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 by leveraging the and optimizing the for development private sector use of scarce public resources MFD requires identifying the Creates imperative to Public sector faces right investments, taking the leverage the private sector limitations in meeting this financial risk to initiate them, for economically beneficial, need, including in fiscal and implementing them sustainable investments that space, capacity, and effectively and efficiently. contribute to development governance. goals. 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
Outline 1 Value Propositions of Islamic Finance 2 Infrastructure Financing Gap 3 PPP - Islamic Finance Match 4 Challenges and Recommendations 5 Key Takeaway Points 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 of transactions for applying Islamic finance instruments to infrastructure PPP projects: Sales and purchase Leasing Equity investments transactions arrangements • Many Islamic finance instruments tailored and utilized to meet the financing needs of infrastructure PPP project: Istisna, Ijarah, Forward Ijarah, Murabahah, Musharakah, Sukuk Strictly private & confidential. Not to be disclosed without prior written consent of Islamic Development Bank
Infrastructure Financing Gap Globally Required infrastructure Infrastructure investments amount to investment is $2.5 trillion/ year $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 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. Asset-based Risk Sharing • The assets of PPP projects are • PPP projects allow risks to be “ring - fenced” : that is, these allocated to the parties assets are not mingled with the involved; hence Islamic rest of the assets of the project financiers, assume certain risks sponsors. of the project. Strictly private & confidential. Not to be disclosed without prior written consent of Islamic Development Bank
Distribution of PPP with Global Numbers Sovereign vs Private Capital in Distribution of PPP Investments Infrastructure Investments based on Income Level 4% 20% 96% 80% Middle and High Income Countries Low Income Countries Sovereign Financing Private Sector Participation PPP investments as of 2016 cumulatively Infrastructure investments amount to amount to $2.5 trillion/ year $2.5 trillion Share of private capital in infrastructure is still way behind sovereign financing. Only around 4% is in LIC Strictly private & confidential. Not to be disclosed without prior written consent of Islamic Development Bank
Islamic Finance for Infrastructure PPPs: Challenges New Models & Instruments Guarantees Capital & Insurance Markets & Funds Fiscal Space PPP Financing (Islamic) Challenges Institutional Awareness Capacity Regulatory Framework 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 Strictly private & confidential. Not to be disclosed without prior written consent of Islamic Development Bank
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
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