Wednesday, March 18, 2020 / 10:53 AM /
Bukola Akinyele for WebTV / Header Image Credit: WebTV
The Chairman, Altra
Capital United Kingdom, Professor John Davie in a recent presentation on the developments
in Islamic Finance at a recent forum in Lagos, identified the reasons why
Islamic Finance is deployed for Public-Private Partnerships (PPPs).
In his presentation,
Altra's chairman said the use of Islamic financing for PPP projects is becoming
more common for the following reasons:
in Islamic Institution: The proliferation of Islamic banking
institutions e.g. Islamic Development Bank
in Non-Islamic Finance: The reduced availability of non-Islamic
financing across the globe.
in PPPs: The increased number of infrastructure PPP
projects being promoted in the middle east have acted as a catalyst for
the use of Sharia-compliant project financing.
Islamic financing can provide a complete
financial solution or can be used in combination with other sources of
highlighted the sharia-compliant components in PPPs, which include;
- The PPP
model involves creative tension induced by private capital at risk
mirror this simply by eliminating interest is missing an opportunity
finance is more than economic components; so is PPP
finance carries ethical, social, political and religious dimensions that
inform its structure
financial institutions foster social justice as well as generate wealth: a
common position with the wider objectives of many of the commissioning
agents of PPP projects
the infrastructure community bring a long-term mindset towards asset
to invest in assets throughout economic cycle and have a desire to engage
with regulators to ensure public needs are properly met.
- Of the
capital raised by infrastructure funds since 2006, 48% has been by
vehicles with a maturity of over 10 years.
According to Prof.
Davies the asset-backed, ring-fenced , and project-specific nature of
Islamic finance structures and their emphasis on sharing risks make them a
natural fit for infrastructure public-private partnerships [PPPs].
He asserted that currently,
the problem is that of matching the supply of finance from the private sector
with investable projects.
Giving an illustration,
the expert asserted that the main forms of financing infrastructure remain:
Corporate or on-balance sheet finance
financing- which would involve
getting finance for the
project based on the balance of the private operator
mechanism used in lower value projects
"limited recourse" or "non-recourse" financing
Non-recourse finance is a
type of commercial lending that entitles the lender to repayment only from the
profits of the project.
Speaking further, he gave
an insight into typical Islamic finance PPP, even as the repayment profile
depends upon each particular debt obligation. Typically, there will be:
equity bridge loan
Giving further insight he
said all projects are different, but a typical debt repayment profile might be
term facility -20 years
term facility -10 years [with credit enhancement]
facility- 14 years
According to him, Sukuk
raises all the financing on the day of subscription. This is not the ideal for
infrastructure PPP projects, due to the dynamic nature of greenfield projects
which often have an uneven pattern of expenditure calling for funds at
different times during construction and operation.
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