LONDON, 2 December 2002 — There seems to be a creeping change in corporate culture at the Islamic Development Bank (IDB), the largest trade and project financing institution in the Muslim world. The talk is now of achieving targets and enhancing efficiency and performance.
At the recent 27th annual meeting of the IDB group held in Ouagadougou, Burkina Faso on Oct. 19-25, the bank reaffirmed a target to increase its trade finance operations to $2 billion per annum so as to help achieve a second target of 13 percent of intra-Islamic trade (currently about 9 percent-10 percent), although no time scale was given.
Some member countries have expressed concern over the IDB’s preoccupation with boosting trade finance at the expense of development and project finance. They point out that the IDB is after all a development bank, and as such should concentrate on financing infrastructure and development as a priority. Trade finance should be done separately through the establishment of an IDB trade fund.
The IDB of course has done it the other way round. It has with other private sector partners established the IDB Infrastructure Fund in 2001, which according to IDB President Dr. Ahmad Mohamed Ali, has secured commitments of $980 million (out of a target of $1.5 billion). The fund is planning to invest $150 million in the capital of an unnamed energy project.
Another priority is to boost the performance of the IDB portfolios. In fact, a comprehensive review of the portfolios is already under way “so as to overcome the obstacles and problems that beset the implementation of approved projects. The bank will consider its portfolio management policies by focusing on project selection criteria, by increasing professionalism, and by enhancing field supervision, and increasing follow-up visits.” Slow implementation of projects and disbursements of funds are two key criticisms of the IDB by some member states.
In moving with the times, the IDB board also decided to dump Arthur Andersen as its external auditors, and have appointed Ernst & Young as the IDB group’s new auditors.
Not that the IDB group, which includes the flagship IDB; the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC); Islamic Corporation for the Development of the Private Sector (ICD); The Unit Investment Fund (UIF); the Islamic Banks’ Portfolio (IBP); and the IDB Infrastructure Fund; ought to be overly preoccupied with the mundane task of generating huge profits.
“Profitability is not a key factor for the IDB, because it is essentially a development bank,” stresses Eric Paget-Blanc, director of Multilateral Institutions at Fitch, the international rating agency and author of a recent rating report on the IDB which was published in late October.
Fitch in fact upgraded the long-term rating of the IDB from A+ (A plus) to AA- (AA minus) and assigned a first ever short-term rating of F1+ (F1 plus), based on the IDB’s high level of capitalization and liquidity; good protection against credit risk; and strong support from subscribing countries, of which Saudi Arabia and Kuwait are two largest at 997.17 million Islamic dinars (ID) and 496.64 million Islamic dinars (ID) respectively. (One Islamic dinar is equivalent to one special drawing right (SDR) of the IMF).
The IDB at its 26th annual meeting last year in Algiers announced that it was increasing its authorized capital from 6 billion Islamic dinars to 15 billion Islamic dinars; and its subscribed capital from 4.1 billion Islamic dinars to 8.1 billion Islamic dinars respectively. At its recent 27th annual in Ouagadougou, Dr. Ali confirmed that 29 member countries (out of 54) had so far subscribed to the capital increase and had finalized the relevant procedures. Five other member countries have confirmed that they would also participate in the capital increase and are in the process of ratifying the procedures.
Dr. Ali strongly urged the remaining member countries “to expedite their subscriptions, bearing in mind that the IDB does not intend to call up its subscribed capital but rather to consolidate its financial position so that it can mobilize resources from the market to enhance socio-economic development in member countries.”
Armed with the above capital increase; good financials for fiscal year March 2001-March 2002 (H1422); and the strong rating from Fitch, not surprisingly, the IDB recently announced that it has appointed Citigroup to lead arrange a Sukook (Islamic bond) program to raise $300 million from financial markets “as a first step toward a future strategic plan for resource mobilization.”
The IDB group announced total financing approved in 2001-2002 at $2,703 million, compared with $2,581 million in the previous year. The net total approvals of the IDB group from its launch in 1975 to end March 2002 amounted to $26.5 billion; and the accumulated net financing to include operations approved to-date amounted to $28 billion. Disbursements increased by 40 percent in 2001-2002 to reach $1,339 million.
Despite a large exposure to member countries experiencing financial problems and a significant concentration of loans to Indonesia, Pakistan, and Turkey, says Paget-Blanc, “the IDB has a very low level of problem loans, and has not had to write off any so far. This is due to the bank’s preferred creditor status, which gives it priority over other creditors in the event of a default by a sovereign borrower.” Most of the IDB’s risk exposure, in fact, lies in its equity portfolio — the IDB has equity stakes in several Islamic financial institutions in Turkey, Bangladesh, Albania, Bosnia, the Gulf states, and North Africa.
The IDB maintains a portfolio of liquid assets which represent 37 percent of total assets, which is a very high liquidity to assets ratio. Because the IDB operates under non-interest basis, stressed the Fitch report, “the bank is not exposed to interest rate risk and it does not seek to enhance earnings significantly through currency mismatching.” Similarly, its strong capital, which accounts for 90 percent of total assets, represents a “substantial cushion for creditors. It also means that the IDB does not need to seek external funding.
In fact, the $300 million Sukook program is more to test market and promote the institutional name of the IDB; to promote the concept of Islamic bonds and to keep the momentum going following the recent launches of the Bahrain government and Malaysian government Sukooks; and to establish a benchmark pricing; than to do with an urgent need to raise liquidity.
In other key developments, the IDB has welcomed the return of Afghanistan under the new government of Hamid Karzai to its board of governors after an absence of several years; and has extended over $50 million of humanitarian aid each to reconstruction in Afghanistan, and in helping the people of Palestine especially to rehabilitate basic school and health services.
Perhaps the most significant development is the Ouagadougou Declaration, whereby the IDB will set aside $2 billion over the next five years to invest in least developed African member countries (LDMCs) which total about 13, especially in the provision of basic education (including the narrowing of the gap between boys and girls’ schooling); vocational training; regional centers of technical education; primarily health care; food production and agriculture; infrastructure projects; and promotion of the private sector. The IDB since its inception has approved $9.3 billion for its LDMC member countries, and projects financed included the building 6,000km of roads; 3,700 drinking water wells, 3,300 school rooms; 200 health centers; and the irrigation of half a million hectares of agricultural land.
