ISLAMIC DEVELOPMENT BANK - 2018

MARC has affirmed its financial institution (FI) ratings of AAA/MARC-1 on Islamic Development Bank (IsDB). Concurrently, the rating agency affirmed its rating of AAA_IS on the Sukuk Wakalah programme of up to RM400 million issued by Tadamun Services Berhad (Tadamun), a trust established by IsDB. The outlook on the ratings is stable.

IsDB’s status as a multilateral development bank (MDB), its strong capitalisation and liquidity position remain key drivers of the ratings. As a MDB, the bank is tasked to provide financial support for projects to facilitate economic development of its member countries and Islamic communities in non-member countries. The stable rating outlook reflects MARC’s expectations that IsDB will maintain its strong capitalisation and liquidity profile, and that the bank’s member countries will continue to extend strong support.

Established in 1975 by the Organisation of Islamic Cooperation (OIC) member countries, IsDB has steadily grown its portfolio, registering an 8.8% y-o-y growth of gross financings to Islamic Dinar (ID)13.1 billion in 2017 (ID1.00 = US$1.42), of which 67.5% is in the infrastructure sector, 13.6% in social services and 10.4% in the agriculture sector. As with other MDBs, IsDB is exposed to the credit risk of sovereigns with weak credit profiles; as at end-2017, 85.2% of the bank’s top 20 sovereign exposures are to unrated and non-investment grade countries with the three largest exposures to Turkey (11.0%), Pakistan (8.4%) and Morocco (6.3%).

IsDB’s capital metrics remain strong. As at end-2017, the bank’s equity-to-assets ratio stood at 43.4% (2016: 45.9%) against its peers of below 30.0% in the same period. For 2017, the bank’s shareholders provided a capital contribution of ID150.6 million which supported a 2.2% y-o-y growth in the bank’s equity base to ID8.5 billion. MARC views IsDB’s policy of restricting earnings distribution until general reserves attain 25% of subscribed capital as prudent; as at end-2017, this stood at 5.4%. The subscribed capital largely comprised callable capital of ID40.8 billion, of which 47.0% is from member countries rated at A- and above on the global rating scale. IsDB benefits from its preferred creditor status which provides the bank with a priority of claim over other creditors in the event of a sovereign default.

As at end-2017, IsDB’s overdue instalment declined to 0.9% of total financing from 1.1% as at end-2016 largely due to an impairment write-off. The bank maintains a policy to make full provisions against instalments overdue by six months or more. As at end-2017, impairment provisions increased to ID264.3 million from ID226.4 million in 2016.

IsDB has a sound liquidity position as reflected by liquid assets-to-total borrowings ratio of 50.7%, higher than many of its peers. Its liquid assets, which stood at ID5.3 billion as at end-2017, comprised deposits with banks, cash balances and sukuk investment. MARC observes that IsDB also has an off-balance sheet liquidity buffer in the form of the Waqf Fund, a trust fund with ID922.5 million in total assets.

MARC notes that IsDB has sourced deposits of ID380.6 million from the bank’s related parties in 2017, which provides some diversification to the bank’s funding base that comprised solely of borrowings in the past. As at end-2017, the bank’s debt-to-equity (DE) ratio rose to 122.8% (2016: 114.2%). As asset growth is expected to continue to outpace equity growth, the bank has revised its leverage limit to 175.0% from 125.0% during the year. Despite the revised limit, the bank’s leverage ratio is expected to remain lower compared to its peers which registered DE ratios of between 174.0% and 528.0% as at end-2017.

Major Rating Factors

Strengths

• Strong capital and liquidity;
• Strong shareholder support; and
• Preferred creditor status.

Challenge/Risk

• Significant portfolio exposure to sovereigns with weak credit profiles.