University of Isfahan Journal of Asset Management and Financing 2383-1189 14 2 2026 06 22 Providing An Appropriate Model for Islamic Project Financing Aligned with the Project Life Cycle Providing An Appropriate Model for Islamic Project Financing Aligned with the Project Life Cycle 59 84 29751 10.22108/amf.2025.144948.1975 FA Mohammad Ahmadi Beni Ph.D. Student, Department of Financial Management, Faculty of Islamic Studies and Management, Imam Sadiq University, Tehran, Iran Mohammad Noruzi Assistant Professor, Department of Operations and Productivity Management, Faculty of Islamic Studies and Management, Imam Sadiq University, Tehran, Iran Mohammad Tohidi Associate Professor, Department of Financial Management, Faculty of Islamic Studies and Management, Imam Sadiq University, Tehran, Iran Journal Article 2025 04 16 Project finance is a specialized funding mechanism for large-scale infrastructure and industrial projects, wherein financing is secured against the project's future cash flows, thereby mitigating sponsors' financial risk. Despite its advantages, the selection of an appropriate financing method presents a significant challenge, particularly within the context of Islamic finance, where strict adherence to Shariah principles is paramount. An unsuitable selection can lead to escalated costs, delays, and potential project failure. This study proposes a structured decision-making model to identify the most suitable Islamic project finance method. Employing a descriptive-analytical methodology, the research first excludes non-Shariah-compliant instruments. Subsequently, through a literature review, thirty key criteria influencing financing decisions are identified and categorized. The Technique for Order Preference by Similarity to Ideal Solution (TOPSIS) is then applied to rank twenty-three permissible financing instruments according to their applicability across the four primary phases of the project life cycle: initiation, planning, execution, and closure. The results include a phased prioritization framework that assists project sponsors and financiers in selecting Islamic financing instruments that are both economically efficient and compliant with Shariah principles. Keywords: Finance, Project Finance, Islamic Finance, Project Phases, Project Life Cycle. JEL Classification: G20, G32, O16, O22. Introduction Access to adequate financial resources is a fundamental prerequisite for economic development, particularly for funding the large-scale infrastructure projects that underpin growth (Brealey et al., 2011). In this context, project finance has emerged as a critical alternative to conventional corporate financing. It is especially vital for capital-intensive, high-risk ventures where traditional methods are often unsuitable due to balance sheet constraints and the burden of increased corporate indebtedness (Esty, 2008; Finnerty, 2013). The distinctiveness of project finance lies in its structure: funding is allocated directly to a legally independent project entity, with debt repayment deriving exclusively from the project's future cash flows, thereby ring-fencing risk for sponsors (Yescombe, 2014). Despite its recognized advantages, the selection of an appropriate financing model remains a complex and critical managerial decision. This challenge is particularly acute within Islamic financial jurisdictions, where many conventional debt-based instruments are impermissible under Shariah law due to prohibitions against interest (riba), excessive uncertainty (gharar), and speculative gain (maysir) (Warde, 2000). Consequently, Islamic project finance necessitates solutions meticulously tailored to comply with Fiqh al-Mu'amalat (Islamic commercial jurisprudence), requiring instruments that align with both religious principles and pragmatic legal standards (Ayub, 2019; Abdi & Mobini Dehkordi, 2020). Although a substantial body of literature examines individual Islamic finance instruments—such as Ijara, Murabaha, Istisna', and other Sukuk instruments—a significant gap exists in providing a holistic, phase-sensitive framework for their selection. Most studies address these instruments in isolation, without a structured methodology for aligning them with the distinct financial and operational requirements of each stage in the project life cycle. This study seeks to address this gap by developing a structured decision-making model that systematically prioritizes Shariah-compliant financing instruments across the initiation, planning, execution, and closure phases. The proposed framework aims to provide project sponsors and financiers with a robust tool to enhance not only Shariah compliance but also the overall economic viability and implementation efficiency of major projects. Materials & Methods This study was conducted in three sequential stages. First, a descriptive-analytical method was employed to identify and exclude conventional project finance instruments that are non-compliant with Shariah principles. A comprehensive literature review, supplemented by expert consultation, led to the identification of 23 permissible instruments, which were categorized into five primary groups: equity-based, debt-based, mezzanine, multilateral development bank finance, and Sukuk. In the second stage, a systematic review of 16 scholarly publications was conducted to extract 30 key criteria influencing Islamic project finance decisions. These criteria were clustered into six dimensions: financier-related, finance-related, instrument-specific characteristics, project-specific factors, risk management, and Shariah compliance. The criteria underwent validation by a panel of 20 financial professionals and academics, each possessing over five years of relevant experience. Content Validity Ratio (CVR), Content Validity Index (CVI), and Cronbach's alpha were used to confirm the validity and reliability of the criteria set. The third stage entailed the application of the TOPSIS (Technique for Order of Preference by Similarity to Ideal Solution) model to evaluate the relative suitability of each financial instrument across the four project phases: initiation, planning, execution, and closure. Expert assessments, recorded using Likert scales, along with weight normalization, facilitated the ranking of instruments based on their proximity to ideal and anti-ideal solutions. This structured methodology enables a phase-specific prioritization that aligns instrument characteristics with the distinct needs and risk profiles of each project life cycle stage, thereby providing a practical and adaptable decision-support tool for Shariah-compliant project financing. Findings The study identified a total of 23 Shariah-compliant financial instruments. These encompassed equity, preferred shares, Shariah-compliant bank loans, syndicated loans, project-specific Islamic financing, and various Sukuk structures, including those based on Ijara, Istisna’, Murabaha, and hybrid instruments. The application of the TOPSIS analysis yielded a ranking of these instruments based on their alignment with the 30 weighted criteria across the four distinct project phases. Analysis of the initiation phase indicated that bank loans, Salam contracts, and Istisna’ were ranked highest, attributable to their reliability, structural simplicity, and efficacy in securing initial capital. Equity-based instruments received a moderate ranking, reflecting the higher risk exposure for financiers at this early stage. During the planning phase, where cost efficiency and exchange rate risk mitigation were prioritized, Salam, bank loans, and multilateral development bank loans emerged as the most suitable. In the execution phase, the critical criteria shifted to liquidity, comprehensive project cost coverage, and operational risk management. Consequently, Salam and bank loans again led the rankings, followed closely by equity and Istisna’ contracts. For the closure phase, instruments offering strong liquidity and alignment with long-term project horizons were preferred, with multilateral development bank loans, bank loans, and Salam retaining the top positions. A consistent pattern across all phases was the lower ranking of more complex instruments, such as combined Sukuk structures (e.g., Musharakah–Ijara), warrants, and export credit facilities, due to their structural intricacy and associated compliance challenges. These findings provide a nuanced framework for matching Islamic financial tools to the evolving requirements of infrastructure projects, thereby offering a pathway to optimize both Shariah compliance and project performance. Discussion and Conclusion The findings of this study contribute a structured, phase-sensitive model for aligning Islamic financial instruments with the dynamic requirements of infrastructure projects across their life cycle. By systematically excluding non-Shariah-compliant options and identifying criteria critical to Islamic financing decisions, this research provides a tailored decision-making framework for stakeholders in Islamic economies. The results underscore that no single instrument is universally optimal across all project phases. Instead, effective project finance necessitates a dynamic portfolio of tools that adapts to the project's evolving financial, operational, and risk profile. The consistent high ranking of instruments such as bank loans, Salam, and Istisna‘ can be attributed to their operational simplicity, contractual flexibility, and robust conformity with established Islamic jurisprudence, making them particularly versatile. This framework carries significant practical implications. It offers governments, financial institutions, and project developers in Muslim-majority nations a systematic approach for structuring financing packages that are not only economically efficient but also rigorously aligned with ethical and religious principles. Several promising avenues for future research are recommended. These include applying the model to sector-specific case studies (e.g., renewable energy, transportation); investigating distinctions between public and private project finance; incorporating macroeconomic variables such as inflation and currency volatility; and expanding the model to encompass emerging Islamic finance instruments. Furthermore, the framework should be periodically updated to integrate innovative financial tools as they gain acceptance. By integrating the principles of Islamic finance with lifecycle-based project management theory, this study addresses a critical gap in the literature and lays the groundwork for more adaptive, compliant, and strategic infrastructure financing within the Islamic world. Project finance is a specialized funding mechanism for large-scale infrastructure and industrial projects, wherein financing is secured against the project's future cash flows, thereby mitigating sponsors' financial risk. Despite its advantages, the selection of an appropriate financing method presents a significant challenge, particularly within the context of Islamic finance, where strict adherence to Shariah principles is paramount. An unsuitable selection can lead to escalated costs, delays, and potential project failure. This study proposes a structured decision-making model to identify the most suitable Islamic project finance method. Employing a descriptive-analytical methodology, the research first excludes non-Shariah-compliant instruments. Subsequently, through a literature review, thirty key criteria influencing financing decisions are identified and categorized. The Technique for Order Preference by Similarity to Ideal Solution (TOPSIS) is then applied to rank twenty-three permissible financing instruments according to their applicability across the four primary phases of the project life cycle: initiation, planning, execution, and closure. The results include a phased prioritization framework that assists project sponsors and financiers in selecting Islamic financing instruments that are both economically efficient and compliant with Shariah principles. Keywords: Finance, Project Finance, Islamic Finance, Project Phases, Project Life Cycle. JEL Classification: G20, G32, O16, O22. Introduction Access to adequate financial resources is a fundamental prerequisite for economic development, particularly for funding the large-scale infrastructure projects that underpin growth (Brealey et al., 2011). In this context, project finance has emerged as a critical alternative to conventional corporate financing. It is especially vital for capital-intensive, high-risk ventures where traditional methods are often unsuitable due to balance sheet constraints and the burden of increased corporate indebtedness (Esty, 2008; Finnerty, 2013). The distinctiveness of project finance lies in its structure: funding is allocated directly to a legally independent project entity, with debt repayment deriving exclusively from the project's future cash flows, thereby ring-fencing risk for sponsors (Yescombe, 2014). Despite its recognized advantages, the selection of an appropriate financing model remains a complex and critical managerial decision. This challenge is particularly acute within Islamic financial jurisdictions, where many conventional debt-based instruments are impermissible under Shariah law due to prohibitions against interest (riba), excessive uncertainty (gharar), and speculative gain (maysir) (Warde, 2000). Consequently, Islamic project finance necessitates solutions meticulously tailored to comply with Fiqh al-Mu'amalat (Islamic commercial jurisprudence), requiring instruments that align with both religious principles and pragmatic legal standards (Ayub, 2019; Abdi & Mobini Dehkordi, 2020). Although a substantial body of literature examines individual Islamic finance instruments—such as Ijara, Murabaha, Istisna', and other Sukuk instruments—a significant gap exists in providing a holistic, phase-sensitive framework for their selection. Most studies address these instruments in isolation, without a structured methodology for aligning them with the distinct financial and operational requirements of each stage in the project life cycle. This study seeks to address this gap by developing a structured decision-making model that systematically prioritizes Shariah-compliant financing instruments across the initiation, planning, execution, and closure phases. The proposed framework aims to provide project sponsors and financiers with a robust tool to enhance not only Shariah compliance but also the overall economic viability and implementation efficiency of major projects. Materials & Methods This study was conducted in three sequential stages. First, a descriptive-analytical method was employed to identify and exclude conventional project finance instruments that are non-compliant with Shariah principles. A comprehensive literature review, supplemented by expert consultation, led to the identification of 23 permissible instruments, which were categorized into five primary groups: equity-based, debt-based, mezzanine, multilateral development bank finance, and Sukuk. In the second stage, a systematic review of 16 scholarly publications was conducted to extract 30 key criteria influencing Islamic project finance decisions. These criteria were clustered into six dimensions: financier-related, finance-related, instrument-specific characteristics, project-specific factors, risk management, and Shariah compliance. The criteria underwent validation by a panel of 20 financial professionals and academics, each possessing over five years of relevant experience. Content Validity Ratio (CVR), Content Validity Index (CVI), and Cronbach's alpha were used to confirm the validity and reliability of the criteria set. The third stage entailed the application of the TOPSIS (Technique for Order of Preference by Similarity to Ideal Solution) model to evaluate the relative suitability of each financial instrument across the four project phases: initiation, planning, execution, and closure. Expert assessments, recorded using Likert scales, along with weight normalization, facilitated the ranking of instruments based on their proximity to ideal and anti-ideal solutions. This structured methodology enables a phase-specific prioritization that aligns instrument characteristics with the distinct needs and risk profiles of each project life cycle stage, thereby providing a practical and adaptable decision-support tool for Shariah-compliant project financing. Findings The study identified a total of 23 Shariah-compliant financial instruments. These encompassed equity, preferred shares, Shariah-compliant bank loans, syndicated loans, project-specific Islamic financing, and various Sukuk structures, including those based on Ijara, Istisna’, Murabaha, and hybrid instruments. The application of the TOPSIS analysis yielded a ranking of these instruments based on their alignment with the 30 weighted criteria across the four distinct project phases. Analysis of the initiation phase indicated that bank loans, Salam contracts, and Istisna’ were ranked highest, attributable to their reliability, structural simplicity, and efficacy in securing initial capital. Equity-based instruments received a moderate ranking, reflecting the higher risk exposure for financiers at this early stage. During the planning phase, where cost efficiency and exchange rate risk mitigation were prioritized, Salam, bank loans, and multilateral development bank loans emerged as the most suitable. In the execution phase, the critical criteria shifted to liquidity, comprehensive project cost coverage, and operational risk management. Consequently, Salam and bank loans again led the rankings, followed closely by equity and Istisna’ contracts. For the closure phase, instruments offering strong liquidity and alignment with long-term project horizons were preferred, with multilateral development bank loans, bank loans, and Salam retaining the top positions. A consistent pattern across all phases was the lower ranking of more complex instruments, such as combined Sukuk structures (e.g., Musharakah–Ijara), warrants, and export credit facilities, due to their structural intricacy and associated compliance challenges. These findings provide a nuanced framework for matching Islamic financial tools to the evolving requirements of infrastructure projects, thereby offering a pathway to optimize both Shariah compliance and project performance. Discussion and Conclusion The findings of this study contribute a structured, phase-sensitive model for aligning Islamic financial instruments with the dynamic requirements of infrastructure projects across their life cycle. By systematically excluding non-Shariah-compliant options and identifying criteria critical to Islamic financing decisions, this research provides a tailored decision-making framework for stakeholders in Islamic economies. The results underscore that no single instrument is universally optimal across all project phases. Instead, effective project finance necessitates a dynamic portfolio of tools that adapts to the project's evolving financial, operational, and risk profile. The consistent high ranking of instruments such as bank loans, Salam, and Istisna‘ can be attributed to their operational simplicity, contractual flexibility, and robust conformity with established Islamic jurisprudence, making them particularly versatile. This framework carries significant practical implications. It offers governments, financial institutions, and project developers in Muslim-majority nations a systematic approach for structuring financing packages that are not only economically efficient but also rigorously aligned with ethical and religious principles. Several promising avenues for future research are recommended. These include applying the model to sector-specific case studies (e.g., renewable energy, transportation); investigating distinctions between public and private project finance; incorporating macroeconomic variables such as inflation and currency volatility; and expanding the model to encompass emerging Islamic finance instruments. Furthermore, the framework should be periodically updated to integrate innovative financial tools as they gain acceptance. By integrating the principles of Islamic finance with lifecycle-based project management theory, this study addresses a critical gap in the literature and lays the groundwork for more adaptive, compliant, and strategic infrastructure financing within the Islamic world.

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