The Islamic Development Bank
The Islamic Development Bank, a specialized institution of the Organization of the Islamic Conference (OIC), is an international financing institution. Its purpose is to foster the economic development and social progress of Muslim countries and Muslim Communities in accordance with the principles of the Shari’ah and to bridge the gap between rich and poor member-countries.
The IDB is the first international financial institution to commit itself to conduct its activities in conformity with the Shari’ah. As a result, the prohibition of Riba in Islam and the implications thereof have motivated certain conceptual and operational features which distinguish the IDB from other international development banks and other institutions having similar purposes. The Bank is authorized to accept deposits and to mobilize financial resources only through Shari'ah compatible modes and is authorized to levy a service fee to cover its administrative expenses instead of working on the basis of interest. The major source of IDB’s finance has been the capital subscriptions of its members. Repayment of existing lines of credit enabled to have additional funds to support the activities of the IDB after the initial capital injections. And as the bank is providing temporary assistance rather than making grants, the capital is revolving and replenishes itself.
One of the strategic objectives of IDB is to improve and enhance the level of intra trade among its member countries from the developing world. Therefore, the bank assists in the promotion of foreign trade among Muslim countries, by providing financial assistance to member countries and Muslim communities in non-member countries and by developing human capital.
The IDB also acts as a catalyst in these intra trade activities by participating in equity capital through investment in economic and social infrastructure projects and by granting loans for productive projects in the private and public sectors. Equity-financing and profit-sharing functions are the primary modes of operational financing and loan-financing adopted by the IDB.
Furthermore, one of IDB’s missions is to undertake research to enable the economic, financial and banking activities in Muslim countries to conform to the Shari’ah and to develop Islamic finance as a competitive advantage. In fact, thanks to the role played by the IDB, the Islamic baking world has stepped up efforts to standardize regulation and supervision. The bank plays a key role in developing internationally acceptable standards and procedures and strengthening the sector’s architecture in different countries.
The IDB is the first international financial institution to commit itself to conduct its activities in conformity with the Shari’ah. As a result, the prohibition of Riba in Islam and the implications thereof have motivated certain conceptual and operational features which distinguish the IDB from other international development banks and other institutions having similar purposes. The Bank is authorized to accept deposits and to mobilize financial resources only through Shari'ah compatible modes and is authorized to levy a service fee to cover its administrative expenses instead of working on the basis of interest. The major source of IDB’s finance has been the capital subscriptions of its members. Repayment of existing lines of credit enabled to have additional funds to support the activities of the IDB after the initial capital injections. And as the bank is providing temporary assistance rather than making grants, the capital is revolving and replenishes itself.
One of the strategic objectives of IDB is to improve and enhance the level of intra trade among its member countries from the developing world. Therefore, the bank assists in the promotion of foreign trade among Muslim countries, by providing financial assistance to member countries and Muslim communities in non-member countries and by developing human capital.
The IDB also acts as a catalyst in these intra trade activities by participating in equity capital through investment in economic and social infrastructure projects and by granting loans for productive projects in the private and public sectors. Equity-financing and profit-sharing functions are the primary modes of operational financing and loan-financing adopted by the IDB.
Furthermore, one of IDB’s missions is to undertake research to enable the economic, financial and banking activities in Muslim countries to conform to the Shari’ah and to develop Islamic finance as a competitive advantage. In fact, thanks to the role played by the IDB, the Islamic baking world has stepped up efforts to standardize regulation and supervision. The bank plays a key role in developing internationally acceptable standards and procedures and strengthening the sector’s architecture in different countries.
Operations and objectives
The purpose of the Islamic Development Bank since its foundation is to foster the economic development and social progress of member Muslim majority countries as well as Muslim communities in non-member countries individually as well as jointly in accordance with the principles of Shari'ah. This is what distinguishes the IDB from other regional and international developmental institution; in fact it is obliged by its own charter to follow the Shari’ah in all of its functions and operations. The Islamic prohibition of interest and the implications thereof have forced the IDB to have certain distinguishing conceptual and operational features. The IDB foresees different ways of financial involvement with its clientele from the ways of the conventional multinational development banks. The equity participation and profit sharing functions of the bank together with the Shari’ah implied restrictions on the powers of the Bank in so far as accepting deposits, raising funds and suitably investing funds not needed in its operations are concerned, are some of the major issues that the bank had to consider in its planning stages. Among activities undertaken by IDB there are participation in equity capital of productive projects, investment in economic and social infrastructure projects, the promotion of foreign trade, primarily in capital goods and acceptance of deposits or the raising of funds in any other manner
Unlike other multilateral financial institutions, the IDB finances its operations through a number of modes of finance that are compatible with Shari’ah. Loan financing is mainly intended for social, economic and infrastructure projects that are unlikely to be revenue generating and have a long implementation phase. These include schools, water supplies, health centres, hospitals, rural electrification, roads, ports, airports, irrigation schemes and land development. In addition, the IDB participates in the share capital of new or existing enterprises, through equity participation, even though a ruling of the Islamic Fiqh Academy prohibits equity participation with companies that use interest-based financing, therefore, the IDB has taken initiatives to assist successful companies in utilising alternative Shari’ah-compatible modes of financing in close collaboration with Islamic banks. Leasing is another mode of financing used by the IDB because it meets the objective of providing finance for development projects that are sufficiently remunerative to meet market criteria. Leasing involves the purchase and subsequent transfer of the right of usage of equipment to the beneficiary for a specific period of time, during which the IDB retains ownership of the asset. Application of mark-up rate is determined on the basis of sector as well as on rate of return of a project. Instalment sale has also become a most significant mode of financing because of its operational flexibility. Through this mode, IDB purchases equipment and machinery, reselling it to the beneficiary at a higher price. The main operational difference between this mode and lease financing is that ownership of the asset is transferred to the beneficiary on delivery in the case of instalment sale. Besides, the purpose of the Longer Term Trade Financing Scheme is to promote the export of non-traditional goods among OIC member countries through the provision of necessary funds. The scheme has its own independent budget and resources. It is managed and operated under the supervision of the IDB. Moreover, IDB provides technical assistance to member countries for identification, preparation and implementation of projects as well as for institution building. Priority for technical assistance is given to LDMCs as well as regional projects. The assistance is extended in the form of a loan, grant or both. IDB also finances consultancy services to assist its own staff in project preparation and follow-up; it encourages the establishment of a Federation of Consultants from Islamic countries, and provides continuous support for the Federation’s activities. Furthermore, the main window for providing funds to the private sector is the extension of lines of finance to National Development Financial Institutions (NDFIs) in member countries. This mechanism helps aims at assisting development in small and medium scale enterprises. Lines are utilised through equity participation, leasing and instalment sale operations. New procedures have even been added to provide greater flexibility and incentives for the effective utilisation of IDB lines by introducing free limits; higher remuneration for national development banks; two levels of upper and lower limits for financing sub-projects, depending on the nature of the national development bank; and shortening the period for processing sub-projects.
IDB has been successful in applying Islamic principles in the field of finance despite the fact that the benefits to the poorer Islamic countries have been limited. It plays a central role in the development of the Islamic financial sector globally through co-operations with central banks; with national development banks and financial institutions and with regional and international financial agencies. In fact, Regular meetings are held between the Governors of central banks and the representatives of OIC member countries to discuss ways and means of improving co-operation among the financial institutions of member countries. The IDB also expands co-operation with the national development banks of the member countries to grant lines of equity, lines of leasing and lines of instalment sales to these banks so that they can advance finance to viable local projects. This provides the banks with hard currency and facilitates financing operations for the IDB. And the bank helps to promote a greater flow of resources to its member countries from other financial agencies, through its co-financing arrangements with regional and international financial institutions such as the OPEC Fund, the BADEA and the Arab Fund for Economic Aid and Social Development.
Unlike other multilateral financial institutions, the IDB finances its operations through a number of modes of finance that are compatible with Shari’ah. Loan financing is mainly intended for social, economic and infrastructure projects that are unlikely to be revenue generating and have a long implementation phase. These include schools, water supplies, health centres, hospitals, rural electrification, roads, ports, airports, irrigation schemes and land development. In addition, the IDB participates in the share capital of new or existing enterprises, through equity participation, even though a ruling of the Islamic Fiqh Academy prohibits equity participation with companies that use interest-based financing, therefore, the IDB has taken initiatives to assist successful companies in utilising alternative Shari’ah-compatible modes of financing in close collaboration with Islamic banks. Leasing is another mode of financing used by the IDB because it meets the objective of providing finance for development projects that are sufficiently remunerative to meet market criteria. Leasing involves the purchase and subsequent transfer of the right of usage of equipment to the beneficiary for a specific period of time, during which the IDB retains ownership of the asset. Application of mark-up rate is determined on the basis of sector as well as on rate of return of a project. Instalment sale has also become a most significant mode of financing because of its operational flexibility. Through this mode, IDB purchases equipment and machinery, reselling it to the beneficiary at a higher price. The main operational difference between this mode and lease financing is that ownership of the asset is transferred to the beneficiary on delivery in the case of instalment sale. Besides, the purpose of the Longer Term Trade Financing Scheme is to promote the export of non-traditional goods among OIC member countries through the provision of necessary funds. The scheme has its own independent budget and resources. It is managed and operated under the supervision of the IDB. Moreover, IDB provides technical assistance to member countries for identification, preparation and implementation of projects as well as for institution building. Priority for technical assistance is given to LDMCs as well as regional projects. The assistance is extended in the form of a loan, grant or both. IDB also finances consultancy services to assist its own staff in project preparation and follow-up; it encourages the establishment of a Federation of Consultants from Islamic countries, and provides continuous support for the Federation’s activities. Furthermore, the main window for providing funds to the private sector is the extension of lines of finance to National Development Financial Institutions (NDFIs) in member countries. This mechanism helps aims at assisting development in small and medium scale enterprises. Lines are utilised through equity participation, leasing and instalment sale operations. New procedures have even been added to provide greater flexibility and incentives for the effective utilisation of IDB lines by introducing free limits; higher remuneration for national development banks; two levels of upper and lower limits for financing sub-projects, depending on the nature of the national development bank; and shortening the period for processing sub-projects.
IDB has been successful in applying Islamic principles in the field of finance despite the fact that the benefits to the poorer Islamic countries have been limited. It plays a central role in the development of the Islamic financial sector globally through co-operations with central banks; with national development banks and financial institutions and with regional and international financial agencies. In fact, Regular meetings are held between the Governors of central banks and the representatives of OIC member countries to discuss ways and means of improving co-operation among the financial institutions of member countries. The IDB also expands co-operation with the national development banks of the member countries to grant lines of equity, lines of leasing and lines of instalment sales to these banks so that they can advance finance to viable local projects. This provides the banks with hard currency and facilitates financing operations for the IDB. And the bank helps to promote a greater flow of resources to its member countries from other financial agencies, through its co-financing arrangements with regional and international financial institutions such as the OPEC Fund, the BADEA and the Arab Fund for Economic Aid and Social Development.
