Islamic project finance is increasingly being decoupled from global economic growth, partly because it depends on oil prices that tend to be countercyclical. Countries such as Saudi Arabia are increasing spending on infrastructure development as a consequence of domestic pressures to stimulate the economy further to help domestic businesses increase employment for young Saudis. With the currently high oil prices, financing new developments should not prove too great a challenge. Growth prospects for Malaysia and Indonesia are positive, despite China slowing down and Japan facing enormous problems. Of great long term significance are the possibilities for those Muslim countries which have experienced popular uprisings. There was minimal Islamic project finance in the past in countries such as Egypt, but infrastructure development is likely to be accelerated by a new democratically elected government. Although it is too early to predict what will happen, the political composition of the new government may well favor Islamic finance.
PROFESSOR RODNEY WILSON
Project and infrastructure finance are well suited to Islamic finance due to, among others, the fact that it is associated with economic development and has an underlying asset. There are, however, a number of challenges associated with their feasibility for Islamic financial institutions. Mainly due to the nature of the projects, they are typically long-term with tenors of 20 years being the norm rather than the exception. Generally speaking, Islamic investors currently tend to prefer tenors of up to five years. In addition, project and infrastructure finance typically have a relatively low return profile, which is not in line with the expectations of Islamic investors. Notwithstanding the above, Islamic investors would do well to consider project and infrastructure finance as part of a well diversified portfolio and to reduce the concentration on real estate which seems typical for an Islamic investor’s holdings. After all, a low return asset is typically also low risk which might provide some insurance against a decline in portfolio values when the next asset bubble occurs.
DR NATALIE SCHOON Head of product research, Bank of London and the Middle East
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