Journal of Economic and Social Dynamics

Abstract

Development finance institutions (DFIs) face continued pressure to mobilize long-term resources while maintaining their financial sustainability. Islamic finance offers an additional financing structure that can complement conventional development finance, yet conventional multilateral development institutions have received limited empirical attention on its financial implications. This study evaluates the potential financial effects of introducing an Islamic Finance Window (IFW) within the Arab Bank for Economic Development in Africa (BADEA), using BADEA’s audited financial statements and financial reports for 2019–2024 as the historical basis for a financial simulation covering 2025–2029. The model compares a conventional financing baseline with three Islamic-finance integration scenarios: a 60 percent Islamic-finance structure, gradual integration, and full integration. The model employs an Istisna-based Sukuk structure and evaluates three indicators: Return on Assets (ROA), Return on Equity (ROE), and the Cost-to-Income Ratio (CIR). All three Islamic-finance scenarios yield higher projected ROA and ROE and a lower projected CIR than under the conventional baseline. Average ROA rises from 2.45 percent under the baseline to 3.40 percent when Islamic finance accounts for 60 percent of financing. Average ROE reaches 4.41 percent under full integration compared with 2.84 percent in the baseline. Sensitivity analysis using Sukuk profit rates of 5.8, 6.8, and 7.8 percent shows that outcomes vary with financing assumptions, while the general direction remains unchanged. The findings suggest that an IFW could complement BADEA’s financing model, subject to legal, institutional, market, and operational conditions.