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Investigation of Shariah-

Compliant Financing for


Indonesia Transport Projects
Acceleration of Transport Sector Development
INDONESIA INFRASTRUCTURE INITIATIVE

Investigation of Shariah-
Compliant Financing for
Indonesia Transport Projects
Acceleration of Transport Sector Development

AIIRA RESEARCH REPORT

May 2015

i
INDONESIA INFRASTRUCTURE INITIATIVE

This document has been published by the Indonesia Infrastructure Initiative (IndII), an
Australian Government funded project designed to promote economic growth in Indonesia by
enhancing the relevance, quality and quantum of infrastructure investment.

The views expressed in this report do not necessarily reflect the views of the Australia Indonesia
Partnership or the Australian Government. Please direct any comments or questions to the IndII
Director, tel. +62 (21) 7278-0538, fax +62 (21) 7278-0539. Website: www.indii.co.id.

ACKNOWLEDGEMENTS

This research report has been prepared by Dr Fiona Lamari, QUT Team Leader and Prof Suyono
Dikun, UI Team Leader, who were engaged under AIRAA Research Program of the Indonesia
Infrastructure Initiative (IndII), an Australian Aid project managed by SMEC on behalf of the
Australian Government, as part of the Activity P255.01.

We would like to gratefully acknowledge the insights contributed by representatives of the


organisations who agreed to participate at the interviews, and the fruitful discussion by the
participants at the stakeholder workshop convened on 27 April. Finally, we would like to thank
Dr Yulin Liu, researcher from QUT and Dr Ayomi Dita Rarasati, main researcher of this project
from UI for their hard work and support throughout the project. We thank also Dr. Hera Z.
Rahman and Devie Anggra for their contribution to organise a workshop and to supply some
useful materials for the report.

Any errors of fact or interpretation are solely those of the authors.

Dr Fiona Lamari
Queensland University of Technology

Prof Suyono Dikun PhD


University of Indonesia

June 2015

IndII 2015

The title to all Intellectual Property rights in or in relation to Agreement Material created during the
course of the Activity vests in the Organisation upon its creation. The Organisation grants to DFAT a world-
wide, irrevocable, royalty-free licence to use, reproduce, adapt or otherwise exploit the Agreement
Material. The licence granted under this clause includes the right of DFAT to sub-licence any of its
employees, agents or contractors to use, reproduce or otherwise exploit the Agreement Material for the
purposes of performing functions, responsibilities, activities or services for, or on behalf of, DFAT. This
clause does not affect the ownership of Intellectual Property in any Prior Material incorporated into the
Agreement Material, but the Organisation grants to DFAT a permanent, irrevocable, non-exclusive, world-
wide, royalty-free licence to use, reproduce, adapt and otherwise exploit such Prior Material in
conjunction with the Agreement Material.

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TABLE OF CONTENTS
ACRONYMS ................................................................................... ERROR! BOOKMARK NOT DEFINED.
EXECUTIVE SUMMARY............................................................................................................ VIII
CHAPTER 1: INTRODUCTION............................................................. ERROR! BOOKMARK NOT DEFINED.
1.1 PROJECT SCOPE AND OBJECTIVES .......................... ERROR! BOOKMARK NOT DEFINED.
1.2 RESEARCH METHODOLOGY .................................. ERROR! BOOKMARK NOT DEFINED.
1.3 CAPACITY BUILDING: MASTER BY RESEARCH SCHOLARSHIP CANDIDATEERROR! BOOKMARK NOT DEFINED.
CHAPTER 2: ISLAMIC FINANCE ............................................................... ERROR! BOOKMARK NOT DEFINED.
2.1 WHAT IS ISLAMIC FINANCE? ................................. ERROR! BOOKMARK NOT DEFINED.
2.2 TYPES OF ISLAMIC FINANCIAL PRODUCTS AND SERVICES ........................................ 14
2.3 TYPES OF ISLAMIC FINANCE DELIVERY MODELS .......... ERROR! BOOKMARK NOT DEFINED.
2.4 HISTORICAL DEVELOPMENT OF ISLAMIC FINANCE ................................................. 18
2.5 ISLAM FINANCE MARKET ................................................................................ 20
CHAPTER 3: TRANSPORT SECTOR IN THE RPJMN 2015-2019 ............. ERROR! BOOKMARK NOT DEFINED.
3.1 TRANSPORT DEFICIT AND GAP ............................... ERROR! BOOKMARK NOT DEFINED.
3.2 NEW POLICY AND INSTITUTIONAL FRAMEWORKS ....... ERROR! BOOKMARK NOT DEFINED.
3.3 MAGNITUDE OF INVESTMENT ............................... ERROR! BOOKMARK NOT DEFINED.
3.4 INNOVATIVE FINANCING ...................................... ERROR! BOOKMARK NOT DEFINED.
3.5 STRATEGIC PROGRAMS AND PROJECTS .................... ERROR! BOOKMARK NOT DEFINED.
CHAPTER 4: SHARIAH-COMPLIANT FINANCING IN TRANSPORT PROJECTSERROR! BOOKMARK NOT DEFINED.
4.1 ISLAMIC PROJECT FINANCE MARKET ........................ ERROR! BOOKMARK NOT DEFINED.
4.2 FIT BETWEEN ISLAMIC FINANCE AND INFRASTRUCTURE DEVELOPMENTERROR! BOOKMARK NOT DEFINED.
4.3 TYPES OF ISLAMIC FINANCING IN INFRASTRUCTURE PROJECTSERROR! BOOKMARK NOT DEFINED.
4.4 SUKUK FOR TRANSPORT INFRASTRUCTURE DEVELOPMENT PROJECTERROR! BOOKMARK NOT DEFINED.
4.4.1 SUKUK VS. CONVENTIONAL BONDS ............... ERROR! BOOKMARK NOT DEFINED.
4.4.2 OVERVIEW OF GLOBAL SUKUK ISSUANCES ....... ERROR! BOOKMARK NOT DEFINED.
4.4.3 SUKUK ISSUANCES FOR TRANSPORT INFRASTRUCTURE DEVELOPMENTERROR! BOOKMARK NOT DEFINED.
4.5 AI MADINAH INTERNATIONAL AIRPORT EXPANSION PROJECTERROR! BOOKMARK NOT DEFINED.
4.5.1 OVERVIEW OF AI MADINAH INTERNATIONAL AIRPORT EXPANSION PROJECTERROR! BOOKMARK NOT DEFINED.
4.5.2 INNOVATIVE SHARIAH-COMPLIANT FINANCING STRUCTUREERROR! BOOKMARK NOT DEFINED.
4.5.3 BEYOND THE AL MADINAH INTERNATIONAL AIRPORT CASE: HAJJ TERMINAL
EXPANSION AND MOBILY AIRTIME FACILITY ERROR! BOOKMARK NOT DEFINED.
CHAPTER 5: CHALLENGES IN ISLAMIC FINANCING OF TRANSPORT PROJECTSERROR! BOOKMARK NOT DEFINED.
5.1 SHARIAH COMPLIANCE IN DEAL STRUCTURING .......... ERROR! BOOKMARK NOT DEFINED.
5.2 CO-FINANCING USING CONVENTIONAL AND ISLAMIC FINANCEERROR! BOOKMARK NOT DEFINED.
5.3 SHARIAH GOVERNANCE FRAMEWORK FOR ISLAMIC INVESTMENT PRODUCTSERROR! BOOKMARK NOT DEFINED.

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5.4 ISLAMIC FINANCE COMPATIBLE LEGAL AND REGULATORY ENVIRONMENTERROR! BOOKMARK NOT DEFINED.
CHAPTER 6: SHARIAH-COMPLIANT FINANCING IN INDONESIAN TRANSPORTATION SECTORERROR! BOOKMARK NOT DEF
CHAPTER 7: DEVELOPMENT OF THE SHARIAH-COMPLIANT FINANCING FRAMEWORK FOR
INDONESIAN TRANSPORT INFRASTRUCTURE TOOLKIT ........ ERROR! BOOKMARK NOT DEFINED.
7.1 INTRODUCTION ............................................................................................... ERROR! BOOKMA
7.2 KEY FINDINGS ................................................................................................. ERROR! BOOKMA
7.3 CONCLUSIONS ................................................................................................. ERROR! BOOKMA
ANNEXES ............................................................................. ERROR! BOOKMARK NOT DEFINED.
........................................ TYPES AND DEFINITIONS OF SELECTED SUKUK ERROR! BOOKMA
SUKUK ISSUANCES TO FINANCE INFRASTRUCTURE PROJECTS IN
MALAYSIA ............................................. ERROR! BOOKMARK NOT DEFINED.
.........................................................................................IFSB AND AAOIFI ERROR! BOOKMA
REFERENCES ........................................................................ ERROR! BOOKMARK NOT DEFINED.

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LIST OF TABLES
Table 1: Key Islamic financial products and services [4] .................. Error! Bookmark not defined.
Table 2: Islamic finance delivery models ...................................................................................... 17
Table 3: Top 20 countries ranked by Shariah-compliant assets in 2013 [9] ................................. 30
Table 4: Sukuk vs. conventional bond [26] ...................................... Error! Bookmark not defined.
Table 5: Sukuk Issuance by sector in the ninth and tenth Malaysia plan [23]Error! Bookmark not
defined.
Table 6: Types and definitions of selected sukuk [26] ..................... Error! Bookmark not defined.
Table 7: Sukuk issuances to finance infrastructure projects in Malaysia [23]Error! Bookmark not
defined.
Table 8: Islamic Financial Services Board (IFSB) standards [30] ...... Error! Bookmark not defined.

LIST OF FIGURES
Figure 1: World distribution of Muslim population [8] ................... Error! Bookmark not defined.
Figure 2: Change of project finance bank profile over GFC in Middle East [13]Error! Bookmark
not defined.
Figure 3: GCC Islamic project finance by volumes [15].................... Error! Bookmark not defined.
Figure 4: GCC Islamic project finance by sectors [15]...................... Error! Bookmark not defined.
Figure 5: Sukuk issuance by domicile and share in 2013 [26] ......... Error! Bookmark not defined.
Figure 6: Sukuk issuance by sector in 2013 [26] .............................. Error! Bookmark not defined.
Figure 7: Sukuk Issuance by structure in 2013 [26] ......................... Error! Bookmark not defined.
Figure 8: Infrastructure sukuk issuances (2001-1Q2014) [27]......... Error! Bookmark not defined.
Figure 9: Infrastructure sukuk issuances by country (2001-1Q2014) [27]Error! Bookmark not
defined.
Figure 10: The Sharia-compliant debt structure for Al Madinah International Airport [13] .. Error!
Bookmark not defined.
Figure 11: Hajj Terminal expansion project financing structure[29] Error! Bookmark not defined.
Figure 12: Hybrid structure[29] ....................................................... Error! Bookmark not defined.

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CONTENTS
Preface
Executive Summary
Chapter 1 Introduction 1
1.1. Background 1
1.2. Indonesia Transport 3
1.3. Investment and Financing 4
1.4. Innovative Financing 5
1.5. Islamic Financing 5
1.6. Research Approach 7
1.7. Linkages with IndII, GOI,... 11
1.8. Reserach Goal and Objectives 13
1.9. Report Outline 13
Chapter 2 Islamic Financing 14
2.1. What is Islamic Finance? 14
2.2. Historical Development of Islamic Finance 16
2.3. Products and Services 18
2.4. Delivery Model 20
2.5. Market of Islamic Finance 22
Chapter 3 Sukuk, The Islamic Bond 25
3.1. Sukuk vs Conventional Bond 25
3.2. The Demand for Sukuk
3.3. Global Issuance
3.4.

Chapter 4 Challenges in Islamic Financing 14


4.1. Structuring the Deal 14
4.2. Co-Financing: Conventional and Islamic Financing 16
4.3. Governance 18
4.4. Legal and Regulatory Environment 20
4.5. 22
Chapter 5 Looking at Shariah-Compliant Financing in Indonesia Transport 14
5.1. The Magnitude of Investment 14
5.2. Options for Investment 16
5.3. State Budget and Fiscal Space 18
5.4. Innovative Financing 20
5.5. Project Case 22
Chapter 6 Findings and Recommendation 14
6.1. Findings 14
6.2. Recommendation 16
18
Chapter 7 General Issues 14
7.1. Management of Activity 14
7.2. Internal Quality Assurance 16
7.3. Response to Mid-Term Report 18
7.4. Focus Group Discussion 20
7.5. Analysis of Interveiews 22

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7.6. Gender, Social Inclusions, and Environmental Issues 20
7.7. Lesson Learned from Partnership Approach 22
7.8.
Annexes 14
A.1. Curriculum Vitae 14
A.2. List of Individual Interviewed 16
A.3. Budget Expended 18
A.4. Schedule of Key Events 20
A.5. References 22

ACRONYMS
AAOIFI The Accounting & Auditing Organization of Islamic Financial Institutions
BOT Build-Operate-Transfer
BTO Build-Transfer-Operate
GACA The General Authority of Civil Aviation (of KSA)
GCC Gulf Cooperation Council
GFC Global Financial Crisis
GOI Government of Indonesia
IBF Islamic Banking and Finance
IFI International Financial Institutions
IFSB The Islamic Financial Services Board
KSA The Kingdom of Saudi Arabia
MENA Middle East North Africa
OIC Organisation of Islamic Cooperation
PF Project Finance
PFI Private Financing Initiatives
PPP Public Private Partnership
RENSTRA Rencana Strategis (Strategic Planning)
Rencana Pembangunan Jangka Menengah Nasional (National Mid-Term
RPJMN
Development Planning)
Rencana Pembangunan Jangka Panjang Nasional (National Long Term
RPJPN
Development Planning)
SCF Shariah-Compliant Financing
SOEs State Owned Enterprises
UK The United Kingdom of Great Britain and North Ireland
US The United States of America

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EXECUTIVE SUMMARY
Indonesia is now embarking on the third five-year development 2015-2019. The course of the
development will follow the official planning document called the RPJMN 1 , covering
development planning in all the social economic sectors as well as infratsructure and regional
development. The RPJMN estimated that around 2,700 trillion rupiah would be needed for
building and rebuilding Indonesia transport for the next five year 2015-2019, an amount of
more than 500 trillion rupiah per year. The new government of Jokowi administration has
provided some strong indication of making around 250-300 trilion rupiah available per year for
infrastructure development, including transport. The money orignates from state budget and
would be expended through government projects and appointment of strategic state-owned
enterprises for several large-scale strategic projects. The rest must come from private sector
through public-private partnership (PPP) or private financing initiatives (PFI).

In whatever means the government wants to trigger private involvement in the transport
development and provision, the PPP (conventional or strategic alliance) or the PFI, or through
SOEs, the bulk of the money would come from various sources of off-budget financing,
domestic or even global sources of financing. Government in RPJMN has realised the facts that
government financing has always been insufficient and therefore need for innovative financing
to fund the infrastructure development. The State-Owned Enterprises have also been given big
opportunity to play a significant role in the development by direct appointment to execute
large-scale transport infrastructure projects through Presidential Regulations. All the
undertakings with or without government investment would need some sort of modern
projects financing. Unfortunately the knowledge and experience to arrange and manage
different sources of funds to construct modern project financing are somewhat lacking from
Indonesia bureaucracy, academy, and practitioners.

One of the several new ways of modern financing is the emerging Islamic (Shariah-compliant)
financing which have been widely practiced in the middle-east countries, Malaysia, and North
Africa countries (MENA) 2. The Shariah-compliant Financing (SCF) in infrastructure development
has been widely used in many countries in the world, particularly in Islamic countries, Middle
East, and Malaysia3. This innovative form of financing has its potential to be practiced but its
application is still new in Indonesia, although Indonesia has witnessed the growing portfolios in
Islamic banking in recent years. In the MENA countries and Malaysia, the SCF has also been
used to finance large-scale infrastructure projects. But SCF in Indonesia is still in the early phase
of implementation. Although several transport projects have been financed through the SCF
(i.e. Sukuk, the Islamic Bond), the best practice of it is still lacking and research on the
effectiveness of it is non existence. With the exception of a small division within the Ministry of

1
RPJMN is the third national five-year development plans 2015-2019, issued under the Presidential
Regulation No. 2/2015.
2
Shariah is an Islamic Law which governs the life of Muslim at the individual and the societal level.
3
Shariah-compliant financing is a financing system that strictly folows the principles of Shariah.

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Finance and a small group of Syariah financing community, the rest of bureaucracy and
infrastructure industry are probably either unaware or lacks of knowledge of Islamic Financing.

Although the RPJMN has stated the need for innovative financing for development funding,
research on Islamic Financing in Indonesia infrastructure is probably lacking. This research
investigates the extent the SCF has been praticed in Indonesia and find a means to promote its
implementation especially for financing infrastructure and transport projects. This is probably
the first research of its kind and will not be able to cover all perspectives of SCF in Indonesia
social economic landscape. Further research would be necessary.

Literature on Islamic Financing is widely available. Shariah banking keeps emerging and
expanding to western countries. Many big international banks have also stepped in and opened
syariah banking. New cases of its implementation on infrastructure projects are also growing
worldwide. But knowledge and understanding of it in Indonesia is limited. This research reports
the result of a thorough and comprehensive literature study on the best practice of Shariah
financing worldwide. The report begins by introducing the basic concepts regarding Islamic
finance, types of Islamic finance products and services, business models, a brief development
history, and an overview of present Islamic finance market. It follows by describing recent
Islamic project finance market, the fit between Islamic finance and infrastructure projects, and
types of Islamic financing in infrastructure. The two main types of Islamic finance instruments
used in infrastructure projects, sukuk and istisna-ijara, are further analysed using recent
statistics and examples in practice. Finally, challenges found in Islamic financing in transport
infrastructure are discussed with an emphasis on deal structuring and institutional framework
development. Some key challenges are highlighted below:

Shariah compliance in deal structuring;


co-financing using conventional and Islamic finance;
Shariah governance framework for Islamic investment products; and,
Islamic finance compatible legal and regulatory environment

Having a Shariah advisory board with balanced expertise at the capital markets regulator level
and at the individual company level will ensure that cases are admissible in court, which is
important for building investors confidence. The successful development of a robust and
credible investment and Shariah-compliant governance environment is best achieved on a
collaborative effort, taking heed of international investors concerns. A robust governance
framework will be of immeasurable value to provide comfort to investors when financial crises
occur.

Developing financial infrastructure that complies with Shariah requirements remains a


significant challenge to the development of Islamic finance. Prospective Islamic finance
participants need assurance that the local regulatory regime supports the sector. For Islamic
finance to attract market interest and to flourish, countries such as Indonesia, require
regulatory frameworks that create a level playing field between conventional financing and
Islamic financing (for example, the underlying taxation principle should be for economically
equivalent transactions or financial instruments, either conventional or Islamic products, to be

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taxed in the same way). Indonesia is probably in the best position to benefit from Islamic
finance, given that it has already put in place regulations for such transactions. Indonesian
government has also issued a few sovereign sukuk bonds, providing a benchmark for the pricing
of sukuk assets. But Indonesia still has some catching up to do in terms of supportive policies
for the implementation of Shariah-compliance financing.

Islamic (Shariah) financing in infrastructure development has been widely used in many
countries in the world, particularly in Islamic countries, Middle East, and Malaysia. This
innovative form of financing has its potential but its application is still new in Indonesia,
although Indonesia has witnessed the growing portfolios in Islamic banking in recent years. This
report presents a thorough literature study on the best practice of Shariah financing worldwide.
The report begins by introducing the basic concepts regarding Islamic finance, types of Islamic
finance products and services, business models, a brief development history, and an overview
of present Islamic finance market. It follows by describing recent Islamic project finance market,
the fit between Islamic finance and infrastructure projects, and types of Islamic financing in
infrastructure. The two main types of Islamic finance instruments used in infrastructure
projects, sukuk and istisna-ijara, are further analysed using recent statistics and examples in
practice. Finally, challenges found in Islamic financing in transport infrastructure are discussed
with an emphasis on deal structuring and institutional framework development. Some key
challenges are highlighted below:

Shariah compliance in deal structuring;


co-financing using conventional and Islamic finance;
Shariah governance framework for Islamic investment products; and,
Islamic finance compatible legal and regulatory environment

Having a Shariah advisory board with balanced expertise at the capital markets regulator level
and at the individual company level will ensure that cases are admissible in court, which is
important for building investors confidence. The successful development of a robust and
credible investment and Shariah-compliant governance environment is best achieved on a
collaborative effort, taking heed of international investors concerns. A robust governance
framework will be of immeasurable value to provide comfort to investors when financial crises
occur.

Developing financial infrastructure that complies with Shariah requirements remains a


significant challenge to the development of Islamic finance. Prospective Islamic finance
participants need assurance that the local regulatory regime supports the sector. For Islamic
finance to attract market interest and to flourish, countries such as Indonesia, require
regulatory frameworks that create a level playing field between conventional financing and
Islamic financing (for example, the underlying taxation principle should be for economically
equivalent transactions or financial instruments, either conventional or Islamic products, to be
taxed in the same way). Indonesia is probably in the best position to benefit from Islamic
finance, given that it has already put in place regulations for such transactions. Indonesian
government has also issued a few sovereign sukuk bonds, providing a benchmark for the pricing

x
of sukuk assets. But Indonesia still has some catching up to do in terms of supportive policies
for the implementation of Shariah-compliance financing.

xi
CHAPTER/ANNEX TITLE

CHAPTER 1: INTRODUCTION
1.1. BACKGROUND

Our world has changed substantially in the last two decades. Worlds economy has also
changed accordingly. Global GDP growth is projected to gradually rise from 2.4 percent in 2013
to 3.4 percent in 2015 and 3.5 percent in 2016. Rebounding growth in high-income countries
from 1.3 percent last year to 1.9 percent this year and 2.5 percent by 2016 is the main
impetus for the acceleration. The acceleration in activity among developing countries is
projected to be more muted, as the recovery from the crisis of 2008 is by and large complete
for these economies. In addition, economic rebalancing in China, and a gradual tightening of
financial conditions as the recovery in high-income countries progresses are expected to
moderate outturns. Developing-country GDP growth is projected to stay flat for the third year
in a row at 4.8 percent this year and to rise only gradually to 5.5 percent by 20164 .

Many factors have contributed to the rapid economic changes. One of them is believed to be
the well-built global infrastructure that makes them possible for the worlds economy moving
and growing very rapidly. The strategic relationship between infrastructure and economy in the
global stage is observed and acknowledged by many international agencies. The International
Monetary Fund (IMF) has warned that the global economy is weaker than projected earlier and
called for a US$ 6 trillion investment to improve global infrastructure over the next 15 years.
The IMF in its April 2014 report projected the world economy will grow 3.4 percent for this
year (2014). There is some economic recovery but the upward trend is not enough to respond
to various global challenges. In advanced economies, the amount of money earmarked for
public works has declined and social infrastructure has gotten old 5 . The World Economic Forum
has also warned the great needs of urban infrastructure in the global economy. Besides, the
needs for infrastructure in urban areas are vast. In the face of sustained urbanization across a
majority of emerging market countries, many experts estimate that some 75 percent of all
infrastructure investments will be needed in urban and peri-urban environments over the next
40 years. The World Economic Forum has also recently projected that about US$ 5 trillion in
global infrastructure investment is required per year to 2030 in various sectors 6 . This is also to
support a future global population of 9 billion people.

Governments, bilateral donors and international financial institutions (IFIs) are increasingly
conscious of this vast challenge. Indeed, with many countries continuing to face economic
headwinds in the aftermath of the global financial crisis, the importance of infrastructure to
spur and sustain economic activity is now established at the Group of Twenty Major Economies

4
The World Bank. Global Economic Prospects, June 2014.
5
http://www.globalpost.com/dispatch/news/kyodo-news-international/141002/imf-chief-urges-6-tril-
infrastructure-investment-over.
6
http://reports.weforum.org/green-investing-2013/appendices/

An investigation of Shariah-compliant
financing in Indonesian transport 1
infrastructure projects
(G20). The response from the G20 has been consistent and sustained 7 . G20 efforts to promote
infrastructure have led to a capital increase of $100 billion across the main International
Financial Institutions (IFIs) in 2009. At the G20 Seoul meeting in 2010, a high-level panel
recommended a review of the Multilateral Development Bank (MDB) policy framework for
infrastructure, incorporating a more explicit recognition of the sectors role in boosting growth.
The joint publication by the MDB (Asian Development Bank, African Development Bank,
European Bank for Reconstruction and Development, European Investment Bank, Islamic
Development Bank and the World Bank Group), Infrastructure Action Plan 2012 Report,
recommended to the G20 an increase in the supply of bankable projects in recognition of the
fact that the pipeline of projects must be made broader to achieve higher levels of investment
in the sector8.

Table 1: World and Asia Economy, 2050 Entering the second decade of the 21st. century,
Regions percent of
several phenomena occurred in the global
Worlds GDP
Asia 52 economy. One of them is the rising growth of
Europe 18 economy in China and India over more than one
North America 13 last decade and sluggish economy in the US and
Latin America & Carribean 10 Europe due to various economic and financial
Middle East & North Africa 3 crises. These give strong signs of the revival of
Sub Saharn Africa 2
Asian economy and shifting the center of world
Rest of World 2
GDP at market exchange rate (US$ trillions) economic power from the West to Asia. This global
World 333 economic shift is studied by the Asian Development
Asia 174 Bank which projects the shifting of world economy
USA 38 to Asia as shown in Table 1, whereby in 2050 Asia
GDP per capita at constant PPP (US$)
economy is projected to rise again to 52 percent of
World 37,300
Asia 40,800
the world economy and Indonesia together with six
USA 94,900 other Asian Economies will contribute to around 91
Source: Asian Development Bank, 2012 percent of the Asias growth between 2010-20509 .

In a separate global projection of the so-called Emerging and Growth-Leading Economies


(EAGLEs), Schwartz and Herrero (2011)10 identified 10 emerging countries in which Indonesia
ranks fourth among them. During the coming decade, it is estimated that the ten countries will
contribute 51 percent of global growth, compared to just 14 percent for the G7 countries (Table
2). Indonesia high ranking within the ten emerging economies reflects its strong growth
prospects. Keys to such optimism includes Indonesias positive structural factors such as
demographic bonus, natural resources endowment, and large domestic economy. All these
global and regional phenomena provide some indications of stronger economic growth of Asia
and Indonesia in particular in the next decade or two.

7
World Economic Forum. Accelerating Infrastructure Delivery. New Evidence from International Financial
Institutions. April 2014.
8
Ibid.
9
The Asian Development Outlook, ADB, 2013
10
Schwartz S. and A.G. Herrero, Strategic Review, August 2011

An investigation of Shariah-compliant
2 financing in Indonesian transport
infrastructure projects
CHAPTER/ANNEX TITLE

1.2. INDONESIA TRANSPORT

Following severe economic crisis in 1997/1998, Indonesia transport is in a serious crisis. It


suffers from the lack of capacity and adequate level of service to serve the economic demand
that has been rapidly increasing from time to time. From outdated, overburdened airports, lack
of adequate capacity of ports to heavily congested road and poor rail services, building up of
urban gridlocks, to heavy congested major road arterials, Indonesia's transport infrastructure is
in a bad shape. The resulting traffic congestion, the bottlenecking, urban gridlocks, and
excessive transportation delays affect everyone from urban travelers, local commuters to
international investors. The government has grand designs, master plans, and blue-prints to
build new roads, airports, ports, and mass rapid transit systems but several impediments in
bureaucracy and financing still prevail. It takes years until those facilities have completely built
and ready to serve the demand. Indonesias transport is in poor shape, having suffered from
under-investment since the Asian financial crisis of 1997-1998 and constraints growth potential.

Apart from fundamentals of the economy that are deemed strong and stable, over one last
decade Indonesia has been experiencing a very significant deficit and maintenance backlog of
its transport infrastructure and service system in all lines: roads, railways, ports, airports, and
ferries. More than that transport gap between more developed and less developed areas are
also widening. Deficit and backlog of transport infrastructure occur due to unavailable sufficient
capacity of transport network system that is able to accommodate the rapidly growing
economic movement. The years of 2015-2019 are critical for transport sector in Indonesia in
term of its roles in both national and global settings. Backlog of development targets during the
last decades have now become our future debt to settle. Transport deficit has rapidly built up
and transport disparity between regions is widened. In addition, many new tasks must be
executed to build national connectivity, to develop national transport industry, to internalize
policy on safety, security, energy, environment, social and political affairs, as well as to
restructure our urban transportation system. At the same time, the dynamics of Asia regional
and global economy require high competitiveness and compatibility of the Indonesia transport
with global constellation. ASEAN Connectivity as a part of ASEAN Economic Community, for
example, will take effect in 2015. The Indonesian transport system networks must therefore
have prime quality standards and services to be able to play its role in the global arena.

Various strategic issues and major global economic agendas, however, could hinder the
infrastructure and transport development in Indonesia in years to come. There will be
development challenges from global geo-strategic environment and domestic socio-economic
dynamics that rapidly move and change. Global challenges are responsible for the increasing
demand for competitiveness and compatibility of Indonesia in global economy arena,
particularly in Asia region when global trade mobility integrates the global infrastructure and
transport network more and more. Domestic challenges, partly constituting a legacy of the past
that has never been completely resolved and become pending matters for a quite long period
of time and partly constituting the burden of long-term development that must indeed, be
implemented and the burden arising out of the new government initiatives, are all accumulated
in the burden of development for a critical period of 2015-2025.

An investigation of Shariah-compliant
financing in Indonesian transport 3
infrastructure projects
Table 2: EAGLEs Gross Domestic Product One of the challenges and great
Countries Annual GDP Contribution to
opportunities include the development of
Growth Global Growth
2010-2020 ( 2010-2020 ( future transport infrastructure and service
percent) percent) delivery that is advanced, efficient and
China 8.7 30.2 reliable, that is able to bear the burden of
India 6.9 8.5 the advanced economic development.
Brazil 4.5 2.7
Burden of development within the next
Indonesia 6.7 2.3
Korea 4.4 1.8 five years must be very heavy since the
Russia 2.6 1.4 government must be responsible for the
Mexico 3.1 1.2 past burden and new tasks mandated by
Egypt 6.2 1.0 the RPJPN and laws. Routine and
Taiwan 4.7 1.0 monotonous bureaucratic rhythm will not
Turkey 4.1 1.0
be able to face these great challenges. It is
EAGLEs 6.4 51.1
Japan 1.7 1.7 necessary to bring about non-linier or
Germany 1.6 1.1 exponential transformation, unconventi-
United Kingdom 1.8 1.0 onal, and out-of-the-box approaches as
Canada 2.4 0.8 well as competent and professional
France 1.5 0.8 government administration system and
Italy 0.9 0.4
bureaucracy.
G6 1.5 5.8
United States 2.3 8.7
G7 1.9 14.4 The condition of transport infrastructure in
World 4.6 - Indonesia remains far from ideal to sustain
Source: Schwartz and Herrero, 2011 such great transformation. Burdens of the
past and future development have been
national strategic issues that must be considered properly and seriously in the preparation of
RPJMN 2015-2019. This planning document must be innovative and offensive compared to the
previous one. All government apparatus assigned to implement the development must also be
innovative and offensive. The period of 2015-2019 is the period when transport must be built in
a quick, massive and radical manner in order to address deficit, gaps, bottlenecking, and total
gridlock. Doing business as usual is simply obsolete. Thus, governments investment must be
increased significantly and spent for strategic projects that have high priorities that may
immediately reduce deficit and transport gap. Private sector investment must be facilitated as
best possible as development working partner that may very potentially accelerate the
development of infrastructure projects, including transport. Therefore, the Ministry of
Transport needs to immediately enhance the institution of PPP-Unit that specifically works for
promoting PPP projects.

1.3. INVESTMENT AND FINANCING

Efforts to tackle the transport deficit and to narrow the gap will require huge investment from
government and private sector as well. However, for a very long time in the past, infrastructure
and transport were only financed by the state budget, regional budget, external/foreign loans,
and subsidy and grant schemes to regional government. The government has also invested
heavily in building basic infrastructure which is then used as capital investments to state owned

An investigation of Shariah-compliant
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CHAPTER/ANNEX TITLE

enterprises. Under the state monopoly, the SOEs enjoy government equity in the form of
infrastructure and facilities investments. In recent years, the SOEs have begun to play a role by
making investment using their corporate funds and commercial loans. Public Private
Partnership schemes have been driven for a long time but so far have not achieved the
expected results. Potential domestic funds are huge but they cannot be used for transport
funding. Banking funds, pension funds, insurance funds, non-bank institutional funds, capital
markets funds and other private sector funds are thousands of trillions of rupiah in amount.
This is the Domestic Capital Market that has not been used for investments and financing
infrastructure and transport development. There are still regulatory and institutional obstacles
that hinder it. There are still many maturity mismatches that cannot be bridged. Meanwhile,
modern project financing, as has long been practiced in developed countries has not been done
in Indonesia in line with poor public-private partnerships and absence of poor knowledge and
skills in the government, construction industry, and even finncial sector in Indonesia. RPJMN
should begin to see the possibilities of financing transport infrastructure projects from different
sources of financing, both by the state budget and the non-APBN sources available in the
market and private institutions.

The government has repeatedly stated on various occasions that infrastructure development
requires investment of the private sector and that government investment and public sector
expenditure will never be enough to build domestic transport throughout the nation in the past
and in the future. Private sector participation in infrastructure development and transport
services has in fact been mandated by RPJPN 2005-2025 that must be implemented by all
corresponding RPJMNs. The Transport Laws has also paved the way for the participation of the
private sector investment in the development and provision of transport in Indonesia.
Therefore, private sector participation (PSP) in the form of Public Private Partnership (PPP) or
pure private investment (Private Financing Initiative, PFI) or Strategic Alliance PPP with all
variants and financing spectrums becomes imperative for Indonesia. It is actually also the soul
and spirit of the transport law that should be embodied in the RPJMN of transport sector.

Actually, various forms of private sector participation schemes in transport development and
provision is not solely for financial reasons, but, more than that, to build an extensive, efficient
and internationally competitive transport industry and market, to create value-for-money, and
improve the quality of institutions and human resources. Indonesia needs to create equality
between state owned enterprises and private operators in the mechanisms of national
transport markets, industry and services, including in terms of contract, calculation of
depreciation, subsidies and other PPP scheme to build a fair investment climate and establish
fairly competitive rates. A fair competition requires high openness, transparency and public
accountability of every transport business and industry, including state owned enterprises. In
this case the introduction of international standard cost accounting and management system
(international best practice) will be required.

1.4. INNOVATIVE FINANCING

The very large magnitude of transport investment of IDR 2,700 trillion for 2015-2019 should
trigger the government to look for other means of APBN budget provision and many other ways

An investigation of Shariah-compliant
financing in Indonesian transport 5
infrastructure projects
of non-APBN financing. This notion goes beyond transport sector and should therefore be
communicated intensely with the financial authority and probably also the parliament. The
option for exploring new ways of financing, can be defined as innovative financing, should cover
both the APBN (on-budget) and non-APBN (off-budget). According to the World Bank,
innovative financing involves non-traditional applications of solidarity, public private
partnerships, and catalytic mechanisms that support fund raising by tapping new sources and
engaging investors beyond the financial dimension of transactions, as partners and
stakeholders in development; or deliver financial solutions to development problems on the
ground11 .

1.5. THE MID-TERM DEVELOPMENT PLANNING

Indonesia is now embarking on its third five-year development plan of 2015-2019. In January
2015, the government finalised the national development planning document and issued
Presidential Regulation No. 2/2015 as the legal basis of the document. The third five-year
development plan, called the RPJMN, reflects the vision, missions, and programs of the
President, elected in 2014 and describes the national development strategy, national policies,
sector programs, and regional development. The document also outlines the macro economic
framework, fiscal policy, regulatory framework, and indicative financial schemes. A chapter in
the document describes the develoment of infrastructure and transport sector, including
investment needed for the next five years.

The planning document has identified the magnitude of investment needed and the source of
financing. Infrastructure is estimated to require a magnitude of investment of about IDR 5,500
trillion, out of which IDR 2,800 trillion will be needed for transport development. An IDR 560
trillion a year is needed to build Indonesias transport infrastucture and besides of the state
budget and state-owned enterprises, the sources of financing from private sector has not been
confirmed yet. So far, Indonesia had been heavily relying on the state budget for transport
investment and financing. But on-budget financing has always been and will always be
insufficient to fund the needed infrastructure and transport investment all over the country.
State budget could only cover 30-40 percent of the total needs. The private sector involvement
has been too small. The public-private partnership that was promoted since 2004 has not been
successful to mobilise private funds from both domestic and globl sources.

The government of Indonesia has budgeted US$ 475 million to invest in rail, sea and air
transportation infrastructure in the next 10 years, aiming to drive the countrys economic
growth and transform it into a developed country by 2025. Therefore, how to finance such a
large expenditure is an important and immediate issue to address. The Government expects to
increase the involvement of investors from state-owned enterprise, private sectors, and special
purpose vehicle from public private partnership scheme in order to reduce its financial burden.
It is thus crucial to find a novel and innovative framework for financing Indonesian
transportation sector.

11
The World Bank. Innovating Development Finance, 2009.

An investigation of Shariah-compliant
6 financing in Indonesian transport
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CHAPTER/ANNEX TITLE

1.6. ISLAMIC FINANCING

Islamic Finance emerged as an alternative to conventional finance which has been working thus
far under a western phylosophy of economic liberalism and free market economy. A number of
emerging economies are showing impressive growth rates. But economic growth under
neoliberalism is not serving the welfare function; rather it is enhancing poverty because the
benefits do not trickle down by themselves, due to distortions created by vested interests in a
free market functioning without proper surveillance, disclosure and transparency that, in truth,
reinforces skewed income distribution patterns. China, one of the fastest growing economies
with a growth rate in double digits, is facing the same problem. The lot of the countrys poor,
particularly in rural areas, has got worse, as the previous communist system guaranteed certain
basic needs including food, health care and primary education. The support systems have
collapsed due to the shift to a market-based economic system12.

Among others, Shariah-compliant financing can potentially offer an alternative financing


mechanism in Indonesias transportation infrastructure development by opening the door of
idle funds from Islamic and even non-Islamic sources. The use of Shariah-compliant financing in
infrastructure development, including transport, has become increasing popular worldwide,
particularly in Islamic countries. Although Indonesia is not an Islamic state, its total Muslim
population is the largest in the world (approx. 203 million in 2009, 88.2 percent of Indonesian
population, 12.9 percent of world Muslim population). The concept of Sharia-compliant
financing has already been recently introduced in Indonesia. The Government has been
enacting Law No. 19/2008 in Islamic state securities (sukuk), Law No. 21/ 2008 in Islamic
Banking, and other supportive regulations. Indonesia state sukuk was first issued in 2008 and
the issuance has been substantially increasing.

The use of Shariah-compliant financing in (transport) infrastructure development has become


increasing popular worldwide, particularly in Islamic countries. Although Indonesia is not an
Islamic state, its total Muslim population is the largest in the world (approx. 203 million in 2009,
88.2 percent of Indonesian population, 12.9 percent of world Muslim population). The concept
of Sharia-compliant financing in infrastructure development is generally accepted in Indonesia.
In fact, Shariah-compliant financing has already been recently introduced in Indonesia. The
Government has been enacting Law No. 19 Year 2008 in Islamic state securities (sukuk), Law
No. 21 Year 2008 in Islamic banking, and other supportive regulations. Indonesia state sukuk
was first issued in 2008 and the issuance has been substantially increasing.

However, Shariah-compliant financing is still new in Indonesia and little research has been
conducted to investigate its effectiveness. Project stakeholders also tend to have limited
understanding of Shariah-compliant financing. Sound legal and institutional frameworks also
need to be established in Indonesia. Therefore, it is necessary to investigate the level of
Indonesian project stakeholders knowledge of Shariah-compliant financing and to develop
their understanding on this innovative financing initiative in transportation sector in particular.

12
Ayub, M., Understanding Islamic Finance, 2007

An investigation of Shariah-compliant
financing in Indonesian transport 7
infrastructure projects
This report, based on a comprehensive literature review, provides an overview of Shariah-
compliant financing in infrastructure development and its state-of-practice implementations in
transportation projects around the world. The report aims to a) help readers obtain
fundamental and rounded knowledge about the principles and practices of Shariah-compliant
financing in transportation projects and to b) provide reference for developing policy and
regulatory framework to better use Shariah-compliant financing in infrastructure development
in Indonesia.

1.7. RESEARCH APPROACH

Step 1: Literature Review. A comprehensive literature review was conducted to study the
nature of Islamic Financing and to examine the implementation of shariah-compliant financing
in various global economic activities, especially in infrastructure and transport sector. Search
and explore the articles, reports, texts, and other information regarding the Islamic Financing.
This process accumulates the knowledge and enhance the cases of Islamic financing worldwide
Key issues which are raised from the current implementation of shariah- compliant financing
scheme in Indonesia are synthesised from case studies and verified at a stakeholder workshop.
The outcome of phase one (global review) formed the foundation for phases two (interviews
and cross-case analysis) and three (stakeholder workshop).

As shariah-compliant financing is still new in the Indonesian transportation sector, several


transportation projects with shariah-compliant financing schemes were identified and analysed
to gather lessons learned on shariah-compliant financing in Indonesia. Information such as the
project background, project stakeholders and interest, project financing scheme and project
constraints were gathered for both comprehensive literature review and case studies.
Secondary data were collected from journal articles, public documents and the media. Data was
analysed using content analysis, that is, similar content will be grouped in one theme, also
known as pattern matching.

Step 2: Interviews. Meet and talk with some prominent figures in Project Financing and focus
on Islamic Financing. This p rocess captures various perception and understanding acquired by
different stakeholders in transport financing.

The research strategy is to gain this information by a carefully constructed combination of


interviews, case studies and participatory action. This research method includes interviews with
key transport project stakeholders to explore deeper understanding of Shariah-compliant
financing concept. These key stakeholders include representatives from the financial institution,
the Ministry of Transportation, the National Planning Agency, and academics specialised in
Indonesian transportation and project financing. These interviewees were selected on the basis
of their comprehensive knowledge in transportation projects and/or shariah-compliant
financing; as well as those who have executed or were involved in shariah financed project. The
interview process strictly follows QUT ethics guidelines (Annex 4). This project has received QUT
ethics clearance (QUT Ethics Approval Number 1400000725). For the interview process, an
approach email was sent, together with participant information, consent form and a list of
interview questions, to prospective respondents prior to the interview session.

An investigation of Shariah-compliant
8 financing in Indonesian transport
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CHAPTER/ANNEX TITLE

Research Preparation Data Collection & Analysis Reporting


Stage 1 Stage 2 Stage 3

Problem formulation PO 1
Desk study
(comprehensive
literature review Discussion,
Detailed research and case studies) PO 2 conclusion &
methodology recommendations

Phase 1
Preparation of data
collection
Interviews PO 3

Research
assistants Cross case analysis PO 4
recruitment
Phase 2
Data collection PO5:
protocols
Toolkit
Workshop/FGD development &
testing
Ethics approval
Phase 3

Figure 1: Research Approach and Method

Nine one hour interviews were conducted with representatives from the key transportation
stakeholders mentioned above. All interviews were conducted following a structured format.
The list of interview questions can be found in ANNEXE 4. All interviews were conducted in
Bahasa and recorded, transcribed and coded. Interview data was analysed using content
analysis Interview summaries and notes were compared and categorised using MS Excel.

Step 3: Analysis. Meet and talk with some prominent figures in Project Financing and focus on
Islamic Financing. This process captures various perception and understanding acquired by
different stakeholders in transport financing.

Step 4: Lesson Learned & Best Practice. Meet and talk with some prominent figures in Project
Financing and focus on Islamic Financing. This process captures various perception and
understanding acquired by different stakeholders in transport financing.

Step 5: Focus Group Discussion. Focus Group Discussion was held to gather first-hand
information from the multi stakeholders, including the government, banking sector, academy,
and state-owned enterprises.

An investigation of Shariah-compliant
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infrastructure projects
The workshop process strictly follows QUT ethics guidelines (Annex 5). For the workshop
process, an email was sent to the participants, together with the participant information. The
workshop was conducted in Bahasa and recorded, transcribed and summarised. It was divided
into 2 parts, which are first, opening (by Mr. Bambang Prihartono) and presenting the workshop
introduction (by Prof Suyono Dikun); and secondly the discussion session which was moderated
by Mr Bambang Prihartono. The workshop was closed by Prof Suyono and ended with lunch.

Step 6: Setting the Framework. Meet and talk with some prominent figures in Project Financing
and focus on Islamic Financing. This process captures various perception and understanding
acquired by different stakeholders in transport financing.

Step 7: Developing a Toolkit. Meet and talk with some prominent figures in Project Financing
and focus on Islamic Financing. This process captures various perception and understanding
acquired by different stakeholders in transport financing.

The toolkit framework was developed based on the global overview report, the Indonesian case
study report and the interview results. It captures key findings obtained from representatives in
Indonesian transportation sector such as their perception on Shariah-compliant financing,
critical requirements for Shariah-compliant financing to be implemented in Indonesian
transportation infrastructure sector, success and failure factors learnt from other countries and
sectors which were presented and discussed at the workshop scheduled at the end of April.
The purpose of the workshop is to report findings of this study, to seek a verification of these
findings and an input to the development of the toolkit a set of guidelines for the Indonesian
government and the investors to facilitate the implementation of shariah-compliant financing
instruments in the transportation sector. Approximately of 50 people from industry
representatives from the National Planning Agency, Ministry of Finance, the financial
institution, the Ministry of Transportation, the National Planning Agency, the state owned
enterprises and academics specialised in Indonesian transportation and project financing were
participating at this one-day workshop. The workshop was held at Hotel Akmani, Jakarta. The
workshop was jointly run by Mr. Bambang Prihartono (workshop moderator) from Bappenas
and Prof. Suyono Dikun (Project Leader, UI) from University of Indonesia to ensure workshop
objectives and quality are met. The Workshop Process and Terms of References are attached in
Annexes 5 and 6.

The research strategy is to gain this information by a carefully constructed combination of


interviews, case studies and participatory action. This research method includes interviews with
key transport project stakeholders to explore deeper understanding of shariah compliant
financing concept. Results of the interviews assisted in identifying lessons learnt from shariah-
compliant financing scheme in Indonesian transport sector, which also formed the basis for the
Toolkit development of shariah-compliant financing scheme in Indonesian transport sector. As
previously mentioned, research validation was conducted a user-testing through a stakeholder
workshop with representatives from the Indonesian transport sector.

Both interview process and workshop strictly follows QUT ethics guidelines (Annex 2). This
project has received QUT ethics clearance (QUT Ethics Approval Number 1400000725). For the

An investigation of Shariah-compliant
10 financing in Indonesian transport
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CHAPTER/ANNEX TITLE

interview process, an approach email was sent, together with participant information, consent
form and a list of interview questions, to prospective respondents prior to the interview
session. Interview is conducted in approximately one hour. Nine interviews were conducted
with the banks and non-bank financial institutions. It is expected that more interviews will be
conducted and finished by the end of January 2015. All transcripts, translations and analyses
are expected to be completed by late February 2015.

MASTER BY RESEARCH STUDENT

The candidate for the one year Master by Research Scholarship has begun his degree with QUT
since March 2015. His research area is Shariah project financing with a focus on risk
management one of the key findings identified in this QUT-UI joint project. This student is
supervised jointly by Dr Fiona Lamari (principal supervisor at QUT) and Dr Ayomi Dita Rarasati
(external supervisor at UI).

1.8. LINKAGES WITH INDII AND GOI INFRASTRUCTURE DEVELOPMENT OBJECTIVES


AND POLICIES

Research on innovative financing is urgently needed by Indonesia to support the financing


needs for infrastructure development. This has been explicitly recommended by an IndIIs
background study reported by a Technocratic Paper to support the RPJMN of transport sector 13.
The development of alternative financing for infrastructure has also been mandated in RPJMN
2015-201914. This will be done through several new policy initiatives and actions in fiscal and
finance sector. First, it is stated that there is a need to amend Law No. 17/2003 on State
Finance to include multi-years financing. Second, to study and implement several innovative
financing schemes for public-private partnership. Third, study and implement performance-
based annuity scheme. Fourth, study and implement financing scheme from capital market and
other off-balance sheet financing. In another form of initiatives, the RPJMN also requires
government to enhance the roles of the state-owned enterprises (SOEs) by increasing their
financing capacity and providing government support in terms of working capital and sovereign
guarantee.

This project is based on the proposition that Shariah-compliant financing is a growing and
important financing scheme and that the GOI, although conceptually in favour of the initiative,
does not have the necessary mechanisms, in terms of rules and procedures, to readily adopt
and implement it in infrastructure projects. Hence, the GOI should develop a specific
competence and understanding of the principles and practices required to incorporate Shariah-
compliant financing mechanisms before making a broader implementation of this initiative.
Therefore, this research project proposes the development of a Shariah-compliant financing
toolkit for transportation projects in order to allow the GOI greater access to Shariah-compliant

13 Techocratic Paper to Support RPJMN of Tranport Sector. IndII, January 2015.


14 Presidential Regulation No. 2/2015 on the Third Five-Year Development Planning.

An investigation of Shariah-compliant
financing in Indonesian transport 11
infrastructure projects
finance resources. Hence Islamic investors will be attracted to participate in Indonesian
transportation projects.

In summary, the project aims to address the following key issues:

1. Government ministries, investors and other project stakeholders on infrastructure


transportation projects need clear guidelines for selecting alternative and innovative
modes of financing and demonstrating organisations capacity to deliver best-value.
2. The community needs assurance that the selection of financing instruments is based upon
best-value and fair and transparent processes.
3. If this initiative is adopted then guidance for policy and regulatory framework development
is needed for successful implementation in the industry.
4. Government ministries, investors and other project stakeholders need to develop the skills
to implement shariah-compliant financing instrument effectively and efficiently in the
transportation sector.
5. By focussing on shariah-compliant financing instrument selection, the GOI and all
stakeholders can deliver best value transportation.

The project meets IndIIs objectives in relation to offering alternative financing in Indonesian
infrastructure project financing schemes in the transportation sector. Outcomes of this project
provide contribution towards the improvement of regulation and institution in Indonesian
transportation infrastructure financing.The research methodology or approach undertaken for
this project is shown in Error! Reference source not found., consisted of seven subsequent
steps, described as follows.

1.9. RESEARCH GOAL AND OBJECTIVES

This research has a far-reaching goal to contribute to the body of knowledge of how Islamic
Financing can significantly play a role in Indonesia development funding. Like conventional
modern project financing, Islamic Financing has a big potential to be the instrument of
infrastructure and transport financing once all the legal and regulatory frameworks as well as
the institutional setting following Syariah principles have been put on place.

This research project includes the following objectives:

Study the best practices of Shariah-compliant financing implementation in transport


sector in other countries;
Investigate the key issues in the implementation of Shariah-compliant financing
scheme in the transport sector;
Investigate the current level of knowledge and develop existing knowledge of Shariah-
compliant financing amongst transport project stakeholders;
Develop a framework for the selection of Shariah-compliant financing instruments in
transport infrastructure; and,
Produce a Shariah-compliant financing toolkit related to Indonesian transport projects.

An investigation of Shariah-compliant
12 financing in Indonesian transport
infrastructure projects
CHAPTER/ANNEX TITLE

1.10. OUTLINE OF THE REPORT

CHAPTER 2: ISLAMIC FINANCING

2.1. WHAT IS ISLAMIC FINANCE?

Islamic finance is financial activity that is consistent with the principles of Islamic law or the
Shariah. Islamic law is sourced from the text of the Quran, and the sayings and acts (the
Sunnah) of the prophet Mohammed. The Shariah provides guidance or principal rules that
include coverage of a Muslims economic activity, such as property dealing and wealth creation.
The Shariah explains in detail ethical concepts in use of money and capital, the relationship
between risk and profit, and the social responsibilities of financial institutions. Islamic finance is
not a geographical concept or industry, but is relevant to all financings that involve Muslim
participants, particularly Muslim investors financing in the Middle East, Europe, the United
State of America, and Asia.

The fundamental concept of Islamic finance is that money has no intrinsic value and should only
be used as a measure of worth. Shariah-compliant investments are structured on the exchange
of ownership in tangible assets or services, with money acting simply as the payment
mechanism to assist the transfer. The taking or receiving of interest (riba) is strictly prohibited
as, under Sharia principles, money is not valuable in itself and no charge should be made for its
use. Islamic financial principles also prohibit speculation (gharar), precluding any involvement in
gambling (maysir) or extreme uncertainty. Any risk in a transaction must be shared between at
least two parties. In other words, investors and entrepreneurs alike must bear the business risk
for a share in the profit. Key principles underlying the provision of Islamic finance include 15 [4]:

prohibition of interest (In Islamic finance, rather than interest, a yield from the
deployment of money or capital generally arises in the form of profit and loss sharing
from an investment activity or a profit or fee from sale of asset or lease of asset);
prohibition of uncertainty in contractual terms and conditions;
prohibition of investment in or financing of banned products and services such as
alcohol, gambling, pork and pornography; and,
all financial transactions are underpinned by an identifiable tangible asset.

Islamic finance aims to create business activities that generate a fair and equitable profit from
transactions that are backed by real assets. This method of financing avoids usury, uncertainty,
short selling and excessive credit creation whilst encouraging sound risk management
procedures16.

15
Austrade, Islamic Finance, 2010
16
UKTI, UK Excellence in Islamic Finance. 2013

An investigation of Shariah-compliant
financing in Indonesian transport 13
infrastructure projects
Islamic banks are founded on the concept of profit sharing and loss-bearing, which is consistent
with the Islamic concept that profit is for those who bear risk. Fairness, honesty, avoidance of
hoarding and avoidance of tort are an integral part of Shariah Law, including the prohibition of
riba, gharar and maysir.

A financial institution wishing to conduct financial activity in compliance with the Shariah will
look to a Shariah scholar for guidance. Financial institutions involved in Islamic finance will
normally establish a Shariah supervisory board or committee which will determine if the
institutions financial products are Shariah-compliant. The board will oversee the institutions
financial product and service structures and will issue a fatwa (a legal statement/ a formal
pronouncement on Shariah compliance) when the product or service is taken to market.

principles and prohibitions


Like every other aspect of Muslim life, Islamicbanking is governed by Shariaa and its
interpretation (Fiqh). Together, these provide the ethical framework outlining the essence of
economic well-being and the development of individuals. This framework does not specifically
apply to Islamic banks, but to life and business generally. Fairness, honesty, avoidance of
hoarding and avoidance of tort are an integral part of Shariaa law, In brief, these prohibitions
are defined as follows:
Riba (or usury) is the predetermined interest collected by a lender, which the lender receives
over and above the principal amount it has lent out. Shariah scholars may belong to a particular
Islamic school of thought, and they may interpret Islamic law in varying ways, reflecting
different Shariah regulatory frameworks. There are notable differences of such nature between
the Gulf and South East Asia. For example, Shariah interpretation in Malaysia based on the
Shafii school of law may allow a two-party sale and buy-back transaction for cash financing.
However, scholars in other regions do not allow this practice.

While designed to meet the specific religious requirements of Muslim customers, Islamic
banking and finance is not restricted to Muslims. Islamic financial transactions can be
undertaken between Muslims and non-Muslims. An Islamic finance product can be attractive to
non-Muslim investors for its commercial features as well as its underlying ethical and socially
responsible character. In some countries with significant Muslim populations, Shariah
compliance is required by legislation (such as Sudan and Iran) while in others national
legislation is silent on the matter (such as the UK and Singapore).

To better understand Islamic finance, it is possible to replace the word Islamic with the word
structured. Like any structured finance deal, there are constraints that must be overcome with
creativity and innovation. Here, the principles are based on the principles of Shariah. The
question is how to structure the finance deal by working within these constraints [6].

2.2. ISLAMIC FINANCIAL PRODUCTS AND SERVICES

Islamic financial products work on the basis that the bank and the customer share the risk of
investments on agreed terms. Profits are distributed based on negotiated terms; risk is

An investigation of Shariah-compliant
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CHAPTER/ANNEX TITLE

distributed based on the share of the ownership. In addition, Islamic financial products typically
have an underlying asset or enterprise that requires financing17. Figure 2 illustrates four broad
categories of products of Islamic Financing represented by various contracts dealing with
commercial and business transactions18.

1. Transactional Contracts. Deal with real sector economic transactions that facilitate the
exchange, sale, and trade of goods and services. These contracts create assets which
further become the basis of financing and investment opportunities.
2. Financial Contracts. Offers ways to create and extend credits, facilitate financing of
transactional contracts, and provide channel for capital formationand resource
mobilisation between investors and entrepreneurs.
3. Intermediation Contracts. To facilitate an efficient and transparent execution of
transactional and financial contracts. These contracts provide the economic agents with a
set of tools to perform financial intermediation as well as to offer fee-based services for
econmic activities. These contracts include Mudarabah, Musharakah, Kifala, Amanah,
Takaful, Wikala, and Joala.
4. Social Welfare Contracts. These are contracts between individuals and the society to
promote the well-being and welfare of the less privileged.

Trading is one of the most common activities of Islamic banks. While conventional banks simply
finance trading businesses by providing funds, Islamic banks have to be involved in the sale and
purchase process for goods according to the trading rules prescribed by the Sharah. They are
entitled to profit by undertaking business risk like real sector businesses. However, Islamic
banks trading pattern is different from the general trading business. Banks clients normally
need a credit facility and the banks are selling goods on credit and thus creating receivables.
Credit sale (Bai Muajjal) may take a number of forms, important among which are19:

Musawamah, or normal sale, in which parties bargain on price, a sale is executed and
goods delivered while payment is deferred.
Murabaha, a cost-plus sale, in which parties bargain on the margin of profit over the
known cost price. The seller has to reveal the cost-incurred by him for acquisition of the
goods and provide all cost-related information to the buyer.

Partnership contracts. The Mudaraba and Musharaka contracts are partnership arrangements
in which either one (Mudaraba) or more partners (Musharaka) provide capital and/or skill and
expertise to a Shariaa-compliant project or business. Any profit that is generated is distributed
between the partners based on a ratio that is preagreed in the contract and reflects a return on
capital, but also the effort put in to managing the project or business. However, losses are
distributed between the partners on the basis of the ratio of the capital provided. This implies
that in a Mudaraba where only one party provides the capital, the loss is 100 percent borne by

17
Schoon, N. Financial Services Review, August 2008
18
Iqbal and Mirakhor, 2007
19
Ayub, M., 2007

An investigation of Shariah-compliant
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infrastructure projects
the capital provider (Rab al Mal), unless the managing party has been negligent in which case
he bears all the loss. Mudaraba and Musharaka transactions are typically applied to private
equity investments or to asset management-type instruments. In the latter, the skill of the bank
is their ability to seek out investment opportunities and to mobilise funds. In retail finance
Musharaka contracts are often applied to provide home purchase plans.

Cost plus financing. Murabaha contracts are contracts for the deferred sale of goods at cost
plus an agreed profit mark-up. Murabaha has a variety of applications and is often used as a
financing arrangement, for instance for receivables and working capital financing. A special
form of Murabaha is the Commodity Murabaha, in which the underlying asset is a physical
commodity (often an LME base metal). Commodity Murabaha is mainly used for interbank
liquidity management.

Leasing. Ijara contracts in Islamic finance are largely comparable with conventional leasing
contracts, in which the lessee pays periodical rental payments to the lessor in return for the use
of an asset. Both operational lease (Ijara) and finance lease (Ijara wa Iqtina or lease ending in
ownership) are permissible.

Sukuk or Islamic Bond. Sukuk is a certificate investment, a bond-type instrument, but unlike a
conventional bond, the Sukuk holder also owns a proportional part of the underlying asset. The
Sukuk can be based on each of the abovemic finance covers a range of financial services and
markets similar to conventional finance, such as banking, capital markets, insurance, asset
management and advisory services.

Contracts/Instruments

Transactional Financing Intermediation Social Welfare


Contracts Contracts Contracts Contracts

Murabahah
Fee-Based Insurance
Bay' (Sale) (Trade Partnership Gratuitous
Services (Takaful)
Financing) Loans (Qard-e-
Hasna)

Sarf Asset Backed Guarantee


Mudarabah
(Exchange) (Ijarah/Istisna) (Kitala)

Trust (Waqf)
Musharakah Fee-based
Sale of Right Musharakah
(Equity Service (Jo'ala)
to Use
(Ijarah/Istisna) Partnership)

Custody
(Amanah)

Figure 2: Commercial and Business


Transaction Contracts Representation
(Wikala)
Source: Iqbal and Mirakhor, 2007

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Murabaha
Key Islamic financial products and services
A form of asset financing where an Islamic
finance institution purchases an asset and then
are shown in Figure 3.
sells it to its client at a higher price (i.e., mark-
up sale) with deferred payment terms. The
interest that would ordinarily be paid by the 2.3. ISLAMIC FINANCE DELIVERY MODELS
client in a conventional loan and which would
constitute the banks profitis replaced by the
The main types of organisational structures
difference between the purchase price and the
sale price. or delivery models for the provision of
Islamic finance products, in order of
Mudaraba
increasing preference from a Shariah
A form of limited partnership where an
investor (the silent partner) gives money to an perspective, are highlighted in Table 1.
entrepreneur for investing in a commercial
enterprise. The profits generated by the
investment are shared between the partners in
a pre-determined ratio. The losses are borne
only by the investor

Musharaka
Unlike a mudaraba transaction, both partners
in musharaka must contribute capital to the
partnership. Both partners or one of them may
manage the venture or alternatively both may
appoint a third party manager to manage the
investment. While profits may be shared in a
pre-determined ratio, losses are shared in
proportion to the capital contributed.

Ijarah
Similar to a hire-purchase, the bank purchases
the asset and allows the customer to use it for
an agreed period and for an agreed rent.

Sukuk
Shariah-compliant financial certificates of
investment that are similar to asset-backed
bonds.

Takaful
Similar to a mutual insurance arrangement, a
group of individuals pay money into a Takaful
fund, which is then used to cover payouts to
members of the group when a claim is made.

Figure 3: Products and Services of


Islamic Finance
Source: Austrade, 2010

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Table 1: Islamic finance delivery models
Delivery Model Definition
Islamic A term which describes conventional banking institutions that offer Islamic
Window products through their main distribution networks, e.g., branches providing
both conventional and Islamic banking and financial products. There are
Shariah restrictions around co-mingling of funds, so funds, accounts and
reporting must be maintained separately. This effectively means the Islamic
window operates as a separate entity, but infrastructure, processes and
operations are shared. Islamic windows are typically situated at the lower
end of the Shariah compliance scale.
Islamic A conventional institution operates a separate subsidiary so that the
Subsidiary distribution and operational infrastructure is completely separate from the
conventional bank. The Islamic product range will generally be broader than
an Islamic window. Typically, only Islamic products are provided although a
customer relationship may be managed by both conventional and Islamic
sides of a bank. Significantly, capital funding (at least initially) is provided by
the parent company on the basis of Shariah approved contracts.
Full-Fledged A wholly Islamic banking institution that operates as a stand-alone entity.
Islamic Bank Full-fledged banks offer only Islamic products and typically have a full range
of products compared to an Islamic window of a conventional bank. A full-
fledged Islamic bank would be capital funded and set up from Shariah-
compliant funds, although it could also have been converted from a
conventional bank operation into an Islamic bank. All transactions within a
full-fledged Islamic bank would need to be Shariah-compliant (including
treasury and risk management operations).

2.4. HISTORICAL DEVELOPMENT OF ISLAMIC FINANCE

The embryo of the notion of interest-free financing had probably been developed in the late
nineteenth century when Barclays Bank was establihed in Cairo to raise funds for the
construction of the Suez Canal. The establishment of such an interest-based bank in a Muslim
country evoked opposition from its inception. In the 1890s, a Muslim community in southern
India took the first step in pirsuing an Islamic mode of economc activities by establishing
interest-free loans. An Interest Free Credit Society was estalished in Hyderabad, India, in 1923.
During the first half of the 20.th century, several attempts were made to highlight the
differences betwen the emerging conventional economic system and the areas where it
conflicted with Islamic values. The need for an alternative economic system conformin to the
principles of Islam soon came to the fore and economists began to lay out alternatives to the
conventional banking system by exploring Shariah-compliant contracts, especially equity
partnership.20.

20
Zamir Iqbal and Abbas Mirakhor, 2007

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First modern Islamic finance institution (IFI) emerged in the 1960s and 1970s. Since then,
Islamic banking and finance has spread to a large number of Muslim countries, including the
Gulf Cooperation Council (GCC) states (including Bahrain, Kuwait, Oman, Qatar, Saudi Arabia,
and the United Arab Emirates - UAE), Malaysia, and the Arab world at large.

Table 4: The Historical Picture of Islamic Finance Develoment


Time Scale The Occurence
Pre-1950s Barclays Bank opened its Cairo Branch in the 1890s to process financial
transactions related to the construction of the Suez Canal. Islamic scholars
challenged the operation of th eBank in relation to its dealing with interest. The
majority of Shariah scholars declared that interest in all its forms amounts to the
prohibited element of Riba.
1950-1960 Initial theoretical work in Islamic economics began. By 1953 Islamic economists
offered the first description of an interest-free bank based either on two-tier
Mudarabah or Wakala basis. Subsequently, Mitghamir Bank in Egypt and
Pilgrimage Fund in Malaysia were establsihed.
1970s First Islamic commercial bank, Dubai Islamic Bank opened in 1974. Following that,
the Islamic Development Bank (IDB) was established in 1975. In this era,
accumulation of oil revenues and petro-dollars increased demand for Shariah-
compliant products.
1980s Islamisation of economies in Iran, Pakistan, and Sudan took place when banking
systems were converted to interest-free system. Increased demand atrracted
Western intermediation and institutions. In 1981 the IDB established The Islamic
Research and Training Institute (IRTI). Countries like Bahrain and Malaysia
promoted Islamic Banking parallel to the conventional banking system.
1990s Attention was paid to the need for acounting standards and regulatory
frameworks. Accounting and Auditing Organisation forIslamic Financial Institutions
(AAOIFI) was established. In this era, Islamic Insurance (Takaful) was introduced
and Islamic Equity Funds were establsihed. Interestingly enough, Dow Jones Islamic
Index of Shariah-compatible stocks were developed.
2000-now Islamic Financial Service Board (IFSB) was established to deal with regulatory and
supervisory, and corporate governance issues of the Islamic financial industry. It
was in this er athta Sukuk (Islamic Bonds) were launched.
Source: Khan (1966) and IDB (2005) in Iqbal & Mirakhor (2007)

Islamic finance grew through the 1980s with traditional retail and commercial banking activity
(including trade finance) gradually being recast in Shariah-compliant forms. This took place
particularly in the GCC states and in Malaysia. Since then, Islamic financial products have grown
in range and sophistication to include capital market, insurance and funds management
products. By the 1980s, Iran, Sudan and Pakistan began mandating Islamic banking and finance
systems, although mandatory implementation in Pakistan has been postponed. The GCC and
Malaysia have been most active in developing dual systems where Islamic and non-Islamic
financial institutions operate alongside each other. In the GCC, Bahrain took the lead in
developing an Islamic banking system. Since the end of the 20 th century, European banks have
grown their Islamic finance operations across the Gulf and Asia. In 2002, the UK Government
adopted a policy to facilitate the growth of Islamic finance and the growth of the UK as an
international Islamic finance centre. An increasing number of countries in Europe and Asia have
followed suit.

Islamic finance institutions in general have been more resilient to the global financial crisis
(GFC) than conventional banks. The strength in Islamic finance is derived from the prohibition of

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selling of something which one does not own (for example short-selling is generally prohibited
under the Shariah) and a requirement of profit sharing and risk sharing between an Islamic
finance institution and the customer, which entails appropriate due diligence and the
integration of the risks associated with the real investment activity into the financial
transaction. Islamic finance institutions also tend to avoid speculative investments (such as
derivatives) which insulates the parties from excessive risk exposures. However, Islamic banks
have not been completely shielded from the GFC.

2.5. ISLAMIC FINANCE MARKET

Project finance (PF) is defined as the raising of funds on a limited-recourse or non-recourse


basis to finance an economically separable capital investment project in which the providers of
funds look primarily to the cash flow from the project as the source of funds to service their
loans and provide the return on equity invested in the project. Project finance is the long term
financing of infrastructure and industrial projects based upon the projected cash flows of the
project rather than the balance sheets of the project sponsors21.

The MENA region accounted for the largest regional share of global project finance market in
2013, with a total of US$ 87.6 billion-worth of deals signed. While government spending has
been the key source for the project finance market in the region, public private partnership is
also being explored to finance some mega projects, especially in the transport and industrial
sectors where massive investments are required 22. There has been a material shift in project
financing in the MENA region since the GFC in 2008. Significant uncertainty over the global
economic outlook and tighter credit conditions has led to a retreat of lending to the project
sectors and an increase in the cost of capital. In addition, foreign banks have also been cautious
given recent experience of deep haircuts and restructuring in the MENA region, which has
reduced appetite for project financing23. On the other hand, regional banks (Figure 3) are
playing much more active role, with greater use of local currency tranches [13]. With ongoing
liquidity issues and the Euro crisis, this trend is unlikely to reverse.

There are about 2.04 billion Muslims worldwide, representing approximately 28 percent of an
estimated global population of 7.15 billion in 2013 24. According to a statistical estimate carried
out in 200925, while Muslims are found on all five inhabited continents, more than 60 percent of
the global Muslim population is in Asia and about 20 percent is resident in the Middle East and
North Africa; with the Middle East North Africa (MENA) region owning the highest percentage
of Muslim majority countries. The weighted map of the world (Figure 3) shows each countrys
relative size based on its Muslim population (figures are rounded to the nearest million).

21 Abdullah, A.Z., et.al., 2014.


22 Trade Arabia (2014a).
23 AECOM, Middle East Construction Handbook 2013.

24
Muslim Population 2014. Available from: www.muslimpopulation.com/World/.
25
Pew Research Center. A Report on the Size and Distribution of the Worlds Muslim
Population. 2009.

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Islamic finance represents just one percent of global financial assets, suggesting two factors:
first, Muslim countries, on average, have a lower GDP per capita; second, Muslims have been
relatively willing to use conventional finance. However, in recent years significant economic
growth has been occurring in some Muslim countries such as Indonesia, and this trend towards
better economic performance is expected to continue. Dynamic growth in Islamic finance will
potentially be driven by the following factors26.

Rising oil revenue and strong economic growth of the Gulf: In the past few years, economic
growth in the GCC has been robust on the back of higher oil prices. The GCC holds around
half of the worlds known oil reserves, and oil earnings account for 70 percent of the GCCs
exports and revenues. The substantial petrodollar liquidity in the Gulf economies has meant
that petrodollar investors are increasingly seeking to invest in offshore assets, a proportion
of which is sought in the form of Shariah-compliant financial assets.
Demand from Muslim and non-Muslim investors: Investors from the Middle East and Asia
are increasingly seeking to invest in products that are compliant with their religious beliefs.
Surveys suggest that half of the Muslims worldwide would opt for Islamic finance if given a
competitive alternative to conventional services.
Low penetration levels: In spite of the growth in the Islamic banking and finance industry,
there remains a lack of depth across asset classes and products, signifying untapped
potential. In particular, countries such as Indonesia, India and Pakistan which have the
largest Muslim populations in the world are not considered to have well-developed Islamic
banking and finance industries.
Ethical character and financial stability of products: Islamic finance is attracting attention in
a world of increasing corporate social responsibility. Islamic finance institutions have not
invested in impaired asset classes that have hampered many conventional banks financial

26
Austrade, Islamic Finance.Figure
2010.3: World Distribution of Muslim Population
Source: . PEW Research Center, Global Muslim Population, 2009.

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profiles and performance recently.

With increasing regional bank lending, there is also an increasing use of Islamic financing
structures. The Islamic project finance market has grown significantly over the past decade. The
share of Islamic finance in project finance market in the Middle East increased from 12.5
percent in 2006 to 30 percent in 2012 [14]. In the longer term and with the development of
regional capital markets, the role of Islamic debt finance could play an increasingly important
role [12]. The reliance on Islamic tranches in project finance has become a typical feature in
many of the GCC countries [15]. Figure 4 shows the substantial increase of Islamic finances
share in project finance market in the GCC countries since 2010.

Figure 3: Change of project finance bank profile over GFC in Middle East [13]
Figure 4: GCC Islamic project finance by volumes [15]
Figure 5: GCC Islamic project finance by sectors [15]

Historically, energy and natural resources projects benefitted from Islamic liquidity.
Infrastructure projects will also attract Islamic financing since more public private partnership
(PPP) projects are brought to the market (Figure 5). Islamic project finance has now established
itself as an essential component of the debt mix available (and sought) for large infrastructure
and energy projects in the region. The size of the Islamic tranche is increasing in size and has a
growing number of financial institutions participating in it.

Although Islamic project finance is essentially a Middle Eastern phenomenon, there have been a
few scattered and Islamically structured deals outside the region [16]. For example, Islamic
finance is increasingly being used in major infrastructure projects in the United Kingdom (UK),
such as The Shard of Glass, the Olympic Village and the redevelopments of Chelsea Barracks,
and Battersea Power Station. There is potential for further funding of the UKs infrastructure
requirements given the Governments positive and progressive attitude towards Islamic finance
[5]. With an increased global need for infrastructure expenditure, the demand for Islamic
project finance is expected to grow [16].

Latest data shows that more than half (65.9 percent) of the Islamic financing facilities signed in
2013 carried tenors of at least 10 years, a significant leap from the 19.27 percent recorded in
2012. From the pool of Islamic financing issued in 2012, the largest share was held by facilities
with maturities of zero to three years (34 percent), however this figure fell to less than 10
percent in 2013, reaching just 8.2 percent. This shift towards Shariah-compliant papers of
longer maturities is attributed to the increased number of long-term infrastructure projects
underway and the lingering after-effects of the financial crises which opened the eyes of
investors to the advantages of longer-term financing; and it is anticipated that this trend will
continue in 2014 [17].

FIT BETWEEN ISLAMIC FINANCE AND INFRASTRUCTURE DEVELOPMENT

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Infrastructure development plays a crucial role in overall national development. It has a


multiplier effect in creating social and economic well-being of societies, such as opening
employment opportunities, reducing the cost of production of goods and services, stimulating
increase in the demand for goods and services, and facilitating financial intermediation.
Developing infrastructure has become one of the greatest spurs of economic growth of nations.
However, infrastructure development projects are usually capital intensive normally with large
amount of investment incurred at the initial stages of projects, involving huge sunk costs and
long operating life. Funding for these projects has historically been 100% government financed.
This has proved to be insufficient, volatile and in many cases resulting in inefficient allocation of
resources that gives rise to white elephant and abandoned projects [18]. Potential sources of
funding as alternatives and/or complementary sources to government funding of infrastructure
projects are seen as the viable solution proffered to address this problem.

Nowadays, the preferred form of financing large scale infrastructure projects worldwide is
through project financing. There are many projects that are financed with a debt to value ratio
as high as 80 percent and with project duration as long as 20 to 30 years. Since the main
purpose of engaging in project financing is to transfer and allocate the risk to the several of
parties based on the expertise, most of these infrastructure projects are financed non-recourse
to the sponsoring companies through public private partnership (PPP). In other words, there is a
contractual partnership between the public and private sector agencies and the private sector is
entrusted with the task of providing infrastructure facilities and services that were provided by
the public sector traditionally [19].

PPP is a work model that is based on a contract or concession agreement between a


government or statutory entity on one side and a private sector company on the other side, for
delivering an infrastructure service on payment of user charges. Its goal is to combine the best
capabilities of the public and private sectors for mutual benefit. It is used for building new
and/or upgrading existing public facilities. The private partner assumes a greater role in the
planning, financing, design, construction, operation and maintenance of these facilities,
whereas the governmental body assumes the guarantee for the revenues and controlling the
investment. Advantages of PPP include [20]:

improved and expanded infrastructure services that would not be there otherwise;
transfer the burden of raising funds from government to the private investor;
re-allocation of government resources for other urgent uses;
better allocation of risk between the public and private sectors;
reduce public sector risk and improve budget certainty through improved service
delivery;
operational, administrative and technological know-how transfer, training of local staff
and development of domestic capital markets; and,
stimulate economic growth.

The rationale behind PPP is to be able to develop a project more quickly and more efficiently
than the government could accomplish on its own. PPP has now evolved into primarily a vehicle

An investigation of Shariah-compliant
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for assembling a consortium of investors, lenders and other participants to undertake
infrastructure projects that would be too large for an individual investor to underwrite [19].
Funding an infrastructure development project is never an easy or simple task. The current
jittery state of the world's lending markets is making the task even harder. In the wake of the
global financial crisis, banks are under pressure to shorten maturities, reduce capacity, and
charge higher interest rates, which creates more risks in infrastructure funding. Meanwhile,
given the ongoing problems with parts of the banking systems in the Eurozone, European banks
are cutting back their exposure outside their home markets. With the outlook for the global
lending markets remain uncertain, one of the solutions may rely in finding alternatives to
conventional financing, such as Islamic finance [21].

The nature of infrastructure projects makes logical fit for Islamic finance. Islamic finance is
governed by Shariah [19, 21-23]:

infrastructure assets are true to the premise of Islamic financing, i.e., to channel funds
for the greater good of society;
the asset-backing nature of Islamic financing may provide a better funding match for
infrastructure projects than traditional lenders such as banks, as Islamic finance
product investors typically have an appetite for longer tenors than bank loans, and
prefer stable and predictable cash flow, traits that are typically associated with
infrastructure projects (indeed, the short tenors of bank loans may introduce
refinancing risk for these sorts of long-term developments); and,
referring to the risk sharing philosophy of Islamic finance, one of the characteristics of
infrastructure projects is the involvement of various of parties, which necessitates the
element of risk sharing, thus eminently in conformity with Islamic finance.

Right now there are large capital accumulations in the Middle East (and many oil and gas
producing jurisdictions) in multiple levels: national governments, financial institutions and
individuals. Middle Eastern jurisdictions are conscious of the need to diversify away from oil and
gas as a primary revenue source. They are also conscious of the need to diversify their base and
encourage greater involvement by Western financial institutions. This is particularly true in the
area of large, capital intensive projects. These factors, among others, are driving a concerted
and immediate program of investment in infrastructure, real estate and industrial projects
throughout the Middle East and, to a lesser extent, in other Organisation of Islamic Cooperation
(OIC) jurisdictions. At the same time, after centuries of dormancy, the field of Islamic finance
has entered a period of transformation and innovation and is growing at an enormous rate.
Shariah-compliant financing is no longer a technique specific to the OIC jurisdictions; it is used
the United States and Europe as well [24].

TYPES OF ISLAMIC FINANCING IN INFRASTRUCTURE PROJECTS

The origins of Islamic funding in project financing transactions trace back to the early 1990s,
with the US$ 1.8 billion Hub River power project in Pakistan which involved a US$ 92 million
Islamic tranche. In the past decade we have witnessed a growing application of Islamic finance

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CHAPTER/ANNEX TITLE

to complement and in some cases serve as an alternative in financing infrastructure projects in


various parts of the world [18]. The size of these tranches has progressively increased.
Year 2006 saw the first wholly Islamic project financing, Saudi Arabias US$ 526 million Al-Waha
Petrochemical Project, and there have been others since. For example, the entire commercial
tranche in the US$ 2.5 billion Rabigh independent power project in 2009 was Islamically
structured, while the US$ 1.1 billion Madinah International Airport in 2012 was mainly financed
Islamically. There are a number of multi-billion dollar mega-projects that have been co-
financed, due to their sheer size, by a number of export credit agencies such as Export-Import
Bank of the US or Japan Bank for International Cooperation. Even these institutions have been
comfortable in participating side-by-side with Islamic banks [16].

At the heart of Islamic finance is the need for any product to be compliant with Shariah law.
One of the principles of Shariah law is that investors are not permitted to earn interest (known
as riba), although an investor or financier may, for example, generate a yield from profit
sharing, sale, or leasebacks. Common Islamic finance structures include musharaka (joint
venture), mudaraba (limited partnership), murabaha (cost plus financing) and ijara(operating
lease). In infrastructure context, there are various Islamic financing techniques that could be
utilised. Two most commonly used products are istisna-ijara and sukuk [25].

An istisna-ijara structure incorporates an istisna contract that applies to the construction phase
of a project, and an ijara contract for the operations phase. An istisna is a type of procurement
contract whereby a financier purchases the relevant asset, to be constructed by the customer,
by making part payments to the customer during construction (similar to drawdowns along a
construction S-curve). Once the asset is built and handed over to the financier, the customer
then leases the asset back from the financier (an ijara) at a rental rate that reflects a
conventional repayment and interest profile. An alternative is to have parallel itisnas. Besides
the istisna whereby the financier procures construction of the asset (the drawdown
mechanism), there is a second whereby the customer buys the asset from the financier on
deferred payment terms (the repayment profile).

While sukuk has generally being a corporate financing technique, there is a growing tendency in
established Islamic finance markets to structure project sukuk. Sukuk involves Sharia-compliant
financial certificates, which are broadly comparable to asset-based bonds. One way in which
they can be structured is by way of a special purpose securitisation vehicle which acquires an
asset from an originator (i.e., the borrower). The securitisation vehicle then leases the asset (by
way of ijara) back to the originator for a rental which broadly reflects repayment of principal
and interest under a more conventional financing arrangement. The securitisation vehicle
issues the certificates to investors to which the periodic rental income is distributed. At the
conclusion of the arrangement, the originator will repurchase the asset and the investors will
receive the sale proceeds (i.e. face value of their certificates).

SUKUK FOR TRANSPORT INFRASTRUCTURE DEVELOPMENT PROJECT


Sukuk vs. conventional bonds

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infrastructure projects
Sukuk, the plural of sakk, are certificates that represent a proportional undivided ownership
right in tangible assets or pool of assets that comply with the principles of Islamic finance [18].
Sukuk are issued with the aim of using the mobilised funds for establishing a new project,
developing an existing project, or financing a business activity as per the respective shares. The
trading of investment sukuk is subject to the terms that govern the trading of the rights they
represent. The owners of these certificates share the return as stated in the subscription
prospectus and bear the losses in proportion to the certificates owned (held) by them [26].
Sukuks are issued for a purpose namely for a specific project or asset. Hence, they are tied to
real economy [23].

Sukuk are akin to conventional bonds in economic terms. Initially, Islamic securities (sukuk)
were introduced as an Islamic alternative to the conventional bonds which function more as
fixed-income instruments. However, as the sukuk market develops, it becomes increasingly
distinct from conventional bond instruments (Table 5)[23]. The conventional bond represents
the issuers pure debt, while sukuk represents an ownership stake in an underlying asset for a
defined period when the risk and the return associated with cash flows generated by underlying
assets in a pool are passed to sukuk holders (investor)[10].

Table 5: Sukuk vs. conventional bond [26]


Parameter Sukuk Conventional Bond
Issuer A sukuk issuer shall be engaged in Shariah-compliant business activities.
An issuer of conventional bonds is not limited in its business activities.
Investor base Enjoys a wider investor base from both Islamic and conventional investors
Conventional bonds can only tap the conventional investors.
Ownership Investors take direct ownership of an underlying asset or pool of assets.
A conventional bond is purely the financial debt of the issuer.

Sukuk do not pay interest but generate returns through actual transactions such as profit-
sharing or leasing. Under the mechanics of sukuk, returns to investors or sukuk holders
represent rights to receive payments from a trade transaction, ownership of a particular asset,
or a business venture. In contrast, the returns to conventional bondholders represent the right
to receive indebtedness for borrowed money [26]. In other words, the Shariah accepts the
validity of a financial asset that derives its return from the performance of an underlying asset.
For example, an ijarah (lease) contract that is often used to structure sovereign sukuk creates a
lessee or lessor relationship, which is different than a lender or borrower relationship [10].

Overview of global sukuk issuances

The sukuk market is a fast growing one, reflecting increased investor interest in the instrument.
There is an appetite and demand for investment in sukuk that goes well beyond Islamic
investors among those investors that wish to gain exposure to diverse but high quality assets
[18]. To investors, sukuk provide the opportunity to invest in a new asset class, create an
avenue for a more efficient and effective allocation of capital, and facilitate the channelling of
surplus savings into ethical investments. Concurrently, the issuer is able to widen and diversify
its investor base which could lead to a competitive and sometimes lower pricing [26].

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Sukuk are now being issued in many regions of the world which have very different legal
systems. The growth in demand over recent years raises challenges to the sukuk market which
has led to slight differences in certain aspects of sukuk issuance among the range of
jurisdictions. A prime example of this is allowable underlying assets in a sukuk transaction. For
example, under the Malaysian jurisdiction, debt receivables are considered a permissible asset
class for securitisation according to the Shariah Advisory Council of Securities Commission
Malaysia. Different jurisdictions may utilise different sukuk structures and thus different
methods of raising investors funds.

Project financing structures are versatile enough to accommodate a multiplicity of Shariah


compliant financial instruments. Thus, the myriad of Islamic finance vehicles in the market can
be deployed in project finance. Annexe 1 compares the types of selected Sukuk [26]. Sukuk
inherently have huge potential as a medium of financing infrastructure projects through the
linkage of cash flows and real assets. Sukuk has been tested in many markets covering various
types and offering levels [19].

Sukuk issuance has been by both corporate and public entities in both Muslim and non-Muslim
countries. The private sector arm of the World Bank, the international Finance Corporation last
issued its sukuk in 2009 and it plans to issue sukuk in the future every few years. The German
Federal State of Saxony-Anhalt issued US$ 123 million sukuk as early as 2004 and more
recently, General Electric (GE) issued US$ 500 million lease-based sukuk in November 2009.
Japan after passing laws that allow banks to do Islamic finance is set to issue a sovereign sukuk.
Three different Japanese multinationals have issued both US dollar-denominated and local
currency denominated sukuk out of Malaysia [23].

In the backdrop of global macroeconomic challenges and financial vulnerabilities in major


markets, the fast expanding pool of global Shariah-compliant funds over the years have become
an attractive source for various sovereigns, government related entities and corporates to tap
into in order to meet their financing needs. The global total volume of issuances in 2013
reached above US$ 119.7 billion. The global primary sukuk market continues to be driven by
robust infrastructure funding requirements, particularly in the GCC, the still accommodative
monetary policy that makes sukuk an attractive asset class relative to conventional bonds, and
strong demand for quality papers to meet regulatory requirements. Malaysia remained the
largest (68.8 percent) primary market for issuances in 2013, followed by Saudi Arabia and UAE.
Meanwhile there were inaugural issuances from Oman, Mauritius, Luxembourg and Nigeria
during the year [26]. Figure 6 compares the amount of sukuk issuances in 2013 among 18
countries.

Figure 6: Sukuk issuance by domicile and share in 2013 [26]


Sovereign issuances were at US$ 74.7 billion in 2013. Overall corporate sukuk issuance stood at
US$ 31.5 billion in 2013. Government related entities issuances were US$ 13.5 billion. The
strongest growth was seen in the power and utilities and real estate markets where issuances
grew 69.3 percent and 55.1 percent year on year, respectively (Figure 7).

Figure 7: Sukuk issuance by sector in 2013 [26]

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By sukuk structure during 2013, murabahah accounted for 57.7 percent of total volume, 89.6
percent of which were issued in Malaysia. Notably the ijarah structure accounted for 44.1
percent of the number of sukuk issued in the GCC, although murabahah accounted for the
largest share by issuance amount (Figure 8).

Figure 8: Sukuk Issuance by structure in 2013 [26]

Sukuk issuances for transport infrastructure development

Sukuk have been used extensively for infrastructure projects in the oil and gas sector, water,
power and transportation. The sukuk market offers longer-term funding than is typically
available from banks, which face regulatory pressure to shorten maturities, or in Europe, where
a credit crisis is still unfolding [23]. Sukuk have served as alternatives to government funding or
private debts for private concessionaires [18].
There is an increasing trend of sukuk issuances for infrastructure projects (Figure 9). Between
2001 and 2013, a total of US$ 84.3 billion worth of infrastructure sukuk has been issued by
more than 10 different countries [27]. Examples of projects include:

sukuk in Saudi Arabia of size US$ 4.06 billion to finance expansions of Abdul Aziz
International Airport (KAIA) in Jeddah and King Khalid International Airport (KKIA) in
Riyadh; and,
Kuala Lumpur International Airport 2 Expansion of size US$ 0.3 billion in first tranche
and US$ 0.5 billion in second tranche partnership between Government of Malaysia
and Malaysia Airport Holding Berhad.

Figure 9: Infrastructure sukuk issuances (2001-1Q2014) [27]

Malaysia, Saudi Arabia, and UAE are the in the lead of financing infrastructure development
using sukuk (Figure 10). It can be said that project finance helped build the corporate sukuk
market when it first started in 1990 in Malaysia. Post-2000, we have seen sukuk issuances
based on Islamic project finance blossom globally, led by Malaysia with issuances made by the
likes of Sejingkat Power Corporation in 2000, Projek Lebuhraya Utara-Selatan in 2002, New
Pantai Expressway in 2003, Ranhill Powertron in 2005, Plus SPV in 2006 and Pengurusan Air SPV
in 2009. The rest of the world joined the fray in undertaking sukuk-based Islamic project
financing in the past two to three years. In 2013 in Saudi Arabia, we saw Saudi Electricity Global
Sukuk Company issue a US$ 2 billion sukuk, which is helping to pave the way for more such
issuances in the GCC in the future [16].

Figure 10: Infrastructure sukuk issuances by country (2001-1Q2014) [27]

In Malaysia, for example, over the period covering the government's ninth (2006-2010) and
tenth (2011-2015) plans, sukuk for infrastructure related activities helped to develop transport
infrastructure and improve the service quality of power, water, and gas utilities. During
Malaysia's ninth plan (Table 5), issuers raised about US$12.6 billion in infrastructure-based
sukuk, accounting for close to 40% of total corporate sukuk issuance over that period. They

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used the proceeds to upgrade key infrastructure assets, such as Kuala Lumpur International
Airport, key ports such as Westport and Tanjong Pelepas, and roads and bridges, including
Southern link, Senai Desaru Expressway, Maju Expressway, and Penang Bridge.
The contribution from Islamic finance has picked up in the current tenth plan (Table 6), where
currently close to 80 percent of total corporate issuance as of June 2012 are used for
infrastructure related activities. These include very sizable issuance by infrastructure related
companies, such as Projek Lebuhraya Utara-Selatan Bhd. and Malaysia Airlines System in early
2012, port operators Westports and Tanjung Langsat, rail company Syarikat Prasarana Negara,
and water company Pengurusan Air. Annexe 2 provides a more detailed list of sukuk issuances
to finance infrastructure projects in Malaysia since 2006.

Table 6: Sukuk Issuance by sector in the ninth and tenth Malaysia plan [23]
Ninth Malaysia Plan (2006-2010) Tenth Malaysia Plan (2011-2015)
Sector Total Sukuk Issuance (mil. US$ equiv.) Contribution to Total
Corporate Issuance (%) Total Sukuk Issuance (mil. US$ equiv.)
Contribution to Total Corporate Issuance (%)
Airports 790.2 2.6 79.0 0.4
Airlines - - 316.1 1.5
Ports 625.1 2.1 335.2 1.6
Shipping 1,178.4 2.9 68.4 0.3
Roads 6,822.1 22.5 10,683.2 49.6
Rail 1,475.4 4.9 632.6 2.9
Power 579.9 1.9 4,239.0 19.7
Water/Waste 1,115.6 3.7 867.7 4.0
Total 12,586.7 38.8 17,221.2 79.9

Despite the progress made, there are still improvements to be made [27]:

high administrative costs - related to setting up special purpose vehicles, need to


obtain rating from international rating agencies;
legal risks - mainly associated with bankruptcy laws, Shariah compliance and regulatory
clarity on issues conflicting between civil law and Shariah law;
currencies hedging - related to available Shariah-compliant methods related to
swapping issuance proceeds into other currencies; and,
Identifying projects to deploy sukuk proceeds - unlike conventional bonds, sukuk are
issued for a purpose and this has to be specifically known in advance before final
issuance of sukuk.

Islamic finance institutions have taken the form of commercial banks, investment banks,
insurance companies, funds management companies and other financial services companies.
According to The Banker [9], in 2013 the number of institutions reporting Shariah-compliant
assets grew to 349 from 307 in 2012, a 13.68 percent in new institutions; measured by Shariah-
compliant assets of financial institutions, the global Islamic finance industry is estimated at US$
1267 billion in 2013, representing an 8.67 percent annual growth from US$ 1166 billion in 2012.
These total assets have been rising for the seventh consecutive year since 2006, yielding an

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extremely healthy compound annual growth rate at 16.02 percent; Islamic standalone banks
still account for the bulk (US$ 1019 billion) of assets in 2013.

On a regional basis, the Middle East and Asia are the primary locations for Islamic capital. In
particular, the UAE, Bahrain and Malaysia are seen as the main centres of Islamic finance, with
significant activity also taking place in London. Table 3 lists the top 20 countries ranked by total
Shariah-compliant assets in 2013.

Table 2: Top 20 countries ranked by Shariah-compliant assets in 2013 [9]


Rank Country Assets No. of Muslin percent of
(US$ billion) Institutions Population Total
(million) Population
( percent)

1 Iran 475.89 28 73.60 99.5


2 Saudi Arabia 227.17 41 25.53 93
3 Malaysia 196.82 41 18.09 63.7
4 UAE 87.32 19 5.78 76.9
5 Kuwait 72.46 26 2.03 74.1
6 Bahrain 56.47 37 0.89 70.3
7 Qatar 53.13 10 1.19 67.7
8 Indonesia 18.99 57 209.17 87.2
9 Bangladesh 16.48 24 133.52 89.8
10 Turkey 12.11 4 71.30 98
11 Sudan 9.87 9 30.48 90.7
12 Pakistan 7.01 23 167.34 96.4
13 Switzerland 6.57 1 0.42 5.5
14 Egypt 6.51 3 76.98 94.9
15 Brunei 4.98 1 0.30 75.1
16 Thailand 4.07 1 3.80 5.5
17 UK 2.48 4 2.73 2
18 Jordan 1.88 9 6.02 97.2
19 Iraq 1.73 5 31.35 99
20 Yemen 1.68 37 0.89 70.3
Source: The Banker, Top Islamic Financial Institutions. 2013.

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CHAPTER 3: SUKUK-THE ISLAMIC BOND

3.1. INTRODUCTION

Transport infrastructure development projects are capital intensive and in Indonesia funding for
these projects has historically been government obligation. Government has so far not seriously
explored potential sources of funding as alternatives and/or complementary sources to
government funding. Private sector funding through Public Private Partnership (PPP) and other
mechanisms is one of these potential sources but PPP in Indonesia has not progressed well
despite more than ten years efforts. In the past decade we have witnessed a growing
application of Islamic finance to complement and in some cases serve as an alternative in
financing infrastructure projects in various parts of the world. This has been done through
various interests free financing modes offered by syndications of Islamic financial institutions
or through interest-free versions of conventional bonds called Sukuk. Sukuk are certificates that
represent a proportional undivided ownership right in tangible assets or pool of assets that
comply with the principles of Islamic finance. They do not pay interest but generate returns
through actual transactions such as profit-sharing or leasing27.

3.2. THE GROWING DEMAND

There is growing demand for Shariah compliant instruments in the Islamic countries as well as
the rest of the world as an alternative to conventional instruments. In the conventional financial
system, the fixed income securities play a major role in raising capital and have a significant role
in the world economy. Post crisis fund raising activities through bond offerings have again
proven the important role played by this segment of the financial system. In Islamic Capital &
Money Market, Sukuk is anticipated to play a similar role as it gives the industry the option to
issue an instrument with a fixed rate of return profile; while at the same time Sukuk structuring
also takes into account the removal of non-Shariah compliant features such as Gharar
(uncertainty), Riba (interest/usury) and Maisir (Gambling).

The Sukuk market is a fast growing one, reflecting increased investor interest in the instrument.
According to the International Financial Services London (IFSL) 2010 research, recent years have
shown that there is an appetite and demand for investment in Sukuk that goes well beyond
Islamic investors among those investors that wish to gain exposure to diverse but high quality
assets. An illustration of this growing interest is the concluded sovereign offering of Sukuk by
the Malaysian Government which was over-subscribed by over 4.5 times in just six days, where
a total of USD 9 billion in orders was received for a deal size of USD 2 billion. This was
distributed globally with 29 percent of the Sukuk distributed to the Middle East, 27 percent to

27 Jibrin, I. http://businessdayonline.com/2014/08/the-role-of-islamic-bonds-sukuk-in-infrastructure-
development/#.VKeXlfIcSP8, August 2014, accessed May 8, 2015

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Malaysia, 22 percent to the rest of Asia, 14 percent to Europe and the remaining 8 percent to
the United States.

Sukuk issuance has been by both corporate and public entities in both Muslim and non-Muslim
countries. The private sector arm of the World Bank, the international Finance Corporation last
issued its Sukuk in 2009 and it plans to issue Sukuk in the future every few years. The German
Federal State of Saxony-Anhalt issued USD 123 million Sukuk as early as 2004 and more
recently, General Electric (GE) issued USD 500 million lease-based Sukuk in November 2009.
Japan after passing laws that allow banks to do Islamic finance is set to issue a sovereign Sukuk.
Three different Japanese multinationals have issued both dollar-denominated and local
currency denominated Sukuk out of Malaysia.

Sukuk have been used extensively for infrastructure projects in the oil and gas sector, water,
power and transportation. They have served as alternatives to government funding or private
debts for private concessionaires. Examples include Malaysias USD 5.87 billion Sukuk to
develop the nations water infrastructure, and the Qatar- UAE Dolphin Project involving the
production and processing of natural gas from Qatar and transportation of the dry gas by sub-
sea pipeline across joint UAE- Qatari waters to the UAE, beginning in 2006.

A report by Standard & Poors Ratings Services indicated that demand for sukuk by corporate
and infrastructure issuers in the Gulf countries is likely to continue growing at a double-digit
pace in the year or two ahead. Issuance in the Gulf Cooperation Council (GCC or Gulf) grew a
solid 11 percent in the year to Sept. 24, 2013, to reach US$14.8 billion. Support for the market
is coming from refinancing requirements, a huge need to finance infrastructure projects, the
pullback in bank lending, and supportive governments, though investor uncertainty continues
to hold back even stronger growth.

The past year featured a sukuk with record-setting tenor of 30 years, compellingly low rates on
some big-name issuance, but also issuance volatility on the heels of the Feds announcements
about its tapering program. One of the main factors that continued to support GCC corporate
and sukuk issuance during the period to Sept. 24--and especially in the first half of 2013--was
low yields on average, because many GCC issues are denominated in U.S. dollars and are
therefore sensitive to changes in Fed policy. Other factors included some improvement in the
perceived credit quality of sukuk, arising from better economic conditions and higher oil prices,
the continued need for infrastructure finance, and calls by GCC governments (in particular
Dubai) for greater Islamic issuance by corporate and infrastructure entities.

OVERVIEW
CORPORATE/INFRASTRUCTURE

Standard & Poors Islamic Finance Outlook 2014 69

Sukuk were issued at compellingly low prices in the first half by infrastructure entities such as
Saudi Electricity Co. (SEC) and Dubai Electricity and Water Authority (DEWA), compared to
historical pricing for these entities at similar tenors. These large issuances favored

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denomination in U.S. dollars to attract international investors, and the SEC issue broke a record
in tenor with its 30-year maturity, illustrating that the market is broadening and innovating. In
the past, maturities have typically been no longer than about seven years for this asset class.

After Dubais ruler early in the year announced plans for the emirate to be the worlds eminent
sukuk hub, several government-related entities went to market including DEWA. Then in the
third quarter, following the Feds announcement of a possible tapering, issuance for GCC
corporate and infrastructure sukuk began to decline, mirroring the falloff in conventional bond
issuance. As a result, sukuk yields spiked more than 1 percentage point. Granted, the third
quarter has seen a lull in activity in the GCC in the past couple of years due to summer and
religious festivities when the markets generally tend to be less active. When the Fed indicated
that it would delay tapering, yields started to tighten again, and declined by about 30 basis
points to about 4.2 percent on average over the month to Oct. 25, according to the GCC
Corporates (GSKC) HSBC Sukuk Index. Certain issuers have returned to the market (notably in
Saudi Arabia) such as the General Authority for Civil Aviation (GACA), with a Saudi riyal 15.2
billion issue. Al Marai Co. also issued Islamic bonds, and others such as ACWA Power have
announced plans for sukuk by the end of the year. In November, the Saudi real estate entity Dar
Al Arkan tapped the market with a US$300 million, three-year issuance, and the board of the
countrys Capital. Market Authority approved Saudi Electricitys sukuk offering, whose size the
company will determine at a later time.

The drivers for sukuk in the coming years in the GCC are likely to be refinancing requirements,
the vast government programs for building out the infrastructure, and tighter global and local
regulation of banks that could dampen their issuance. Infrastructure plans include much-
needed investment in power and water, expansion related to events like the FIFA World Cup in
Qatar in 2020, and corporates aiming to diversify their sources of funding with the aim of
supporting the development of Islamic finance in the region. In the tougher regulatory
environment, issuers are likely to turn to alternative sources of funding in the capital markets,
with corporate and infrastructure entities in the Gulf favoring sukuk. In Asia, the Asian
Development Bank projects infrastructure spending at more than $8 billion over the
next 10 years. Countries like India and Indonesia have some of the largest infrastructure
development plans in the region, and China plans to spend about 9 percent of its GDP on
average for infrastructure. In the meantime, regulators in Asia are looking at how to facilitate
growth of the sukuk market. Hong Kong passed an ordinance in July to create a level playing
field for sukuk. The huge demand for finance and the growing popularity of Islamic finance as
an investable asset class among fixed-income investors in Asia, we believe, is likely to improve
the supply-demand dynamics of sukuk in the region.The CBN has granted a license to Jaiz Bank
for Islamic banking, the SEC has registered a number of Islamic Fund Management companies,
and a number of insurance operators have opened windows for Islamic insurance, Takaful. All
these types of institutions plus Pension funds wishing to cater for a section of their clients that
are averse to interest-based financial products, are in need to alternative capital market
products that are interest-free, which is a role that would be played by the Sukuk products. All
efforts should be geared to see Nigeria develop as a global financial centre in the region, much
like Hong Kong, Malaysia, Singapore, Dubai, the UK, etc , all of which have developed as Sukuk
centres.

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3.3. GLOBAL ISSUANCE

Total global Sukuk issuance increased from a size of just over US$ 1 billion towards the end of
2001 to US$ 136 billion as of 30th June 2009, a compounded annual average growth rate or
CAGR of 88 percent. The GCC has been more inclined towards international issues while
Malaysia has been more active in its domestic market. As can be seen from data in Table 3
below, domestic issues form a much higher percentage of the total global Sukuk market (74
percent) than international issues (26 percent) as of 30th June 2009 with a broad regional
break-up as follows:

Source: In-house IIFM Sukuk issuance database

Table 3: Regional Break-up of Global Sukuk Issues


GCC Malaysia Others Total
Domestic Sukuk
Value (US$ billion) 16 67 18 101
Market Share ( percent) 16 66 18 100
International Sukuk
Value (US$ billion) 29 3 3 35
Market Share ( percent) 83 9 9 100
Global Sukuk
Value (US$ billion) 45 70 21 136
Market Share ( percent) 32 53 15 100

Total
Source: Sukuk Report, First Edition, 2010

While the domestic Sukuk market forms a very important (and much larger) part of the global
Sukuk market, it is fully dominated by Malaysia and hence mostly Ringgit denominated. All
domestic issues, by definition, are denominated in local currencies. For the purpose of this
report, we have chosen to focus on issues denominated in internationally accepted hard
currencies because they are of interest to investors at large from all around the world who have
US dollars or other hard currency based operations.

Therefore, after the following section on Malaysia and Sudan, the rest of the report will focus
exclusively on the international Sukuk market.

Sukuk can be structured alongside different techniques. While a conventional bond is a promise
to repay a loan, Sukuk constitute partial ownership in a debt (Sukuk Murabaha), asset (Sukuk Al
Ijara), project (Sukuk Al Istisna), business (Sukuk Al Musharaka), or investment (Sukuk Al
Istithmar). Certificates that represent projects or activities managed on the basis of
Mudarabah. This is an agreement made between a party who provides the capital and another
party (an entrepreneur), to enable the entrepreneur to carry out business projects, which will
be on a profit sharing basis, according to pre-determined ratios agreed on earlier (participation
or trust financing). In the case of loss

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SUKUK
The Islamic Bond

Mudarabah Murabahah Ijarah


Operating Lease
Trust Financing Sale $ Purchase
Concept

Istishna Musharakah Salam


Purchase by Order or Partnership, Project
to manufacture Finance Participation Upfront Payment Sale

Figure 4: Sukuk Structure

Murabaha Certificates (Sukuk)

Are certificates of equal value issued for the purpose of financing the purchase of commodities.
The Murabaha technique (cost-plus financing) is one of the most widely used instruments for
Islamic short-term financing. It is based on the traditional notion of purchase finance. Its
structure is relatively straightforward and is based on declared markup integrated into the
selling price with a deferred payment. The Islamic financial institution purchases and takes title
of the necessary equipment or goods from a third party, and sells the equipment or goods to its
customer at cost plus a reasonable profit.es, the losses are born by the provider of the funds
only.

Ijarah Certificates (Sukuk)


This is one of the most common Sukuk issuance types, especially for project finance. Ijarah
Sukuk is a leasing structure coupled with a right available to the lessee to purchase the asset at
the end of the lease period (finance lease). The certificates are issued on stand-alone assets
identified on the balance sheet. The rental rates of return on those Sukuk can be fixed or
floating depending on the agreement. The cash flow from the lease including rental payments
and principle repayments are passed through to investors in the form of coupon and principle
payments. The Ijarah Sukuk provides an efficient medium to long-term mode of financing.

Musharakah Certificates (Sukuk)


Certificates of equal value issued with the purpose of using the mobilized funds for establishing
a new project. This is very similar to the Mudarabah contract and is widely used in equity
financing. The structure of Musharakah requires both parties to provide financing

Al-Salam Certificates (Sukuk)

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Certificates of equal value issued for the purpose of mobilizing funds. The main concept of
Sukuk Al-Salam refers to a sale, whereby the seller undertakes to supply a specific commodity
to the buyer at a future date in return for an advanced price paid in full on the spot. The price is
in cash but the supply of the purchased good is deferred. As a form of financing, the purchaser
is able to acquire the assets by advance payment at a discounted.

Istisnaa Certificates (Sukuk)


Certificates of equal value issued with the aim of mobilizing funds. This type of Sukuk has been
used for the advance funding of real estate development, major industrial projects or large
items of equipment such as: turbines, power plants, ships or aircraft (construction/
manufacturing financing). The Islamic financial institution funds the manufacturer or the
contractor during the construction of the asset, acquires title to that asset and upon completion
either immediately passes title to the developer on agreed deferred payment terms or,
possibly, leases the asset to the developer under an Ijarah.

IJARA / IJARAH Lease To Own


The term Ijara literally means rent, the Sharia process is known as Ijara-wa-Iqtina , rent with an
acquisition or rent to own. The process of Ijara can be used for equipment as well as
property. This islamic finance process is very simple. A single asset Trust is created whereby
the Trust purchases the property, and then leases the property to the customer. A portion of
each monthly payment goes towards ownership, until the customer owns 100 percent.

The basic difference between a Sharia Ijarah-wal-iqtinah Islamic loan process and a
conventional lease is the Ijarah process obligates the Trust (seller) to sell the property to you
under a Promise to Purchase. While the same contract entitles the customer to purchase the
property, the customer is not obligated to do so.

HOW THE PURCHASE PRICE OF THE IJARA TRANSACTION DETERMINED


The purchase price agreed to in the Promise to Purchase is equal to the original purchase price
less the down payment made by the customer plus $1.00. For example, if the value of the
property is $200,000 and the customer makes a $40,000 down payment, the initial amount the
customer has to pay the investor for 100 percent ownership is $160,001. As the customer
makes more payments, this amount reduces, until the final ownership payment of $1.00 is
reached.

HOW THE MONTHLY IJARA RENT PAYMENTS CALCULATED


The initial Ijara islamic finance amount financed by the customer earns profit for the investor
through monthly rental payments. Traditional amortization calculations are utilized to
determine the exact monthly payment. The mathematical formulas are acceptable as there are
no Sharia issues with these calculations. The major difference between a traditional mortgage
amortization and an Ijara transaction is that the Ijarah transaction is based upon a reverse
amortization calculation.

THE BASIS OF USING A PERCENTAGE

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While it may appear contrary to the Sharia, it is acceptable to describe the profit on an Islamic
finance transaction as a percentage. The following example highlights the acceptability of
quoting the profit as a percentage in an Ijara transaction:
1. Suppose you have a $100,000 in cash.
2. You purchase a home and pay cash for the home.
3. You rent the home to a tenant for $500 per month
4. At the end of the year you have collected $500 x 12 or $6,000 in rent
5. That $6,000 in rent is a 6 percent return on your $100,000 investment

Is that 6 percent Rent or Riba? well it is clearly it is Rent since it is based upon a business
transaction. Now lets look at a traditional mortgage interest transaction:

1. Starting with the same $100,000 cash.


2. You give someone the money.
3. They proceed to purchase the same home with those funds.
4. They pay you the same $500 per month, or 6 percent a year for use of the money.
5. This is basically rent on money

In this case is the 6 percent Riba? Yes, as it is rent on money. The first example was rent on
property. From a Sharia perspective it is acceptable to describe the profit on an Islamic
Ijara transaction as a percentage. Its also a requirement under the Truth in Lending
Act/Consumer Protection Act; any profit earned on a residential real estate finance transaction
should be described as a percentage so a customer can clearly understand what the overall cost
of the financial transaction is.

TENANT OR HOMEOWNER?

In an Ijara islamic finance transaction, you are technically a tenant. You sign a lease obligating
you to a rent payment over a period of time. However, unlike a typical rental property lease,
you are responsible for all the maintenance of the property, and you have all the other rights
and duties of a homeowner. You can sell the property anytime you wish, remodel, decorate,
landscape, sublet, or basically utilize the property for any legal purpose it is zoned for. The only
exception may be if you engage in an activity that may adversely affect the propertys value,
like demolishing a garage without rebuilding it. For all practical purposes your role is the same
as a homeowner, because once you have fulfilled your obligations under the lease or promise
to purchase, you become the owner of the property.

SHARING OF A GAIN OR LOSS

One of the basic Sharia compliance principles is there should be a sharing of either a gain or loss
in any islamic finance transaction. The Ijara transaction is structured in such a way 100 percent
of the gain is rightfully the customers. Under the Shariah, the gain or loss is shared by the
parties in a transaction according to their percentages of ownership. The Ijara transaction

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abides by this principle, in that at the time of realization of the gain or loss, there is only one
owner of the property, and that is the customer. From a procedural perspective, at the time of
sale:

1. The Trust will transfer the title of the property to the customer,
2. The customer will then transfer the title to the new buyer,
3. The new buyer will then settle the transaction according to the agreement with the customer,
4. And then the customer will settle with the trust according to the agreement between the
customer and the trust (the Ijara documents)

These procedural steps create a situation where the customer holds 100 percent title, albeit for
a short period of time, and is the beneficiary of the difference between the two agreements;
that is the sale to the new buyer, and the original promise to purchase agreement with the
trust. Find out more about Ijara Contracts or Forward Dated Ijara Contracts. There are links
to Other Islamic Finance Topics

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CHAPTER 4: CHALLENGES IN ISLAMIC FINANCING

4.1. STRUCTURING THE DEAL

There are differences between conventional project financing and Islamic financing, primarily
from the Shariah compliance aspect. When implementing PPP models for infrastructure
projects, challenges will arise in developing suitable Shariah-compliant financing structures for
these projects. The conventional financing method is based on interest. In this respect, the
element of uncertainty exists in the conventional financing method primarily in the banking and
insurance contract. Conventional financing techniques always hedge and in order to transfer
risk using the financial derivatives. The application of financial derivatives such as futures and
options, are deemed to be prohibited by many Islamic scholars due to the existence of the
element of gambling [10].

The nature of the concession model used in many PPP structures for infrastructure projects
means there may not be any (or may only be limited) physical assets - and this means that for
some projects it might not be possible to use the typical istisnah-ijarah structure in Islamic
finance. Two main issues related with the major barriers to accessibility to Islamic financing for
infrastructure projects are [10]:
institutions involve in the project financing may differ in how the Shariah
should be interpreted. Most likely to happen is that some Shariah boards allowed their
respective institution to invest in certain sukuk, while others do not allowed their institutions to
invest in such sukuk as they view them Shariah non-compliant. Government, investors, and
banks can differ in the way which Shariah is being practice. The difference opinions from
Shariah scholars to the others on whether certain practices or products are Shariah compliant
still continue.
an institutional barrier in achieving Shariah compliance is the lack of common
accounting practices, which also may increases transaction costs and raise uncertainty. A
common set of standard practices in the institutions play a crucial role in the addressing the
Shariah compliance issue.
Another potentially thorny issue is the possible variation of Shariah interpretation across
different jurisdictions on a single investment product. The market acceptance of the investment
product will face challenges. However, Shariah advisory boards for internationally distributed
investment products are now made up of scholars from different jurisdictions. This is to ensure
Shariah convergence and acceptability across different markets. Shariah scholars from different
schools of thought and geographical regions are also predisposed to respect and seek
harmonization. The challenge is to find the right balance between Shariah interpretation and
market acceptance [30].
Similarly, in all structured finance dealing, the constraint should be overcome with creativity
and innovation. Here, the constraints are based on the principles of Shariah. However, the key
question is how the structure can deal with these constraints [31]. Financing structures already
exist or have been developed to structure around such potential problems. For example, in the
Al Madinah International Airport PPP project in Saudi Arabia, an innovative financing structure
was developed pursuant to which the concession granted under the concession agreement

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itself was the subject of an ijarah [32]. The tactic to use an intangible asset may serve to widen
the base of borrowers that could access the market. Importantly, a balance has to be
determined between innovations and divergence from the Islamic principles that govern the
asset class [26].

In addition, governments should be responsive [25]. Most infrastructure projects are procured
by governments, each of which can have different approaches to the risks associated with such
projects. However, the public private partnership model is designed to promote innovation by
the private sector with a view to providing a more optimal solution. Competitive bidding
processes will continue to drive innovation in the financing of such projects and it is important
for the public sector to take the time to understand and ultimately get comfortable with the
financing solutions offered by the private sector. For solutions involving Islamic finance, this is
particularly relevant as there are conceptual differences between it and more conventional
finance, which need to be appreciated, particularly in the context of infrastructure funding.

4.2. CO-FINANCING: CONVENTIONAL FINANCING AND ISLAMIC FINANCING

Co-financing is a popular option found in financing infrastructure projects in Islamic countries.


Under a co-financed deal, the sponsors combine conventional Western finance with Islamic
finance. The challenge is to develop project finance structures that are not only consistent with
Shariah principles but are also attractive to international capital providers. However, by trying
to integrate Islamic financing with conventional financing in a single deal, complications
regarding inter-creditor agreements arose. These pertained to creditor rights in the event of a
default as well as cash flow entitlement [6]. The asset ownership requirement by Islamic
financiers generates several potential complications in deal structuring and project
management. Because the Islamic investors would own the assets, they bore ownership risk,
which could result in substantial liabilities. For example, the requirement that Islamic financiers
retain title to part of the projects assets could increase the projects riskiness from the
perspective of the Western lenders because it hinders the lenders recourse in the event of a
project default due to a reduction in the collateral backing their loans. To address this concern
one option is to place the particular assets in a special purpose vehicle with limited liability.
However, this structure has never been tested in a major litigation and it is unclear whether a
court might pierce the corporate veil and assert liability on the deals Islamic investors. In the
case of a default, it is unclear whether Islamic religious law or English law would govern the
contracts.

Furthermore in the case of an actual default, a judge usually orders an automatic stay and
supervises a liquidation or reorganization with the goal of ensuring maximum liquidation or
going concern value. Piecemeal liquidation of integrated projects would destroy its value.
Islamic investors who are owners of specific assets in the project could claim those assets and
come out whole while conventional lenders would suffer. This would violate the pari passu
treatment of most intercreditor agreements. Pari passu treatment refers to the fact that all
creditors holding the same securities should have equal claim to the assets in the project.
However, the alternative of lumping all investors together would violate the Islamic tranche.

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The standard solution is for Islamic investors to forgo their rights in the case of a liquidation or
default.

Payment of insurance and maintenance expenses associated with Islamically financed assets is
another issue. A possible solution entails signing a service management contract that obligates
the sponsors to pay insurance and maintenance expenses in a timely fashion. For example,
delay in payments is another concern. While conventional lenders could charge an interest
penalty, Islamic investors could not. To solve this problem, liquidated damages are generally
included in the Islamic tranches to ensure equal and fair treatment to all investors.
Projects partially or fully funded by Islamic investors are undoubtedly more complex to
structure than the projects funded using conventional methods. However, this should not limit
the possibility and progress of Islamic finance in project finance and infrastructure
development. As the market develops and innovative financing structures become more
widespread and familiar to investors, infrastructure projects can avail the vast amount of
wealth that nations in the Islamic world have at their disposal.

4.3. GOVERNANCE OF ISLAMIC INVESTMENT PRODUCTS

Good governance is necessary for investor protection and confidence [30]. The governance of
Shariah investment solutions focuses on two areas: investment and Shariah compliance. Islamic
investing seeks to reduce investment risk in a very similar manner to conventional investment
governance, where there is a clear benchmark in terms of global best practices. It is in the area
of Shariah governance where the industry is still coming together toward international
convergence and acceptability. In the conventional space, investment management companies
adhere to their home countrys capital market regulations. Investment products need to adhere
to the regulations of the country where the products are being established as well as to the
companys respective internal governance processes. Since Islamic capital market regulations in
many countries may still be undergoing a robust foundation-building process, there is a higher
reliance on the companys internal governance processes. The dominant market practice now is
to appoint Shariah advisory boards comprising only scholars of Islamic law. The composition of
a Shariah advisory board model could potentially evolve to a mix of these scholars, with Islamic
finance professionals such as bankers, lawyers, and accountants. This way, different views can
be taken into account, resulting in practical and implementable decisions that bear in mind the
Islamic fatwas.

In addition to the effectiveness of a Shariah advisory board itself, integrating it into a regulatory
framework can further increase its ability to make credible decisions. In some countries such as
Malaysia, Bahrain, the United Arab Emirates, the United Kingdom, and Singapore, these
investment processes, policies, and procedures have been standardized to achieve a certain
level of international acceptance and build investors confidence. There are two established
international organisations to standardise the Islamic finance industry internationally: the
Islamic Financial Services Board (IFSB) and the Accounting & Auditing Organization of Islamic
Financial Institutions (AAOIFI) (see Annexe 3 for a brief introduction).

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infrastructure projects
For example, in Malaysia, Shariah advisory boards must exist both at the capital markets
regulator level and at the individual company level. The Capital Market Services Act, which
governs the Securities Commission Malaysia, confers its Shariah advisory board with the
authority to establish the Islamic finance regulatory framework and guidelines (for companies)
in accordance with Islamic law. The Shariah advisory board is solely dedicated to this singular
role, and its members have the necessary expertise to integrate and balance Shariah
interpretation with capital markets experience and knowledge. The Shariah advisory board of
an individual company must then ensure that it complies with the relevant regulations.
Therefore, in the area of Islamic investment management, the Securities Commission Malaysia (
Malaysias Shariah Advisory Board) must then approve all Islamic investment products before
they are offered to the marketplace, whether in Malaysia or around the world.

Importantly, the inclusion of Shariah advisory board responsibilities within the capital markets
regulatory framework enables the admission of cases involving Islamic investment products into
civil court, which importantly makes the judicial decision enforceable. Malaysia identifies the
imperative role of Shariah advisory and has realized the participation of finance-savvy Shariah
advisers at the regulatory level. If such a framework is not in place, it is hard, if not impossible,
to adjudicate Islamic investment product issues and provide investors with the confidence in
the underlying law. Here are two examples:

In some Muslim countries, the capital markets regulator must obtain approval for Islamic
investment products from the national fatwa council, which is not solely dedicated to
Islamic finance regulation. The Shariah scholars at the national fatwa council may make
decisions solely on a faith-based perspective, without having the relevant capital
markets experience and expertise. This may result in a decision that does not sufficiently
take into account the interests of the capital markets. In addition, as the decision is
made outside the capital markets regulatory framework, it is difficult to admit cases
involving Islamic investing into civil court where decisions will have legal standing.

Even more disconcerting, some countries only encourage Shariah advisory boards at the
individual company level. Companies must then solely rely on the interpretation and
judgment of their own Shariah advisory boards. There is no path to obtain approval for
an Islamic investment product from a capital markets regulator or from a national fatwa
council. As there is no Shariah regulatory framework at all, this makes enforceability
even harder. Having a Shariah advisory board with balanced expertise at the capital
markets regulator level and at the individual company level will ensure that cases are
admissible in court, which is important for building investors confidence. The successful
development of a robust and credible investment and Shariah-compliant governance
environment is best achieved on a collaborative effort, taking heed of international
investors concerns. A robust governance framework will be of immeasurable value to
provide comfort to investors when financial crises occur.

4.4. LEGAL AND REGULATORY ENVIRONMENT

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While sukuk and istisna-ijara arrangements may, at first sight, be suitable structures for
infrastructure projects, there are some hurdles to overcome, particularly from a regulatory and
tax perspective. Prospective Islamic finance participants need confirm that the local regulatory
regime supports the sector. A number of regulatory issues may need to be resolved, such as
lack of specific prudential and accounting standards. The underlying taxation principle should
be for economically equivalent transactions or financial instruments, either conventional or
Islamic products, to be taxed in the same way [25].

Appropriate financial infrastructure is one of the important elements in the development of


Islamic finance. Developing financial infrastructure that complies with Shariah requirements
remains as a significant challenge to the development of Islamic finance [10]. Institutional
rigidity refers to the current weaknesses of Islamic financial infrastructure. A lack of institutional
arrangements for Islamic financing can increase the risk in providing Islamic financing for
infrastructure projects [33] due to:

Non-existent inter-bank money market;


Lack of hedging and financial engineering processes;
Non-uniform accounting, auditing and income and loss recognition systems;
Lack of best practice and uniform regulatory standards and regimes;
Weaknesses in litigation and legal support framework, particularly, in the treatment of
default;
Non-robust investment appraisal, promotion and monitoring infrastructure;
Ineffective external credit assessment systems;
Rudimentary state of financial markets; and,
Weak inter-segmental support and linkages.

Malaysia is a pioneer in using sharia-compliant sukuk bonds to fund infrastructure projects. The
construction of the iconic Kuala Lumpur International Airport in the early 1990s was fully
funded by way of sukuk issuance, and it attracted a tighter pricing for the issuer than it would
have achieved if it had issued a conventional bond. In terms of capacity of support large project
financings, we do not see any limitation for Islamic finance to do this if it has the right market
infrastructure, such as that currently available in Malaysia. The only reason why we have not
seen the same development in other jurisdictions yet is because the market infrastructure is
not ready [16].

As part of the overall strategy to identify new sources of growth 30 years ago, Malaysia focused
its efforts to build a niche to build a recognizable presence on the global financial landscape. In
2006, Malaysia embarked on a conscious strategic intent to internationalize its Islamic finance
leadership to transform the country as a global financial hub for Islamic finance. The universally
accepted legal and regulatory frameworks offered to international players are supported by a
strong political will and market players. The framework involves statutory authorities such as
the Central Bank of Malaysia and Securities Commission, with the Ministry of Finance playing a
pivotal role in ensuring the right regulatory and supervisory framework exists for the Islamic
Banking and Finance (IBF) to flourish [30].

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The precursor to the Malaysian model of IBF was the enactment of the first Islamic Banking Act
in 1983. Ever since then, Malaysia has evolved into a leading hub for IBF through various
developmental phases. With diverse ethnic demographics, Malaysia adopted a dual-banking
system in which the Islamic system grew side by side with its existing conventional counterpart.
This may lead to an important remark regarding the existence and enforceability of Shariah-
based system vis--vis conventional system. Unlike Pakistan and Iran, the jurisdictions that tried
to convert their respective financial systems to completely comply with the Shariah principles,
Malaysia introduced the Shariah-based system to coexist with the conventional and has
managed to become a leading international financial player in IBF.

Malaysia today has a comprehensive Islamic financial system that coexists within its financial
system. It has a diversity of players and a wide range of products supported by legal, Shariah,
and regulatory framework. The Malaysian model presents international investors with a
platform that adheres to global standards and best practices. This comprehensive framework
provides the governance that will enable market players and investors to have confidence, for it
ensures admissibility in court and enforceability of all cases involving Islamic finance and
investing.

To ensure the diverse players and wide range of products are supported by enforceable legal
Shariah and regulatory framework, Malaysia has instituted the Islamic Banking Act, the Takaful
Act, the Government Funding Act, and the Capital Market Services Act. There exist two Shariah
advisory councils at the national level. One is at the central bank and the other is at the
Securities Commission. The Shariah Advisory Council at the central bank makes decisions under
the local standards of the Central Banking Act. The Shariah Advisory Council in the Securities
Commission makes decisions based on the Capital Market Services Act. In the interest of
protecting investors interests and the Islamic finance community as a whole, Malaysia has a
judicial system that offers a dedicated high court to resolve Islamic finance cases. It also
established the KL Regional Centre for Arbitration. The Financial Mediation Bureau was
established to further inculcate a speedy resolution to challenges confronted in an infant
industry.

Other economies in the region can benefit from Malaysia's example, especially some countries
with large infrastructure requirements that do not have a developed local bond market. It takes
time for each jurisdiction to carry out their own different processes to put in place the right
sukuk market infrastructure [16]. Indonesia is probably in the best position to benefit from
Islamic finance, given that it has already put in place regulations for such transactions.
Indonesian government has also issued a few sovereign sukuk bonds, providing a benchmark
for the pricing of sukuk assets [21]. Indonesia has some catching up to do in terms of supportive
policies for Islamic finance [23]:

Indonesia is subject to a civil law code that doesn't recognize the separation of legal and
beneficial titles. Indonesia's sovereign sukuk involved the sale of beneficial interests on
certain properties under an ijara structure, which a government decree permitted. But
this practice hasn't flowed down to the corporate sector due to a lack of legislation.
Having beneficial ownership in an asset means enjoying the economic benefits that the

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asset brings: for example, receiving rent from a commercial property leased to another
party without actually holding its legal title. Recognition of beneficial ownership makes it
easier and cheaper to complete sukuk transactions, and therefore should attract greater
participation from the corporate sector. Transactions involving only beneficial titles have
fewer issues to deal with in terms of filing and registration of titles. In addition,
transaction costs are generally reduced because of lower stamp duty costs, if any.

Tax incentives may prove pivotal. This is because the conventional financial system has
been a tried and tested system for many decades now. For countries looking to
implement dual systems, i.e. both conventional and Islamic, Islamic financing is, in most
cases, only an alternative option. Also, the institutional sector must be convinced that
Islamic finance is a viable alternative before deciding to invest money and resources in
learning and adopting a new system. Through various tax incentives, Islamic financing
could become a cheaper alternative for corporations to raise capital. This is now the case
in Malaysia, where issuers are able to save several basis points in financing costs, and
where sukuk now account for about 60 percent of domestic bond transactions.

As long as there is a need for infrastructure development in any particular country, there will be
opportunities for Islamic project finance. And as long as there is facilitation of the Islamic
finance industry through proper legislation, regulation, legal and sharia framework in a
particular country then there will be opportunities for Islamic project finance [16]. For Islamic
finance to attract market interest and prosper, however, countries need regulatory frameworks
that create a level playing field between conventional financing and Islamic financing [21].

Innovative financing solutions, such as Islamic finance products, are just as capable of broad
acceptance by government once they become more visible in the market and it is seen that,
despite the different conceptual approach, they do not materially differ in economic
characteristics or risk profile to conventional solutions. Notwithstanding the form of the
investment structure, it is expected that the role and involvement Islamic financiers in a project
will be similar to that of a conventional debt financier. The experience in both Islamic and non-
Islamic countries, and the ability of industry to engage with governments to explain innovative
financing solutions such as securitised leases, suggests that these hurdles are not
insurmountable.

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infrastructure projects
CHAPTER 5: SHARIAH-COMPLIANT FINANCING IN
INDONESIA TRANSPORT SECTOR

5.1. THE MAGNITUDE OF INVESTMENT

Transport deficit and gaps between regions accumulated over years provide a strong indication
of the importance for Indonesia to build transport facilities, infrastructure, and services in a
rapid fashion manner within the next 5-10 years. The deficit occurs simply because of the huge
gap between the current capacity of infrastructure and transport services and demand of
economic mobility. Therefore, there will be a tremendous size of investment needed to build
transport infrastructure to fill the gap. Figure 9 exhibits the magnitude of investment needs to
The estimated magnitude of investment and financing by using macro approach has been
performed by Bappenas and JICA in the Background Study of infrastructure sector for RPJMN
2015 to 2019. In this study, investment requirements are categorized into three scenarios. In
this Background Study, Bappenas-JICA carried out a macro perspective study for infrastructure
sector, particularly with regard to debottlenecking and Key Performance Index (KPI). This study
uses macro or top-down approach using the benchmarking of GDP/Capital of USD 14.000 of
developed countries in Asias. The investment magnitude of the three scenarios is summarized
in Figure 9. The initial estimate of transport sector investment in the amount of IDR 1,270
trillion for 2015-2019 is at 100 percent full scale in accordance with the international
benchmarking of middle income countries with a per capita income of USD 14,000. The figures
for scenario 75 percent and 50 percent are IDR 1,006 billion and IDR 657 trillion respectively.
The study has somehow built a macro model or algorithm of correlation between the level of
per capita income and the magnitude of Indonesian ICOR and the need for Indonesian
infrastructure/ transport within the next 5 years.

2800 2638 The study recommends a combination


of financing scheme between the state
2400 Total Ports budget, regional budget, PPP and off-
Roads Airports balance financing, including loans and
2000 Railways Urban Transport bonds. According to the study, the
Land Transport Rural Transport scenario will require a 100 percent
1600
increase in the ratio of debt to GDP
from 22.5 percent to 26 percent, over
1200
906 20 percent contribution from PPP
805 scheme, and implementation of off-
800
balance sheet funding. In addition, the
357
280 implementation requires a strong
400 265 commitment and leadership in the
122 103
bureaucracy, especially from financing
0
and infrastructure sectors. Scenario 75
percent likely requires a greater level of
Figure 9: Magnitude of Investment (IDR Trillion)

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debt and the use of off-budget financing and PPP at the level of 20 percent. Scenario 50 percent
does not need to increase the debt ratio, 15 percent PPP implementation and use of off-budget
financing. The above macro projections explicitly require off-budget financing as a very
important part in the future development of transport infrastructure.

Table 11.1 shows a description of the financing scenarios along with its identified strategic
projects. The table shows a hard fact that road sub-sector still dominates the investment
needed if full-scale development will be carried out while the balance will shift to the transport
sub-sector for scenario 75 percent and scenario 50 percent. In scenario 100 percent, from IDR
2,543 trillion for the transport sector, the allocations for road sub-sector and transport sub-
sector are still comparable at IDR 1,274 and IDR 1,269 trillion respectively, as well as in scenario
50 percent at IDR 637 trillion and IDR 657 trillions. In Scenario 75 percent, transport sub-sector
is far ahead of road sub-sector by a margin of IDR 155 trillion. Ports and Railways are the
IDR 906 Trillions IDR 805 Trillions subsectors that must receive very big
Ports
financing in the next 5 years and it is very
much in line with the spirit to build national
connectivity and establish a more advanced
and modern national transport industry. The
IDR 357 Trillion IDR 280 Trillions strategic programs and projects contained in
Railways
RIPNAS and the NRMP can be the quick-win
projects in the pipeline of transport sector
development in the future and in developing
national connectivity.
IDR 265 Trillions IDR 122 Trillions
Urban Transport Land Transport Projections through micro-sector approach is
based on various existing planning
documents such as the Master Plan,
Blueprint, Background Study of Urban
IDR 103 Trillions
Transport and by the real conditions currently
Rural Transport associated with new state-owned enterprises
such as the air navigation institution.
Therefore both the Master Plan and Blue
Print are prepared until 2030, assumptions
are taken to predict the project activities that
Figure 8: Magnitude of Investment by Sector can or must be done during 2015-2019 to
meet the targets of the Master Plan or
Blueprint. The sector approach is projecting an investment of around IDR 2,679 trillions for the
next 5 years (Table 11.2 and Figure 11.3).

5.2. OPTIONS FOR INVESTMENT

The government is still obliged to build not commercial but economically important basic
transport for the people. This is a market where the private sector may not contribute
financially because it is financially non-viable and its non-cost recovery in nature. Meanwhile,
full cost recovery projects which are economically and financially viable can be left entirely to
private sector financing. These include special projects (e.g. Special Railway, Special Ports, etc.),

An investigation of Shariah-compliant
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infrastructure projects
that can be unsolicited in nature and in fact does not require a competitive auction. The limited
resources of financing that can be allocated by the Indonesian government to the construction
of transport infrastructure has provided great opportunities for the private sector to participate
through public private partnership (PPP) scheme.

Less financially feasible but economically very desirable projects for the interests of public
economy and welfare can be built through PPP scheme. Therefore, the government can focus
on building non-commercial infrastructure which is much needed by the people, such as non-
toll roads, railways, pioneer ports and airports, rural infrastructure, irrigation, rural clean water,
sanitation and drainage. In carrying out its public service obligations, the government still needs
to improve its development budget in the national and regional budgets for the infrastructure
and transport sectors which currently stands at approximately 3 percent of the GDP to 5
percent or even up to 7 percent of the GDP gradually from 5 to 10 years from now. To that end,
the Government should allow other financing options such as by establishing Infrastructure
Bank/Institution, Infrastructure Bonds and the use of sharia fund, or Islamic Financing such as
bonds, etc.

For the period of a few years to come, the government still needs to get foreign loans for non-
commercial transport projects, but with high prudence and high efficiency. The period of low
interest loan has passed and the government should be very selective in seeking loans as the
more severe repayment burden will burden the budget. Still in the context of government
investment, the role of state owned enterprises should be improved to allow them to make
investments and financing in the transport sector based on a hybrid scheme, namely the use of
corporate funds and external financing combined with the role of government investment,
often through appointment or Presidential Decree. Perhaps this scheme is lex-specialist in
nature, in a sense for specific projects that are not generally accepted and so as to not
distorting the market excessively and ruining the interest of the private sector in other PPP
schemes.

Having been independent from state monopoly for several years, the transport sector is still
highly dependent on the public sector expenditure for its construction. In addition, the
increasing role of PPP in the transport sector indicates the need for the government to look
back to the legal frameworks and regulation on the implementation of PPP process and

Transport
Investment

Private Financing
Government Investment Public Private Initiatives (PFI) State-Owned
(Public Sector Spending) Partnership (PPP) Enterprises

Conventional Strategic
PPP Alliance PPP

Figure 6: Options for Transport Investment

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procedures that complies with the principles. With regard to PPP, it seems that the knowledge,
experience and skills of our human resources are still poor in preparing, managing and
overseeing the international principles. In addition there are many operational constraints such
as the time consuming and cost-ineffective land acquisition process. If the frame has been
correct and its implementation can be implemented well, the implementation mode of land
acquisition and institutions need to be reviewed to speed up the process of land acquisition. In
the somewhat longer term, it is necessary to consider the ownership of land by the government
for transport infrastructure projects in which the government can lease the land to private
operators or use them as government equity in PPP based projects or PPP Strategic Alliance.

PPP Strategic Alliance (PPP-SA) is for a large-scale infrastructure projects financing scheme (for
example with the assumption of 30 percent of total capital expenditure) in which both the
government and the private sector are unlikely to finance or build the projects on their own
because of their capital-intensive, technology-intensive, long-term in nature which require a
modern and advanced management. The collaboration between government and private sector
that can involve more than one party, requires an exclusive handling including by the
establishment of special entity. However, actually, merging two forces government/state
owned enterprises and private/industry- can be a major force to carry out the big works. In PPP
Strategic Alliance, the government in collaboration with private investors or consortiums of
private investors prepares the project, share the risks, put their equity as well as seek debt
financing from external sources. The government can issue infrastructure bonds and the private
consortium may also issue corporate bonds. The government has an equal position with the
private sector. The use of SOEs funding with governments responsibility to complete part of
the projects is the initial form of PPP-SA, therefore all SOE should be act as corporate sectors
which perform various project financing efforts.

Their positions are equal before the law. The use of state owned enterprises funding in which
the government is still responsible for most of the work is an early form of AS-PPP since actually
state owned enterprises must now act as corporations and perform various project financing
efforts as the private sectors do. Full private sector investment in the development and
provision of transport is often preceded by unsolicited projects in the forms of special facilities,
such as Coal Railway, Special Ports and Special Airport to meet private sectors requirement in
operating theirs business.

As mentioned in the above Table 10.7. for project with PPP scheme with economically viable
but financially not viable (or marginal financial viable) and requires support to increase its
viability can applied Viability Support (or namely Viability Gap Funding or VFG) on the project
constructions cost as stipulated in PMK No. 223/PMK.011/2012. The socialization on VFG
implementation should be increased to get more financing alternative to finance infrastructure
projects.

Private Sectors Full Investment Through Strategic Alliance

A Large and very large scales of infrastructure projects (for example with the investment cost of
around 30 percent of total capital expenditure) such as fast train and Trans Sumatra railway

An investigation of Shariah-compliant
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infrastructure projects
cannot be fully financed from the state budget therefore need collaboration with private
sectors consortium as well as funding support from multilateral agency, banking sector and the
capital market. The Accumulation of large capital, advanced technology and advanced
management required to implement giant projects often require a strategic alliance between
the government and the private sector or the private sector consortium. The government has
regulatory authority, budget development authority, licensing authority and land acquisition
authority, while the private sector has the capital, technology, management and experience to
mobilize global funds to finance the projects. The development of strategic business entity can
be considered in managing the infrastructure project which can be related to the development
of KEK.

5.3. STATE BUDGET AND FISCAL REFORMS

The need for innovative financing in transport development becomes very urgent given the
tight fiscal space of our state budget to be able to finance the construction of infrastructure
project during the next five years. As an example, we can look at the structure of state income
and expenditure in the state budget 2014. Revenues in the revised budget 2014 are Rp. 1.597.7
trillion (tax, non-tax revenues, grants) while state expenditures are Rp. 1,849.4 billion,
consisting of central government expenditure in the amount of Rp. 1,.265,8 and transfers to
regions in the amount of Rp. 583.7 trillion. Revised state budget 2014 suffered a deficit at Rp
251.7 trillion. Figure 12.6 and Table 12.4 show that routine expenditure in the state budget
2014 reached around 70-80 percent of the revenues and left a very narrow fiscal space for
infrastructure, including transport. The narrow fiscal space is unlikely to change in the next 5
years. One of the ways to widen the fiscal space is to reduce or even eliminate energy subsidies
and to allocate the subsidy savings for additional budget for transport development.
One method to widen the fiscal space is to reduce and or gradually eliminate the energy
subsidy and at the same time to allocate the change to increase the transport sector
development cost. If we see the energy subsidy to total government expenditure is around 23-
24 percent whilst non subsidy energy including subsidy for transport sector is booked around 4
percent out of total central government expenditure.

0.20% 2% Energy Subsidy


Fiscal Space 2015-2019
Routine Budget
7%
1% Goods Exp. The National Development Planning
4%
31% Capital Exp. Agency has developed development
10% funding plan for 2015-2019. They
Debt Service,
domestic review and exercise the state budget
1% Debt Service,
fiscal space with reference to the
external
12% Subsidy non-energy Law No. 17/2003 regarding Public
21% Social Aids Finance particularly in relation to
budget deficit and the Law No.
Grant
17/2007 in relation to strategy, stage
Other Exp.
and long term development
Figure 12.6: Central Government Expenditure Structure
(2014, %) Source: APBNP 2014

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priority28. In theirs exercise Bappenas has projected GDP and has configured fiscal space as stated in
Table 12.5, Table 12.6. The Fiscal Space has been increased from Rp. 267,2 trillion in 2015 to Rp. 616,3
trillions in 2019.

Table 5.1: Public Expenditure Structure 2012-2014


Public Expenditure 2012 % 2013 2014
percent percent
Employee expenditure 197 864 20 232 979 19 262 978 21
Goods expenditure 140 885 14 206 507 17 153 129 12
Capital expenditure 145 104 14 192 600 16 151 270 12
Debt Service Payment 100 516 10 112 518 9 135 887 11
Domestic 70 211 7 96 759 8 121 491 10
Foreign 30 305 3 15 759 1 14 396 1
Subsidy 346 420 34 348 119 29 444 857 35
Energy 306 478 30 299 830 25 392 132 31
Non Energy 39 942 4 48 289 4 52 725 4
Grant 75 0 2 346 0 2 853 0
Social 75 621 7 82 488 7 88 060 7
Other expenditure 4 073 0 19 271 2 26 724 2
Total government 1 010 558 100 1 196 828 100 1 265 758 100
expenditures
Source: 2012-2013, BPS from APBN-P and 2014 from RAPBN Revision

The infrastructure and facilities sector as one of seven funding priorities will need budget of Rp. 1.104,5
trilion. The program consists of the strengthening national connectivity of Rp. 872,8 trillions and the
improvement of water sustainability of Rp. 231,7 trillions for the next five years.

Table 5.2: Fiscal Space 2015-2019 (IDR. T)


Expenditure (Rp. Triliun) 2015 2016 2017 2018 2019
Basic Infrastructure 25.7 28.7 49.2 72.3 96.4
Village Fund 13.8 14.6 15.4 16.2 17.0
Labour 22.7 34.1 53.8 72.5 92.2
Eduation 148.1 168.5 189.7 214.2 242.3
Transfer to regional 645.6 729.9 812.7 909.1 1,018.1
Routine Expenditure 343.1 363.4 383.4 402.9 423.4
Subsidy 448.1 492.1 543.9 600.8 666.0
Interest Payment 181.9 202.5 221.6 225.7 258.3
Total Mandatory Spending 1,829.0 2,033.8 2,269.7 2,513.7 2,813.7
Fiscal Space 267.1 351.9 415.7 518.9 616.4
Source : Bappenas, June 2014

Table 5.3: Exercise Fiscal Space 2015-2019 (IDR. T)


Category (Rp. Trillion) 2015 2016 2017 2018 2019 Total
GDP Nominal 1,596.4 3,209.8 5,067.3 7,211.5 9,667.2
Revenue 1,837.3 2,055.5 2,308.7 2,602.4 2,938.5 1,742.4
Deficit (258.8) (330.2) (376.7) (430.3) (491.7)

28
Deputi Bidang Pendanaan Pembangunan Bappenas, Juni 2014.

An investigation of Shariah-compliant
financing in Indonesian transport 51
infrastructure projects
Resources Envelope 2,096.1 2,385.7 2,685.4 3,032.7 3,430.2
Mandatory Spending 1,829.0 2,033.8 2,269.7 2,513.8 2,813.8 1,460.1
Fiscal Space 267.1 351.9 415.7 518.9 616.4 2,170.0
Fiscal Space/GDP ( percent) 2.3 2.7 2.8 3.0 3.1
Source : Bappenas, June 2014

Actually, the fiscal space exercise can be implemented through energy subsidy and quality
spending improvement on other central government expenditure. If we assume aournd 30
percent of energy subsidy allocated to other productive expenditure, we can gain around Rp.
60-100 trillions that can be allocated to infrastructure-transport sector.
Every increase of Rp. 1,000 in subsidy based oil price per litre will increase around Rp. 50 trillion
of government budget. Recent government policy to increase oil based subsidy to by Rp. 2.000
will safe government budget of Rp. 100 trillion. Part of this amount is expected to be allocated
to transport-infrastructure sector including maritime shaft.

5.4. INNOVATIVE FINANCING

A non-linear breakthrough of all parties are required in provisioning of infrastructure-transport


financing of Rp. 2.500 trillion in the period of 2015-2019 (Bappenas - JICA scenario 100
percent). The breakthrough must consist of some fundamental factors such as (a) the
strengthening the role and capacity of SOE infrastructure financing under MOF (especially SMI
and IIF), (b) the strengthening of investment capacity of SOE Transport under Ministry of SOE,
(c) the issuance of infrastructure bond and Islamic bonds, (d) the enhancement of project
financing instrument using Performance Based Annuity Scheme or PBAS, (e) the utilization of
pension fund, (f) the establishment of infrastructure bank/institution and (g) the establishment
of pool of fund managed infrastructure financing companies, (i) the utilization of source of
financing from PT. Pann Maritime Finance and the strengthening its investment capacity, (j) the
establishment of Land Banking.

5.1.1 International Practice

The very large magnitude of transport investment of IDR 2,700 trillion for 2015-2019 should
trigger the government to look for other means of APBN budget provision and many other ways
of non-APBN financing. This notion goes beyond transport sector and should therefore be
communicated intensely with the financial authority and probably also the parliament. The
option for exploring new ways of financing, can be defined as innovative financing, should cover
both the APBN (on-budget) and non-APBN (off-budget). According to the World Bank,
innovative financing involves non-traditional applications of solidarity, public private
partnerships, and catalytic mechanisms that support fund raising by tapping new sources and
engaging investors beyond the financial dimension of transactions, as partners and
stakeholders in development; or deliver financial solutions to development problems on the
ground29.

29
The World Bank. Innovating Development Finance: From Financing Sources to Financial Solutions, 2009.

An investigation of Shariah-compliant
52 financing in Indonesian transport
infrastructure projects
CHAPTER/ANNEX TITLE

Figure 7: The Innovative Financing

Another defnition of Innovative Financing is provided by the Organisation for Economic Co-
operation and Development (OECD). According to this organization, innovative financing
comprises mechanisms of raising funds or stimulating actions in support of development that
go beyond traditional spending approaches by either the official or private sectors, such as:

new approaches for pooling private and public revenue streams to scale up or develop activities
for the benefit of partner countries;
new revenue streams (e.g., a new tax, charge, fee, bond raising, sale proceed or voluntary
contribution scheme) earmarked to developmental activities on a multi-year basis; and
new incentives (financial guarantees, corporate social responsibility or other rewards or
recognition) to address market failures or scale up ongoing developmental activities30.

30
OECD. Innovative Financing to Fund Development: Progress and Prospects, 2009.

An investigation of Shariah-compliant
financing in Indonesian transport 53
infrastructure projects
In terms of amount mobilized, both the public and private sectors have been important sources
of capital. The largest category of innovative financing is public sector investments in the
private sector through mechanisms such as guarantees, which mobilize investment, and results-
based financing mechanisms, through which the public sector hires private companies to
provide public goods. Public investments in the public sector occur through mechanisms such as
debt-swaps and dedicated levies. The private sector could provide capital to the public sector
through voluntary and compulsory contributions and investments, such as bonds. The last
category, private sector investments in the private sector, captures resources from
microfinance funds and impact investing funds. The breakthrough must consist of some
fundamental things31:

(a) establishment of new financial institutions (banks and non-bank) specifically focusing on long
term infrastructure financing;
(b) mobilization of non-conventional sources of funds in the capital markets and the private sector
as the basis for financing new infrastructure, particularly from Pension Fund and Insurance
Fund;
(c) strengthening and expanding the volume of project management infrastructure through
renewal schemes of long term infrastructure project financing;
(d) strengthening the financing role and capacity of infrastructure financing state owned
enterprises under the Ministry of Finance;
(e) strengthening the business and financing capacity of transport state owned enterprises under
the Ministry of State Enterprise; and
(f) issuance of infrastructure bonds.

Domestic Capital Market

In the era of public monopoly in the past, infrastructure and transport development in
Indonesia was only financed by the state budget, regional budget, foreign loans and several
subsidy schemes and grants to regional government. In the future, the financing of transport
infrastructure by the government will still be experiencing fiscal constraints of limited fiscal
space while financing by regional government will also face a lot of difficulties in getting source
of fund from regional budget. In recent years, State Banks have begun to co-finance the
construction of highway, ports, railways and power plants projects - but the number is still not
very meaningful due to lot of issues in land acquisition process, regulatory limitations and
because of maturity mismatch between short-term deposits and long-term infrastructure
financing. The capital market is actually a potential financing source and can provide attractive
financing options.

In around 1970s the private sector began to help build some toll roads, drinking water
installations and power plants in cooperation with several selected national companies but not
under a well-designed scheme of cooperation or partnership. In 2001 the government began to

31
Ibid

An investigation of Shariah-compliant
54 financing in Indonesian transport
infrastructure projects
CHAPTER/ANNEX TITLE

design Public-Private Partnerships (PPP) scheme and has established KKPPI. Nevertheless,
number of PPP project is still very limited. The state owned enterprises have utilized their
corporate funds to finance their investment cost, whilst explored funding opportunity from
financial market. Other sources of fund will include banking industry, insurance industry,
pension funds, capital markets and in non-bank financial institutions.

An investigation of Shariah-compliant
financing in Indonesian transport 55
infrastructure projects
ANNEXES
ANNEXE 1: TEAM MEMBERS, CURRICULUM VITAE, AND DISTRIBUTION OF TASKS

Distribution of Tasks
Members Position Tasks
Prof. Suyono Dikun PhD Project Team Leader (University Responsible for overall
of Indonesia-Indonesia) performance of the research.
Focus on the study of Indonesia
transport development, its
finanicng scenarios, and the
potential of Shariah-compliant
financing for transport sector in
Indonesia.
Fiona Lamari PhD Project Co-Team Leader Responsible for overall
(Queensland University of performance of the research.
Technology - Australia) Focus on the study of global
perspective of Islamic Financing.
Ayomi Ditta Rarasati PhD Main Researcher University of
Indonesia
Herawati Z, Rachman
Devie Anggra

CURRICULUM VITAE

Suyono Dikun PhD

EDUCATION
1988 : PhD in Transport System Planning, University of Wisconsin, Madison, USA
1984 : MSc in Transport Engineering, University of Wisconsin, Madison, USA
1976 : Post Graduade Course in Highway and Traffic Engineering, Bandung Institute of
Technology, ITB, Bandung, Indonesia
1975 : Engineer Degree (Ir.) in Civil Engineering, University of Indonesia, Jakarta, Indonesia

PROFESSIONAL ORGANIZATION
1984- : Transportation Research Board (TRB)
1985- : Institute of Transport Engineer (ITE)
1995-2003 : Chairman and Founder of Indonesia Transport Society (MTI)
1990- : Indonesia Institute of Engineers (PII)

56 REPORT TITLE
CHAPTER/ANNEX TITLE

1990- : Indonesia Road Development Association (HPJI)


1996- : Indonesia Planner Association (IAP)
1997- : Indonesia Road Development Association (HPJI)
2003- : Association of Indonesia Project Management (IAMPI)

KEY QUALIFICATIONS
Professor Dikun is a trained civil engineer, graduated from the University of Indonesia, Jakarta and from
Post Graduate Course in Highway and Traffic Engineering and certified as Highway/Traffic Engineer from
Bandung Institute of Technology, Bandung. In 1982 he continued his study in the USA and finished his
Master degree in Transportation Engineering in 1984 from the University of Wisconsin-Madison, USA. He
then pursued a doctoral degree in the same university and received his PhD in Transportation System
Planning in 1988.

Dr. Dikun has more than 30 years professional experience, started initially as a researcher, lecturer, and a
consultant, and then since 1993 engaged in infrastructure and regional development policy and planning
for the National Development Planning Board (Bappenas). He took a significant part on the making of the
Sixth Five Year Development Planning (Repelita VI) in the areas of science and technology, human
resources, transport, telecommunication, water resources, and regional development strategy. During his
subsequent assignment with Bappenas Dr. Dikun was responsible for oversighting of the policy direction
and budget allocation for regional development, especially on regional development strategy and policy
and Specific Grant for Provincial and Kabupaten Roads. He then subsequently got new assignment to
oversight the same portfolio in transportation sector, covering roads, ports, airports, and land transport
facilities. In 1998-2000, Dr.Dikuns assignment was enlarged to cover industry and services responsible to
the Coordinating Minister of Economy, Finance, and Industry.

During the last 5 years, Dr. Dikuns engagement with infrastructure had been widened when he got
involved with the establishment of the National Committee for the Acceleration of Infrastructre Provision
(KKPPI) right from the beginning and played a significant role in the making of new policy and regulation
frameworks for infrastructure, including the Infrastructure Policy Package. He also had taken a critical part
in the governments effort to conduct Infrastructure Summit 2005 and Indonesia Infrastructure
Conference 2006.

Dr. Dikun has participated in a great number of national and international forum and seminars, leading a
delegation for talks and negotiations with bilateral and multilateral organizations and lending agencies.
Since 1993, Dr. Dikun has been very active in different tasks and working groups on infrastructure
development and provisions in Indonesia, both as a member and as a chairman. Dr. Dikun was also the
Chairman of Indonesia Transport Society for two terms between 1995-2003. He is also a member of many
national and international professional organizations in transport science and project management.
Dr.Dikun has written a book in 2003, entittled Indonesia Infrastructure: Before, During, and After the
Crisis, and has written more than 200 articles, research report, papers, and other publications.

Professional Record
Features Works undertaken that best illustrates capabilityto handle the tasks assigned
Year Sept.2014 Dec. 2014
Name of assignment Lead Advisory Support Unit (LASU) Extension
Main project features Completion of Technocratic Paper for both RPJMN (Bappenas) and RENSTRA
2015-2019 (Ministry of Transport).
Position Lead Advisor
Client Aus Aid-Indii, Bappenas, and Ministry of Transport
Location Jakarta, Indonesia
Activities performed Backgrouns Study on the policy initiatives of transport sector 2015-2019.

Year Sept.2013 August 2014


Name of Lead Advisory Support Unit (LASU)

REPORT TITLE 57
assignment
Main project Providing a high profile advisory services to the Vice Minister of Transport, especially
features in support to the making of Strategis Planning of Transport Sector 2015-2019
Position Lead Advisor
Client Aus Aid-Indii and Ministry of Transport
Location Jakarta, Indonesia
Activities Backgrouns Study on the policy initiatives of transport sector 2015-2019.
performed
Year Sept. Dec. 2013
Name of Support for RPJMN III
assignment
Main project Advisory services to Bappenas on the third mid-term development planning of
features transport sector
Position Team Leader
Client Aus Aid-Indii and Directorate of Railway Safety, DG Rail, Ministry of Transport
Location Jakarta, Indonesia
Activities Conduct a background study covering all strategic aspects of Indonesia transport
performed sector.
Year Jan. June 2013
Name of assignment Enhancement of PPP Institutions in Indonesia
Main project Options to explore the possiblity of revitalizing KKPPI, the National Committee on
features Infrastructure Provision
Position Co-Team Leader
Client The ADB and Bappenas
Location Jakarta, Indonesia
Activities performed Discussing, exploring, preparing, and writing a Final Report on the Indonesias
Revitalized PPP Institutions.
Year Sept. Nov. 2012, intermittent
Name of assignment Scoping Study, Indonesia Railway Safety Regulatory Function
Main project Searching the possibility of enhancing the functions of the current rail safety
features regulator
Position Team Leader and Railway Policy Expert
Client Aus Aid-Indii and Directorate of Railway Safety, DG Rail, Ministry of Transport
Location Jakarta, Indonesia
Activities performed Discussing, exploring, preparing, and writing a Final Report on the Indonesia
Railway Safety Regulatory Function

Year June December 2012 (intermittent)


Name of PPP Institutional Improvement
assignment
Main project Looking for the best configuration of Indonesia PPP Institutional settings including the
features revitalization of KKPPI
Position Institutional Specialist
Client ADB and Bappenas
Location Jakarta, Indonesia
Activities Discussion with government agencies: MOF, CMEA, and Bappenas and preparing and
performed writing a Technical Report and Final Report on gradual transformation of KKPPI and
P3CU as championship at the top of PPP undertakings in Indonesia

Year June December 2012 (intermittent)


Name of Preliminary Financial and Costing Template for PSO-IMO-TAC
assignment

58 REPORT TITLE
CHAPTER/ANNEX TITLE

Main project Preparing a financial and costing template for PSO-IMO-TAC to be used under
features Presidential Regulation No. 53/2012
Position Team Leader
Client Aus Aid-Indii and Directorate General of Railway, Ministry of Transport
Location Jakarta, Indonesia
Activities Preparing and writing an Interface Report as a medium towards the final Indonesia
performed Railway Master Plan 2030.

Year April Oct. 2011


Name of Survey of Trip Maker Behavior During Lebaran
assignment
Main project Home Interview Survey on the behavior of trip makers and number of trips during
features Lebaran and formulating the improvements on the efficiency of trip making
characteristics
Position Team Leader and Transport Planner
Client Research & development Agency, Ministry of Transport
Location Jakarta, Indonesia
Activities performed Conducting home interview survey and analysing the behavior of trip makers and
forecasting the magnitude of trips a week before, during, and a week after Lebaran
2011

Year April June, 2011


Name of assignment Development of Special Railway and Limited Public railway Regulations
Phase III
Main project features Quick assessment on the social economic background of Special Railways
Position Railway Specialist
Client AusAid-IndII and DGR of MOT
Location Jakarta, Indonesia
Activities performed Preparing and writing a Background Report on the regulations of Special Railway
and Limited Public Railway.

Year March 1 March 18, 2011


Name of Preparatory Survey for Jabodetabek Railway Capacity Enhancement Project
assignment
Main project Quick assessment on institutional and infrastructure improvement of Jabodetabek Railway
features
Position Railway Specialist
Client JICA
Location Jakarta, Indonesia
Activities Preparing and writing a technical Report on the Revitalization of Jabodetabek railway
performed covering institutional setting, investment, and financing schemes.

Year Febr. 2011 March 2011


Name of Scoping Study on PSO-IMO-TAC Frameworks
assignment
Main project Reviewing the existing PSO-IMO-TAC Frameworks
features
Position Railway Specialist and Lead Advisor
Client Aus Aid-Indii and DG Rail, Ministry of Transport
Location Jakarta, Indonesia
Activities Summarizing all previous research, analyses, consultations, and reports into a single
performed document and reviewing, preparing, and writing a Technical Report on the PSO-IMO-

REPORT TITLE 59
TAC Frameworks.

Year March December 2010


Name of assignment Indonesia National Railway Revitalization
Main project features Studying and recommending new initiatives and policies for the revitalization of
Indonesia railway
Position Chairman of Technical Team
Client Coordinating Ministry for Economic Affairs
Location Jakarta, Indonesia
Activities performed Study the policy and strategic actions to revitalize national railway covering
railway sector, institutions, and corporate undertakings

Year July 2010


Name of assignment Review of IDPL Programs
Main project features Reviewing the World Banks IDPL program achievemnt
Position Infrastructure Specialist
Client The World Bank
Location Jakarta, Indonesia
Activities performed Reviewing IDPL I-III and the preparing of the fourth and fifth IDPL; summarizing and
reviewing IDPL I-III Programs that had so far been achieved by every sector as
described in the infrastructure policy matrix.

Year Nov. 2009 February 2010


Name of assignment The Railway Master Plan
Main project features Formulating and writing background papers and consolidate them into one policy
report on the substances of the Indonesia National Railway Master Plan
Position Transport Planner
Client AusAid-IndII and DGR-MOT
Location Jakarta, Indonesia
Activities performed Formulating and writing an Interface Paper containing social economic background of
the Indonesia economy, the consequences to transport and railway sectors, and the
investment and financing schemes. The Interface Report is treated as a medium
towards the final Indonesia Railway Master Plan 2030.

Year April 2010


Name of assignment Transport Sector Policy Reform
Main project features Study the legal and regulation frameworks for Indonesia transport sector 2030 including
policy development and institutional settings
Position Senior Transport Planner
Client Research & Development Agency, Ministry of Transport
Location Jakarta, Indonesia
Activities performed Preparing and writing a Policy Report on Transport Sector Policy to reach a sustainable
transport system network 2030.

Year 2010
Name of assignment PPP Framework Specialist
Main project features The Review of IDPLs and the preparation of the fourth and fifth IDPL
Client The World Bank
Location Jakarta, Indonesia

60 REPORT TITLE
CHAPTER/ANNEX TITLE

Activities performed Preparing and writing a Policy Report as a medium towards the final Indonesia Railway
Master Plan 2030.

Year Nov. 2009 April 2010 (intermittent 60 day working days)


Name of assignment PPP Framework Specialist
Main project features Studying the Improvement of PPP Institutional Setting
Client The World Bank
Location Jakarta, Indonesia
Activities performed Conducting a stakeholder survey and preparing and writing a Policy Report on the
different ways of improving PPP institutional settings in Indonesia infrastructure
provision

REPORT TITLE 61
PARTICIPANT INFORMATION FOR THE RESEARCH PROJECT

PARTICIPANT INFORMATION FOR QUT RESEARCH PROJECT


Interview

An Investigation of Shariah-Compliant Financing in Indonesian Infrastructure Projects:


Acceleration of Transportation Sector Development
QUT Ethics Approval Number 1400000725

MAIN RESEARCH TEAM


Project Leader: Prof Suyono Dikun PhD Universitas Indonesia (UI)
Project Co-leader: Dr Fiona Lamari PhD Queensland University of Technology (QUT)
Main Researcher: Dr Ayomi Dita Rarasati PhD UI
Research Assistant Dr Herawati Zetha PhD Universitas Pancasila (UP)
Ms Devi Anggraeni ST, MT
DESCRIPTION
The government of Indonesia (GOI) expects to transform Indonesia into a developed country by 2025. With infrastructure
investment being one of the key drivers to economic growth, GOI has proposed a USD475 million investment budget in the rail,
sea and air transportation sector over the coming 10 years. What are GOIs project finance and management options?

To address this immediate and foreseeable expenditure burden, QUT is partnered with UI to carry out this research. The project
goal is to establish a shariah-compliant financing framework for Indonesian infrastructure development in the transportation
sector. Shariah-compliant financing schemes have predominantly been researched in Islamic countries and developed countries.
However, the implementation of shariah-compliant financing is still new in Indonesia and little research has been conducted to
investigate its effectiveness.

You are invited to participate in this project because you are one of the key stakeholder representatives who have comprehensive
knowledge of transportation projects and/or shariah-compliant financing; and have executed or been involved in projects with
shariah financing schemes.

PARTICIPATION
Your participation will involve an audio recorded interview of approximately one hour at your office or other agreed location. The
purpose of the interview is to gather key transportation project stakeholders existing knowledge of shariah-compliant financing
scheme and to explore the most suitable shariah-compliant financing instrument for Indonesian transportation projects.

Questions will include How would you describe shariah-compliant financing scheme and In your own experience, which is the
most suitable shariah-compliant financing instrument for Indonesian transportation projects.

Your participation in this project is entirely voluntary. Your decision to participate or not participate will in no way impact upon
your current or future relationship with QUT, UI or with associated external organisation such as GOI or your own organisation.
You do not have to answer questions you feel uncomfortable about and you can withdraw from the interview at any stage without
consequence. Note however, the data will be made non-identifiable by transcription of the audio-recording. One week after the
interview any data that you have provided will not be able to be deleted.

EXPECTED BENEFITS
It is expected that this project will not benefit you directly. However, it will contribute to the knowledge of better understanding
Indonesian project stakeholders current knowledge of shariah-compliant financing and to further their existing understanding on
this innovative financing initiative. This project fits well with Indonesia Infrastructure Initiative, IndIIs priorities in the
transportation sector and will provide a sound foundation for transportation projects. As this proposed innovative financing
initiative becomes more widely accepted, greater expertise in its application becomes evident and the regulatory framework
matures, it should be possible to apply shariah-compliant financing in other infrastructure sectors. The scope of this project will
primarily cover financing of transportation project development on a national level; however the application of shariah-compliant
financing is able to be implemented at a provincial or local level. It is expected that this project will increase the source of funding
from private investment in Indonesian infrastructure projects. This project will also enhance sustainable economic development in
Indonesian transportation projects, as part of DFATs Core Strategic Goal.

To compensate you for your contribution should you choose to participate, the research team will offer you a souvenir on the time
involved in taking part in the interview.

RISKS
There are no risks beyond normal day-to-day living associated with your participation in this project.

62 REPORT TITLE
CHAPTER/ANNEX TITLE

PRIVACY AND CONFIDENTIALITY


All information or comments provided by you at the interview session will be audio recorded and then transcribed in non-
identifiable format. All data collected will be treated confidentially. Only the research team will have access to the audio recording
and transcription. After completion of the study, the audio recording and transcription will be destroyed in 5 years. Non-
identifiable data collected in this project may be used as comparative data in future projects.

The project is funded by Indonesia Infrastructure Initiative AIIRA Grant Project (Activity P255.01) and they will not have access to
the data obtained during the project. Only non-identifiable data will be reported. Data will be presented in aggregated reports
only.

CONSENT TO PARTICIPATE
To confirm your interest to participate, please email the main researcher Ms Ayomi Dita Rarasati (details below).

We would like to ask you to sign a written consent form to confirm your agreement to participate on the day.

QUESTIONS / FURTHER INFORMATION ABOUT THE PROJECT


If have any questions or require further information please contact one of the research team members below.

Dr Ayomi Dita Rarasati ayomi@eng.ui.ac.id +62 812 812 0721


Prof Suyono Dikun suyonodikun@gmail.com +62 21 727 0152
Dr Fiona Lamari fiona.lamari@qut.edu.au +61 7 3138 1339

CONCERNS / COMPLAINTS REGARDING THE CONDUCT OF THE PROJECT


QUT is committed to research integrity and the ethical conduct of research projects. However, if you do have any concerns or
complaints about the ethical conduct of the project you may contact the QUT Research Ethics Unit on +61 7 3138 5123 or email
ethicscontact@qut.edu.au. The QUT Research Ethics Unit is not connected with the research project and can facilitate a resolution
to your concern in an impartial manner.

Thank you for helping with this research project. Please keep this sheet for your information.

REPORT TITLE 63
CONSENT FORM FOR THE RESEARCH PROJECT

CONSENT FORM FOR QUT RESEARCH PROJECT


Interview

An Investigation of Shariah-Compliant Financing in Indonesian Infrastructure Projects:


Acceleration of Transportation Sector Development
QUT Ethics Approval Number 1400000725

RESEARCH TEAM CONTACTS


Dr Ayomi Dita Rarasati ayomi@eng.ui.ac.id +62 812 812 0721
Dr Herawati Zetha herazetha@gmail.com +62 816 197 1394
Ms Devi Anggraeni devie.anggra@gmail.com +62 812 154 6251
Prof Suyono Dikun suyonodikun@gmail.com +62 21 727 0152
Dr Fiona Lamari fiona.lamari@qut.edu.au +61 7 3138 1339

STATEMENT OF CONSENT
By signing below, you are indicating that you:
Have read and understood the information document regarding this project.
Have had any questions answered to your satisfaction.
Understand that if you have any additional questions you can contact the research team.
Understand that you are free to withdraw at any time, without comment or penalty.
Understand that you can contact the Research Ethics Unit on +61 7 3138 5123 or email ethicscontact@qut.edu.au if you have
concerns about the ethical conduct of the project.
Understand that the project will include an audio recording.
Understand that Non-identifiable data collected in this project may be used as comparative data in future projects.
Agree to participate in the project.

Name

Signature

Date

Please return this sheet to the investigator.

ANNEXE 1: TYPES AND DEFINITIONS OF SELECTED SUKUK

Table 6: Types and definitions of selected sukuk [26]


Type of Sukuk Definition
Ijarah
(Certificate of
ownership in leased
asset) These are certificates that carry equal value and are issued either by the
owner of a leased asset or an asset to be leased by promise, or by his financial agent, the aim of
which is to sell the asset and recover its value from subscription, in which case the holders of
the certificates become owners of the assets.
These securities would suit the classification of asset-based because the leased asset will be
transformed into units of proportionate ownership to be subscribed by the investors
Manfaah

64 REPORT TITLE
CHAPTER/ANNEX TITLE

(Certificate of
ownership of usufructs
of existing assets) Certificates of equal value issued by the owner of an existing asset either on
his own or through a financial intermediary with the aim of subleasing the usufruct and
receiving the rental from the revenue of subscription so that the holders of the certificates
become owners of the usufruct.
These are also part of asset-based securitisation though the asset is in the form of usufruct
and services.
Intifa
(Certificates of
ownership of usufructs
of described future
assets) These are documents of equal value issued for the purpose of leasing out
tangible future assets and for collecting the rental from the subscription revenue so that the
usufruct of the described future asset passes into the ownership of the holders of the
certificates.
These are deemed to be part of assed-based securitisation though the underlying asset is the
future services that are to be performed in the future.
Milkiyyat Al-
Khadamat
(Certificates of
ownership of services
of a specified supplier) These are documents of equal value issued for the sake of
providing or selling services through a specified supplier (such as educational programmes in a
nominated university) and obtaining the value in the form of subscription income, in which case
the holders of the certificates become owners of the services.
Similar to the other ijarah-based securities, these securities come under the purview of asset-
based securitisation.
Al-Khadamat
Al-Mawsufah fi
Al-Zimmah
(Certificates of
ownership of
services to be made
available in the future
as per description) These are documents of equal value issued for the
purpose of providing future services through described provider (such as certain prescribed
educational benefits from university without naming the educational institution) and obtaining
the fee in the form of subscription income so that the holders of the holders of the certificates
become owners of the services.
Services, though to be provided in the future are deemed as an asset thus making this security
a type of asset-based securitisation.
Salam
(Salam Certificate These are documents of equal value issued for the purpose of mobilising
Salam capital so that the goods to be delivered on the basis of Salam basis come to be owned
by the certificate holders.
The salam sukuk represent the ownership of the investors in the asset to be delivered in the
future.
These salam sukuk can be issued but are not traded even on the basis of par value because
the salam asset which is represented by the salam sukuk cannot be sold to another party
without the initial buyer taking possession of the asset.
Istisna

REPORT TITLE 65
(Isitsna Certificates These are certificates of equal value issued with the aim of
mobilising funds to be employed for the production of goods so that the goods produced come
to be owned by the certificate holders.
This definition refers to the sukuk that represents the proportionate ownership in the asset to
be constructed. This is an asset-based structure until the asset is delivered to the buyer.
As practiced in some jurisdictions like in Malaysia, istisna sukuk refers to debt securitisation
that is the receivables owing to the contractor. This type of issuance, from an international
Shariah standpoint, cannot be traded freely as it reflects debt trading instead of asset-trading.
Murabahah
(Murabahah
Certificates These are certificates of equal value issued for the purpose of financing the
purchase of goods through murabahah so that the certificate holders become the owners of the
murabahah commodity.
Similar to istisna sukuk, this definition refers to an activity of pooling monies to purchase a
commodity to resell the same to another party under murabahah sale. This sukuk if issued is an
asset-based securitisation.
However, as practiced in Malaysia, murabahah sukuk may refer to the securitisation of the
sellers receivables. This issuance cannot be traded except on face value principle in accordance
with AAOIFI Shariah standards because murabahah receivables connote debt or financial
obligation which is deemed to be money in character.
Musharakah
Certificate These are certificates of equal value issued with the aim of using the
mobilised funds for establishing a new project, developing an existing project or financing a
business activity on the basis of any of partnership contracts so that the certificate holders
become the owners of the project or the assets of the activity as per their respective shares.
There are three modes of issuing securities based on musharakah concept:
(i) musharakah sukuk (Participation Certificates). These are certificates
representing projects or activities managed on the basis of musharakah by appointing either
one of the partners or another person to manage the operation.
(ii) mudharabah sukuk (Issuer is the mudharib or manager). These are certificates that
represent projects or activities that are managed on the basis of mudharabah by appointing the
mudharib for the management of the operation.
(iii) wakalah sukuk (Investment agency sukuk). These are certificates that
represent projects or activities that are managed on the basis of investment agency by
appointing an agent to manage the operation on behalf of the
certificate holders.
Istithmar These are the sukuk which are hybrid in nature. They combine both financial
assets such as murabahah receivables and tangible assets such as ijarah leased asset according
to a proportion of 70:30 respectively.
The issuance of these securities which was initiated by the Islamic Development Bank was a
breakthrough in addressing the issue of receivables securitisation.
These securities have been deemed as asset-based securitisation and therefore are tradable
in the secondary market without any Shariah constraint in trading these securities.

ANNEXE 2: SUKUK ISSUANCES TO FINANCE INFRASTRUCTURE PROJECTS IN MALAYSIA


Table 7: Sukuk issuances to finance infrastructure projects in Malaysia [23]
Ninth Malaysia Plan (2006-2010) Tenth Malaysia Plan (2011-2015)
Sector Project Issuance (mil. USD equiv.) Sector Project
Issuance (mil. USD equiv.)
Airports Malaysia Airports 790.2 Airports Senai Airport 79
Airlines Airlines Malaysia Airlines 316.1
Ports Sabah Ports 19.2 Ports Senari Synergy 131.6

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Tanjung Langsat Port 13.6


Tanjung Langsat 72.8
Westports Malsysia 140.6
Westports 142.2
Pelabuhan Tanjong Pelepas 165.9

Shipping MISC 1,013.60 Shipping


Borcos Shipping 129.6
Roads Penang Bridge 219.7 Roads PLUS 9,671.7
Lebuhraya Kajang-Seremban 448.2 ANIH
790.1
MRCB Southern link 330
Besraya 221.4
PLUS 1,912.8
Cerah Sema Bhd. 120.1
MTD Infrapardena 221.2

Lingkaran Trans Kota 456.7

Manfaat Tetap 234.1


Seafield 300.3
Haluan Gigih 132.8
Konsortium Lebuhraya Utara-Timur 259.1

Maju Expressway 173.8


New Pantai Expressway 53.7

Senai Desaru Expressway 1,752.6

Rail Kuala Lumpur Sentral 227.6 Rail


Syarikat Prasarana Negara 632.1
Syarikat Prasarana Negara 1,247.8

Power Mukah Power 240.2 Power Manjung Island 1,532.6


Sarawak Power 61.6 Ranhill Powertron
1,434.8
Segari Energy 278.1 Sarawak Power 948.1
Musteq Hydro 25.6
Nur Power 194.1
Tanjung Bin Power
1,039.8
Water Syarikat Pengeluar Air Sungai 104.3 Water
Pengurusan Air 853.4
Syarikat Bekalan Air 268.6

Pengurusan Air 679.5

ANNEXE 3: IFSB and AAOIFI

The Islamic Financial Services Board (IFSB) was established in 2003 to match the international
standards adhered to in conventional finance in the areas of risk management, capital adequacy

REPORT TITLE 67
requirements, and governance for Islamic collective investment schemes. Headquartered in
Malaysia, the IFSB is an international organization that promotes the soundness and stability of
the Islamic financial services industry by issuing global prudential standards and guiding
principles for the industry, broadly defined to include banking, capital markets, and insurance
sectors. The IFSB has published 13 standards as of March 2012, a summary of which is provided
in Table C.1. As of March 2012, the 187 members of the IFSB comprise 53 regulatory and
supervisory authorities; 8 international intergovernmental organizations that include as
International Monetary Fund, World Bank, Bank for International Settlements, Asian
Development Bank, Islamic Development Bank; and 126 market players, professional firms, and
industry associations operating in 43 jurisdictions.

The Accounting & Auditing Organization of Islamic Financial Institutions (AAOIFI) was registered
in 1991 in Bahrain for the Shariah community to standardize its accounting, auditing,
governance, ethics, and Shariah standards for Islamic financial institutions. AAOIFI is an
independent international organization supported by 200 institutional members from 45
countries, including central banks and financial institutions. AAOIFI standards are more
comprehensive and entail 85 standards as of 2010, covering all five areas of accounting,
auditing, governance, ethics, and Shariah individually. AAOIFI has gained considerable
recognition as its standards are now adopted by the Kingdom of Bahrain, the Dubai
International Financial Centre, Jordon, Lebanon, Qatar, Sudan, and Syria. Other national
authorities have also shown the initial recognition to AAOIFI standards by issuing guidelines
conforming to AAOIFI standards. These countries include Australia, Malaysia, Indonesia,
Pakistan, and the Kingdom of Saudi Arabia.

Table 8: Islamic Financial Services Board (IFSB) standards [30]


Year Standard
2005 IFSB-1:Guiding Principles of Risk Management for Institutions Offering Only
Islamic Financial Services (excluding Insurance Institutions)
2005 IFSB-2:Capital Adequacy Standard for Institutions Offering Only Islamic
Financial Services(excluding Insurance Institutions)
2006 IFSB-3:Guiding Principles on Corporate Governance for Institutions Offering
Only Islamic Financial Services(excluding Takaful and Islamic Mutual Funds)
2007 IFSB-4:Disclosures to Promote Transparency and Market Discipline for
Institutions Offering Islamic Financial Services(excluding Takaful and Islamic Mutual Funds)
2007 IFSB-5:Guidance on Key Elements in the Supervisory Review Process of
Institutions Offering Islamic Financial Services(excluding Takaful and Islamic Mutual Funds)
2008 IFSB-6:Guiding Principles on Governance for Islamic Collective Investment
Schemes
2009 IFSB-7:Capital Adequacy Requirements for Sukuk, Securitizations, and Real
Estate investment
2009 IFSB-8:Guiding Principles on Governance for Takaful Undertakings
2009 IFSB-9:Guiding Principles on Conduct of Business for Institutions Offering
Islamic Financial Services
2009 IFSB-10:Guiding Principles on Shariah Governance Systems for Institutions
Offering Islamic Financial Services

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2010 IFSB-11:Standard on Solvency Requirements for Takaful Undertakings


2012 IFSB-12:Guiding Principles on Liquidity Risk Management for
2012 IFSB-13:Guiding Principles on Stress Testing for Institutions Offering Islamic
Financial Services

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