RE-DESIGNIFING%20THE%20FINANCIAL%20ARCHITECTURE

1
RE-DESIGNIFING THE FINANCIAL ARCHITECTURE
Islamic Development Bank
IDB Views
Presented by Mrs Diallo Kodeidja, Group Risk
Director
2
(No Transcript)
3
1
Post Crisis On-going Challenges for IFIs

• Ongoing turbulences
• Volatile operating environment
• Market discipline competitive pressure

• Struggle for Compliance with new regulatory RAs
  Requirements
• Compounding of stress events in some regions

4
IFS are under tremendous pressure to build
resilience due to emerging constraints
1

• Weakening of Capital Quality
• and borrowing capacity

Increasing unrealized gains and losses
Increased provisioning
Changing Balance sheet Risk Profile
5
Knowledge Sharing
2
Islamic Finance as Growing Financial system
Case of IIFs
6
Islamic Finance become important component of the
Financial System.
2

• The Global Islamic Market in the High CAGR (USD
  1.6 tril. expected to reach USD 6.5 tril. By
  2020)
• Shift from Muslim communities to reach out to
  Global Investors.
• GCC Region Surpluses derive growth, Asia is still
  leading.
• Enhanced Regulatory Frameworks with key support
  (AAIOFI, ISFB, etc..) and Structures..

7
Islamic Finance demonstrates resilience during
the crisis but also face challenges .
2
IIF Resilient During the crisis
More Challenges Ahead

• Prudency in the business model (prohibition of
  debt-based instruments, CDO CDS
• Leverage constrained by availability of tangible
  assets
• Relatively high capitalization and Liquidity

• Exposure to stress zone countries counterparts
• Portfolio sensitive to sector risk and dominated
  by illiquid and lower credit instruments (REIT,
  Equities, Corporate..)
• Venerable to market risks and lack of shariah
  compliant practical hedging instruments

Adjst Business Model
LT financial Sustainability?
8
Towards ensuring Financial sustainability
2
The strategic considerations underpinning the
re-design of financial system is to build
resilience of IIFs .
Risk Management and Governance
9
Knowledge Sharing
Enhance the enabling environment
3
IDB AAA Rated MDBs derived from its support
Islamic Finance Development
10
As Key Market Actor -Operate in the suSuk Market
both as Issuer and Investor.
3

• IsDBs capital markets objectives
• Develop a liquid yield curve as part of IsDBs
  wider strategic objectives
• Enhance its profile in the international capital
  markets To establish a benchmark in the
  Supranational market
• Undertake issuance in or linked to different
  currencies of MCs

• USD Benchmark Program
• Establishing a track record by issuing benchmark
  transactions in the regional market
• Deepening and broadening investor base
• Policy of tapping markets every year through a
  US benchmark issuance

IDB exhausted its current MTN program of US 6.5
Bn in 2013
11
I As Support - Contribution to the Islamic
Finance Industry Sustainability
3
Partnering and Support for major Islamic bodies
IDB is shareholder in 20 banks and NBFI
IDB is major global issuer and investor in sukuk
Focus on Product development and Industry
training.
12
As Fund provider - More than 20 years f
funding of DFIs, FIs and IIFs
3
IDB (PPP) - 12 FIs(including 1 IFI-Turkish ICD -
15 FIs ( including only 1 IFIs- Yemen
Direct IDB - 30 Through Private Sector
Affiliates ICD - 8
Annual Rating of 55 FIs
13
Further Resilience Building - Key areas
4
Countries / Supervisory Bodies
Risk Management Governance
ALM Market Risk
Macro-Level
Products

• Liquity Risk Management
• New Products

• Standardization
• Supportive Legislative/
• Regulatory framework
• Convergence to Basel III

Governance

• Oversight
• Risk Committees

14
2
Background slides
15
(No Transcript)
16
Credit Risk Assessment

• Key Strengths
• Strong Capitalization levels (on average 13).
• Good asset quality (low NPLs) and adequate
  coverage metrics.
• Healthy funding base with strong deposit and
  liquidity profile.
• Key Weaknesses
• Concentration risks especially sector-wise and
  product-wise.
• Rapid Assets growth rates.
• Limited disclosure especially on corporate
  governance issues (e.g. shareholding
  structure).
• Low financial intermediation levels (low
  loan/deposit ratios)

17
General Overview of IFIs

• Under utilization of capital which provide a lot
  of scope for taking additional risk.
• Still no major innovative instruments in islamic
  finance (the same ijarah, mudarabah, musharakah
  and murabaha.
• No major /significant difference in profitability
  and efficiency between IFIs and conventional
  ones.
• Absence of harmonised accounting standards (and
  auditing) is pertinent to IFIs notwithstanding
  AAOFIs efforts to improve such situation.

18
General Overview of IFIs

• Potential conflict with Central banks especially
  in non-Muslim countries.
• Benchmark taking the conventional interest rate
  benchmark as the base of pricing an Islamic
  product.
• Lack of adequate talented manpower in Islamic
  finance.