Integrating Islamic and Conventional Project Finance

This article analyzes the traditional modes of Islamic project financing in light of modern financial engineering. The vehicles elaborated include debt, hybrid, and equity instruments. The first category includes the Qardh Hasan (benevolent loan), Murabahah (mark-up), Ijara (leasing), and Islamic income/revenue bond facilities; the second incorporates the classical Mudharabah (profit-sharing) contract; while the third category comprises the Musharakah (equity) vehicle. The Mudharabah contract can be synthetically created as a combination of a Cost-plus (Murabahah) facility and an Option (Al-ikhtiyarat) instrument to endogenously determine the profit sharing parameter. It is malleable in two-dimensions depending on the financial goals and the risk profile of the investor. Securitization of the Mudharabah facility avoids the controversy of Bai' al-dayn bi al-dayn (sale of one set of debt security with another). Finally, the design of financial contracts via variants of Mudharabah securities such as income bond and participating bond is illustrated in a numerical example