Reasons Why Islamic Finance Is Deployed For PPP Projects

18 March, 2020      12



The Chairman, Altra Capital United Kingdom, Professor John Davie in a recent presentation on the developments in Islamic Finance at a recent forum in Lagos,  identified the reasons why Islamic Finance is deployed for Public-Private Partnerships (PPPs). 

In his presentation, Altra's chairman said the use of Islamic financing for PPP projects is becoming more common for the following reasons:

  • Increase in Islamic Institution: The proliferation of Islamic banking institutions e.g. Islamic Development Bank
  • Dearth in Non-Islamic Finance: The reduced availability of non-Islamic financing across the globe.
  • Increase in PPPs: The increased number of infrastructure PPP projects being promoted in the middle east have acted as a catalyst for the use of Sharia-compliant project financing.
  • Completeness: Islamic financing can provide a complete financial solution or can be used in combination with other sources of non-Islamic finance.

The expert highlighted the sharia-compliant components in PPPs, which include;

  • The PPP model involves creative tension induced by private capital at risk
  • To mirror this simply by eliminating interest is missing an opportunity
  • Islamic finance is more than economic components; so is PPP
  • Islamic finance carries ethical, social, political and religious dimensions that inform its structure
  • Islamic financial institutions foster social justice as well as generate wealth: a common position with the wider objectives of many of the commissioning agents of PPP projects
  • Generally the infrastructure community bring a long-term mindset towards asset ownership
  • Willing to invest in assets throughout economic cycle and have a desire to engage with regulators to ensure public needs are properly met.
  • Of the capital raised by infrastructure funds since 2006, 48% has been by vehicles with a maturity of over 10 years.

According to Prof. Davies  the asset-backed, ring-fenced , and project-specific nature of Islamic finance structures and their emphasis on sharing risks make them a natural fit for infrastructure public-private partnerships [PPPs].

He asserted that currently, the problem is that of matching the supply of finance from the private sector with investable projects.

Giving an illustration, the expert asserted that the main forms of financing infrastructure remain:

Government funding

  • Traditional procurement
  • Design-build-operate

Corporate or on-balance sheet finance

  • Corporate financing- which would involve

getting finance for the project based on the balance of the private operator

  • The mechanism used in lower value projects

Project finance

"limited recourse" or "non-recourse" financing

Non-recourse finance is a type of commercial lending that entitles the lender to repayment only from the profits of the project.

Speaking further, he gave an insight into typical Islamic finance PPP, even as the repayment profile depends upon each particular debt obligation. Typically, there will be:

  • A conventional loan
  • An Islamic loan
  • An equity bridge loan

Giving further insight he said all projects are different, but a typical debt repayment profile might be as follows:

  • Conventional term facility -20 years
  • Islamic term facility -10 years [with credit enhancement]
  • ECA facility- 14 years
  • Equity bridge loan
  • Revolving credit facilities

According to him, Sukuk raises all the financing on the day of subscription. This is not the ideal for infrastructure PPP projects, due to the dynamic nature of greenfield projects which often have an uneven pattern of expenditure calling for funds at different times during construction and operation.

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