Finance articulated in Hamburg Recognize country ownership - - PowerPoint PPT Presentation

• 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 Recommendations 4 Key Takeaway Points 5

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 that

are asset-based and interest-free.

• The risk sharing nature ensures parties on both sides of the

transaction maintain a continuing interest in the underlying venture.

• Islamic finance for infrastructure projects is a natural fit, and it

serves the very purpose of asset-backed redistribution of Sariah- compliant finance

• The flexibility of Shariah structure to accommodate needs specific

to the country, sector, and project, Islamic financiers can craft many solutions 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

• f

transactions for applying Islamic finance instruments to infrastructure PPP projects:

• Many Islamic finance instruments tailored and utilized to meet the

financing 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, these assets are not mingled with the rest of the assets of the project sponsors. Risk Sharing

• PPP projects allow risks to be

allocated to the parties involved; hence Islamic financiers, assume certain risks

• f the project.

PPP: Contractual relationship that can be applied to anything from a simple, short term management contract (with or without investment requirements) 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 the

deployment of Islamic finance for infrastructure PPP projects

• Developing and penetrating new and innovative Islamic finance products and

structures

• Looking for opportunities of mobilization of more resources by raising infrastructure

focused funds and B-loans

• Tailoring portfolio of conventional financial products to accommodate Islamic finance
• Establishing an infrastructure fund focused on solutions using Shariah-compliant

structures

• 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 documentation

and 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