KUWAIT CITY, 29 May 2006 — The 31st Annual Meeting of the Board of Governors of the Jeddah-based Islamic Development Bank (IDB) kicks off tomorrow here. The meeting could not have come at a more important time for the multilateral development bank (MDB) of the Muslim world.
Fresh from the launch of its ‘Vision 1440H’ document in Kuala Lumpur in March 2006, which sets the road map for the future strategy of the MDB for the next 14 years, the IDB faces a tough yet potentially rewarding time ahead.
The signs of progress are there, although slow and steady. Intra-Islamic exports, for instance, now stands at 12.4 percent of the total exports of IDB member countries. The IDB’s private sector funding arm, the Islamic Corporation for the Development of the Private Sector (ICD), similarly has signed a memorandum of understanding with the Saudi Economic Development Company (SEDCO), the investment arm of the Bin Mahfouz family, and the Bahrain-based International Investment Bank (IIB) to set up real estate development company in Saudi Arabia with a capital of SR400 million.
The aim is to build housing units to help alleviate the huge shortage of housing for the Kingdom’s growing population. The company is expected to mobilize investments reaching SR1 billion over the next five years. The ICD has the mandate to reach out to the private sector in the IDB member countries both with the aim of development the sector and helping them to contribute to intra-Islamic trade and their contribution to GDP of their respective countries.
For fiscal year 2005/2006, the IDB Group net financing totaled $3.99 billion, which represents a 17.2 percent decline on the previous year. Net cumulative approvals by the IDB Group since the start of its operations in 1976 totaled $41.37 billion.
Of the $3.99 billion of net financing for the fiscal year 2005/2006, project finance and technical assistance accounted for $2.24 billion, up 9.9 percent on the previous year. This includes $776 million of project financing by IDB affiliates such as the Islamic Corporation for the Development of the Private Sector (ICD) and the Islamic Banks’ Portfolio (IBP).
Trade financing operations totaled $1.74 billion mainly through the group’s Import Trade Finance Operations (ITFO) and Export Finance Scheme (EFS). Special assistance financing totaled a mere $11.33 million for the same period.
A major development over the next few days will be the separation of the trade finance function of the IDB from its development finance function.
This will be done through the official launch of the Islamic Trade Finance Corporation (ITFC) following the approval of its Articles of Association by the IDB Board of Governors at the 31st Annual Meeting in Kuwait. The ITFC will be based in Jeddah but crucially will also have an office in Dubai, which is considered far more user-friendly in terms of effecting operations and agreements.
The ITFC is capitalized at $500 million and has an authorized capital of $3 billion. The new CEO of ITFC will also be appointed from a short list of candidates.
Trade finance is a very important function of intra-Islamic economic cooperation, given that the IDB member countries possess some of the world’s most important commodities and raw materials.
As such the bringing together of the IDB Group’s trade finance activities under one umbrella makes sense both in terms of strategy, operations, efficacy, delivery and economies of scale.
Ideally the ITFC should be closely linked to the export credit and investment entity of the IDB, the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC). The export credit culture is still largely under-developed in IDB member countries.
However, ICIEC in 2005/2006 reported a dramatic increase in its underwriting to about $850 million from $250 million. With the incidence of business and financial risks increasing, exporters in member countries would find greater comfort through the use of export credit and investment insurance.
The IDB and ICIEC need to promote the concept of export credit and investment insurance much more in member countries to provide the necessary platform to increase intra-Islamic trade to its desired levels.
Major other initiatives launched during the year in question include the implementation of the ‘Capacity Building Program for the OIC Countries’; the launching of the Ten Year Master Plan for the Islamic Financial Services Industry; together with the Kuala-Lumpur based Islamic Financial Services Board (IFSB); and the launch of a Shariah-compliant short-term and tradable liquidity instrument called Short-term Sukuk Program (STS) in cooperation with the Bahrain-based Islamic investment bank, Liquidity Management Center (LMC).