Last year, the Islamic Development Bank Group and the World Bank Group launched a report, ‘Mobilising Islamic Finance for Infrastructure Public-Private Partnerships’, which showed that, through partnerships, interest-free finance can provide the financial resources needed to meet the tremendous demand for critical infrastructure.
According to the report that was commissioned by the Public-Private Infrastructure Advisory Facility, over the past two decades, Islamic finance has emerged as one of the important sources of finance for a wide variety of infrastructure projects, through both public sector and PPP schemes.
Amidst the dearth of conventional infrastructure financing, Islamic finance offers the prospect of widening the sources of financing needed to meet the massive infrastructure investments in developing countries, including but not limited to Muslim-majority countries.
Interest-free finance is based on a philosophy of sharing profit and risk and seeks to promote socio-economic development by creating real assets, not just by generating transactions that are merely financial.
Infrastructure PPP projects are ideal candidate for interest-free finance. Financing these projects involves profit-and-risk- sharing with other project partners, and the projects facilitate socio-economic development by creating essential assets.
The ‘Mobilising Islamic Finance for Infrastructure Public-Private Partnerships’ report shows that infrastructure projects, designed in a PPP scheme, are in a better position to attract interest-free finance because these projects offer many features that are well-suited to the fundamentals of interest-free finance, such as asset backing and risk sharing.
Interest-free finance requires that the financial institution becomes a party to the contract underlying the project assets—not merely a party to the financing agreements. As such, interest-free financiers must assume roles such as asset construction contractors, asset owners, and asset managers.
However, because they are financial institutions, they cannot perform these tasks. In practice, interest-free financiers appoint the project implementer as their agent to do these jobs.
The East African Community (EAC) is one of the fastest growing regions in sub-Saharan Africa. However, the impressive growth has not translated into structural transformation, significant job creation and poverty reduction.
This raises concerns over the long-term sustainability of EAC growth and its impact on poverty eradication. Industrialisation, the guarantor of broad-based, inclusive economic growth, is the missing link.
The most binding constraints to industrialisation in the EAC are high energy cost, high trade and transport logistics costs, inadequate appropriate skills and limited technology and innovation capacities.
The EAC needs US$ 80 billion over the next ten years to fund more than 200 infrastructure projects. Some of these projects are the railway lines that will open up markets, reduce transport costs and offer good business opportunities in the region.
These include Standard Gauge Railway lines running on the following lines: (i) Dar es Salaam to Kigali Line passing through Isaka; (ii) Nairobi to Addis Ababa Line passing through Garissa and (iii) Lamu to Juba Line passing through Garissa.
These corridors will lay the groundwork for vital energy and communication infrastructure and facilitate the quick and cost-effective movement of goods from production areas to collection and processing centres, and onward to the region’s ports for export.
Improved competitiveness will attract increased investment along with technology transfer, thus equipping the youth with appropriate skills that enhance their ability to innovate.
These fundamental building blocks will accelerate the EAC’s industrialisation and socio-economic transformation.
Moody’s, a US rating agency, estimates that the share of Islamic banking assets, as a percentage of total African banking assets , will more than double over the next five years, to over ten percent from their current level of less than five percent.
This will increase the amount of interest-free and socially-responsible finance available that is committed to share the profit and risk associated with physical and social infrastructure ventures in Africa.
The EAC and other regional economic communities will be able to partner with interest-free finance providers to facilitate the implementation of essential projects that enhance their ability to generate inclusive and sustainable economic growth.
Interest-free finance is a natural partner for infrastructure PPP projects. It only invests in asset-backed ventures, and can be applied to a wide variety of projects such as airports, seaports, roads, power generation, hospitals and schools.
Indispensable projects in the EAC that have not been implemented due to a lack of funds can finally be realised. This will generate good returns-on-investment for all stakeholders and benefit the people of East Africa.
The projected growth of interest-free finance in Africa is an excellent opportunity to explore mobilising socially-responsible finance to fund infrastructure development and the socio-economic transformation of the EAC and Africa.
The writer is a commentator based in Kigali.
The views expressed in this article are of the author.