The mega bank project was promoted by Saleh Kamel, head of Dallah Albaraka Group, who has been trying to get it launched for the last few years. But his failure to get the project started off through the support of both government and private investors saw the project somehow passed on to the IDB. Instead of mega commercial, investment or universal Islamic bank, the plan is to launch a mega bank that will effectively be an Islamic Interbank bank, with the aim of providing short-term liquidity to the global Islamic banking market and of promoting the trading of sukuk in the secondary market by acting as a market maker.

Sources stressed that work on the mega bank project is progressing with a major international consultancy and a law firm working on the legal structure and feasibility of the proposed bank. It is envisaged that the mega bank will have an initial capital of $2 billion, with governments, multilateral agencies and institutional investors also invited to participate in the equity subscription. A further $1 billion tranche of capital may be introduced at a later stage, which would be sold down to ordinary investors in IDB member countries at an ultra-retail level so as to widen the ownership franchise of the mega bank to including all types of stakeholders.

No decision has been taken as to the name of the bank, or the location of its headquarters. This will be taken by its founding shareholders.

The IDB has thus far issued a $400-million debut sukuk; followed by a $500 million sukuk and the $850 million sukuk in 2009. Two weeks ago it successfully closed its latest offering — a $500 million sukuk, thus bringing the total volume of IDB Sukuk offerings to date to $2.25 billion — the largest volume of sukuk issuances by any supranational. The IDB’s ceiling of its current Trust Certificate Issuance Program is $3.5 billion. This leaves $1.25 billion of issuances to come.

IDB Vice President for Finance Abdul Aziz Al-Hinai has confirmed that the MDB plans to issue a sukuk under the program fairly regularly, and as such may have to increase the ceiling further. The plan is to issue up to $1 billion of sukuk in 2011, most likely in two tranches.

However, with all these issuances, the IDB is building up a sound asset pool base. Some of the proceeds of the new offerings will also be used to redeem earlier issuances. So it is a virtuous circle of financing, according to one Islamic banker. Indeed, according to the IDB, it will soon pay off one of the sukuk to the tune of $300 million. The significance of this asset pool is that the IDB Trust Certificates Program is AAA rated by all the three top international rating agencies, Standard & Poor’s, Moody’s and Fitch Ratings.

The IDB Program is a rarity because of its AA rating. There are not many triple-A-rated Islamic commercial papers in the market save one or two others such as the $100 million Sukuk issued by the International Finance Corporation. These AAA-rated assets would be a major boost to the IDB’s proposed interbank bank especially in promoting its role as a market maker for secondary trading.

The IDB offerings are also enjoying very tight pricing as underlined by the latest five-year, fixed-rate $500-million Trust Certificates tranche which were priced at par with a 1.775 percent semi-annual profit rate to yield 40 basis points over the benchmark mid-swap rate. According to one seasoned Islamic banker, this was the tightest pricing of any of the IDB Sukuk offerings to date. Al-Hinai stressed that the pricing was fair and that the MDB could have raised ten times more from the market with perhaps 10 to 20 basis points more.

CIMB of Malaysia, Citigroup, HSBC and Standard Chartered Bank acted as joint lead managers and joint book-runners, and NCB Capital of Saudi Arabia acted as co-lead manager for this transaction. The success of IDB’s transaction was underpinned by a comprehensive international road show covering Asia, the Middle East and Europe.

IDB’s AAA ratings, says Al-Hinai, made a compelling story for investors which participated strongly in the book notwithstanding the accelerated book-building exercise and volatile market conditions. IDB achieved a quality order book with new investors from Asia and high allocation to real money accounts.

Investors distribution was diverse with 54 percent of the Trust Certificates allocated to Middle-East investors, 34 percent to Asian investors and 12 percent to European investors. The Trust Certificates will be listed on the London Stock Exchange and Bursa Malaysia under an Exempt Regime.