Abstract: How different is Islamic project finance?
Islamic finance checks and balances shape the way infrastructure is developed. In evaluating three MDBs (IsDB, ADB, and WB), even under conditions featuring the same project cycle, procurement guidelines, and collateral, the merits of Islamic finance emerge from disbursement procedures and manifest in the legal context. Islamic finance ensures fairness by correcting the imbalance found in conventional finance contracts, which favor lenders. Nevertheless, the same merit emanating from legal-financing agreements is also the root cause of time-overrun problems. Besides, Islamic Istisna contracts for infrastructure development make banks responsible for assets produced after project completion, and hence encourage observance of strong environmental and social safeguard measures. This feature of Istisna alone shows the embedded responsible financing feature in Islamic finance.
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Notes
- 1.
Beck et al. (2010).
- 2.
Asutay (2007).
- 3.
In the case of the WB, the document is called the Implementation Status and Result Report (ISR).
- 4.
The IsDB PGs are available at: https://www.isdb.org/sites/default/files/media/documents/2019-06/IsDB_Official_Guidelines_Procurement_of_GoodsNWorks_ENG.pdf. Accessed September 18, 2019. The WB PGs are available at: http://pubdocs.worldbank.org/en/492221459454433323/Procurement-GuidelinesEnglishJuly12014.pdf. Accessed September 18, 2019.
The ADB PGs are available at: https://www.adb.org/sites/default/files/procurement-guidelines-april-2015.pdf. Accessed September 18, 2019.
- 5.
IsDB Disbursement Guidelines available at: http://www.tagtenders.com/UploadFiles/Disbursement%20Manual.pdf. Accessed September 18, 2019.
World Bank Group Disbursement Guidelines available at: http://documents.worldbank.org/curated/en/410851468161639013/pdf/385750ENGLISH01ement0Guide01PUBLIC1.pdf. Accessed September 18, 2019.
ADB Disbursement Guidelines available at: https://www.adb.org/sites/default/files/adb-loan-disbursement-handbook-2017.pdf. Accessed September 18, 2019.
- 6.
Special Accounts for PMU expenditures are example of advance payment.
- 7.
As a separate account for project financial management, it might be noted that all three MDBs open loan accounts to allocate financing amounts. However, in the details therein, there are substantial differences. For example, in the case of the WB, a loan account is managed by the borrower, but for the ADB and the IsDB, a loan account is managed by the lender (i.e., the banks themselves).
- 8.
The procedures are the same across all three MDBs, with basically the same content and only a few changes in terminology. For example, the ADB issues an irrevocable reimbursement undertaking, while the IsDB calls it an irrevocable commitment to reimburse (ICR).
- 9.
In this regard, such disbursements may lead to Shariah-compliance issues as IsDB now opts for installment sale over Istisna.
- 10.
See the IsDB disbursement guidelines, 4.56–4.57.
- 11.
This additional benefit of IsDB financing should be communicated to MC by project teams.
- 12.
ADB Loan Disbursement Handbook 2017. Financial closing date is the date on which loan account is closed. A 0.15 percent (p.a.) commitment fee is accrued on the full loan amount.
- 13.
The WB charges a 0.25 percent upfront fee, payable not later than sixty days after the effectiveness day. The commitment fee of 0.25 percent per annum is charged on the unwithdrawn loan balance.
- 14.
To compare the legal documentation, the following agreements are used.
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1.
Loan agreement between the WB and the Empresa Municipal De Agua Potable Y Alcantarillado De Guayaquil, EP Emapag EP, for the Guayaquil Wastewater Management Project.
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2.
Loan agreement between the ADB and the Kingdom of Thailand for the Greater Mekong Subregion Highway Expansion Phase 2 Project.
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3.
Istisna agreement between the IsDB and the Government of the Republic of Kazakhstan for the construction of the Aktobe-Makat Road Project.
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1.
- 15.
This feature alone suggests that Islamic finance urges financial institutions to be more diligent in their lending practices.
- 16.
The issue of moral hazard is relatively low in the case of MDBs that evaluate projects on a standalone basis to mitigate such moral hazard. Besides, MDBs are very peculiar in terms of the timely implementation of projects, given their internal follow-up mechanisms. The issue of moral hazard with respect to collateral would be much more prominent in the case of project finance lending by private banks.
References
Asutay, Mehmet. 2007. Conceptualization of the second best solution in overcoming the social failure of Islamic finance: Examining the overpowering of homoislamicus by homoeconomicus. IIUM Journal in Economics and Management 15(2): 167–195.
Beck, T., A. Demirgüç-Kunt, and O. Merrouche. 2010 Islamic vs. conventional banking: Business model, efficiency and stability. World Bank Policy Research Working Paper No. 5446. Washington, DC.
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Diallo, A.T., Gundogdu, A.S. (2021). Islamic Versus Conventional Infrastructure Project Finance vis-à-vis Time-Overrun Issues. In: Sustainable Development and Infrastructure. Palgrave Studies in Islamic Banking, Finance, and Economics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-67094-8_2
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