China-Pakistan corridor set to unleash potential of Islamic finance schemes

The planned China-Pakistan Economic Corridor, or CPEC, a project comprising a significant number of large infrastructure and energy projects on a route across Pakistan to the border of China, is broadly expected to bring the full potential of Islamic finance in infrastructure funding into action.The CPEC, as it stands, will see €54bn in investments up to 2030 to create, overhaul or expand highways, railways, ports, airports, power plants, solar parks and wind farms, pipelines and optical fibre lines, which partly will be raised through a variety of Islamic finance instruments, notably sukuk. This represents lucrative Islamic finance public-private partnership opportunities in energy and construction and will positively affect Pakistan’s Islamic finance sector, experts say, and offers an opportunity for the Islamic finance industry to channel liquidity into long-term projects which also have spillover benefits for other industries, including real estate, manufacturing,  building materials and contracting. Pakistan’s Finance Minister Ishaq Dar has repeatedly emphasised that Pakistan wanted to make Shariah-compliant financing its first choice for infrastructure and long-term financing needs. In fact, the government plans to shift between 20% and 40% of its debt financing to Islamic sources from conventional ones, which is also the case for CPEC projects.Co-financing for the corridor comes from Chinese state loans, as well as from funding from the Asian Development Bank and the new, China-backed Asian Infrastructure Investment Bank, whereby the two latter stated that they are also considering the utilisation of Islamic finance for infrastructure funding. Latest examples of how such funding looks like are financing agreements between Pakistan and China amounting to approximately $1.95bn for a coal-fired power plant including coal mining operations to be developed in Thar region of Pakistan, with a financing package including US dollar and Pakistani rupee loans in Shariah-compliant tranches. Other large investments are being made by foreign and domestic investors in addition to the Chinese and involve Islamic finance instruments such as ijara, one of the most commonly used sukuk structure which is basically a Shariah-compliant leasing contract.According to Dar, Pakistan also wants to “utilise surplus equity” of Pakistan’s Islamic banks to fund the infrastructure developments, saying that his ministry has issued instructions that the first priority should be given to Islamic finance instruments whenever funds are needed for such projects.The CPEC spans over three phases and four major areas, namely the development of Pakistan’s southern port city of Gwadar, the energy projects, road, rail and communication networks and industrial cooperation. Currently, CPEC projects worth about $18bn are in the implementation phase, while another $17bn are in the active pipeline. The short-term, medium-term and long-term projects will be completed by 2020, 2025 and 2030, respectively, and will have significant economic impact on Pakistan and its role in the entire Western Asian region and towards its archrival India. The project is, of course, of huge geostrategic importance for China as it represents a new trade axis across the Asian continent to Western Asia, the Middle East, Africa and eventually Europe as it circumvents China’s main maritime trade route across the South China Sea, the Strait of Malacca and the Indian Ocean and opens a vital route for China particularly for oil transportation. The CPEC is also predicted to create more than 700,000 direct jobs up to 2030 and add two to 2.5 percentage points to Pakistan’s annual economic growth.The question of how market participants, including domestic and foreign investors can benefit from CPEC financing will be discussed at the upcoming International forum on “Unlocking Islamic Finance Potential in CPEC and Beyond” to be held on January 17 at the Institute of Business Administration IBA City Campus in Karachi, organised by the Center for Excellence in Islamic Finance of the institute.