Ethical Finance for Belt and Road Initiative?
Belt and Road Initiative (BRI) or also known as One Belt One Road (OBOR) is believed to be a world-changing project that was unveiled in 2013 by China’s President Xi Jinping. It was reported that 68 countries have signed up to this signature project that involves the development of infrastructures to facilitate, more efficiently, the trade between many countries (Xinhuanet, 2017).
BRI as a whole is undoubtedly a risky project because it travels across geographical and social borders. It is widely understood in finance literature that a risky project will attract higher cost of borrowing. This means that issuing conventional bonds to finance BRI is feared to contribute further to unsustainable debt burden (ABC, 2016). While BRI provides investment opportunities in infrastructure projects, one may ask how best to finance such risky projects?
It was estimated that BRI would require $890 - $900bn investments (Financial Times, 2016; 2017). China recently pledged $124bn for the project (Reuters, 2017). While the next sources of funding are largely unknown, risk-sharing finance can be introduced as a practical risk management strategy. This strategy relates well to Islamic finance that is based on partnership (musharakah), whereby contracting parties become profit/loss/risk sharing partners.
In this financing strategy, each partner will contribute capital and share the profit and loss of an investment project. This strategy is consistent with the Islamic concept of fairness that advocates risk sharing. Islamic finance promotes the sharing of risk and performance of an investment between partners. If BRI is about different countries or nations working together to develop infrastructures for commercial and social purposes, then partnership and joint ownership of the infrastructure assets can be an ethical strategy forward. While there is no consensus on what constitutes ethical finance, Islamic finance is normally described as advocating ethical finance (Minhat and Dzolkarnaini, 2016).
In addition, many of the core countries along the belt and road are of Islamic origin such as Central Asian republics, Iran, Turkey, Indonesia, Malaysia, and Middle Eastern countries, among others. Islamic finance can be relevant to raise capital for infrastructure developments in those countries. There are also opportunities for non-Muslim investors to learn about and take advantage of the diversification benefits offered by Islamic financing instruments.
[Contributors: Marizah Minhat, Nazam Dzolkarnaini, Mazni Abdullah and Stephen Li. The contributors are based, respectively, at Edinburgh Napier University (UK), University of Salford (UK), University of Malaya (Malaysia), and SCOPE, City University of Hong Kong. This article is based on the talk “Islamic Finance/Investment: Rent-seeking, Risk-sharing, and One Belt One Road” organised by the Treasury Markets Association (TMA) at the Hong Kong Monetary Authority (HKMA) on 20 July 2017 (see: https://www.tma.org.hk/en_edudetail.aspx?EduId=763].
References:
ABC (2016). China warned to rein in growing mountain of debt or risk triggering another global financial crisis. Sept 27.
Financial Times (FT) (2016). How the Silk Road plans will be financed. May 9.
Financial Times (FT) (2017) China encircles the world with One Belt, One Road strategy. May 4.
Minhat, M. and Dzolkarnaini, N. (2016) Islamic corporate financing: does it promote profit and loss sharing? Business Ethics: A European Review, 25(4), pp. 482-497.
Reuters (2017). China pledges $124 billion for new Silk Road as champion of globalization. May 14.
Xinhuanet (2017). Xi says 68 countries, int’l organizations signed Belt and Road agreements with China. May 15.
