The Islamic Development Bank's (IDB) ordinary capital resources has increased its use of sukuk instruments, not only boosting its lending capacity but also promoting the global Islamic financial markets, Moody's Investors Service said in its report "Islamic Development Bank – Ordinary Capital Resources". The IDB currently has a long-term issuer rating of Aaa with a stable outlook. The IDB has a long-term issuer rating of Aaa with a stable outlook. Moody's highlighted that IDB's Aaa rating reflects the bank's (1) strong shareholder support, including from several highly-rated sovereigns; 2) the institution's preferred creditor status, which ensures that debt it is owed is excluded from the imposition of capital account controls, as well as any restructuring of sovereign obligations; (3) a strong capital base and prudent financial and risk management policies; and (4) solid liquidity levels. The IDB is one of the largest issuers of sukuk, along with the governments of Malaysia (A3 positive), Indonesia (Baa3 stable) and Qatar (Aa2 stable), all IDB members. IDB issued four series of trust certificates in 1435H under the recently upsized MTN program, increasing total borrowings by 19% to Islamic dinars (ID, or SDR) 7.4 billion in 1435H ($10.9 billion). In late 1436H, the IDB decided to increase the ceiling on its sukuk program (IDB Trust Services Limited, Aaa) to $25 billion from $10 billion. Despite increased leverage from sukuk issuance, the IDB benefits from a large and expanding capital base. because of the recent general capital increase, callable capital rose fourfold to ID40.5 billion at end-1435H, of which about half comes from member countries rated a or higher. besides, its ratio of liquid assets to borrowings remains higher and its gearing ratio lower than several Aaa-rated multilateral development banks (MDBs). The debt-to-equity ratio is expected to rise to 125% in the coming years, a level still well below that of other Aaa-rated MDBs. "Despite the risks inherent in its role as a development bank, the IDB's operational assets continue to perform well, with a low level of impairment," said Mathias Angonin, a Moody's analyst and an author of the report. "As a supranational entity, besides its development mandate, the IDB strongly promotes and sets standards for Islamic finance," added Angonin. "The bank has helped many of its 56 members to introduce the necessary legislation for the issuance of sovereign sukuk and to develop the regulatory and legal framework for Islamic banking. The bank's public offerings have enabled it to develop a sukuk yield curve, with a target of at least one benchmark dollar-denominated issuance every year." The IDB's impaired operational assets remained stable in 1435H at a very low level (around 1.1% of problem loans to total loans), close to their five-year average. This phenomenon is largely explained by the fact that the bulk of the IDB's exposures are sovereign-guaranteed. In addition, the IDB enjoys strong support from its member countries underlined by its preferred-creditor status. The board of governors' major decisions in 1434H included the increase in authorized capital from ID30 billion to ID100 billion, as well as a similar increase in subscribed capital from ID18 billion to ID50 billion, of which ID 3.6 billion was called and will be paid up in straight-line installments over 20 years. In 1435H paid-up capital increased 1.0% to ID4.85 billion. "We expect paid-in capital to rise further in the coming next years as the new subscribed capital is progressively paid. These developments illustrate the continued commitment of the bank's shareholders and are key to maintaining the bank's strong capital structure, as the amount of subscribed capital has been growing more slowly over the past five years, with sukuk financing preferred to equity in order to finance operational growth," Moody's said. Moreover, the IDB's asset portfolio is well diversified geographically and by sector. The bank has a culture – supported by explicit rules – of prudent risk management. Among the key rules, beyond the statutory limit outlined in article 21 of the Articles of Agreement, are scoring systems and counterparty limits and provisioning, as well as binding limits on geographical concentration. As per the IDB Group policy, a single country exposure is limited to 15% of total exposure. The largest country exposure (Morocco) is well below that threshold as it represents 10.2% of total exposure (including equity investment and profit sharing), followed by Pakistan (8.3%) and Turkey (5.3%). In fact, the 10 largest sovereign exposures accounted for 53% of total operational assets at end-1435H (slightly lower than in previous years), a lower level of geographic concentration than most Aaa-rated MDBs. The IsDB's country Herfindahl-Hirschman Index comes out at 4%, the second-lowest level of concentration among rated MDBs after IFC (3%) – IBRD is at 6% and AfDB at 12%, for instance. Assets are also diversified by region, with the North Africa and the Middle East regions accounting each for about 25% of exposure, while the Sub-Saharan Africa, South-East Asia and Commonwealth of Independent States regions, account each for about 10% of exposure. Although the IDB's gearing ratios have increased over the last few years due to sukuk issuances, they remain low in absolute and comparative terms. The ratio of total borrowing to usable equity rose sharply to 95.6% at end-1435H from 79.5% at end-1434H, coming very close to IDB's leverage ceiling of 125%. This ceiling was increased form 100% during the 40th Annual Meetings (1436H). Nonetheless, compared to other similar rated MDBs, IDB's leverage profile remains conservative. For example, the gearing ratios of the International Bank for Reconstruction and Development (Aaa stable) and the Asian Development Bank (Aaa stable) both exceed 350%. The IDB intends to continue tapping the market in years to come. Given the favorable maturity structures to finance longer term infrastructure projects and lower pricing, IsDB has increased the ceiling of its MTN program to $25 billion in 1436H from $10 billion, and plans to issue at least one public sukuk of $1 billion every year. The issuances will more than offset the agreed increase in subscribed and paid-in capital, leading to a gradual leveraging of its activities. According to the bank, the debt-to-equity ratio will rise to 125% in the next five years, which would still be well below the median for Aaa-rated MDBs of around 250% in 1435H. — SG
