Beyond Financing: How Shariah Governance and Risk Sharing Shape Infrastructure Project Performance in Sukuk-Funded Projects

Abstract

Sukuk discussion as a funding tool of major infrastructure projects is growing fast and an essential question emerges: do Islamic financial structures only supply the capital, or do they also alter the way the projects are managed and implemented? Though, the literature is mainly focused on the performance of Sukuk in the market, its effects in relation to project delivery have not been adequately comprehended. This paper explores the impacts of Shariah governing and risk-sharing frameworks to the performance of Sukuk-financed infrastructural projects and assesses the moderating impacts of project management efficacy.

Data on the surveys were gathered among professionals working on projects which were financed by Sukuk and analyzed by means of Partial Least Squares Structural Equation Modeling (PLS-SEM). The model has a high level of explanatory power as it explains 63 percent of the variation in project performance. According to the results, Shariah governance contributes to the effectiveness of project management significantly, which means that compliance oversight is a monitoring and accountability system ( = 0.41, p < 0.001). On the same note, the risk-sharing arrangement may have a positive effect on the effectiveness of the managers ( 0.37, p < 0.001) indicating that incentive harmonies between the financiers and operators of the project are beneficial in terms of coordination and monitoring practices. On its part, project management effectiveness has a powerful positive influence on the project performance ( 0.61, p < 0.001). The mediation analysis proves the fact that the impact of both Shariah governance and risk sharing on the performance takes place through managerial processes and not directly through the financing structure.

These results indicate that Sukuk is a financing mechanism and a governance system that influences the behavior of managers and the cooperation with stakeholders. The study offers new evidence of the applicability of the theory of financial design in the design of operations in terms of its ability to impact performance through the establishment of an institutional environment and the establishment of incentive alignment by combining the theory of Islamic finance with the project governance literature. The findings have practical implications to policy makers and Islamic financial institutions that aspire to improve the provision and sustainability of infrastructure projects that are funded by Shariah-compliant instruments.