Integrating Islamic and conventional project finance

Abstract

This article analyzes the traditional modes of Islamic project financing in light of modern financial engineering. The vehicles elaborated include debt, hybrid, and equity instruments. The first category includes the Qardh Hasan (benevolent loan), Murabahah (mark‐up), Ijara (leasing), and Islamic income/revenue bond facilities; the second incorporates the classical Mudharabah (profit‐sharing) contract; while the third category comprises the Musharakah (equity) vehicle. The Mudharabah contract can be synthetically created as a combination of a Cost‐plus (Murabahah) facility and an Option (Al‐ikhtiyarat) instrument to endogenously determine the profit sharing parameter. It is malleable in two‐dimensions depending on the financial goals and the risk profile of the investor. Securitization of the Mudharabah facility avoids the controversy of Bai' al‐dayn bi al‐dayn (sale of one set of debt security with another). Finally, the design of financial contracts via variants of Mudharabah securities such as income bond and participating bond is illustrated in a numerical example. © 1999 John Wiley & Sons, Inc.

A Survival Analysis of Islamic and Conventional Banks

“…Islamic banks' depositors are treated as investment account holders or preferred stockholders with a residual claim to profits but without explicit capital protection; hence, they share the risks of the banks' investments. On the one hand, this is likely to exacerbate the bank's withdrawal risk (Ebrahim, 1999). On the other hand, religious beliefs may instil a certain loyalty in depositors which would allow banks to pass on realized losses in bad times, thereby achieving some pro-cyclical protection.…”

Islamic financing for infrastructure projects and its implementation barriers

“…Islamic financing forbids certain transactions relating to the receipt of interest or usury (riba), uncertainty (gharar), gambling (maysir) and trading in particular items such as pork and alcohol [15][16][17][18][19][20]. According to the sharia concept, the business stream should also be economically efficient and generate fair and genuine profit [21,22]. Transactions which include interest, gambling and speculation are inclined to converge wealth only to a few people and will negatively affect the economic balance, distributive justice and equal opportunities [15].…”

Failure Risk in Islamic and Conventional Banks

“…hence, they share the risks of the banks' investments. On the one hand, this is likely to exacerbate the bank's withdrawal risk (Ebrahim, 1999). On the other hand, religious beliefs may instil a certain loyalty in depositors which would allow banks to pass on realized losses in bad times, thereby achieving some pro-cyclical protection.…”