Islamic financing for Indonesia infrastructure project: mini hydropower plant case studies

Abstract

Project financing has been implemented globally in infrastructure financing for at least half a century. In Indonesia, where the adoption of project financing is gaining momentum, there is a concurrent need for innovation in project financing schemes in order to accelerate infrastructure development. One area of recent innovation is the use of Islamic finance or sharia-compliant financing. To date, research on Islamic project financing of infrastructure has been conducted predominantly in Islamic countries and developed countries, which shows that it has many benefits. It is reasonable to expect that Islamic project financing may also be a suitable financing alternative in Indonesian infrastructure development. This paper discusses the Islamic financing implementation in Indonesian infrastructure projects. Case studies on three mini hydropower plant projects that have utilised Islamic financing mechanisms were conducted. The results show that the use of Islamic finance instruments has been integrated into financing infrastructure projects. In the context of Indonesia, Islamic banks play the most important role in financing infrastructure projects through the use of the sharia scheme. However, there are challenges that need to be addressed to ensure that this implementation can be executed extensively.