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Emerging Markets

IDB trade financing gains ground

Oil and food price increases are helping to drive business growth at the Islamic Development Bank’s new stand-alone trade finance arm.

The International Islamic Trade Finance Corporation (ITFC), which began operations on January 10, approved $1 billion in financing volumes in the first quarter of 2008, compared to $750 million approved for trade finance by the IDB last year, said ITFC deputy CEO Hani Sonbol.

Oil, of course, is a big demand area – for any given importing country, oil invoices have tripled in recent years,” Sonbol said. “We are now starting to support our member countries suffering from food price increases,” Sonbol said: “We are heavily engaged with several countries in this regard.”

Bangladesh – which was borrowing $1 billion annually from the IDB for oil imports – is the Jeddah-headquartered ITFC’s main client for this business. Other clients include the Moroccan oil refining company Samir, which tapped $100 million from the ITFC and the OPEC Trade Finance Fund in May to facilitate crude purchases.

As part of its remit in developing trade finance among Muslim nations, the ITFC has also taken on a new role in financing cash crops in West Africa.

“These are structured trade finance deals, for cocoa and cotton, in a couple of countries where the borrowing companies would not normally qualify for finance,” Sonbol said. ITFC is “taking the lead, supported by trade finance funds in Geneva and some French banks.”

A financing facility for a pharmaceuticals sector company is also expect this summer, “mirroring a paradigm where private-sector borrowers are becoming the biggest driver of our business”, he said.

The ITFC’s target financing level this year is $2.7 billion, Sonbol said. With $750 million in paid-in capital, plus an additional $1 billion in Mudaraba (or “profit and loss” sharing) financing authorized for its subsidiary on January 10 by the IDB, the new unit will catalyze its remaining needs via commercial bank syndications and co-financings. 

“Banks do tend to come in with us,” he said. Business is also thriving at the IDB’s other trade arm, the Islamic Corporation for Insurance of Investment and Export Credit (ICIEC) – which recorded a 71% growth in underwriting volumes activity to $1.5 billion in its year ending 28 December 2007, mainly in short-term trade credit underwriting.

IDB president Ahmad Mohamed Ali, who is also head of ICIEC, attributed the rise to “aggressive direct marketing strategy and a robust market demand for risk mitigation and credit enhancement services”.

The global liquidity crunch “has not had a major impact on ICIEC’s business as of now, partly due to the relatively buoyant economies of the GCC [Gulf Cooperation Council],” says director of underwriting Khemais El-Gazzah.