LONDON — As delegates and members of the Board of Governors of the Jeddah-based Islamic Development Bank (IDB) converge on Almaty, the capital of Kazakhstan, for the multilateral development bank’s (MDB’s) 28th Annual Meeting today and tomorrow, there will no doubtedly be a mood of expectancy and quiet optimism among them.
The IDB is still smarting from the successful launch of its debut $400m Islamic bond (sukuk) which closed in July. This was after all the first AAA rated paper, whether conventional or Shariah-compliant, to be issued from the Middle East and North Africa (MENA) countries and indeed from the Islamic world, and was the first such international capital markets issue by a non-sovereign.
The IDB is also smarting from the zero risk weighting assigned to it as an MDB by the Basel Committee of the Bank of International Settlements (BIS), which will help facilitate the integration of the IDB into the Basel Accord process. In some respects this development is more important than the successful debut launch of the IDB Global Sukuk, and will contribute to a more competitive rating and therefore pricing of IDB papers in future. IDB President Dr. Ahmad Muhammad Ali has confirmed that the MDB’s “plan is to raise $3bn over the next ten years.” The MDB has indeed already been assigned AAA and AA long-term institutional ratings by international rating agencies Standard & Poor’s and Fitch respectively — the same ratings assigned to the IDB’s debut sukuk.
It has also the Ouagadougou Declaration (launched at last year’s annual meeting in Ouagadougou in Burkino Faso) in which the IDB committed $2 billion for the next five years to support development in its 25 Sub-Saharan African member countries, through co-operation with the NEPAD (New Partnership for African Development) Initiative, headquartered in South Africa.
The IDB is also operating on a wave of a huge liquidity position, enhanced by the increase two years ago of the IDB’s authorized capital to 15 billion Islamic dinars (from 6 billion Islamic dinars) and of its subscribed capital 8.1 billion Islamic dinars (from 4.1 billion Islamic dinars). This translates in reality to access to significant callable cash capital resources of $1.8 billion and to “contingency callable capital” of $4 billion, which makes the IDB perhaps the most liquid of the world’s MDBs.
This situation, however, does have a downside. It reinforces the handholding culture of the bank, sustained mainly by the MDB’s major equity subscribers such as Saudi Arabia, Kuwait, and Libya, who are effectively the MDB’s “Lender of Last Resort”, which in turn is an important reason why the IDB has been assigned such attractive ratings. As such the sukuk program could be important in that it will help build up a debt portfolio of the bank which will be on its own balance sheet and which the Bank has to service through its own resources and efficiencies.
No doubt the genteel Muhammad Ali will report on these extraordinary achievements over the last year to his Board, which comprise the central bank governors of the IDB member countries. What IDB watchers would also be interested to know is the progress of the task force set up by the president two years ago in forming a common future strategy for the IDB group, and how this has and will contribute to enhancing the three core strategies of the IDB, namely, poverty alleviation in member countries; enhancing co-operation among member countries; and the promotion of Islamic banking and finance.
Greater exposure to the international capital markets means not only greater name recognition but also greater scrutiny of the IDB by rating agencies, financial analysts, and the like. Rating agencies tend to overconcentrate on the quality of shareholders and their ability to pay in the case of major shocks. In the case of the IDB, the ratings assigned has also been because of the MDB’s fundamental liquidity position and its financial soundness. However, would the ratings be the same if the IDB had a much more “normal” debt portfolio than it currently has? How would this impact on the organizational risk of the IDB, especially given its project appraisal capacities and inefficiencies. The IDB’s management culture has come under sustained criticism over the years. The problem is that both bankers, corporates, and even ministers from member countries are coy (for political and economic reasons) in openly attacking the MDB. Key to these criticisms is the response time to and processing of deal and transaction enquiries and financing applications. Bankers and companies are exhausted by the sheer exasperation in having to wait for the IDB managers and committees to come up with responses.
This culture seems to be driven by an absence of a customer-friendly charter, and poor delegation of responsibilities by managers. In some instances it also reflects on the quality of the managers themselves. This culture can best be improved if the IDB inculcates a “one-stop shop” approach with guaranteed response times and in-built sanctions against managers who fail to deliver.
To be fair to Muhammad Ali, he has acknowledged that the IDB, like any institution, “has to improve our internal procedures. We welcome constructive criticism because it will drive us toward reviewing and improving our procedures from time to time. We can’t claim we have the ideal system, but we do have a major responsibility in disbursing all these funds and ensuring that the projects and programs we invest in are viable and have to be properly appraised.”
The IDB has recently recruited some new senior faces, including the seasoned Mohammed Tariq, formerly of Faisal Islamic Bank and Arab Banking Corporation, to head the Treasury department. Over the last few years also, the growth in IDB disbursements has been much faster than the growth in the number of operations financed by the bank, which means that the cycle is improving.
Delegates will also be on the lookout for new policy initiatives and nuances; and any firm commitments to some of the extraordinary development challenges of the hour, namely reconstruction of dysfunctional states such Iraq and Afghanistan, and the ongoing plight of the Palestinian people.
- Arab News Business 1 September 2003
