Brazil has a well documented deficit in infrastructure: the 2016-2017 Global Competitiveness Report of the World Economic Forum ranks the country in 72nd in the infrastructure pillar, and Brazil invests a puny percentage of its GDP in infrastructure (2.3%), even when compared with other emerging countries, such as China (13.4%), Vietnam (10.3%) and India (6%).
Recent efforts from the federal government, although welcome, have large obstacles to overcome, especially regarding the source of financing for the new projects – the Brazilian development bank, BNDES, has recently reduced its lines of financing and the Brazilian capital markets, albeit its increasing development, is still not big enough to absorb all the capital needs for infrastructure investment.
One alternative still underutilized globally, and virtually non-existent in Brazil, is what is known as Islamic Finance, which can be summarized as structures of financing compliant with the rules of the Sharia (the religious legal rules of the Islam). This type of financing is being increasingly used outside predominantly Islamic countries (such as the UK, France and Luxembourg), and the amount of Sharia compliant financial assets worldwide has surpassed USD1.8 trillion.
The Brazilian legal system is particularly well-suited to receive Sharia compliant alternative structures of financing, with a legislation which embraces atypical contracts (forms of agreement not specifically provided for by legislation) and gives formal and substantial flexibility to contracting parties. Moreover, infrastructure is particularly appropriate to this type of financing for it involves projects with tangible assets that can be object of various forms of halal (permitted) agreements.
The projected growing demand for investment products compliant with Islamic rules (the Muslim population is growing at a rate of 1.5% per annum), on the one hand, and the large capital demand for investment in infrastructure projects on the other, present a favorable scenario for the use of Islamic Finance in Brazil.
Legislative initiatives could make the Brazilian market more attractive for Islamic Finance, providing tax incentives, for instance, or eliminating potential inefficiencies of complex structures. However, even in the absence of legal reform, the Brazilian market is ripe for alternative means to provide financing to infrastructure projects.
Nevertheless, for new projects to benefit from an Islamic Finance arrangement, be it via cross-border or domestic structures, they have to be designed with caution, so as not to infringe the core principles of Sharia both on the project and on the financing levels.
Luis Antonio Semeghini de Souza
Julio Antonio Nunes Queiroz