IDB chief: Islamic banking not confined to Muslim communities

The global credit squeeze and recession have made many countries turn to the Islamic Development Bank more than ever to seek help in their development projects, says its President Ahmed Mohammed Ali.

"Islamic banking is a fast-growing global industry. This is due to the integration with the real activity," he said.

"It is to be noted that Islamic banking is not confined to Muslim communities. Many social sectors participate in it," the president said in an interview.

Can you tell us about the size of the bank's assets since its establishment? What is the growth rate achieved last year? What are your growth prospects for next year?

IDB's assets are estimated at US$ 17 billion. Operational assets are estimated at $ 10 billion. Last year's loans ratio was about 13 percent, totaling $ 7.9 billion.

These include project finance and trade operations. We expect that the bank's operations will grow by 15 percent this year. The bank decided to increase its annual total operations by 30 percent, during the period 2009-11, in order to help member states to weather the effects of the world financial crisis.

Starting from 2013, the bank's financing went back to its earlier growth rates, estimated at 15 percent.

In addition to the above, insurance commitments issued by the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) until the end of 2012 are estimated at $ 17 billion.

What is the impact of the global crisis on IDB? How much are the bank's earnings for last year? What are the expected earnings for this year?

The global crisis led to an increase of the financing activity in the member states. As a result of the crisis, the global credit squeeze and recession made many countries turn to the bank more than ever to seek help in their development projects.

The annual growth rate of financing operations was increased from 15 percent in 2009 to 30 percent by the end of 2011. Thus the growth in the bank's operations during these three years was 90 percent.

Although IDB is an international development institution that complies with the Shariah rules in all its transactions, the bank's annual earnings were around 5 percent. We do not distribute dividends. We allocate them to the various operations and to shore up the bank's reserves. The bank's profits in 2012 were $ 175 million, with an expected growth rate similar to the previous years.

How much did the bank's group finance economic and social development?

Since its establishment and until November 2012, the group allocated around $ 90 billion for the member countries, which were channeled to economic and social development. This was warmly welcomed by many interested circles and by the international rating agencies. Thanks to the generous support of the member countries, IDB for the eleventh year in a row, got a triple-A rating with a positive outlook from the major rating agencies, Standard and Poor's, Moody's, and Fitch.

What do you think of the activities of the Islamic banks? Do they cooperate and achieve harmony amongst themselves?

Islamic banking is a fast-growing global industry. This is due to the integration with the real activity. There are now around 300 Islamic banks all over the globe. In addition, Islamic banking windows in international European banks stand now at 30, and are expected to rise.

It is to be noted that Islamic banking is not confined to Muslim communities. Many social sectors participate in it.

Islamic banking now can boast a solid infrastructure and this will surely help it to push forward in international banking operations. I believe now is the right time to invigorate the industry to transform the quality of its products and services in order to better serve the world's aspirations for safer and more creative banking.

Can you tell us about the Islamic International Finance Market (IIFM)?

IIFM was established in Bahrain in 2002 to address the lack of Islamic investment financial instruments, as well as address the problem of liquidity at Islamic banks, since Islamic banks transactions deal mostly with commodities.

But of course there are other investment instruments available for these banks, like Islamic sukuk, leasing sukuk which have gained currency recently.

How are Islamic banks rated internationally?

Islamic International Rating Agency (IIRA) was established in Bahrain in 2004. It was the first agency that gives ratings to Islamic banks and financial institutions. Before IIRA was established, they used to rely on the traditional international agencies for rating.
IIRA helped Islamic institutions offer their securities in international markets by giving them an international rating. It also helps increase transparency in the operations of these institutions, and enables them to assess operating risks.

How do you see Islamic banks in terms of anti-corruption and governance?

Islamic banking, by its very nature, complies with the Shariah rules. Not only do these rules supervene on financial transactions and contracts, but also on every aspect of any transaction with the shareholders, investors, and depositors. Therefore governance in Islamic banks is more stringent than in traditional banks. But of course the people working in these institutions are human after all, and they can make mistakes. But since the very concept of Islamic banking is asset-based, there can be less chances for corruption, and this imposes a solid framework for governance.

How does the bank handle financing operations with the non-Islamic international institutions?

We can have cooperative financing. In principle, Islamic contracts do not generate interest but they can give guarantees similar to interest-generating loans. For example, financing through leasing gives the investor more guarantees that mortgaging assets. This is so because the assets in the leasing arrangement are registered the assets in the name of the financier, not the person who got the loan.

As I can see it, there is nothing that stops traditional banks from using Islamic contracts, like the Istisn'a contract, where you can get a letter guaranteeing execution for an Islamic bank, so that the financier does not become vulnerable to unacceptable risks.

Does IDB work toward creating a common Islamic market?

We need to increase intra-country trade among Islamic nations. This is a strategic objective and a necessity imposed by the global economic developments.

The volume of intra-country trade is 18 percent, which is not enough to warrant the establishment of a common Islamic market. That project is a dream we want to come true. It would facilitate our adaption to a globalized economy and our response to the external challenges in commerce, productivity, and technology. It would also increase our competitiveness in international markets and help achieve social and economic growth in Islamic nations.

(Arab News / 21 May 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com