Islamic Finance Needed for Infrastructure?

November 30, 2011 by  
Filed under National, newsletter-asia

Global Credit PortalIndia, November 28, 2011: Will Islamic Finance play a key role in funding Asia’s huge Infrastructure task?

– A Standard & Poor’s [S&P] document released on October 13, 2011 mentions:

‘Financing multi-billion-dollar infrastructure projects is rarely easy. But the current jittery state of the world’s lending markets is making the task of funding infrastructure developments – from power stations to railways – even harder. This issue is particularly pertinent for Asia, which is struggling to keep up with the escalating infrastructure needs of the region’s surging population amid solid economic growth. With the outlook for global lending markets still uncertain, part of the solutions for Asia may lie in finding alternatives to conventional financing. Islamic finance is one such alternative’.

The Document further says:

‘Standard & Poor’s Ratings Services believes that the growing and deepening market for Islamic financing is a key reason why we think this market is worth considering for the infrastructure sector. We also believe that infrastructure projects are a logical fit for Islamic finance, which is governed by Sharia and predicated on asset-backing and shared business risk. Indeed, we believe that the asset-backing nature of Islamic financing may provide a better funding match for infrastructure projects than traditional lenders, such as banks. What’s more, sukuk investors typically have an appetite for longer tenors than bank loans, and prefer stable and predictable cash flow–traits that are typically associated with infrastructure projects’.

About Asian Economic Growth and its infrastructure needs, it states:

Islamic Finance‘As economies across Europe and the U.S. continue to struggle to regain momentum, it’s clear that Asia will remain a key driver of world economic growth in coming years. Estimates suggest that the population across Asia—already home to more than half of the world’s population–is set to surge in the next few decades. To cater for the region’s rapid growth, Asian governments will need significant developments and upgrades of its infrastructure. The Asian Development Bank (ADB) recently predicted that Asian economies require US$8 trillion over the next decade to fully address the region’s basic infrastructure needs, including developments in areas such as water, transportation, and energy. In particular, we believe demand for power sources will increase significantly’.

According to S&P report, Malaysia leads the way in Sharia based Sukuk Bonds to fund infrastructure and countries like Indonesia, Philippines, Vietnam and India need regulatory framework that create a level playing field between conventional finance and Islamic Finance. Learning from Malaysia tax initiatives is another important factor for the Islamic finance industry.

Economist Report

The Economist through its Economist Intelligence Unit – UIT – has brought out a report entitled – GCC trade and investment flows – The emerging market search – which says that emerging markets will drive global growth in the years ahead and forecast that around two-thirds of the world’s economic growth will be generated by the emerging markets in the next five years. This means that by 2015 emerging markets are projected to account for 41% of global GDP compared to an estimated 31% in 2011.

On Islamic Finance it mentions that Sukuk (Islamic Bonds) totaled up to US$ 23 billion in 2009 with cumulative issuance exceeding the US $ 100 billion mark.

In the emerging markets too China and India are the two countries which are currently focused by GCC countries. China is preferred for its huge manufacturing capacity compared to India, but India has an edge because of its historical relationship, there is a cultural affinity shared by the region and there are more than 6 million Indians in the Gulf.

Financial Need for Infrastructure

India’s infrastructural sector requires about US $ 1 billion in the 12th Five year plan, which is double the amount envisaged in the ongoing plan. The Indian Government has estimated a gap of US$300 (30% funding gap) in its target to achieve infrastructure investment of US$ 1 Trillion by 2017.

The debt for longer maturity is usually not available because of the various constraints such as absence of bench mark rates for raising long-term debt from the market, asset-liability mismatch of the tenure of debt incase when most of the financial institutions are on high cost of long-term debt. Banks can lend only around 70% of the raised deposits. In addition 40% of bank loans are allocated to priority sectors such as agriculture which curtails the total fund available for infrastructure. Recently Government of India has taken some policy measures like infrastructure debt fund (IDF) and has also allowed China’s Renminbi as an acceptable currency – under external commercial borrowings with an overall ceiling of US $ 1billion and also refinance of Rupee debt, etc. But these steps are not adequate enough to fill the gap.

In a recent report of ‘Standard & Poor’s’ entitled ‘Can India’s developing infrastructure keep pace with the Economic Growth? Its credit analyst Raju Viswanathan talks of India’s inadequate infrastructure to be a major road block to the country’s target of achieving, 9.0 – 9.5% annual growth in 2012-2017.

Prospects of Islamic Finance

Islamic finance regulations in Non-OIC juridictionsAbout US$ 800 billion Gulf money from US and Europe is looking towards East – India and China after 9/11 episode. An estimated US$ 1.5 trillion funds are sloshing around the Middle East and it will have US$ 8 trillion to invest by 2020.

It is high time that India should develop Islamic Sukuk markets seeking guidance from Malaysia or Middle East experts. Finance Ministry and Reserve Bank of India has to co-ordinate with Accounting and Auditing Organizations of Islamic Financial Institute (AAOIFI), Bahrain and Islamic Finance Service Board (IFSB), Malaysia to amend its Banking and Financial regulations and provide a level playing field for Islamic Finance and Banking along with conventional financial banking as done in modern, secular and industrialized countries like UK, Singapore, Japan, Hong Kong and France to become a developed country with 9.0 -9.5% growth with the Islamic Finance in the infrastructure development. China has already made a base in Hong Kong to be an Islamic Finance Hub by amending its banking and financial regulation along with taxation policies thus, Hong Kong has become an effective corridor for Islamic Finance. It has also joined Islamic Finance Service Board of Malaysia.

‘Simple regulatory changes to transform India into a regional hub for Sharia complaint finance and clear the way for a much needed wave of investments into its infrastructure’, writes Ben Fromine in his well documented article ‘The dawn of Islamic Finance’ in India Business Law Journal, June 2008.

– h abdur raqeeb

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