Essay on Islamic Financing

3760 Words 16 Pages
Islamic Financing for Large Infrastructure Projects
Jasper Camacho International Financial Mgmt, Section 1 Fall 2005

Summary This paper examines the growing Islamic finance market and how it is becoming an important source of capital to fund infrastructure projects in the Muslim world. The paper starts by introducing basic tenants of Islamic finance and the problems as it relates to large capital projects. Innovations in Islamic project financing are then introduced along with the complexity that those have to innovations address. The paper concludes with a description of selected recent infrastructure development projects that use Islamic financing.

Islamic Project Development Needs Increasing population throughout the Muslim world
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These areas include the prohibition of collecting interest on transactions (riba), prohibition in entering an uncertain contract (gharar), prohibition of gambling (masir), prohibition of the use of “un-Islamic” products such as alcohol and pork, and the idea of socially responsible investing.3 There are two forms of riba, one form is money is exchanged hand to hand but for different quantities and the other is where money is exchanged for money with deferment4. The latter form is what is also known as usury or interest and what conventional financing method is largely based on. It is helpful to note that riba doesn’t preclude one party from charging a premium on a loan based on the riskiness of a project, nor does it prevent deferred payments. However, the idea of riba does forbid charging a premium or structuring the payment schedule around financing costs. The Shari’ah also forbids parties from entering a transaction with uncertainty, also known as gharar. This is difficult to express since there are almost no transactions that exist without any certainty. Rice University Professor Mahmoud Amin El-Gamal gives a good example of how to comply with the principle of gharar: Prohibition of (gharar) pertains to a person paying a fixed price for whatever a diver may catch on his next dive. In this case, he does not know what he is paying for. On the other hand, paying a fixed price to hire the

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