In the wake of the global financial crisis and the attendant issues and reforms, the IDB, like any other multilateral development bank (MDB), is faced with new challenges for the 21st century. In addition, the IDB Group has initiated a serious reform process — organizationally, strategically and process wise — whose objective is to transform the MDB of the Muslim world into world-class institution.
Is the IDB up to this task? Has it got the creative future leadership to steer the supranational toward realizing the lofty core objectives of the development of its member countries — alleviating poverty in its member countries most of which are classified by the UN as least developed countries (LDCs), promoting Islamic banking globally, encouraging private sector development; promoting small- and medium-sized enterprises (SMEs), and promoting the role of women in development.
Going forward, the IDB has three crucial challenges — political, leadership and expansion. While the annual meeting will inevitably encompass some civil service tourism in Baku, just a stone’s throw away, an IDB country and for that matter an OIC (Organization of the Islamic Conference) member country, is embroiled in sectarian violence pitching Muslim against Muslim and Kirghiz against Uzbek. There has hardly been a whisper from the OIC Secretary-General Ekmelleddin Ihsanoglu and IDB President Ahmad Mohamed Ali. After all, political violence impacts on development and on economies.
Three IDB members — Saudi Arabia, Indonesia and Turkey — are also members of the G20, whose latest meeting is imminent. The World Bank, the International Monetary Fund (IMF) and its private sector funding arm, the International Finance Corporation (IFC), have all commended a potential role Islamic finance can play in contributing toward global financial stability. The IDB has prepared a report highlighting this role for Islamic finance merely to be distributed amongst the delegates at the G20 meeting and all three Muslim countries are unlikely to do this.
The IDB governors’ meeting will also see Dr. Ali re-elected as president for a further five-year term, taking him well into his 80’s. Saudi Arabia and the GCC countries who dominate the equity subscription of the IDB and therefore the voting rights. Apart from an absence of a year or so, Dr. Ali, a Saudi, has been at the helm of the IDB since its establishment in 1975, arguably a world record for any president of a development bank.
During his tenure, the IDB has achieved much but it has also been weighed down by bureaucratic inertia that has cost much in terms of lost opportunities.
Some senior member countries have privately indicated that Dr. Ali may step down after two years to make way for a younger candidate. This would be an important gesture on behalf of Dr. Ali whose legacy at the IDB is already established. There may be one or two eminent Saudi candidates who are already working in senior posts within the IDB Group, and who are also trained development economists and bankers. One even started his career at the Saudi Ministry of Finance and is considered a protégé of Finance Minister Ibrahim Al-Assaf, who will have perhaps the most important say in any future change at the top management of the IDB.
Another encouraging sign is the increasing involvement of Nigeria, Africa’s most populous country. Nigeria has applied to become a permanent member of the IDB Board of Governors, which has been accepted in principle. This means that Nigeria’s capital commitment to the IDB is $600 million, some of which has been paid up and the rest is callable according to the agreed articles of association of the MDB.
Nigeria’s ambition should be a lesson to other large and prosperous Muslim countries especially Malaysia, Indonesia, Turkey and Iran. If these countries wish to see a more level-playing development function for the IDB Group, then they have to increase their equity commitments to the MDB so as to up their voting rights and therefore their influence. For far too long have these countries paid lip service to IDB membership without committing enough resources to make a real impact.
The IDB’s membership vision is also far too narrow. There are many non-member countries that have far greater numbers of Muslims in their populations than many existing IDB member countries. If Mozambique and Uganda can be IDB member countries, why can’t Russia, China and India? After all, their Muslim populations are far bigger than these two countries. The IDB should rethink its membership strategy because it does impact on its core development objectives and sometimes in a negative way. It is no use talking about the IDB being the development bank of the Ummah when millions of members of the Ummah are out of reach because of the IDB’s anachronistic membership rules.
The IDB should be actively engaged to invite the above countries to full membership of the bank. Its Group entities are being forced to revise its financing rules and regulations because in a globalized world it becomes impossible to sustain a MDB purely in terms of financing member country with member country. Many Muslim member countries trade more with non-member countries — both in terms of exports and imports. The original goal of the IDB of stimulating intra-Islamic trade, which currently is about 13 percent, cannot sustain the above financing or trade or insurance functions, because the pool is too small.
In fact the Islamic Corporation for the Insurance of Export Credits and Investment (ICIEC) is proposing at its annual meeting also in Baku to insure imports from non-member countries to member countries of strategic goods, machine tools, development of infrastructure, and for food security.
“Whether a member country exports to another member country or to the US, the economic benefit is the same. Some of the changes also enabled us to insure the political risk of investment coming into our member countries irrespective of their source. Why should I care whether the investment is coming from the UK, Switzerland or Saudi Arabia? As long as the investment is coming into our member countries,” explained Abdul Rahaman Taha, CEO of ICIEC.
The IDB, according to Mohamed Tariq, senior adviser to the bank’s president, is also poised to go to the international financial markets in September this year to raise in excess of $850 million in a sukuk issuance under its $3.5-billion MTN program.
At the same time the IDB is looking at a number of private placements of local currency sukuk even in non-member countries such as a sterling issue in the UK, or a HK dollar issue in Hong Kong. The major challenge is for the productive use of the proceeds of such issues, especially good projects. The IDB has already successfully issued such local currency sukuk in Malaysia and in Singapore.
Last year the IDB and the Islamic Financial Services
Board (IFSB) established two task forces — the Task Force on “Islamic
Finance and Global Financial Stability” with the brief to recommend ways
of further strengthening the Islamic financial infrastructure to boost
its resilience and ability to meet future challenges; and a Liquidity
Management Task Force whose mandate is to enhance the efficiency of
Islamic financial institutions in managing liquidity at both national
and across borders. The Islamic Finance: Global Financial Stability
Report was unveiled in Khartoum, Sudan, in April, and the key
suggestions included eight building blocks in three key areas to promote
financial stability in the global Islamic financial industry; the
establishment of an Islamic Financial Stability Forum (IFSF) which would
essentially “be a broad-based and constructive strategic platform for
IFSB members to achieve the primary objective of building cross-border
dialogue in efforts to promote financial stability within the Islamic
financial system;” and the promotion of “collaboration and cooperation
in remedial policies to prevent, contain and manage emerging issues in
Islamic finance”. The Liquidity Management Mechanism however is
proving to be more challenging, especially in identifying suitable
assets that can be the basis for the underlying transactions and that
are tradable on a cross-border basis with full recourse to the law of
the land. In fact, there has not been much tangible progress in this
liquidity management challenge and no report has thus far been released
by the task force. Markets all over including the established ones
of Malaysia, Bahrain and the UAE are urging the development of a
well-established short term hard currency international liquidity
management scheme to meet their various overnight, daily, monthly and
even yearly requirements.
