This month the Islamic Development Bank, together with the World Bank, held a symposium in Bali on Islamic Infrastructure Finance.

As part of the 2018 International Monetary Fund Annual Meetings, high-level attendees from the world over explored how the use of Islamic finance for infrastructure development is becoming increasingly important to enhance the impact of finance for development in countries where financial transactions that follow principles of Islamic law are assuming a larger market share. The event focused on how to attract private and institutional investors to existing delivery frameworks of Islamic infrastructure finance and explore solutions to relevant policy, legal, regulatory and institutional challenges. The meeting built on the current collaboration between the World Bank Group (WBG) and the Islamic Development Bank (IsDB) under the strategic partnership framework signed by the both institutions.

Infrastructure financing, in areas such as transport, telecommunications, energy, water and sanitation, has had a prominent presence within the development agenda over many years due to its contribution to ending extreme poverty and boosting shared prosperity, especially in countries that have witnessed high population growth rates. At the macro-level, infrastructure financing is viewed as being critically important in raising economic output and enhancing resilience in many developing countries. This realisation is increasingly being recognised as the development community faces the challenges of implementing the Sustainable Development Goals (SDGs) in time for 2030.

Despite its many positive traits, there is a wide funding gap between the demand and supply of infrastructure financing globally - and even more so in developing countries such as the Member-Countries of the IsDB. In fact, years of pent-up deficits in infrastructure financing are proving to be constraints to national development. Notably, this gap is expected to continue, and may even widen, well into the future.

Whereas Islamic finance is core mode of operations for IsDB, the WBG has also been active supporters of this unique form of finance. For example, a number of Sukuk have been issued by both the World Bank and IFC, which complement the WBG’s participation in Islamic finance project financing and investment guarantees as well as risk insurance. IsDB, for its part, has had a long history of being one of the most prominent advocates of the Islamic financial principles whether by leading development finance that follows Islamic principles, or the establishment of Islamic banks, or expansion of the Islamic capital market space around the world by facilitating the issuance of Sukuk instruments. Notably, as a precursor to the Symposium, both the World Bank and the IsDB published a joint report, Mobilizing Islamic Finance for Infrastructure Public-Private Partnerships.

Looking forward, apart from addressing the aforementioned challenges in both infrastructure financing and the Islamic finance industry, there is a need to expand the environmental, social and governance footprint of Islamic finance not only at the project level, but also at the financial product level. This will serve to enlarge the number and scope of infrastructure projects, as well as expand and diversify the investor base. Moreover, creativity and innovation should be at the forefront of Islamic infrastructure financing in order to meet the many different risk and return preferences of both fund seekers and financiers.

Apart from the significant role of the private sector, Multilateral Development Banks can help with not only with their financial resources, but also their knowledge base and deep network of partners such as investors, intermediaries, and contractors to expand the Islamic infrastructure financing space. For this, capacity building efforts will be integral in the creation of an environment that deepens the technical competency of developing countries in directing infrastructure investment in the most effective and efficient manner.