Financing issues in the Belt and Road Initiative (BRI) in Muslim-majority countries

This is a summary from the talk held in Hong Kong on 6 November 2018.

A properly implemented Islamic finance will benefit both Muslims and non-Muslims. The emergence of BRI has revived the importance to learn Islamic finance. This is because BRI has attracted participation of many countries with large Muslim population.

Middle East, Central Asia, South Asia, and Southeast Asia fall within the areas where Islamic law or norm is practised. These areas are in the core sections of land and sea routes of BRI. At global level, Muslims are no longer minorities. According to the statistics produced by Pew Research Centre (2011), in 2010, there were 49 countries in which Muslims comprise more than 50% of the population. By 2030, Nigeria is projected to become the 50th Muslim-majority country. In 2009, there were 1.57 billion Muslims of all ages around the world. This will increase to 2.2 billion in 2030, and to 2.8 billion in 2050 to account for 30% of the world’s population.

Therefore, it is wise for the forward-looking professionals and business stakeholders in Hong Kong to equip themselves with knowledge of Islamic finance in order to facilitate communication and formulation of suitable deals with stakeholders in Muslim origin countries along the Belt and Road (e.g., Afghanistan, Bangladesh, Brunei, Malaysia, Indonesia, Pakistan and many countries in Central Asia and Middle East regions). Learning about Islamic finance is also a step in the right direction to prepare relevant stakeholders towards strengthening Hong Kong’s position as a gateway to BRI-linked investment and financing opportunities.

A properly implemented Islamic finance will eliminate ethically contentious issue associated with interest-based debt financing. According to the statistics reported by the Institute of Chartered Accountants in England and Wales (2018), governments around the world now owing almost £30tn to external lenders. Public debt for the 76 indebted countries that reported net debts has more than tripled since 2001, from £9.7tn to £29.7tn. Interest on debt was £0.8tn, while average nominal interest rate (net interest charges / average net debt) was 2.8%.

Although one may view borrowing is not necessarily bad, but from an ethical perspective, interest income on debt can be viewed as a form of rent-seeking. Lenders are entitled to a flow of income that is fixed to amounts borrowed by borrowers rather than fluctuated according to the performance of the underlying investment projects. There is no profit/loss/risk sharing between lenders and entrepreneurs in this normal practice. It is plausible that this norm has contributed to social issues such as the widening gap between rich and poor.

The world has also learned that an excessive reliance on debt financing can fuel financial crisis. Therefore, this talk calls for a rethinking of conventional debt financing and offers an insight into the prospect of Islamic financing in contributing to the development of BRI-linked projects particularly across Muslim-majority countries.

References:

The Institute of Chartered Accountants in England and Wales (2018) The Debt of Nations: a Policy Insight. Better Government Series. London: ICAEW.

The Pew Research Center (2011) The Future Global Muslim Population: Projections for 2010–2030. Washington, DC: Pew Research Center.