It is often argued that Asia’s massive—national and regional— infrastructure needs could easily be financed by the region’s large domestic savings and huge foreign exchange reserves. But the reality is far more complicated. Islamic financial instruments also offer an attractive source of financing for regional infrastructure projects.

Islamic Financial Instruments

Islamic capital markets offer a huge potential source of finance for infrastructure investment. The global market for sukuk (Islamic bonds) is more than $100 billion and is growing by an estimated 25–35% a year. Two thirds are issued in the Malaysian market, leaving Southeast Asia well placed to absorb Islamic funding. The size and number of sharia-compliant private equity funds has also increased in recent years, in both Islamic and non-Islamic markets.

Sukuk and equity markets in Kuala Lumpur and the Middle East could potentially generate significant funds for infrastructure projects that comply with sharia financing principles. This requires that consultations begin during the planning stages of infrastructure projects on how to configure the financial package to meet sharia requirements and how to appeal to Islamic investors. Currently, each project requires customization to meet Islamic requirements, but work is under way to create standardized documentation. This will greatly facilitate the process. This study proposes that a small working group on Islamic finance for infrastructure should be created to work primarily with the Islamic Financial Services Board in Kuala Lumpur to promote this standardization and explore the potential for expanding Islamic financing.

 Islamic Financial Instruments for Financing Asia Infrastructure (3.3MB)