Question

d) Islamic finance is receiving a lot of attention in academic research as well as in global business. With reference to the tenets of Islamic Finance, discuss the appropriateness of Islamic financial products as sources of project finance.   

Answer 1

Islamic law has been designed to comply with principles of Islam. The purpose of using Islamic finance is to allow issuers and borrowers of debt to gain access to Islamic institutions and create a wide base of investors in compliance with Sharia law. This type of finance is more prevelant in the Middle East countries and a high number of successful companies have demonstrated financing transactions using Islamic finance. The base of this law is that interest is prohibited but a profit can be made on the investment which allows the borrower to choose the type of financing than a fixed rate loan. The most common type of project finance is the procurement and forward lease combination which most oil and petroleum refining companies have utilized in the past years. Also, when credit markets tightened due to the recession, the major sponsors of large infra projects was through Islamic banking structure and it was seen as a alternative source of liquidity.