Financing development strategies
What is the distinctive mandate and mission of the Islamic Development Bank?
The purpose of the Islamic Development Bank (IsDB), which was established in 1975, is to foster the economic development and social progress of its 56 members, spread over four continents. The IsDB provides loans and grants to finance productive activities in key economic sectors, including infrastructure, agriculture, health and education. It is a South-South international financial institution with distinctive features: its members are all from the South, it operates on Islamic principles and solidarity among members as all its beneficiaries are considered partners, its modes of financing comply with Sharia (no interest is charged on loans and finance is linked to the real economy), it provides assistance to Muslim communities in non-member countries, and it contributes to the development of the Islamic finance sector. IsDB is the only multilateral development bank without G8 members that has been continuously rated AAA by all major rating agencies.
What are its guiding principles and how have they been inspired by the model of Islamic finance?
IsDB operates under a Sharia-based finance model that integrates ethics into finance by prohibiting usury, gambling, injustice, speculation and deceit. The model works on the basis of partnership and cooperation among the financiers and investors or entrepreneurs, with risk sharing to ensure market discipline. It requires greater transparency and disclosure and is designed to link financial transactions to the real economy. It operates purely on five major Islamic instruments:
– Ijara (or leasing): sale of an asset’s usufruct. The lessor retains the ownership of the asset, together with all the rights and responsibilities that go with ownership;
– Istisna’a: a contract in which a manufacturer (or contractor) agrees to produce (or construct) and deliver, at a given price on a given date in the future, a well-described good (or building) according to specifications;
– Instalment sale: facilitation of the purchase of assets for the benefits of clients who will pay in instalments over a pre-determined duration;
– Mudarabah: a contract of profit- and loss-sharing partnership between capital and work – that is, between two parties, one or more capital owners or financiers; and
– Murabahah: sale agreement whereby the seller purchases the goods desired by the buyer and sells them at an agreed marked-up price.
These Islamic finance principles promote social justice, encompassing economic justice and distributive justice, such as the fair and equitable distribution of wealth, the provision of basic necessities of life to the poor and needy, and the protection of the vulnerable against economic exploitation, as well as the elimination of exploitation.
How does the IsDB support economic growth and development in the Islamic world?
The IsDB Group fosters the economic development of its members through project financing, technical assistance for capacity building, private-sector development, trade financing and the insurance of investment to promote economic cooperation. Its financing has high multiplier impacts on the economies of its members. To this end, the volume of financing since inception has continued its upward trend and cumulatively reached $102 billion, financing 8,059 projects and operations as of June 2014. It has targeted strategic themes such as poverty alleviation, comprehensive human development, capacity development and private-sector development.
In 2013, infrastructure received the largest allocation of IsDB’s Ordinary Capital Resources (OCR), totalling $3.1 billion or 73.1 per cent of total financing. In addition to using its OCR for infrastructure, the bank has launched other new facilities and funds, including the Public-Private Partnership (PPP) Division, the Arab Financing Facility for Infrastructure; the New Mudaraba Infrastructure Investment Facility: Islamic Infrastructure Fund; and the IsDB Infrastructure Fund I and II. Through these efforts, it aims to facilitate affordable access to energy, foster urban development and improve transportation networks.
IsDB accords high priority to the private sector in its efforts to help members sustain stronger economic growth, create jobs and reduce poverty. It also contributes to the development of the private sector through its entities, the Islamic Corporation for the Development of the Private Sector (ICD), the International Islamic Trade Finance Corporation (ITFC) and the Islamic Corporation for the Insurance of the Export Credit and Investment (ICIEC). In 2013, ICD’s support for the private sector totalled $426 million, and ITFC’s trade-financing operations for both the public and private sectors was $5 billion. In the same year, ICIEC’s business operations reached $3.4 billion.
Deepening regional cooperation and economic integration is pursued through trade financing and investment promotion in order to facilitate exchanges of goods, capital and services among members and PPP initiatives. In addition, the IsDB Group uses a new modality called ‘Reverse Linkage’ through which members themselves become the agents in providing specific expertise, knowledge, know-how, investments and best practices, as well as financing.
The IsDB Group is at the forefront of promoting and advancing Islamic financial services through providing technical assistance for creating the requisite legal, regulatory, supervisory and Sharia frameworks, improving access to Islamic finance for the poor, developing the Islamic finance architecture, supporting Islamic infrastructure institutions, participating in equity investments, and creating a common platform for the regulators of the Islamic financial services industry to enhance constructive dialogue. In this context, it has contributed significantly to the establishment of the Accounting and Auditing Organization for Islamic Financial Institutions, the Council of Islamic Banks and Financial Institutions, the Islamic Financial Services Board and the International Islamic Liquidity Management.
IsDB also provides assistance to Muslim communities in non-member countries in supporting education and health.
What progress has the Arab Financing Facility for Infrastructure made?
The Arab Financing Facility for Infrastructure (AFFI) is a flagship initiative by the World Bank Group and IsDB to support in-country and cross-border infrastructure projects, in particular PPPs, in the Middle East and North Africa (MENA). It is an integrated facility aiming at fostering infrastructure development and country dialogue in the Arab countries through holistic approaches for financing and implementing PPP projects. It is an opportunity to share PPP experiences and lessons learnt, as well as to address infrastructure bottlenecks (such as regulation or project preparation).
The IsDB is actively involved in implementing the $8 million Technical Assistance Facility (TAF), to which it has contributed along with the World Bank, International Finance Corporation, EuropeanInvestment Bank and Arab Fund for Economic and Social Development. TAF resources have been fully committed in supporting 12 projectsin five different countries, of which four have already been completed.
How has the TAF been working with the private sector to support the key infrastructure needed for development?
TAF focuses on financing transaction advisory services to assist members in creating an enabling environment for infrastructure investments and to support project preparations by addressing the policy and institutional constraints. The grants have been successfully used in providing expertise to countries to develop PPP-based infrastructure projects and help governments address barriers to investments and legal framework issues. The pre-feasibility studies and documents prepared with TAF’s assistance are expected to improve the quality of project bankability and mobilisation of resources from the private and public sectors.
What particular infrastructure projects and innovations has it pioneered through the use of PPPs?
TAF is the first collaborative initiative of its kind in the region. TAF has also significantly helped in building the PPP framework and policies in the region, which provide legal and political transparency to the private sector by setting the PPP rules and procedures openly before the parties enter into any commitments. TAF is also raising awareness about the PPP modality in the MENA region through its activities. TAF has helped the governments of Morocco and Tunisia draft their PPP laws. Specific projects using TAF funding include power and health projects in Egypt; projects involving water, sanitation and information and communications technologies in Tunisia; municipal services (solid waste management) in Palestine; and water treatment in Lebanon.
What challenges lie ahead?
The key elements of PPP success in any country are a balanced sharing of risk between the public and private sectors, as well as the legal infrastructure. The AFFI assists in creating the required enabling environment. IsDB is actively working with various MENA governments to develop the legal instruments, procedures and laws necessary for that enabling environment. Governments also need to address infrastructure funding structures – who pays for infrastructure services (user fees, taxation, and so on). TAF was designed to address financing issues, but governments must address the more politically difficult funding issues.
To be more specific, on the government side, better governance is needed to ensure effective management for PPP projects and stronger initiatives to realise those projects. On the private sector side, the private sector’s unwillingness to accept the political risk in the region needs to be tackled.
How can the G20’s Brisbane Summit best support and take advantage of this work?
The G20 can help promote best practices in delivering infrastructure services, including funding and financing. It can partner with the multilateral development banks to set up larger preparation facilities that can have deeper and longer-lasting engagement with governments. The creation of a global infrastructure facility is key to attracting investments in this sector. Finally, the G20 can encourage the promotion of innovative financing instruments, such as Islamic finance (including sukuk, or Islamic bonds) to mobilise financing for infrastructure projects.
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