Why is Islamic infrastructure financing important for Qatar? A survey of Islamic project finance in the Gulf Cooperation Council countries

Abstract

Infrastructure assets and services, such as water, energy, transport and telecommunications, play a vital role in promoting economic prosperity, political stability and human development. However, throughout the Muslim world, the availability of infrastructure services is poor due to the combination of growing populations, rapid urbanization, and historic underinvestment in infrastructure. These factors as well as the constant need for technological advancements put extreme pressures on public budgets, many of which are already constrained. Huge investment in infrastructure is needed through a consorted effort between the public and private sector. In Qatar alone, the pipeline of infrastructure projects is estimated at over $70 billion up to 2030. Among the most important sources of financing in the Muslim world is Islamic finance. However, data suggests that Islamic finance and capital market activity in infrastructure projects (excluding real estate) has been relatively limited. The objective of this paper is to highlight the importance of Islamic finance in infrastructure projects, to investigate the current state of Islamic infrastructure finance within the Gulf Cooperation Council (GCC) region, and to suggest ways of overcoming the challenges that Islamic and infrastructure finance face. The paper begins with a review of the economic literature on the importance of infrastructure to economic development, poverty alleviation, entrepreneurship and trade. The paper argues that there is a natural theoretical and ideological link between Islamic finance and infrastructure finance. Sources of financing infrastructure projects are then analyzed, and the mechanics of Islamic project financing are explained. The Islamic infrastructure finance market in the Gulf Cooperation Council countries is then surveyed. Case studies of past projects are then presented drawing attention to four areas: (1) structure of Islamic finance products for infrastructure financing; (2) challenges facing the use of Islamic finance; (3) potential development of new products; and (4) implications for policy-makers. The information presented in this research will provide useful lessons for GCC member countries on a subject that is given scarce attention to by academia.