Islamic rule of law matters in Belt and Road Initiative financing

There is little evidence that China-linked financing schemes have served the purpose. The financing of the ECRL project is a good example to illustrate a possible compromise of Islamic rule of law

By MARIZAH MINHAT & NAZAM DZOLKARNAINI / Pic By BLOOMBERG

It was initially estimated that the China’s Belt and Road Initiative (BRI) would require investments of about US$1 trillion (RM4.16 trillion) to help grow the real economy of the Belt and Road countries. The sources of funding have been in various forms including Chinese government-linked fun-ding schemes and debt instruments.

As the world has learned that an excessive reliance on interest-based debt financing can fuel financial crises, this article calls for a rethinking of conventional debt financing and questions whether Islamic rule of law matters in the development of BRI-linked projects, particularly across Muslim-majority countries.

The Middle East, Central Asia, South Asia and South-East Asia are in the core sections of land and maritime (sea) Silk Road and fall within the areas where Islam is a dominant religion.

On a global scale, Muslims are no longer the minorities. According to Pew Research Centre, there were 49 countries in which Muslims comprised more than 50% of the population in 2010. It has projected that Nigeria will become the 50th Muslim-majority country by 2030.

It was also reported that there were 1.57 billion Muslims of all ages around the world in 2009. This number is expected to increase to 2.2 billion in 2030 and 2.8 billion in 2050, which will account for 30% of the world’s population. These numbers are comparable to China’s population of 1.4 billion. There were also over 23 million Muslims in China itself.

Any strong presence of Muslim identity across the BRI-linked countries should not be taken for granted from both economic and social perspectives. Respecting the Islamic rule of law is indeed a rational step to gain a stronger support for BRI.

Unfortunately, there is little evidence that China-linked financing schemes have served the purpose. The financing of the East Coast Rail Link (ECRL) project is a good example to illustrate a possible compromise of Islamic rule of law. Such financing was ironically imposed on a country that is claiming to be leading the Islamic finance agenda globally.

It was reported elsewhere that 85% of the ECRL project was to be funded by the Export-Import Bank of China. Interest income payable to the bank was fixed at 3.25% per annum. The fixing of income independent of performance in this manner (ie riba) is compromising the Islamic rule of law.

Implicated in this borrowing contract is the Malaysian government as a guarantor who has effectively exposed more than 60% of its stakeholders (ie, rakyat from Muslim backgrounds) to the violation of Islamic finance rule.

The financing of the ECRL is also one-sided because Malaysia was made to borrow from a China bank in order to pay a China company — China Communications Construction Co Ltd — to build the rail infrastructure. Sources said Malaysia will still have to repay the loan from the China bank with interest regardless of the performance or profitability of the ECRL. Payments are also to be based on a pre-determined timetable and not based on job progress.

This borrowing contract clearly exposes Malaysia to bankruptcy risk, whereas a Chinese bank and a construction company get to “free-ride” on guaranteed interest income and revenue from construction respectively. This means that the risk and liability of the ECRL are to be completely borne by Malaysia. This arrangement does not at all promote the profit/loss/risk-sharing principle of Islamic finance.

To what extent Malaysia will benefit from the “borrow to spend” ECRL project is questionable. The total cost of the ECRL project is estimated at more than RM80 billion.

According to a local economist, the existing national rail network carries only about six million tonnes per annum.

However, there is still a great uncertainty on whether there will be enough passenger traffic in the foreseeable future to justify the huge spending. If the projected massive surge in freight tonnage of 60 million yearly by 2035 does not materialise, then the project will experience a cashflow gap. This scenario may force taxpayers for generations to come to massively subsidise the project through increased fares. Therefore, rethinking the project’s financing does matter if the transfer of its risk to the public at large is very likely.

The Islamic rule of law is about risk-sharing, rather than risk-shifting or risk transfer.

Questioning the necessity of the ECRL project also seems just right from the Islamic perspective. This is because the country is currently grappling with huge national liabili-
ties of over RM1 trillion, and spending beyond means is against the Islamic concept of wasatiyyah.

  • Dr Marizah Minhat is assistant director of International Centre for Management and Governance Research, and Dr Nazam Dzolkarnaini is associate professor in Accounting and Finance at The Business School, Edinburgh Napier University, UK. The views expressed are of the writers and do not necessarily reflect the stand of the newspaper’s owners
    and editorial board.