Islamic infrastructure finance means funding the construction and operation of public or private works such as roads, energy or water through contracts backed by these real assets, especially Istisna, Ijara, Musharaka and sukuk, rather than through interest-bearing loans.
A natural fit between tangible assets and Sharia
Islamic finance requires funding to rest on a real asset or activity. A bridge, a desalination plant or a railway line is precisely an identifiable, durable and revenue-generating asset, which makes compliant structures over long maturities easier to build.
Construction phase: Istisna as an order contract
During construction, the financier orders the works from the contractor under Istisna and pays according to progress. Technical specifications, price and schedule are set in the contract, which limits gharar even though the asset does not yet exist.
Leasing an asset before completion
A forward Ijara allows the lease to be signed while construction is still under way. Rentals, often called advance rentals, may start before commissioning, but they must be offset or refunded if the asset is ultimately not delivered as specified.
Operation: fixed and variable rentals
Once the infrastructure is operating, the operator pays rent made up of a fixed part and a variable part linked to a market benchmark. Indexation is acceptable as long as the amount for each period is known at its start.
The project company as a Musharaka
Equity from Islamic investors can take the form of a Musharaka in the project company. Operating profits are shared according to an agreed ratio, but losses remain strictly proportional to the capital each partner has committed.
Project sukuk: securitising the asset
To raise large amounts, the project company or the state can issue sukuk. Holders own a share of the asset or its usufruct and receive rentals instead of an interest coupon calculated on a debt.
Asset-backed or merely asset-based?
In asset-backed sukuk, holders have real recourse to the infrastructure. In the more common asset-based form, their protection mainly rests on the issuer's purchase undertaking. Investors should read the prospectus carefully to know which applies.
Sitting alongside conventional lenders
Large projects often combine an Islamic tranche with conventional loans. An intercreditor agreement sets the ranking of each tranche, the sharing of security and events of default, while preserving the ownership of assets the Islamic side requires.
Who bears construction risk?
Under Istisna and Ijara, the owner in principle carries the risks attached to the asset. Structures often pass these risks to the contractor through a parallel contract or an agency, but a clause fully guaranteeing the financier's capital would breach Sharia.
Takaful and insuring the assets
Financed works must be insured against damage. Where possible, structures favour Takaful, based on pooling and donations between participants. The insurance cost can be passed through in the rent as a charge belonging to the owner.
Public-private partnerships and concessions
In a concession, the state entrusts construction and operation to a private company that hands the asset back at the end. Such partnerships fit well with Istisna followed by Ijara, the state sometimes paying availability charges rather than tolls.
What authorities and investors check
Before committing funds, examine the ownership rules for public assets, the tax treatment of each transfer, the quality of the operator and the Sharia board opinion on every contract. A multilateral lender such as the Islamic Development Bank often takes part.
Specialist external source
The Bank of England describes its relationship with Islamic banks, including its Alternative Liquidity Facility invested in high-quality sukuk.