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Speeches & Transcripts October 10, 2018

Opening Remarks at Symposium on Islamic Infrastructure Finance

Ladies and gentlemen, good afternoon. Welcome to this Symposium on Islamic Infrastructure Investment, which we have put together in partnership with Dr. Zamir Iqbal, a World Bank alumnus and now CFO of the Islamic Development Bank. Let me particularly welcome our distinguished guests: H.E. Sri Mulyani Indrawati, Finance Minister of Indonesia, Dr. Bello Danbatta, Secretary General of the Islamic Financial Services Board (IFSB), Mr. Mohamed Nouri Jouini, Vice President (Partnership Development) of the Islamic Development Bank.

When I look around the room, I see a wonderful cross-section of representatives from both the private and public sectors—this is exactly the blend of decision-makers we need to push forward with this important topic.

Let me begin by stressing the importance for the World Bank Group of financing climate-friendly, quality infrastructure. Expanding the supply of infrastructure is critical to raising potential output and enhancing resilience in many of our client countries while reducing the carbon footprint of progress. It is a key element to our development agenda of ending extreme poverty and boosting shared prosperity so that we can achieve the UN Sustainable Development Goals by 2030. The use of Islamic finance helps us implement this concept of infrastructure, especially in countries where shari’ah-compliant financial transactions are assuming a larger market share. Therefore, it is no surprise that the World Bank supports Islamic finance.

Islamic finance has several features that make it suitable for infrastructure development. While friendly to profits, it places emphasis on the direct link to physical assets and risk sharing. It also recognizes the right to pay for the usufruct of an asset after it is produced. In this environment, financial relationships between financiers and borrowers are not governed by capital-based investment gains but by shared business risk (and returns) in lawful activities (halal). Such “entrepreneurial investment” requires a high level of transparency and creates incentives to monitor projects more carefully.

Islamic finance has already emerged as an important source of finance for infrastructure projects, through both public sector schemes and public-private partnerships (PPP), and can be scaled up to respond to investors’ demand. The asset-backed, ring-fenced nature of Islamic finance structures and their emphasis on shared risks make them a natural fit for PPPs in the infrastructure space. A wide variety of financing structures (e.g., murabahah, istisna, ijarah) are available to provide flexibility to those who want to finance equipment purchases and build assets—with clearly specified risk-sharing provisions—and those ready, for instance, to lease these assets upon completion and pay for their use. These contracts can also be transformed into marketable credit instruments linked to specific assets (sukuk), which afford the shari’ah-compliant financing of assets through their full life cycles, independently of whether they are on the government balance sheet or not. This flexibility also helps combine and align these instruments with conventional financing in blended structures.

We believe that these structures respond to the needs of shari’ah-compliant investment as well as of many institutional investors around the world. Islamic finance—in a broad sense—is a $2 trillion asset industry, with a penetration that exceeds 50% of total financial sector assets in several countries. It also has a tremendous growth potential in predominantly Muslim countries, as it stands below 10% of these assets in places such as Turkey and Indonesia. Although today most Islamic finance assets are in the banking sector, the scope of adoption of these instruments by pension funds and other long-term institutional investors is quite significant. As asset managers, including in Western countries, get more familiar with these instruments, they discover the possibilities of using them for clearly defined, fair financing of infrastructure.

The World Bank Group has been very active in fostering the development of Islamic finance. Part of our mission is to show how these structures can incorporate, in a transparent way, the typical risks of long-term, complex business endeavors, such as the building and operation of infrastructure assets, especially if they need to meet certain quality criteria. We have promoted Islamic finance, especially in the context of infrastructure finance, through specific projects:

We have also intensified our global engagement with key stakeholders. In 2013, we established a Global Islamic Finance Development Center in Istanbul, serving as a hub for research, training, workshops, and technical assistance. The World Bank is also implementing an extensive Islamic finance program through its newly created Malaysia Knowledge Hub in Kuala Lumpur.

As part of our efforts aimed at broadening the use of Islamic finance, we also continue to work closely with industry standard setters, such as the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the IFSB, to enhance global standards.

Our conversation at this symposium today will therefore highlight how we have worked with several partners to help attract more private investors to Islamic infrastructure finance, by also addressing existing policy, legal, regulatory and institutional challenges. You will hear about the findings of the joint report, Mobilizing Islamic Finance for Infrastructure Public-Private Partnerships, recently published by the World Bank Group and the Islamic Development Bank Group, as well as about the experience of key regulators and market leaders in this space, on what it takes to foster the development of Islamic finance and maximize its contribution to achieving the Sustainable Development Goals.

Let me stop here and hand over to Indonesia’s Finance Minister, H.E. Sri Mulyani Indrawati, who is a long-standing champion of the development agenda. Her vision and energy has made Indonesia a fertile ground to develop new approaches to infrastructure finance.

Thank you all.