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Leveraging Islamic Finance for Sustainable and Resilient Infrastructure

Asset-based and risk-sharing instruments – the backbone of Islamic finance – ensure that financiers become stakeholders in a project’s success. A hybrid financing model that makes use of both conventional and Islamic finance could accelerate investment in sustainable infrastructure in developing countries.

JEDDAH – Today’s world is confronting a host of complex development challenges, from climate change and rapid urbanization to widening inequality, debt sustainability, and a persistent digital divide. But, as the COVID-19 pandemic made plain, many developing countries lack the sustainable and resilient social-sector infrastructure required to address such complex and overlapping crises. More worryingly, these countries – particularly the least-developed among them – are unable to close their infrastructure gaps, owing to shrinking fiscal space, heavy debt burdens, and inadequate levels of official development aid.

By 2040, the global infrastructure-financing gap will have widened to an estimated $15 trillion – a massive shortfall that can be attributed to a few key factors. Many developing countries simply do not have the financial resources for expensive and time-consuming large-scale infrastructure projects. And private actors often shy away, owing to the perceived high risks of investing in infrastructure projects in developing countries. Together, these factors pose a significant obstacle to building desperately needed infrastructure.

The good news is that multilateral development banks (MDBs) and other stakeholders are increasingly aware of the need for swift action to overcome these challenges. MDBs are under pressure from their shareholders to become better, bigger, and more effective. An independent review of MDBs’ capital-adequacy frameworks – an important initiative commissioned by the G20 – recommended the expanded use of innovative finance. More recently, the G20 Independent Expert Group on strengthening MDBs released a multi-volume report that, among other things, calls for increasing private-sector engagement in development finance by broadening existing risk-sharing instruments and pioneering new ones such as asset-based vehicles.