Fitch Ratings has affirmed the Islamic Development Bank’s (IDB) long-term issuer default rating (IDR) at ‘AAA’ with a stable outlook and short-term IDR at ‘F1+’.
The ratings primarily reflect IDB’s strong capitalisation. The bank is one of the most highly capitalised multilateral development banks (MDBs) rated by Fitch.
The equity to assets ratio has remained above 65% since inception (70.7% at end-1431H, equivalent to 6 December 2010 in the Gregorian calendar). The IDB also maintains comfortable liquidity and compliance with Sharia’h principles induces extremely low leverage (21.3% at end-1431H).
IDB’s capital is owned by 56 countries, all members of the Organisation of the Islamic Conference. Its main shareholder is Saudi Arabia (‘AA-‘/Stable), which owned 24.6% of callable capital at end-1431H. Although the proportion of ‘AAA’ and ‘AA’ rated shareholders is lower than for other ‘AAA’-rated MDBs (42.5% at end-1431H), support is strong, as indicated by continuous capital increases since 2006.
IDB mainly extends project financing guaranteed by states or state-owned banks to finance infrastructure or social services; due to compliance with Islamic finance principles, most financing is asset-backed. As for other MDBs, activity is mostly focused on speculative-grade borrowers (68.8% at end-1431H), but the bank benefits from preferred-creditor status on sovereign-guaranteed operations, which has enabled it to keep NPLs at a minimum (1.0% of non-equity operations at end-1431H).
The bank also abides by strict country and single obligor limits on its financing operations, limiting concentration risk (the five largest obligors accounted for 30.7% of equity at end-1431H, which compares favourably with other MDBs).
Credit risk on treasury assets is mitigated by the recourse to short-term investments in a diversified range of regional and European banks. Interest rate risk and foreign exchange risk are also limited. The bank’s risk on its equity investments is higher, as illustrated by rising impairment provisions since 1429H (2008) but remains manageable.
As is typical of MDBs, the IDB is not profit oriented and does not distribute dividends. Its profits are used to strengthen the equity base. RoE has averaged 2.9% since 2006, and profitability improved in 1431H thanks to reduced borrowing costs, depreciation and provisions for loan losses.
Like other MDBs, the bank has carried out countercyclical activity since 2009: total outstanding operations rose by 19.2% in 1430H (2009) and 9.4% in 1431H. It intends to increase operations by 10% a year until 2013 but with no significant shift in business model: sovereign-guaranteed operations should remain prominent despite rising private-sector financing. Fitch does not expect any loosening in the bank’s prudential framework.
Established as an MDB in 1975, the IDB provides financial assistance to member countries and Muslim communities in non-member countries based on the principles of Sharia’h and on asset-based methods of finance. Headquartered in Jeddah, Saudi Arabia, the bank operates through four regional offices (in Morocco, Malaysia, Kazakhstan and Senegal).