Viability of Islamic project financing for the belt and road initiative

Abstract

Infrastructure development provides impetus for economic growth; however, it requires huge funding, yet tend to generate long-term and lower revenues. Significant financial allocations for infrastructure development projects under the Belt and Road Initiative (BRI, Silk Road Economic Belt and the 21st Century Maritime Silk Road), introduced by China in 2013, is gathering substantial momentum and making positive economic impact for 70 participating host countries including 27 Muslim-majority countries. They are expected, through their proactive involvement, to gain substantial economic benefits. Moreover, the participating Muslim countries are mostly having lower levels of local economic and infrastructure development. Although China is willing to invest, it is evident that China alone is not able to finance all the projects; and hence, the participation of host Muslim countries is inevitable. Despite having many BRI projects in Muslim-majority countries and the existing funding gap for cross-border project financing, the role of Islamic finance (IF) is virtually non-existent. This is the underlying issue to be analysed and expanded in this study. There are some issues and challenges hinder BRI’s potential to prosper. The most important one is the huge funding gap. Meanwhile, IF is showing rapid growth worldwide. Despite this growth of IF and the increasing financing needs of BRI projects, the role IF plays in BRI project financing is still inexistent. The theoretical proposition of IF proclaims that after removing the Shari’ah prohibitions (riba, may’sir, gharar) from conventional financial practices, savings and investments by Muslims at aggregate level could be boosted, as hypothesized by many Muslim economists. Therefore, this thesis presents how Islamic Project Financing (IPF) can better facilitate BRI projects in Muslim countries, especially Pakistan and Malaysia. Qualitative semi-structured open-ended in-depth personal expert interviews are conducted on a ‘one-on-one’ basis as research methodology to gather valuable insights provided by six experts from Greater China, Malaysia, and Pakistan to analyse how IF can help to address some of the issues and challenges of BRI whilst providing it with new growth avenues. Moreover, a “content analysis” approach has been employed to analyse gathered data. The results indicated that Hong Kong’s ready IF regulatory and legal framework, together with the recent internationalization of the Chinese Renminbi (RMB) offer possibilities of issuing Offshore-RMB (CNH) denominated Istisna’-Ijarah Sukuk in Hong Kong/Kuala Lumpur to facilitate BRI project financing and partially fulfil the financing gap of BRI projects. In addition, it is suggested that China should further relax its capital controls and provide better regulatory and tax frameworks for the adoption of IPF for BRI; Malaysia should avoid flip-flopping in government policies for BRI projects; and Pakistan should convince China to allocate certain percentage of IPF for the China-Pakistan Economic Corridor (CPEC) projects. This study adds to the existing literature on Islamic banking and finance by proposing a viable structure for Sukuk issuance based on Istisna’ and Ijarah. This structure is expected to fill not only the financing needs of Muslim countries in BRI, but also help Chinese infrastructure development firms to cater for the issues of Chinese capital controls and divergence between CNY and CNH.