The Islamic Development Bank (IDB) will go to the market this month to raise between $500 million and $1 billion to finance its activities during the year. In an exclusive interview, Dr. Ahmad Mohamed Ali, IDB President, who is on a visit to the United Kingdom, confirmed that because of increasing demands from member countries for financing, the multilateral development bank (MDB) of the Muslim World plans to issue regular annual sukuk tranches ranging from $500 million to $1.5 billion under its Medium Term Notes (MTN) program going forward. Last year IDB total funding exceeded $8.3 billion and this figure is expected to increase given the huge demand especially from the MENA countries like Egypt, Tunisia, Yemen and Morocco which are undergoing political and economic transformation. Perhaps because of the changing appetite for IDB resources, the Board of Executive Directors of the bank have thus far not set a ceiling for a new MTN program. The one for last year was $3.5 billion that was spread over a number of years. In addition the IDB does have a local currency sukuk issuance program and has thus far issued tranches in Malaysian ringgit and in Singapore dollars. Despite rumors of a second ringgit issuance, Dr. Ali said that no decision has been taken in that respect although the bank remains open to discussions although any such issuance would depend upon quality assets to invest in. “If we find the opportunities, we will consider them. The IDB has close cooperation with Malaysia and recently signed a Member Country Partnership Strategy (MCPS) with the Malaysian government which is already operational.” Furthermore the IDB also mobilizes resources through private placements with investors including in the UK. Dr. Ali revealed that work was progressing well toward launching the Mega Islamic Bank, which was announced at the 37th annual meeting of the Board of Governors of the IDB in Khartoum, Sudan in April. The Mega Bank is being launched by the IDB together with the government of Qatar and the Dallah Albaraka Group of Saudi Arabia, which is headed by Sheikh Saleh Kamel. According to Dr. Ali, Qatar has subscribed to $300 million or 30 percent of the equity and the IDB and Dallah Albaraka to $100 million or 10 percent each of the equity. “The government of Qatar is encouraging other Qatari institutions to also subscribe and we hope that financial and other institutions including sovereign wealth funds(SWFs) would also participate,” he added. The Mega Bank will be headquartered in Doha, Qatar and the license and organizational and capital structures should be finalized in the next few months. The bank is expected to be officially launched early next year, the IDB chief said. The Mega Bank, explained Dr Ali, has three objectives: It will support the Islamic banking industry as far as liquidity is concerned; it will invest in infrastructure projects in IDB member countries and it will help find investment opportunities for funds being repatriated from investment portfolios outside the IDB member countries to projects in member countries and in other real economy projects. “One of the major challenges for the Islamic banking industry is to manage liquidity properly. This bank will invest in real projects and issue Shariah-compliant commercial papers against these projects and these instruments will be marketed and traded. When Islamic banks have excess liquidity they can buy these instruments and when they have a need for funds they can sell these instruments,” he added.The IDB is under pressure from its board to mobilize more funds from the capital markets instead of relying solely on equity and callable capital. It is also under pressure to devise a financing strategy for the next three, five and 10 years. In the aftermath of the financial crisis, the IDB board decided on a 30 percent increase per annum in the bank's financing for the next three years, a target which the management considers very ambitious and high. “We are always looking at new ways of resource mobilization. It is our duty to do this to utilize the AAA rating by the top three international rating agencies assigned to us, and the Zero Risk Weighting for multilaterals given to us by the Bank for International Settlements in Basel. Our member countries expect us to do this. The bank's AAA rating enables it to mobilize funds on reasonable terms from the market. We have enjoyed this AAA rating for ten consecutive years or so, including the periods before, during and after the global financial crisis,” maintained Dr. Ali. To his credit, the octogenarian Dr. Ali concedes that raising up to a $1 billion from the market may not be enough because every year the bank is exceeding its financing target. As such, future resource mobilization targets may indeed be higher. The major constraint for resource mobilization for the IDB is that its cost of financing (the cost of the money it raises from the market) is higher than for peer institutions — 40 percent higher than the World Bank and 20 percent higher than the Asian Development Bank and the African Development Bank. “We know this is a challenge and we are getting specialized institutions to advise us on this. The two main reasons why our cost of financing is higher for our sukuk is because our volumes (size) are smaller and we go to the market less frequently, which means we are not continuous originators. This is why we have decided to go to the market every year to issue an international sukuk from now on,” he confirmed. In fact, at the IDB annual meeting in Khartoum, some member countries went even further. They wanted multilaterals such as the IDB to start thinking of ways and means to overcome the impact of systemic shocks on their respective member countries, not caused by deficient domestic policies but due to external shocks. “While the bank offers long-term development funding, we need to consider the need for a timely, targeted and temporary fiscal (financial stimulus) assistance or at least a multilateral sovereign-quality guarantee mechanism to ensure that our member countries are not disproportionately impacted by systemic global events,” advised Husni Hanadzlah, Malaysian Finance Minister. One of the success stories out of the IDB annual meeting in Khartoum was its engagement with the youth of member countries. The bank facilitated a Special Program for Youth around the annual meeting which was organized by youth organizations from several member countries. Indeed, Dr. Ali confirmed that disbursements from the IDB$250 million Special Fund to finance youth employment generation projects in the Arab Spring countries through microfinance has started. The first recipient country is Tunisia. However the IDB is waiting for Egypt, Morocco and other countries to come up with projects that need financing. __
