•

•

•

•

•

MDBs are guided by the Principles

for Crowding-in Private Sector

Finance articulated in Hamburg

• Recognize country ownership

• Investment-friendly environment

• Prioritize commercial finance

• Expand and standardize credit

enhancement

• Blend concessional resource with

private capital• Review incentive

“Pursuing private sector solutions where they can help achieve development goals, and reserving scarce public finance for where it is most needed.” –Development Committee

Paper, 2017

Maximizing finance

for development

MFD requires identifying the

right investments, taking the

financial risk to initiate them,

and implementing them

effectively and efficiently.

by leveraging the

private sector

Creates imperative to

leverage the private sector

for economically beneficial,

sustainable investments that

contribute to development

goals.

and optimizing the

use of scarce public

resources

Public sector faces

limitations in meeting this

need, including in fiscal

space, capacity, and

governance.

A role to play for each actor.

Targets: MDBs have committed to collectively increase the private financing they

mobilized by 25%-35% over the next three years up to 2020.

Nine Pilot Countries: Cameroon, Côte d’Ivoire, Egypt, Indonesia, Iraq, Jordan, Kenya,

Nepal, and Vietnam

CATALYZING ISLAMIC FINANCE TO MAXIMIZE FINANCE FOR DEVELOPMENT

Mohamed Hedi Mejai,

Advisor to the Chairman of the ICD Board

September 13, 2018

Strictly private & confidential. Not to be disclosed without prior written consent of Islamic Development Bank

Outline

Value Propositions of Islamic Finance

Infrastructure Financing Gap

1

PPP - Islamic Finance Match

2

3

Challenges and Recommendations4

Key Takeaway Points5

Strictly private & confidential. Not to be disclosed without prior written consent of Islamic Development Bank

Value Propositions of Islamic Finance (1)

• All Islamic finance structures are characterized by transactions thatare asset-based and interest-free.

• The risk sharing nature ensures parties on both sides of thetransaction maintain a continuing interest in the underlyingventure.

• Islamic finance for infrastructure projects is a natural fit, and itserves the very purpose of asset-backed redistribution of Sariah-compliant finance

• The flexibility of Shariah structure to accommodate needs specificto the country, sector, and project, Islamic financiers can craft manysolutions to infrastructure PPPs.

Strictly private & confidential. Not to be disclosed without prior written consent of Islamic Development Bank

Value Propositions of Islamic Finance (2)

• Three types of transactions for applying Islamic financeinstruments to infrastructure PPP projects:

• Many Islamic finance instruments tailored and utilized to meet thefinancing needs of infrastructure PPP project: Istisna, Ijarah,Forward Ijarah, Murabahah, Musharakah, Sukuk

Sales and purchase transactions

Leasing arrangements

Equity investments

Strictly private & confidential. Not to be disclosed without prior written consent of Islamic Development Bank

Infrastructure Financing Gap Globally

Infrastructure investments amount to

$2.5 trillion/ year

Required infrastructure investment is

$2-3 trillion/ year

Strictly private & confidential. Not to be disclosed without prior written consent of Islamic Development Bank

Infrastructure Financing Gap in IsDB MCs

MCs' infrastructure financing gap is estimated at around $100 billion annually

Strictly private & confidential. Not to be disclosed without prior written consent of Islamic Development Bank

PPP Fit to Islamic Finance

Asset-based

• The assets of PPP projects are“ring-fenced”: that is, theseassets are not mingled with therest of the assets of the projectsponsors.

Risk Sharing

• PPP projects allow risks to beallocated to the partiesinvolved; hence Islamicfinanciers, assume certain risksof the project.

PPP: Contractual relationship that can be applied to anything from asimple, short term management contract (with or without investmentrequirements) to a long-term contract that includes funding, planning,building, operation, maintenance and divestiture.

Strictly private & confidential. Not to be disclosed without prior written consent of Islamic Development Bank

Distribution of PPP with Global Numbers

Distribution of PPP Investments based on Income Level

Middle and High Income Countries Low Income Countries

PPP investments as of 2016 cumulatively amount to

$2.5 trillion

Only around 4% is in LIC

Infrastructure investments amount to

$2.5 trillion/ year Share of private capital in infrastructure is still way behind sovereign financing.

Sovereign vs Private Capital in Infrastructure Investments

Sovereign Financing Private Sector Participation

80%

20%

96%

4%

Strictly private & confidential. Not to be disclosed without prior written consent of Islamic Development Bank

Islamic Finance for Infrastructure PPPs: Challenges

PPP Financing (Islamic)

Challenges

New Models

& Instruments

Capital Markets &

Fiscal Space

Institutional Capacity

Regulatory Framework

Awareness

Guarantees & Insurance

Funds

Strictly private & confidential. Not to be disclosed without prior written consent of Islamic Development Bank

Islamic finance for Infrastructure PPPs: MDBs’ Role

• Provide technical assistance to developing country governments to help facilitate thedeployment of Islamic finance for infrastructure PPP projects

• Developing and penetrating new and innovative Islamic finance products andstructures

• Looking for opportunities of mobilization of more resources by raising infrastructurefocused funds and B-loans

• Tailoring portfolio of conventional financial products to accommodate Islamic finance

• Establishing an infrastructure fund focused on solutions using Shariah-compliantstructures

• Identifying pilot projects and pursue them within given sectors and particular countries,especially where Islamic finance for infrastructure PPPs has not been tested yet

• Sharing good experiences on Islamic finance for PPPs through better documentationand communication

Strictly private & confidential. Not to be disclosed without prior written consent of Islamic Development Bank

Key Takeaway Points

There is a huge financing gap to finance Infrastructure projects.

Islamic finance is well fit to help Governments close this gap.

PPP is a relevant tool for Islamic finance penetration in Infrastructure financing

But PPP financing (Islamic) has challenges and MDBs could play a critical role in addressing them

MDBs have a lot to do jointly to address this financing gap either in terms of mobilization, co-financing, knowledge creation & dissemination

THANK YOU

▪ US$ 2.05 trillion of Islamic finance assets in 2017

▪ Islamic banks US$ 1.55 trillion

▪ Sukuk US$ 400 billion

▪ Islamic funds US$ 67 billion

▪ Takaful US$ 26 billion

▪ Concentrated in the Middle East and North Africa

▪ South and East Asia has significant Islamic finance assets