The significance of Islamic finance for groupings of the economically most powerful nations in the world is constantly increasing, statements of influential officials show.
For example, Germany’s Finance Minister Wolfgang Schäuble told a meeting of Group of 20 (G20) leading economies earlier this September at an event Ankara that “Islamic finance is growing in importance for the global economy, and it is therefore important that international financial institutions consider (…) integrating Islamic finance into global finance.”
Schäuble in particular referred to infrastructure finance through Islamic funding vehicles, namely sukuk, as their asset-backed nature makes it a perfect match to build highway networks, railways, sea ports and airports, power stations and other big and long-term projects. An estimated $800bn worth of infrastructure financing will be needed each year in Asia alone over the next decade, according to the Asian Development Bank.
Another field for Islamic finance is funding of small and medium companies (SME), where asset-backed rent or leasing contracts such as murabaha and ijarah could reduce the burden of high working capital requirements and therefore have a high relevance for the sector, even more since a sizeable part of G20 or Organisation for Economic Co-operation and Development (OECD) members boasts a large SME sector which is vital to their economies.
In the infrastructure sector, both groupings already jointly outlined in a recent working paper the importance of Islamic financing instruments such as sukuk for project funding, and they also cited a number of case studies as a reference for the successful facilitation of Islamic finance.
The G20/OECD working paper particularly suggested the development of “innovative forms of public-private partnerships and Islamic sukuk financing models” in order to “enable infrastructure sustainability, facilitate private financing and strengthen institutions to ensure adequate transparency.”
This makes even more sense given the fact that sukuk actually to some extent resemble public-private partnerships due to a similar risk-and return-sharing arrangement.
The G20/OECD paper also acknowledges that the issuance of sukuk is a growing trend in global markets, but is still in its early days in many f the groupings’ member countries. Therefore, the paper suggests stronger international coordination to implement regulatory and supervisory frameworks necessary “to foster stability and create durable interpretations of Shariah law for the finance of infrastructure.”
Such regulations should specifically take into account the trend for greater issuance volumes, a standardisation of Shariah interpretation of the various financing instruments, the growing levels of savings that seek Shariah-compliant investments, as well as the growing urge from Western countries to access savings in Islamic countries.
With all this set up, sukuk may be issued by governments, development banks and private corporations, using multiple structures that can include project-finance sukuk, asset-backed sukuk, sale/lease-back structures or rent/income vehicles. Again, the asset-backed nature of Islamic financial instruments make sukuk well suited for infrastructure assets as the underlying principal of such instruments remains the sharing of risk and return amongst the parties involved in such a transaction. At the same time, cash flows are determined by incomes generated by the assets, and the returns to investors is linked to the performance of the assets.
Overall, the common interpretation of the role that Islamic finance can play in G20/OECD countries is obviously that sukuk and related Shariah-compliant financing structures are a viable capital market instrument can play an important role, namely as it has become clear that the availability of stable long-term funding has become indispensable for supporting global growth in the future, not as a substitute, but an alternative to be used simultaneously with conventional financing.
That said, with big sukuk issuances for infrastructure to be expected in the future, more money attracted from the Islamic world and a subsequent growth of the Islamic finance industry, it comes as no surprise that Islamic finance remains on a fast growth track and should reach an overall volume of $6.5tn by 2020, up from a meagre $150bn in 1990 and from $1.8tn in 2015, as projected by the International Financial Service Board.


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