Monday 21, August 2017 by Georgina Enzer

Moody's: Islamic Development Bank benefits from strong capital, prudent risk management

Islamic Development Bank's (IsDB) credit strengths include a strong capital base, prudent financial and risk management policies, as well as solid liquidity levels, supporting its Aaa rating and stable outlook, said Moody's Investors Service in a report.

While the bank is planning a further increase in borrowing to about 12.2 billion Islamic Dinars (equivalent to Special-Drawing Rights, with ID1=USD1.344 as of end-2016) by 2020 from ID 9.5 billion in 2016, its ratio of liquid assets-to-borrowings will remain higher than that of most Aaa-rated multilateral development banks (MDBs), and its gearing ratio will also still be lower.

"Strong shareholder support, including that from several highly rated sovereigns, also supports creditworthiness," said Mathias Angonin, an Analyst at Moody's. "Although the weighted average rating of IsDB's shareholders is lower than other Aaa-rated development banks, its 57 members are strongly committed to the organisation."

This support is reflected in continued capital increases. Because of the decision made in 2014 by shareholders to expand the bank's capital base, the bank's paid-in capital rose to ID 5.1 billion at end-2016, from ID2.7 billion in 2007, and an additional ID 2.4 billion is expected over the next 10 years.

As with other development banks, the IsDB is governed by a rule that stipulates the total amount of equity investment, loans outstanding and other ordinary operations cannot, at any time, exceed the total sum of capital and reserves. This prudential rule is well observed, and the ratio stood at 36 per cent at end-2016 and comfortably below the 100 per cent ceiling.

To ensure prudent risk management, the IsDB's single country exposure is limited to 15 per cent of total exposure. At the end of 2016, the 10 largest exposures accounted for close to 49 per cent of total exposure for the bank, a lower level of geographic concentration than most Aaa-rated development banks.

The bank's credit challenges include a risky operating environment that is inherent to its role as a development bank, as well as lower oil prices and the risks from geopolitical tensions in the Middle East and North Africa region. Nonetheless, its operational assets continue to perform well, with a very low level of impairment.

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