by Christopher W. Holton
Increasingly, Shariah-compliant forms of financing are supplanting and replacing conventional financing in the Islamic world.
For years, Pakistan has used conventional financing for infrastructure projects, such as bridges. Now the government is embarking on a plan to replace conventional methods with Shariah-compliant financing.
While it is not a big surprise that a country such as Pakistan would seek more Shariah-compliance, it does have potential implications for the broader world. As more and more countries replace conventional financing with Shariah-compliant finance, it will inevitably result in Western nations following suit to secure financing from wealthy petro-despots in the Islamic world…
Pakistan is stepping up its use of sharia-compliant financing to fund infrastructure deals, which could help to promote the use of longer-term transactions in Islamic finance.
Islamic deals are backed by specific assets, which makes them convenient for infrastructure projects. But traditionally, Islamic bonds and loans have shorter tenors – often around five years – than their conventional equivalents.
This is partly because Islamic markets are generally not as deep and liquid, and products are not as standardised. Also, Islamic banks mostly hold short-term deposits on their books.
This month, however, Pakistani banks arranged 100 billion rupees ($955 million) worth of 10-year Islamic bonds (sukuk) for a hydropower plant, the largest infrastructure deal to use Islamic financing in the country.