The Jeddah-based Islamic Development Bank (IsDB) is preparing its second commercial paper issuance, a shariah-compliant MTN (medium-term note), which in effect will be part of a series of MTNs which the IsDB is planning to launch over the next year or so, and ranging from US$400mn to a total of US$1bn.
As the IsDB finalises the structure of the MTN and the asset allocation, the mandates, the negotiations for the ratings, the distribution, and the dates for the roadshows, the multilateral development bank is coming under increased pressure from its 55 member countries who are demanding urgent action on boosting intra-Islamic trade, greater flexibility in using other hard currencies such as the euro and the yen to finance such trade outside the US dollar zone, the dominant currency by far for IsDB financings, and a more realistic mark-up or rate of return on IsDB financing operations to reflect “the equivalent prevailing low interest rates environments in international money markets in recent times.”
More recently, the UAE government has similarly urged the IsDB to do the same, and has pledged to underwrite some of this anticipated expansion of intra-Islamic trade. The IsDB group as a multilateral has historically concentrated more on trade finance – especially import and export financing operations of its member countries – confined mainly to primary products such as oil, oil products, and other raw materials.
Its development finance function has taken a back seat in terms of size of allocations and disbursements, compared with the volume of trade finance operations. In 2003/04 for instance, out of a total US$3.974bn of financing approved, some US$2.056bn was for trade finance; and US$1.825bn for project and development finance.
The IsDB in fact has appointed a top international consultancy to study the feasibility of setting up a standalone trade bank to promote intra-Islamic trade. Perhaps it is this bank, if it goes ahead, that may be located in the UAE, which would then attract the additional resources being offered by the UAE government.
Others point to the underdeveloped culture of export credit cover in IsDB member countries to mitigate against various risks in financing trade operations, especially to the riskier markets in member countries. The IsDB’s ICIEC (Islamic Corporation for the Financing of Investment and Export Credit) is severely limited by its resources, although there is a greater effort now to restructure and re-position the activities of the institution.
Next July 2005, the IsDB celebrates its 30th anniversary. It has approved cumulatively some US$34.24bn over the last three decades for financing trade and development in its member countries.
To mark the occasion, IsDB president, Ahmad Muhammad Ali, who has been at the helm of the institution for most of its 29 years, and his board have ordered an independent and comprehensive evaluation of the bank’s operations and performance to date. The bank is coming under increasing pressure from within its ranks for its policies and financing to impact more urgently and meaningfully on the economic development of its member countries.
At the IsDB governors’ 29th annual meeting held on September 14-15 in Tehran, several member countries were calling for a more flexible approach to financing with perhaps a greater choice in a basket of hard currencies. IsDB sources, however, play down the extent of these currency losses, and stress that at least 13% of the IsDB financing is done in yen and a smaller portion in euros.
Ali agrees with the need to increase intra-Islamic trade from its current 13% level because “trade has a role in economic and social development”. But, he has warned in his opening address in Tehran, “the bank is fully aware that to increase the volume of trade exchange among member countries adequately, there are huge difficulties and challenges that must be surmounted. Yet, all this cannot be achieved unless there is a strong will among member countries to support intra-trade, develop (appropriate) mechanisms, and open up the appropriate channels.”
There are also the external factors of trying to integrate into international trade, especially in the light of various agreements such as the textiles agreement, of attracting FDI flows, of debt burden and servicing, and of internecine conflicts which are ravaging several member countries. IsDB membership comprises disparate economies ranging from the liquidity surplus, to the intermediate, to the least developed countries, of which the latter category is by far the single largest and received a disproportionate 27% of the bank’s US$4mn of financing approvals last year.
This diverse IsDB membership has given rise to competing developmental and governance challenges, some of which overlap and some of which clash. Couple this with the IsDB’s increasing maturity as a multilateral, given its zero risk-weighting as an multilateral by the Basel Committee of the Bank of International Settlements (BIS), and its AAA long-term rating by Standard & Poor’s.
The IsDB itself is faced with the dilemma of balancing its development mandate with that of its newly-acquired financial status and its desire to maintain its rating so as to access cheaper funds from the international markets to finance its expanding activities. In addition, there is the acid test of the quality of delivery, implementation and enforcement of its policies and products and services.
This should be the additional driver behind the recently-approved IsDB strategic plan of the operations complex for the period 2005-10, which comes into effect in February 2005.