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The Role of Islamic Financial System in Building Sustainable Infrastructure

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Islamic Finance and Sustainable Development

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Abstract

The investment gap to fund sustainable infrastructure, especially in the developing and Muslim world, is massive. Goal 17 of SDGs acknowledges the role of domestic and international finance, private sector and multinationals to fund infrastructure gap, which, according to various estimates, ranges between USD 2.6 and 3.4 trillion globally and USD 1–1.5 trillion annually for developing countries. Infrastructure projects cover a wide range of sectors and could be categorized from both financial and non-financial perspectives. Increasingly, a comprehensive definition of sustainability is being used that combines the elements of financial, environmental, social and institutional sustainability. Governments in most developing and Muslim countries don’t have required fiscal space to finance the infrastructure needs of their societies from domestic sources due to which options such as funds from international lenders, bond issuance, consortium financing, public-private partnership and even seeking investments and donations from citizens are used. Most of these options, however, end up increasing the debt burden on the government, resulting into even further reduction of their fiscal space. Islamic financial system offers infrastructure building tools that are not only more sustainable from financial management perspective but also address related environmental and community issues. Using an exploratory research design, this paper explores these options in detail by undertaking literature research, case study review and analysis of stimulating examples from history and recent past to suggest various reforms that could make these tools more impactful, widely available and cost-efficient. Finally, an assessment is provided on the immediate impact of Covid-19 on the ongoing and future infrastructure projects and opportunities this crisis will bring for Islamic finance.

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Notes

  1. 1.

    https://www.adb.org/sectors/finance/islamic-finance/country-profiles.

  2. 2.

    https://data.adb.org/dataset/general-capital-increases-and-capital-composition.

  3. 3.

    https://www.afdb.org/en/news-and-events/press-releases/african-development-bank-shareholders-approve-landmark-115-billion-capital-increase-signalling-strong-support-32344.

  4. 4.

    The terms investible, bankable or viable are used for those infrastructure projects which generate sufficient economic and financial returns from the underlying revenue stream (such as tolls in case of highway, utility bills in case of electricity, etc.) over their lifetime so that they become attractive for private investors to fully or partially sponsor the project.

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Authors and Affiliations

  1. Islamic Banking Department, Central Bank of Oman, Muscat, Oman

    Zahid ur Rehman Khokher

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  1. Zahid ur Rehman Khokher
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Editors and Affiliations

  1. Department of Economics and Finance, University of New Orleans, New Orleans, LA, USA

    M. Kabir Hassan

  2. Faculty of Economics, Department of Business Administration, Istanbul University, Istanbul, Turkey

    Mehmet Saraç

  3. Institute of Business Administration Karachi, Karachi, Pakistan

    Ashraf Khan

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Khokher, Z.u.R. (2021). The Role of Islamic Financial System in Building Sustainable Infrastructure. In: Hassan, M.K., Saraç, M., Khan, A. (eds) Islamic Finance and Sustainable Development . Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-76016-8_8

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