KUALA LUMPUR, 26 June 2005 — The Islamic Development Bank is finally going the route of separating its trade finance function from its development mandate. The board of governors of the multilateral development bank, meeting on Friday evening in Putrajaya in Malaysia, approved a resolution to set up a $3 billion International Islamic Trade Financing Corporation (IITFC) to boost trade among the 57-member Organization of the Islamic Conference (OIC) countries.
The corporation, which will be headquartered in Jeddah, will have an authorized capital of $3billion and a subscribed capital of $500 million. News of the corporation emerged from an announcement made by Malaysian Prime Minister Abdullah Ahmad Badawi at the closing ceremony of the 30th Annual Meeting of the Board of Governors of the IDB.
Unlike other multilateral development banks, the IDB has never separated its development function from its trade finance activities. The African Development Bank, for instance, has a separate stand-alone African Trade Fund, which is effectively the trade financing arm of the bank. Given that the IDB’s predominant financing activities have been centered on import and export financing, there have been numerous calls over the last few years from member countries for the IDB to separate the two functions and to concentrate more on financing development and infrastructure projects in member countries.
Delegates attending the meeting in Putrajaya welcomed the establishment of the IITFC as a timely and serious move to promote intra-Islamic trade, which currently hovers around 12 percent. The aim of the corporation is to boost intra-Islamic trade to about 20 percent to 30 percent over the next 15 years. Increasing intra-Islamic trade is a core objective of the IDB’s mandate, together with alleviating poverty in member countries and promoting the Islamic banking system worldwide.
Badawi, who chaired the proceedings over the last few days, stressed that participants in the IDB’s existing export financing scheme (EFS) will automatically become members of the proposed corporation. The contribution of each participant in the capital of the corporation will be equal to its entitlement in the assets of the EFS. The IDB will also allocate 5 percent of its forecast net income for the financial year 2005, provided the amount to be allocated is not less than $5 million. The corporation will later on open a branch network, of which the first will be in Dubai, the United Arab Emirates. In fact, Dubai was keen to host the corporation when it was first mooted some two years ago.
Badawi also passed the IDB chairmanship, which is held for one year, to Kuwait’s Finance Minister Badr Mashari Al-Humaydhi. The 2006 IDB annual meeting will be held in Kuwait on May 30-31.
Earlier Badawi proposed that Islamic countries set up a bond fund to finance infrastructure projects in the underdeveloped Muslim countries, which form a large percentage of IDB member countries. He urged central banks of the member countries to subscribe to the bond fund.
Badawi said that IDB countries would require about $741 billion of infrastructure and development financing over the next 10 years. This demand is huge and cannot be raised through conventional means. He also suggested that zakah and waqf institutions in Muslim societies be improved to help reduce poverty and finance economic development. He said that IDB has to play a vital role in mobilizing funds for the development of member countries. “While the IDB has supported the Sukuk issuance of Bahrain and Qatar, it could also participate more actively in the Sukuk issued by other member countries,” Badawi said
Intra-OIC investment flow is another important factor and Badawi said he hopes investment flow among the countries will increase significantly with the more wealthy members providing the capitals for capacity building among the poorer nations.
“The plan is to implement commercial exploitation of natural resources in those countries which can earn more revenue and create jobs as well as more business.” He said there is great merit in the idea of bilateral payments arrangements (BPA) at a central bank level to enhance trade and investment in the Muslim world. He said Malaysia, which introduced the BPA in 1988, has signed such agreements with 24 countries, of which nine are OIC members.
IDB President Dr. Ahmed Muhammad Ali, whose term was extended for another five years, said that the IDB will continue its efforts to expedite approval of development projects as well as to minimize red tape.
Meanwhile, Badawi launched three commemorative gold coins in conjunction with the IDB’s 30th annual meeting. The coins, which are legal tender, come in gold, silver and Nordic gold, Bank Negara Malaysia (central bank) said in a statement released on Friday.