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Trade Finance Business of the Islamic Development Bank Group

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56 Member Countries (members of OIC) Headquarter in Jeddah, Saudi Arabia ... (e.g. Egypt and Morocco) and Sub-Sahara Africa (e.g. Senegal, Mali, Burkina Faso) ... – PowerPoint PPT presentation

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Title: Trade Finance Business of the Islamic Development Bank Group


1
Trade Finance Business of the Islamic
Development Bank Group
  • Trade Finance Workshop
  • Vienna, Austria, 6-7 March 2008

2
Brief Content
  • Background History
  • Key Figures Achievement
  • Development in the Objectives Features
  • Mechanisms Documentation
  • The Future ITFC
  • Threats, Strengths Plans

3
Background history
  • Part 1

4
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

5
  • 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.

6
  • 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).

7
  • B. History of Trade Finance Business in IsDB

8
  • 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

9
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10
  • 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

11
  • 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

12
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13
  • 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

14
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15
  • 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

16
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17
  • 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)

18
  • 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

19
  • 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

20
Key Figures Achievement
  • Part 2

21
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)

22
Key Figures Achievement
  • Trade finance approval as percentage of total
    IsDBs financing approval volume (since inception
    up to 2007)

23
  • Intra-trade finance approval as percentage of the
    total volume (since inception up to 2007)

24
  • Growth of trade finance volume (over the last 5
    years)

25
  • 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)

26
  • Financing by region (in the last 5 years)

27
  • 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

28
  • Resource mobilized as percentage of total trade
    finance volume (over the last 5 years)

29
development in the Objectives Features
  • Part 3

30
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

31
  • 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

32
  • 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

33
  • 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)

34
  • 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

35
  • 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

36
  • 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

37
  • 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

38
  • 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

39
  • 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

40
  • 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

41
  • 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

42
  • 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

43
  • 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

44
  • 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

45
Mechanisms documentation
  • Part 4

46
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

47
Mechanisms Documentation
(1-a) Shipment
(1-b) Notification
(1-b) Request
(3) Repayment of Sale Price
(2) Payment of Purchase Price
48
  • 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

49
  • 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)

50
  • 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

51
(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
52
  • 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

53
  • 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

54
(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
55
The Future ITFC
  • Part 5

56
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.

57
  • 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

58
  • 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

59
  • 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)

60
  • 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.

61
  • 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.

62
  • 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

63
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64
Threats, Strengths plans
  • Part 6

65
Threats, Strengths Plans
  • A. Threats facing ITFC

66
  • B. Strengths of ITFC

67
  • C. Plans of ITFC

68
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69
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70
Thank you for your attention
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