2011 Volume 67 Issue 5 Pages 67_I_231-67_I_242
Application of PPP (Public Private Partnership) to infrastructure developments is a common phenomenon around the world. This movement of adopting PPP allows the financial source of infrastructure development procurement to be diversified. Recent development of Islamic finance made itself remarkable as one of the alternatives for financial procurement in PPP projects. This paper proposes a formal model to analyze a mechanism of determining the rate of return (RoR), or the interest in the conventional finance, in order to derive an implication of the recent development of Islamic finance to the procurement cost of project financing projects for infrastructure. The analytical result of our paper shows that Islamic bank's RoR are lower in both of the deposit market and the lending market compared to conventional banks. Furthermore, the more religiously conscious those Muslim depositors are, the higher the RoR of Islamic finance becomes, and also the less the transaction costs are, the higher the RoR of Islamic finance becomes.