MARC has affirmed its long-term and short-term financial institution (FI) ratings of AAA/MARC-1 on Islamic Development Bank (IsDB). Concurrently, MARC Ratings has affirmed its rating of AAA_IS on the Sukuk Wakalah programme of up to RM400 million issued by Tadamun Services Berhad, a trust established by IsDB. The ratings outlook is stable. The total outstanding amount under the programme stood at RM350.0 million as at end-July 2023.

Rationale   

The affirmed FI ratings continue to be driven by IsDB’s status as a multilateral development bank (MDB), with strong shareholder support, solid capitalisation and sound liquidity. The ratings also consider IsDB’s preferred creditor status which provides the bank with a priority claim over other creditors in the event of a sovereign default. These strengths mitigate the risk exposures in its financing and investment portfolios. 

Established by the Organisation of Islamic Cooperation (OIC) in 1975 to provide financial support for development projects in OIC member countries and Islamic communities in non-member countries, IsDB has steadily grown its financing portfolio. In 2022, total gross financing grew by 5.1% y-o-y to ID 17.8 billion. Given its development mandate, the bulk of its financing continues to be in the infrastructure sector with countries in Asia and Africa accounting for 53.7% and 44.3% of the total net financing exposure as at end-2022. While exposures to these countries, many of which are largely unrated or non-investment grade remain high, overdue instalments by six months continue to remain low.

MARC Ratings views the low overdue instalments as being due to IsDB’s credit risk management framework, which necessitates full sovereign guarantees for financing and limits exposure to non-sovereigns through stringent requirements. As at end-2022, overdue instalments stood at 1.27% of total financing (2021: 0.96%). The rating agency considers the bank’s policy of making full provisions when instalments are overdue by six months as conservative, which is reflected in the strong provisioning coverage of about 200% as at end-2022. IsDB benefits from preferred creditor status which places priority of debt payments ahead of other creditors. In line with its financing policy, the bank maintains a single country exposure limit of 15% on its financing and investments to address concentration risk; its three largest country exposures — Turkey (8.7%), Indonesia (7.3%), and Senegal (5.7%) — are within the limit.

IsDB has maintained strong capitalisation levels. Its members’ equity-to-assets ratio of 37.2% as at end-2022 (end-2021: 36.7%) remains higher than that of many of its peers (members’ equity refers to paid-in capital, reserves, and net income). Its paid-in capital grew by 3.8% y-o-y to ID6.4 billion, with the remainder ID14.8 billion called-up capital to be paid over the next 14 years. MARC Ratings views positively strong shareholder support from Saudi Arabia, Kuwait, Qatar, and the United Arab Emirates (UAE), which have a combined stake of 45.1%. IsDB’s policy of restricting earnings distributions until general reserves attain 25% of subscribed capital, which comprises callable capital of ID40.9 billion and called-up capital, is viewed as prudent. 

Total sukuk outstanding rose to ID16.4 billion in 2022 from ID15.6 billion in 2021, with the proceeds utilised for its financing initiatives. Leverage remained flat at 166.3% (end-2021: 166.0%), within the bank’s leverage threshold and significantly lower than that of many of its peers. Liquidity, as reflected by liquid assets-to-total borrowings ratio of 49.6%, remains strong. Its liquid assets, which stood at ID8.3 billion as at end-2022, comprise deposits with banks, cash balances and sukuk investments. Issuance of sukuk with long tenures has helped the MDB’s asset-liability profile. As at end-2022, assets with maturities of less than 12 months were about 2.3x of liabilities with similar maturities, effectively mitigating refinancing risk. As at end-July 2023, the outstanding amount under the rated programme stood at RM350 million. The programme will expire on June 28, 2024.

The stable outlook reflects our expectation that IsDB will continue to receive strong support from its key shareholders and maintain its status as a preferred creditor.

Any downside rating action would be triggered by visible signs of weakening support from its key shareholders and/or changes in its mandated role.