ADB Offers First Shari'ah-Compliant Project Financing

MANILA, PHILIPPINES – The Asian Development Bank (ADB) has participated in its first shari’ah-compliant project financing, providing assistance to two projects to build wind farms close to the port city of Karachi, Pakistan using two partial credit guarantees worth up to $66 million to the Islamic Development Bank (IDB).

“This transaction allows ADB to be more responsive to borrower demand and provides an opportunity to participate in the fast-growing Islamic finance market,” said Siddhartha Shah, Senior Investment Specialist at ADB’s Private Sector Operations Department.

The Fauji Foundation, which owns majority stakes in the two projects, had requested that all financing be obtained in compliance with shari’ah principles, so ADB used an innovative structure in which it provided a partial credit guarantee to half of the IDB financing, which is in form of an ijarah, akin to lease financing.

The remainder of the financing is provided by a consortium of Pakistani banks using a musharaka, a partnership structure with profit-sharing elements that is used in Islamic finance. The structure allowed the projects to raise their entire financing on a shari’ah-compliant basis. The financing will have a term of 12 years.

IDB will use the assistance to finance two projects that will each produce 50 megawatts of much-needed additional power for Pakistan and lower reliance on fossil fuels. The wind farms will avoid greenhouse gas emissions equivalent to 136,000 tons of carbon dioxide per year. The projects will also create local employment in southern Sindh, one of the poorest regions in Pakistan

With an estimated 50,000 megawatts of wind capacity available in the south of the country alone, the Government of Pakistan is now engaged in a major drive to tap its wind resources.

“Successful implementation of the projects will foster confidence among potential investors and lenders and promote further private sector investment in renewable energy and power in Pakistan,” said Azim Hashimi, Senior Investment Officer at ADB’s Pakistan Resident Mission.