Investors are having trouble looking for profitable deals, who says! Solution is found. Infrastructure investment is claimed as benefited solution offering diversification ,low double digit returns (majority from cash yield) and rest from capital appreciation.
It is widely documented and accepted that developing countries like Africa is currently facing a considerably large infrastructure shortfall. Residence lacks access to good quality infrastructure and reliable basic services. Recent surveys (2015) reports indicates that in developing countries who falls under low and middle-income bracket, requires around USD 1 trillion to USD 1.5 trillion of annual infrastructure by 2020 and African continent is one of them.Africa total infrastructure financing needs amounts USD 93 billion per year until 2020 (Africa Infrastructure Country Diagnostic, 2009), there is already a lapse and gap is widened. According to SylvianBoko, the principal regional advisor and head of development planning at the Economic Commission for Africa (ECA) a solid infrastructure base is critical for Africa’s economic transformation and it is imperative for the continent to create an enabling environment for investment in trans boundary infrastructure projects.
Initially, infrastructure investment in Africa was controlled by structural obstacles and lack of financing options. Fortunately, now investors can benefit from additional sources of financing which means Islamic financing for infrastructure development is the new opportunity for investors. Islamic Banks and financing institutions are stepping up their efforts by providing finances and different financial solutions to minimize the risk of the investment in developing region like Africa. Islamic Financing is growing in Africa, it is the new and innovative way to meet the needs of this continent to fund infrastructure development.
Islamic finance contributes to only 1% of the global financial market, the percentage looks very small,how can tapping these funds will bridge the gap for developing countries to work on their infrastructure?and how can it attract the investors to jump in with their two feet and invest?The Answer is the deployment of Islamic financial products which gives new horizon to infrastructure development and financing in a region like Africa where the risk is high and political and economic condition is yet not stable.
The Islamic finance is growing at an impressive rate and particularly for infrastructure development, an ample amount of attention is received in past year or so and it will continue increasing in the coming years. Islamic financial instruments such as Mudarabah (trust financing), Musharakah (equity financing), Ijara (lease financing) and Istisna’a (work-in-progress financing) have intrinsic features of risk-sharing and asset-backing which makes them perfect candidate for infrastructure financing projects. Another amazing creation of Islamic financing is Sukuk (Islamic bonds), is the most important new source of financing for large constructions and longer tenure infrastructure projects.Sukuk has given a complete new horizon and a lifeline to Islamic finance to support infrastructure development in Africa and other emerging and developing countries.According to the seniors at African development Banks, Sukuk is the instrument that can play a potential role in large infrastructure developments projects such as airports, energy plants and roads and bridges which are large scale projects but basic necessity for this continent. But Sukukis Still in an embryonic state in this region. Hence, expected to grow as these are the early days of Islamic Financing in Africa. It is still very niche in that part of the world but as it is ready to embrace the change to develop infrastructure and to provide a good life to its citizen and good return to its investors.
Key Islamic Financing products are giving new horizon to Africa infrastructure market , that are now used and can be more aggressively used in later years to develop Africa’s infrastructure. Mudarabah which is trust financing is the Islamic financing instrument designed to share the risk asit comes with the undertaking t0 sell the asset later for a profit.Istisna is an instrument commonly used during the construction phase of a project where Islamic Financing institution engages a borrower to undertake a service provider/ supplier to deliver project assets. No installments whereas, phased payments are made until the asset is operational. Ijara financing structure is another name to a financial lease involving purchase by a financial institution and lease of the asset at a fixed rate. This financing model is perfectly used for resource mobilisation.Sukuk is a corporate financing instrument and comprises of Sharia-compliant medium to long term debt-like instruments having good liquidity in the market .Co financing is also a new financing model, whereby Islamic finance and conventional finance does converge. Co-financing is the blending conventional finance instruments with Islamic finance. The key challenge is the differing legal regimes, western/conventional and Islam. Blending financial models does minimize and mitigate investors risk.
Despite the niche market and lower tapped percentage the Islamic finance industry is a new ray of hope for continents like Africa and emerging developing markets. It indeed is the new horizon which is growing and the future looks promising for this part of the region which is Africa. Islamic financing Products could potentially fill the infrastructure funding gap in Africa giving it a new horizon for a number of reasons. Firstly, the increased liquidity in Islamic financial markets driven by high oil revenues, created huge demand. Secondly, Africa has a large Muslim community about 50%, and a large number is working in developed countries and investing in Islamic Banks. Once they are aware and convinced, who wouldn’t invest in their own country to see it growing and get returns as well.
Africa is the promising and emerging market, a developing region with enormous infrastructureinvestment opportunities for investors. It is a region in transition, with increasing and promising stability, a young and growing educated population, expanding in technologies, rising incomes and consumption patterns. Taken all in account this part of the developing world has abundance commercial investment opportunities for investors to get in the infrastructure investing business that they really cannot afford to miss and not jump in with two feet.