Islamic Development Bank may pair with AIIB

Asian Infrastructure Investment Bank may consider the use of Islamic finance in their banking system

Photo by: Reuters
Photo by: Reuters

Updated Jul 28, 2015

The Islamic Development Bank (IDB) is in discussions with Chinese officials to study the use of Islamic financing in the planned Asian Infrastructure Investment Bank (AIIB), the head of the Jeddah-based multilateral lender told Reuters.

The move could spur the use of sukuk (Islamic bonds), which have gained prominence as funding tools for a range of countries in recent years, and among multilateral lenders to help fund some of Asia's mounting infrastructure needs.

A potential link-up between IDB and AIIB, which have 20 member countries in common, would also open a growing pool of capital in the hands of private-sector Islamic investors across the Middle East and Southeast Asia.

"Our delegation has visited Chinese counterparts and we expect them to visit us soon," IDB president Ahmad Mohamed Ali said on the sidelines of an industry conference.

"We are ready to collaborate with AIIB on this project and also to help them develop expertise in Islamic financing."

Most analysts believe the AIIB will have to work with established institutions for some of its initial investments, as it takes time to develop its own pipeline of deals.

Developing countries spend about $1 trillion a year on infrastructure and an additional $1-1.5 trillion will be needed through 2020 in areas such as water, power and transportation projects, according to the World Bank.

The asset-backed nature of Islamic finance makes sukuk ideal for such transactions, but until now the format has been confined to handling mid-sized deals with shorter tenors.

The IDB wants to change this, with the multilateral lender now planning to set up a dedicated infrastructure unit.

"Our research unit is currently exploring ways on how to pursue these plans and formation of a special unit to deal with infrastructure projects is on the table," Ali said.

Even the Asian Development Bank, seen as a rival to the AIIB, is stepping up efforts to assist its member countries to use sukuk for infrastructure financing.

The IDB is also coordinating with Turkey, Indonesia and Saudi Arabia to support efforts by the G20 group of nations which has included infrastructure sukuk in its annual agenda.

The AIIB has yet to start operating, but it is designed to cater to Asia's growing appetite for infrastructure, with many of its projects housed in IDB member countries.

Besides the three Muslim-majority G20 members, the AIIB counts other Muslim countries such as Kazakhstan, Pakistan, Qatar, Jordan and Oman as founding members. All have issued or have plans to issue sovereign sukuk.