Never mind the global financial crisis and its impact, which is a given challenge for the entire international community. Perhaps it is a poignant reminder that this annual meeting should have been convening on the southern flank of the Arabian Peninsula in Sanaa in Yemen rather than in the heart of Hijaz in Saudi Arabia.

The venue of the meeting was changed because of the political turmoil and violence in Yemen, which of course is a mere single manifestation of the so-called ‘Arab Spring’ sweeping several IDB member countries including inter alia Bahrain, Syria, Jordan, Libya, Egypt and Tunisia.

As such this is the first IDB annual meeting since the ‘Arab Spring’ started and as such assumes a much greater significance as a result of the manifold challenges that it has presented not only to the individual countries but to multilateral institutions such as the IDB, which is often trumpeted as the multilateral development bank (MDB) of the Muslim world.

In many respects, the ‘Arab Spring’ is a misnomer.

For the underlying issues that gave rise to the genuine outpour of protest at Tahrir Square in Egypt, and in Tunis, Manama, Damascus, Sanaa, Benghazi and so on, are not confined to Arab member countries, but to most of the IDB member countries whether they are in Central Asia, the non-Arab Middle East (save Turkey), South Asia or in Africa. Remember the street protests in recent years in Iran, Uzbekistan, Khirgiz Republic and Turkmenistan and in several sub-Saharan member countries of the IDB.

The common theme in general is bad political, economic and social governance, tempered with endemic corruption, cronyism, lack of basic individual rights and dignity, and the politics and economics of despair through high unemployment, lack of affordable housing and poverty.

Take for instance, the Expert Group Meeting at the IDB headquarters in May, supposedly to discuss the dire problem of unemployment, especially that besetting the youth.

Almost every technical reason was ‘diagnosed’ ranging from the financial crisis, to low quality education and training, lack of long-term strategies for creating job opportunities, data and methodology inadequacies and high operating costs.

The ‘recommendations’ predictably mirrored the causes.

There was hardly a mention of bad political and economic governance.

The IDB is quick to stress that it does not interfere in the internal politics of its member countries.

That may be so, but it would be foolhardy to dissociate or deny any correlation between political governance and economic management.

Dysfunctional politics will always lead to poor and corrupt economic management which includes allocation of resources and poverty alleviation, which is after all one of the core objectives of the IDB.

In the case of the IDB there is an added dimension.

It is unique among its MDB peers in that it operates on faith-based financial principles.

As such it has a duty to ensure that its allocations and disbursements serve the purpose that they are intended for and do not fall into the hands of dysfunctional politicians or apparatchiks.

In other words, there needs to be much greater connectivity between IDB funding and the quality of political and economic governance of the receiving countries.

The World Bank, IMF, Asian Development Bank and even the African Development Bank have arrangements in place, which tie in their lending criteria to good governance where relevant.

The IDB seems to be an institution, which merely reacts to situations rather than have policies based on the economics of prevention.

This should not detract from the genuine efforts the bank has made toward achieving its core objectives of increasing intra-Islamic trade, alleviating poverty, promoting Islamic finance, boosting the role of the private sector and promoting the role of women in development.

Cumulative funding by the IDB at end December 2010 totaled just over $70 billion, with group funding in 2010 alone reaching $7 billion.

These have impacted on the real economy and on the lives of real people.

The IDB has also allocated over $300 million as grants and technical assistance including to Muslim communities in non-member countries.

During the Indian Ocean tsunami disaster, the IDB Group allocated $500 million to support the affected and the bank to its credit is even sponsoring 10,300 Tsunami orphans who will be looked after until the age of 18.

But it is the appreciation of the bigger picture that is seriously wanting, especially the urgency of the scale of the challenges and effecting the necessary action.

Intra-Islamic trade has improved over the last few years to reach 16.3 percent of the total trade of IDB member countries.

The establishment of its standalone trade financing entity, the Islamic Trade Finance Corporation (ITFC), was supposed to herald a new era for intra-Islamic trade.

In 2009, ITFC’s trade funding allocations totaled $2.16 billion, of which 82 percent was directed to intra-Islamic trade.

The ITFC says that its target for trade funding in 2011 is $3 billion.

But put this against the total trade of the 56 IDB member countries of $3.374 trillion in 2009, then the true task and inefficacy of the ITFC and the IDB as a group becomes apparent.

Intra-Islamic trade will always have its limitations because major exporters and importers such as Saudi Arabia, Turkey, Iran, Indonesia, Malaysia, Egypt, and the UAE will always be constrained by the direction of their trade, which are dictated by demand and GDP growth dynamics.

No one expects intra-Islamic trade to reach for the sky, but at least after 30 years and with the benefit of hindsight and developments in trade finance and facilitation the figures should show a bit more robust upward movement and much greater urgency.

On the other hand, the two IDB Group entities that are over-achieving are the Islamic Corporation for the Development of the Private Sector (ICD) and the Islamic Corporation for Insurance of Export Credit and Investment (ICIEC), both headed by accomplished technocrats who know their business.

The ICD under CEO Khaled Al-Aboodi has done more in promoting Islamic finance in the private sector in the last few years than its parent has done over the last decade.

Similarly Abdul Rahman Taha, CEO of ICIEC, has almost single-mindedly steered the development of Islamic export credit and political risk insurance in the IDB member countries.

As the only multilateral export credit and investment insurance agency in the world that provides Shariah-compatible insurance and reinsurance products, ICIEC, which has recently increased its capital from $240 million to $640 million which would substantially increase its underwriting and reinsurance capacity, continues to make steady strides increasing its business insured during the first quarter 2011 by an impressive 56 percent, reaching $630 million compared to the $403 million last year.

“The fact remains that export credit and political risk insurance,” says Taha, “is still not recognized as a widely accepted risk management tool in IDB member countries. However, at ICIEC we have taken several steps to disseminate awareness about the usefulness of these products. We believe our efforts are paying off as more and more banks and traders tend to become aware about export credit and political risk insurance. We should not underestimate the impact of the global financial crisis in raising awareness of the need to manage and mitigate credit and political risks.

Lack of urgency has also been a feature of the IDB response to the economic challenges sprung up by the Arab Spring.

In April 2011, the IDB allocated $250 million to finance employment opportunities for youth through the establishment of small and medium projects in a number of Arab countries that have recently experienced change and are undergoing political and economic.

The reality, however, is that the $250 million allocated for the youth employment generation program is extra money which is not coming from the IDB ordinary resources but has to be raised separately.

The source of funding was not properly thought through and was approved in a big hurry.

The funds were originally requested by the new interim governments of Egypt and Tunisia, and by Morocco.

“Nothing has been disbursed thus far. The IDB will have to be liberal to be practical. The employment generation programs initially will probably have to be financed from current liquidity or IDB equity,” stressed one market source.

The pressure is on the IDB to start disbursement of the funds because of the urgent problem of youth unemployment in these countries.

Usually the drawdown period is up to three years, which is preceded by another three years typically to identify and research projects.

This six-year gestation for the funds is simply unrealistic because of the urgency of the situation.

At the same time, the IDB recently announced a three-year $2.5 billion package for financing development projects, export and import insurance, and private sector development in Egypt.

The IDB is quick to trumpet its brand as a MDB aspiring to be the best of its class.

In early 2011, Fitch Ratings, raised the bank’s long-term Issuer Default Rating (IDR) to ‘AAA’ and affirmed its short term IDR at F1+.

Moody’s Investors Service and Standard & Poor’s have at the same time reaffirmed the long-term foreign currency issuer rating of the IDB Ordinary Capital Resources of Aaa and AAA with a stable outlook respectively.

The IDB was also classified as a Zero Risk Weighted Multilateral Development Bank by the Basel Committee on Banking Supervision and the Commission of the European Communities in 2004 and 2007 respectively.

All these ratings have facilitated the bank’s efforts to mobilize financial resources from the international financial markets though the issuance of sukuk.

The rationale for the IDB rating of all three agencies, are uncannily similar and deficient in their appreciation of the politics (and therefore the political risk) and the governance (and therefore the operational and opportunity cost risks) of the IDB.

The buzzwords are strong capital, low leverage and high liquidity.

“Downward pressure on the rating could arise from a weakening in the credit standing of shareholders, a marked increase in leverage induced by the rapid growth in lending, and a softening of the bank’s stringent risk management policies,” says the latest report by Fitch on the IDB.

The reality is that the IDB is propped up by the notion that Saudi Arabia will act as a guarantor or Lender of Last Resort for the IDB should something go wrong.

The Kingdom’s sovereign rating, for instance, was upgraded last year to Aa3 from A1 by Moody’s, which confirmed that “this may improve the IDB’s risk asset coverage ratios going forward.”

The fact that 21 percent of the IDB subscribed equity is held by Aaa or Aa rated member countries, of which Saudi Arabia is by far the largest subscriber with 26.8 percent of the equity, distorts the true strength of the IDB as an MDB.

Indeed, the IDB’s capital is more or less evenly distributed between investment grade and sub-investment grade countries.

Under normal circumstances, the MDB would struggle to merit its AAA rating.

Another major challenge going forward is the bank’s resource mobilization strategy, especially as its current $3.5 billion Islamic Trust Certificates Program is nearing exhaustion.

The IDB is funded exclusively by equity and Islamic debt instruments, namely sukuk.

The increase in sukuk issuances and the ceiling of the trust certificate program has led to a rise in leverage in 2010 to compensate for a higher growth in assets than in paid in capital.

The IDB has thus far issued a $400 million debut sukuk, followed by a $500 million sukuk and a $850 million sukuk in 2009, a $500 million sukuk in 2010 and the recent $750 million in May 2011, thus bringing the total volume of IDB sukuk offerings to date to $3 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 $500 million of issuances to come.

According to market sources, this remaining tranche could be raised either through another sukuk issuance or through a private placement.

However, the IDB’s funding requirements for 2011 is estimated at $1.4 billion, and with the current $750 million sukuk, this leaves another $650 million to be raised.

The crucial meeting will take place during the upcoming IDB board of governors annual meeting which in Jeddah toward the June-end.

Some of the senior members of the MDB such as Saudi Arabia, by far the largest equity subscriber of the IDB, argue that the bank is sufficiently capitalized and that armed with its zero risk weighting for an MDB by the Basle Committee and its AAA rating by all three top international agencies — Moody’s, Standard & Poor’s and Fitch — it should raise funds from the capital markets.

At the same time, the board of governors meeting this week is expected to sound out member countries regarding callable capital.

The suggestion is that there should be 50 percent cash callable in 2012-13 if any motion to that effect is supported and carried at next year’s board of governors meeting.

The IDB’s current authorized capital is 30 billion Islamic dinars (ID), (one ID is equivalent to one Special Drawing Right (SDR) of the International Monetary Fund (IMF).

Its subscribed capital is ID15 billion.