Project-backed Sukuk: can it be a model for resource mobilization, risk sharing and capital market development in developing economies?

By Bukhari M. S. Sillah

Abstract

This paper reviews the comparisons between asset-backed and asset-based Sukuk using a number of criteria including Islamic contract principles and return types. Based on contract principle, asset-based Sukuk are found to account for 62% of global Sukuk and asset-backed 19%. Based on return type criterion, asset-based Sukuk constitute 98% of global Sukuk and asset-backed 2%.Project-based Sukuk are becoming a familiar financing model for developing economies. However, they are also generally asset-based. The paper finds that it is inappropriate to use only asset-based instruments to finance the public projects from construction to operation phases. This is a one-size-fits-all model, and it ignores the facts that some projects are social and others are economic, and that the construction phase, which generates no return, requires financing customization. Asset-based instruments delink the underlying asset from the financing and obscures the good governance practices to which the underlying asset should be subjected. Delinking the underlying asset from the financing leads to debt proliferation and accumulation, which are a recipe for a financial bubble and crisis. The paper proposes a project-backed financing model that uses quasi-equity instruments. It classifies public projects into either a social infrastructure or an economic infrastructure and tailors accordingly the financing instruments and the investor types. Social investors should play a key role in the construction phase, and financial investors can use asset-based instruments to participate in this construction phase. After delivery of the asset, the asset-based instruments should convert into asset-backed instruments to prevent massive build-up of debt and to maintain long-term development financing sustainability