION OF ISLAMIC FINANCE TO THE 2030 AGENDA FOR SUSTAINABLE DEVELOPMENT 13 NOVEMBER 2017

CONTRIBUTION OF ISLAMIC FINANCE TO THE 2030 AGENDA FOR SUSTAINABLE DEVELOPMENT 13 NOVEMBER 2017 AUTHOR: HABIB AHMED Durham University Business School, Durham University, United Kingdom habib.ahamed@durham.ac.uk