The Islamic Development Bank is looking to its annual meeting in Dakar first, to launch its much-anticipated Poverty Alleviation Fund, and second, to re-engage with the African economies, whose development should be at the centre of the Jeddah-based multilateral’s activities.
In an exclusive interview, IDB president Ahmad Mohamed Ali tells Emerging Markets that the Dakar meetings are “an important occasion for a number of things. First, we will launch the Poverty Reduction Fund, and Senegalese president Abdoulaye Wade will chair a special session for its launch. Second, because the meeting is held in Africa, there will be a particular focus on the role of the IDB in enhancing African development.”
The new fund is intended to promote grassroots work on poverty reduction, and is also intended to raise IDB member states’ productive capacities. These are big issues, and to address them the PRF intends to raise a headline $10 billion. The huge reserves build-up among key IDB donors, led by Saudi Arabia, suggests this is possible. So far, some $1.4 billion has been raised, Ali tells Emerging Markets.
“We expect some member countries will announce their contribution [to the fund] at the meeting, and from there we will continue efforts to mobilize resources,” Ali says. An appeal will be made to wealthier countries to increase their initial contributions, he adds. The fund is targeting $10 billion, Ali says. “We do not know when we will reach this figure, but we are hopeful because, in the Bank’s history, member countries have always shown their support, and we believe this will continue.”
The IDB’s board of directors has advised that the PRF should be established as a Waqf – Islamic Solidarity – fund. It is expected to start operations soon after the meeting. The PRF’s creation, and the IDB’s greater focus on Africa, will formalize efforts made in the past 18 months to make the Bank more relevant to its poorest members. The December 2005 Organization of the Islamic Conference (OIC) summit decided to establish the fund, and also called for the formulation of a special programme to focus on African development – spreading the IDB’s reach to its least developed constituency.
Financial leadership
Development of the Islamic financial sector is another critical theme that will be explored in Dakar. Critics charge that the IDB has yet to play a defining role in shaping the burgeoning Islamic financial sector, despite its multilateral status and the ambitions of the Vision 1440H strategy paper, which makes development of the sector a strategic objective.
“Developing standards in the Islamic finance industry is a continuous exercise... it is difficult to say there is a lack of standard,” Ali says. “Standards have to be developed and changed because the industry is facing different circumstances; modes of business are changing, and standards have to be continuously adapted too. I think it is very important to have more confidence in the industry as it faces tough competition, and it has to compete,” he adds.
In 2005, the IDB and Kuala Lumpur-based Islamic Financial Services Board (IFSB) launched a joint initiative to develop a 10-year master plan for the industry – “a framework and direction-setter... at national and international levels,” the IDB says. Ali answers critics who suggest the Bank could do more by arguing that the IDB has already played a significant role in shaping the industry: “When the IDB was established in 1975 there was only one Islamic bank – the Dubai Islamic Bank. The IDB has played a major role in supporting the development of the industry through equity financing, participation, technical assistance, developing standards, modes and methods of financing which are in accordance with sharia.” It has worked to establish and strengthen institutions such as the International Islamic Financial Market, IFSB and International Islamic Rating Agency.
The UAE central bank has recently said it is working with the IDB to develop a sharia-compliant certificate of deposits to mop up excessive liquidity from the banking system. The IDB is also working with the Bahrain-based General Council for Islamic Banks and Financial Institutions to establish a mega-Islamic bank that could fund large projects. Indeed, the IDB has supported the growth of Islamic banks by participating in their equity and providing co-investment opportunities for many years. Officials in Jeddah observe that, as of 2006, it had investments in 29 financial institutions’ share capital.
Accelerated change
Much has changed in the three decades since the IDB opened in October 1975, with 22 member countries – compared with 56 now. While its richer members – including Saudi Arabia, Qatar, Kuwait and the UAE – have grown vastly wealthier, 22 member states remain least-developed countries according to UN classification. Six more – Albania, Azerbaijan, Kyrgyzstan, Palestine, Tajikistan and Uzbekistan – are considered “least-developed member countries” by the IDB.
The IDB itself has changed from a single entity into a group made up of five entities: the IDB, ICIEC, Islamic Research and Training Institute, Islamic Corporation for the Development of the Private Sector, and a newcomer, the International Islamic Trade Finance Corporation. “When the Bank was established 32 years ago, the development issues of all member countries were completely different from today, and we expect them to again be different in 20 years from now. That is why the IDB has to make rapid changes to remain relevant to the new development needs of each of our member countries,” Ali tells Emerging Markets.
The IDB’s 31st Annual Meeting in Kuwait, in May 2006, launched a new strategy called Vision 1440H, aimed at meeting a series of goals – mainly to reduce poverty and empower ordinary people – by 2020. “A team of personalities from all member countries, led by the former Malaysian prime minister Mahathir Mohamad, helped the Bank in working out the 1440H vision.” Ali says: “One of the vision’s major points is for the bank to change from mainly financing institutions to being a facilitator of institutions – to help mobilize all available resources in member countries within the private sector or in different institutions like chambers of commerce.”
Promoting economic cooperation among member countries remains a strategic objective. Accordingly, Ali says, “The Bank gives priority to those projects which benefit more than one country.” An example: “In Africa’s land-locked member countries, it supports the building of roads to connect these countries and to give them access to ports for trading.”
Trade focus
The IDB in 2006 decided to spin off its trade finance operations into a stand-alone export-import bank – the International Islamic Trade Finance Corporation (ITFC) – sending a clear message to Islamic financiers that trade remains a top priority. According to Ali, “Trade has been on the IDB’s agenda since the very beginning ... IDB was one of the very first international institutions to be concerned with trade among its member countries.” By further honing the trade finance focus, “We hope that with new methods and new ways of doing things – having ‘new blood’ in this area –we will be able to meet this challenge of enhancing intra-trade among member countries.”
Some 50 finance and planning ministers from OIC countries looked on as the ITFC was inaugurated in Jeddah in February. Saudi finance minister Ibrahim al-Assaf points out that “the ITFC has been created to boost the economic development of member countries by enhancing intra-trade volumes from the current 14% to as high as 20% by 2015.”
ITFC’s authorized capital is $3 billion and subscribed capital $500 million. The IDB will also make funding available from its ordinary resources for ITFC to manage and use in trade financing transactions – and ITFC is expected to mobilize resources from regional and international financial markets, in the form of syndications or specialized funds.
An ITFC official tells Emerging Markets that the new organization planned to develop new and innovative sharia-compliant products. “Along with the trade facilitation programmes and capacity-building for exports, the availability of trade finance – particularly for small and medium enterprises – plays a significant role in the development of trade. ITFC will be positioned to assist member countries in accessing funds for financing trade.”