Academic journal article Iranian Journal of Management Studies

Islamic Project Financing in Pakistan: Current Challenges and Opportunities Ahead

Academic journal article Iranian Journal of Management Studies

Islamic Project Financing in Pakistan: Current Challenges and Opportunities Ahead

Article excerpt


Considerable progress has been made by the Islamic finance sector during the last 30 years, particularly in the last 10 years this sector has shown a robust growth of between 15 to 20 percent annually (IBD bulletin, Dec, 2011). Islamic financial services are also expanding across the globe (Ali A., 2002; Archer S. and Ahmed T., 2003). This proves the Islamic finance sector is one of the fastest growing segments of the financial system. The worldwide number of Islamic financial institutions has risen to above 500 in more than 75 countries with total combined assets in excess of US$ 1.6 trillion (Global Islamic Finance magazine February, 2012). To get the most out of this potential market, a number of global financial institutions have established Shariah compliance services (Sundararajan and Errico, 2002). Despite all this growth, Islamic financing and banking are quite limited in most of these countries because of their small size compared to conventional financing.

Modern project financing brings numerous participants from the world together and now it has truly become an international undertaking (Niehuss, 2010). Large infrastructural projects need a large amount of capital which involves different parties participating. Sometimes it is hard for the government to finance projects from its own resources; hence it involves the private sector in financing infrastructural projects. Most countries across the globe use project financing techniques for their projects but Muslim countries have only been in this scene for the last two decades. For many years Islamic finance has been the source of funding for Middle Eastern countries but in the last few years Islamic financial institutions (IFIs) have developed their product range to apply to project financing.

The reason behind the late entry is due to the conflicts between Islamic and Western conventional project financing principles. Investors who look to Islamic financial products want to comply with Shariah , which prohibits the collecting of interest ; the real economic activity of an Islamic financial system forbids investment in sectors like alcohol, tobacco, gambling etc. These Islamic financial institutions (IFIs) provide a wide variety of products and services1 and these comply with Shariah principles.

Islamic divine Shariah law is derived from four sources: the Holy Quran, the Sunnah of the Holy Prophet (Peace be upon Him), the consensus of the Ummah (Ijma) and analogies made by Muslim scholars (Qiyas). Islamic financial businesses are based on four main principles: materiality (there should be a real economic transaction), risk sharing (a risk return distribution for parties involved in it), no exploitation of any party in the financial transactions and no investment in the prohibited businesses mentioned before.

This research is based on the realism perspective which states that reality exists independent of the filters and beliefs of the human mind, and is critical to our ability to know reality with certainty (Bhaskar, 1978). A qualitative approach is used to address the research objectives, which is based on the following questions. What are the different sources of (conventional and Islamic) financing available in Pakistan? What is the magnitude of Islamic project financing in Pakistan? What are the current challenges and the prospects of the Islamic project financing in Pakistan?

The research design in this realism perspective is relatively exploratory. The literature is unfolded step by step around the basic phenomenon and we seek to answer the first question mentioned above. The second question is addressed through the descriptive statistics of project financing reviews in Pakistan. Then interviews are used to provide answers related to the third question regarding the current challenges and future prospects.

Literature Review

Two basic principles are provided by Shariah in Islamic finance: risk sharing and promoting the welfare of the society (Ibrahim, 2008). …

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