Trade Finance Business of the Islamic Development Bank Group

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Trade Finance Business of the Islamic
Development Bank Group

• Trade Finance Workshop
• Vienna, Austria, 6-7 March 2008

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Brief Content

• Background History
• Key Figures Achievement
• Development in the Objectives Features
• Mechanisms Documentation
• The Future ITFC
• Threats, Strengths Plans

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Background history

• Part 1

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Background History

• A. Islamic Development Bank (IsDB) in Brief
• Multilateral developmental financial institution
• Established in 1975
• 56 Member Countries (members of OIC)
• Headquarter in Jeddah, Saudi Arabia and 3
  Regional Offices

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• Aims at foster the economic development and
  social progress of its member countries and
  Muslim communities in non-member countries in
  accordance with the principles of Shari'ah
  (Islamic Law)
• Uses Shariah-compatible financial instruments and
  solutions
• Functions include project financing, trade
  financing, equity participation, technical
  assistance, capacity building, etc.

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• Operating in various sectors including health,
  education, infrastructure, industrial projects,
  import and export financing, etc.
• Evolved into a group composed of several
  autonomous entities operating and funds in
  different businesses including mainly ICIEC
  (insurance export credit), ICD (private sector)
  and recently ITFC (trade finance).

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• B. History of Trade Finance Business in IsDB

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• Import Trade Finance Operations (ITFO)
• Similar to Buyers Credit financing
• Operations were financed from IsDBs Ordinary
  Capital Resources
• Aimed to finance the importation of goods needed
  by the member countries in addition to enhancing
  the intra-trade among member countries

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• Export Financing Scheme (EFS)
• Similar to Sellers Credit financing
• Established by the contributions of IsDB and the
  participating countries in the scheme (26
  members)
• The operations were financed from these
  contributions

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• Aimed to finance and promote the exports of the
  participating countries in the scheme to both
  member and non-members countries
• Good must be of local origin with an input from
  OIC member countries of at least 30 of the
  goods value
• EFS ceased to exist with the establishment of the
  International Islamic Trade Finance Corporation
  (ITFC) in 2006
• EFS fund was transformed to form the initial
  capital of ITFC

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• Trade Finance Department (TFD)
• TFPD was established to manage the growing volume
  of ITFO and EFS operations
• Dedicated divisions and section under TFPD to
  manage ITFO and EFS operations, credit
  evaluation, and disbursement of the operations
• Evolved later to be Trade Finance Promotion
  Department (TFPD) in 1995 with adding trade
  promotion activities

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• BADEA Export Financing Scheme (BEFS)
• TFPD started to manage this scheme in 1998 on
  behalf the BADEA bank, Khartoum, Sudan
• Aims to finance the export of Arabic countries
  (members in Arab League) to African countries
  (non-Arabic members in African Union)
• Good with an input from Arabic countries of at
  least 30 of the goods value

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• Resource Mobilization
• Needed to face the growing demand by the member
  countries for trade finance and the growing sizes
  of operations for large clients
• Implemented through two mechanisms
• Syndication
• Two-Step Murabaha Financing (2SMF)

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• Syndication Mechanism
• Used to cover large-volume financing amounts
• Under this mechanism, IsDB invites commercial
  banks and financial institutions to participate
  in large-ticket operations, where the terms of
  financing are attractive and in line with the
  prevailing market rates. Each participant takes
  direct risk of the beneficiary within his
  subscription .
• Syndication is co-financing facility in case of
  only 1 participant
• Details in Part 4 Mechanisms Documentation

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• Two-Step Murabaha Financing (2SMF) Mechanism
• Used initially to mobilize resources from other
  financial institutions and banks to meet the
  needs of IsDBs clients
• Under this mechanism, other financial institution
  or bank provides the funds to IsDB which will be
  then provided to IsDBs ultimate beneficiaries.
  The financial institution or bank takes the risk
  of IsDB.
• Later, this mechanism was used in reverse by IsDB
  to reach small and medium-size beneficiaries in
  member countries, by providing fund to the local
  financial institutions and banks for their
  ultimate beneficiaries
• Details in Part 4 Mechanisms Documentation

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Key Figures Achievement

• Part 2

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Key Figures Achievement

• Importance of Trade Finance to IsDB Group
• Trade finance became a strategic business unit
  and one of the high-priority areas in the IsDBs
  Strategic Framework
• Trade finance approvals constitutes the greater
  part of IsDBs Group overall financing volume
  (about 60)
• Trade finance business is a major source of
  income for IsDB (about 20-25 of the overall
  income)

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Key Figures Achievement

• Trade finance approval as percentage of total
  IsDBs financing approval volume (since inception
  up to 2007)

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• Intra-trade finance approval as percentage of the
  total volume (since inception up to 2007)

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• Growth of trade finance volume (over the last 5
  years)

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• Geographical Coverage
• Active in more all OIC regions including
  South-East Asia (e.g. Indonesia and Malaysia) and
  South Asia (e.g. Bangladesh and Maldives), Gulf
  (e.g. Saudi Arabia and Kuwait) and North Africa
  (e.g. Egypt and Morocco) and Sub-Sahara Africa
  (e.g. Senegal, Mali, Burkina Faso)

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• Financing by region (in the last 5 years)

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• Achievement under Syndication 2SMF
• IsDB has successfully implemented these
  mechanisms to introduce new developing countries
  to the international financial market (e.g.
  Bangladesh, Pakistan, Mauritania and Mali)
• IsDB has excellent relationships with over 80
  regional and international commercial banks and
  financial institutions in Asia (Bahrain, Qatar,
  UAE and Singapore) and in Europe (UK, France,
  Italy) and others
• IDB legal documentations and agreements are used
  as models by other banks in their syndication
  facilities

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• Resource mobilized as percentage of total trade
  finance volume (over the last 5 years)

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development in the Objectives Features

• Part 3

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Development in the Objectives Features

• A. Objectives of Trade Finance in IsDB
• When the business started
• Minor and low-priority activity in IsDB
• A mean to invest its excess liquid fund in short
  term investment
• Developed to be
• Major and core strategic function of IsDB Group
• A vehicle to contribute to in the economic
  development process of the member countries by
  facilitating importation of much needed goods and
  promoting their exports and ultimately to enhance
  intra-trade among them

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• B. Improvement in the Financing Terms
  Conditions
• B.1 Application Channels
• When the business started
• Through the designated official channels by the
  governments only
• Developed to be
• Same condition but also accepting direct
  application by the beneficiaries

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• B.2 Financing Instruments
• When the business started
• Shariah-compatible Murabaha only
• Murabaha Purchase of the good from the supplier
  and then its sale to the beneficiary against a
  reasonable mark-up with deferred payment
  arrangements
• Developed to be
• Shariah-compatible Murabaha, Installment Sale
  Mudaraba
• Installment Sale similar to Murabaha and the
  beneficiary make the repayment of the financing
  amount (plus the markup) in installments
• Mudaraba in case of syndicated operations

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• B.3 Eligible Beneficiaries
• When the business started
• Governments and governmental entities in member
  countries only
• Developed to be
• Governments, governmental entities, joint-stock
  corporations and privately-owned enterprises
• All local financial institutions and banks (in
  case of 2SMF)

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• B.4 Eligible Goods Sources of Supply
• When the business started
• Specific Shariah-compatible goods (of a
  strategic nature with a developmental impact
  (e.g. cement and fertilizers)
• Cross-border from member countries only
• Developed to be
• All Shariah-compatible goods
• Cross-border but both from member and non-member
  countries
• But with preferences (in the terms and conditions
  of the financing) will be offered in case of
  purchasing from member countries

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• B.5 Denomination (Currency) of Financing
• When the business started
• US Dollar only
• Developed to be
• Finances in currencies composing the IMF SDR (US
  Dollar, Euro, Pound Sterling, Japanese Yen) and
  no local currency financing

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• B.6 Amount of Financing
• When the business started
• Covered up to 75 of the transaction amount
• Transaction-by-transaction financing, not a
  conventional credit line
• Developed to be
• 100 of the transaction amount
• Also Transaction-by-transaction financing only
• Maximum amount for a given beneficiary depends on
  the approval authority required and the ceiling
  cap of the beneficiary

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• B.7 Tenor (Period) of Financing
• When the business started
• Max period up to 6 months
• Developed to be
• Usually 3, 6, 9 or 12 months and reach up to 30
  months (or 36 months in case of BEFS) for
  financing capital goods
• Depends on several factors mainly the type of
  goods financed
• The beneficiary can benefit from multiple tenors
• Calculated from the date of payment to the
  supplier

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• B.8 Accepted Security
• When the business started
• Taking the direct Sovereign risk as alternative
  to security
• Developed to be
• Sovereign risk, bank guarantee and corporate
  guarantee
• For creditworthy beneficiary, clean lending
  without a security
• Other security arrangements (e.g. owners
  guarantee, assignment of export proceeds,
  warehouse receipts, etc.) may be accepted on
  case-by-case basis

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• B.9 Markup (Profit)
• When the business started
• Fixed rate
• Developed to be
• Fixed rate or a Benchmark (LIBOR) plus a
  percentage (Spread)
• The corresponding LIBOR of the currency of
  financing is used
• The LIBOR rate on the date of the payment to
  supplier is used
• The Spread is determined based on several factors
  mainly the creditworthiness of the beneficiary,
  tenor of financing and other risk-related
  measures
• The Spread is fixed at the financing agreement

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• B.10 Approving Authority Processing Time
• When the business started
• The Board of Executive Directors (BED) of IsDB
  only which meets every 8 weeks
• Developed to be
• Approving authority delegated to the President,
  IDB
• Processing by various committees shall not exceed
  2 weeks

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• B.11 Mechanisms Sources of Funding
• When the business started
• Only direct financing from IsDB to the
  beneficiary
• Developed to be
• Direct financing as well as mobilizing additional
  resources through Syndication and Two-Step
  Murabaha Financing
• Details in Part 4 Mechanisms Documentation

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• B.12 Documentation of the Financing
• When the business started
• One type of financing agreement for direct
  operations
• Specific documents to be submitted by the
  beneficiary to declare the effectiveness of the
  agreements
• Developed to be
• Several types depending on the mechanism used
  (e.g. syndication, co-financing, 2SMF)
• Required effectiveness documents will be required
  also
• Details in Part 4 Mechanisms Documentation

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• B.13 Drawdown of the Financing Amount (Purchase
  Price)
• When the business started
• Allowed after the declaration of the
  effectiveness of the agreement
• Under Letters of Credit (L/Cs) only
• Developed to be
• Same conditions but allowed under L/Cs,
  Documentary Collection and/or Direct payment to
  the supplier based on open account relationship
  with the supplier

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• B.14 Repayment of the Financing Amount (Sale
  Price)
• When the business started
• Repayment of the financing amount plus the markup
• Must be made on the currency of the financing
• In case of repayment in other currencies, the
  beneficiary has to make conversion at due dates.
• Made in one final repayment (balloon payment)
• Developed to be
• Same conditions, but installments and other
  arrangements are accepted on case-by-case basis

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Mechanisms documentation

• Part 4

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Mechanisms Documentation

• 1. Direct Financing
• A Murabaha financing agreement to be signed
  between IsDB and the beneficiary
• Other parties may co-sign the agreement
• IsDB shall make the payment of Purchase Price
  directly to the Supplier
• The beneficiary shall repay the Sale Price
  directly to IsDB
• IsDB takes the direct credit risk of the
  beneficiary

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Mechanisms Documentation
(1-a) Shipment
(1-b) Notification
(1-b) Request
(3) Repayment of Sale Price
(2) Payment of Purchase Price
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• 2. Syndication
• According to Shariah, a Mudaraba Agreement to be
  signed first between IsDB and the participating
  financial institutions banks
• IsDB will act as a Mudarib on behalf of the
  participants
• IsDB will be the Arranger/Manager and responsible
  for and distribution of the repayment (sale
  price) among the participants
• Then, a Murabaha Agreement to be signed between
  IsDB and the beneficiary
• The beneficiary shall submit effectiveness
  documents

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• Upon the notification by the supplier and the
  request of the beneficiary, IsDB will advise
  other participants (according to their
  contributions) to make the payment of Purchase
  Price directly to the Supplier
• The beneficiary shall repay the Sale Price
  directly to IsDB, which in turns distribute the
  sale price to the participants (according to
  their contributions)

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• IsDB and the participants share the credit risk
  of the beneficiary up to the contribution amount
  by each participant
• Each participant has to make his investigation
  and evaluation of the creditworthiness of the
  beneficiary before approving to participate in
  the syndicated operation

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(1-a) Shipment
(1-b) Request
(1-b) Notification
(3-a) Repayment of Sale Price
(2-b) Payment of Purchase Price
(2) Payment of Purchase Price
(3) Repayment of Sale Price
(3-b)
(3-b)
(2-a)
(3-b)
(2-a)
(2-a)
Participant
Participant
Participant
Mudaraba Agreement
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• 3. Two-Step Murabaha Financing (2SMF)
• A Murabaha Agreement is signed first between
  financial institution or bank (as Fund
  Provider/1st seller) and IsDB (as purchaser)
• Then, another Murabaha Agreement is signed IsDB
  (as 2nd seller) and its beneficiary
• The beneficiary shall submit effectiveness
  documents
• Upon the notification by the supplier and the
  request of the beneficiary, IsDB will advise the
  fund provider to make the payment of Purchase
  Price directly to the Supplier

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• The beneficiary shall repay the 1st Sale Price
  directly to IsDB, which in turns will be repay
  the 2nd Sale Price to the fund provider
• This mechanism transfers the direct credit risk
  of beneficiary to IsDB which will be the obligor
  to the Fund Provider.
• A reverse arrangement is implemented in case IsDB
  provides the fund to the local financial
  institution or bank (which will be the IsDBs
  agent) to reach the ultimate SMEs beneficiaries
  in member countries

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(4) Payment of Purchase Price
(3-b) Notification
(3-b) Advise
(3-b) Request
(2) Shipment
(6) Repayment of 2nd Sale Price
(5) Repayment of 1st Sale Price
(1-b) 2nd Murabaha Agreement
(1-a) 1st Murabaha Agreement
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The Future ITFC

• Part 5

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The Future ITFC

• A. Establishment of ITFC
• Building on the success of trade finance business
  of IsDB for more than 30 years, IsDBs Board of
  Governors approved in their 30th Meeting in
  Malaysia (2005) the establishment of an
  autonomous trade financing entity called
• International Islamic Trade Finance Corporation
  (ITFC)
• Authorized Capital US 3.0 billion
• Subscribed Capital US 500 million
• Both EFS and IBP ceased to exist.
• EFS ex-members (26 countries) and IBP ex-members
  (9 financial institutions) were the founding
  shareholders of ITFC.

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• During the 31st Meeting of IsDBs Board of
  Governors in Kuwait (2006), the ITFCs Articles
  of Agreement (AoA) was signed by the majority of
  member countries and financial institutions
• On 24 Feb. 2007, the Inaugural Meeting of the
  General Assembly of ITFC was convened in Jeddah.
  
• Additional member countries and financial
  institutions were admitted as members in ITFC

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• On 30 May 2007, the 2nd Meeting of the General
  Assembly of ITFC was convened in Dakar, Senegal,
  in conjunction with 32nd Meeting of IDBs BOG.
• Two additional member countries were admitted
• The Subscribed Capital was increased to US 750
  million from US 500 million.
• 5 meetings of the Board of Directors (BOD)
  convened in 2007

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• The BOD approved the following
• Organizational Structure
• Headquarter
• Financial Rules Regulations
• HR Rules Regulations
• Structure of Authority
• Operational Plan for 1429H (2008/2009)
• Administrative Budget for 1429H (2008/2009)

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• B. Objectives Goals of ITFC
• To extend the developmental impact of the trade
  finance in the member countries through promoting
  intra-trade among member countries as well as
  encouraging their exports.
• To increase the volume of overall trade finance
  and intra-trade finance.
• To improve and upgrade the role of trade
  promotion activities.

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• To give more emphasize on the private sector
  enterprises.
• To serve as a beacon in the Islamic banking
  community for trade finance, showing leadership
  in product development and training of local
  banks in member countries.
• To be market-driven and in line with the
  international best practices and consistent with
  the principles of Shariah
• To be managed in a way that reflects both the
  developmental and financial objectives of the
  IDB.

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• To attain more autonomy, productivity, efficiency
  and flexibility and
• To enhance response to the customers needs.
• To achieve more diversification of customer base,
  geographical coverage and financed goods.
• To attract and retain world-class human cadre
• To develop new products and generate more income

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Threats, Strengths plans

• Part 6

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Threats, Strengths Plans

• A. Threats facing ITFC

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• B. Strengths of ITFC

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• C. Plans of ITFC

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Thank you for your attention