Wednesday, December 29, 2010

Islamic Corporation for Investment and Export Credit (ICIEC) may expand capital

The Islamic Corporation of Investment and Export Credit (ICIEC) is not a part of the Islamic Development Bank group which receives much attention. n part, that is due to its relatively small size; its capital is only slightly higher than $200 million and its premium income was only $12.5 million during the last year. However, it provides an important service: takaful for political risks and credit risks to exporters, as well as reinsurance for its 40 member countries' Export Credit Agencies (ECAs).

During 2008/09, the ICIEC increased its authorized capital by 50% (from ID100 million to ID150 million; an Islamic Dinar [ID] is equal to one Special Drawing Right from the IMF). Recently, the ICIEC announced that it was going to increase its capital "to meet the rising demand" for its services. Before discussing the potential for the ICIEC to provide a valuable service, particular to Islamic financial institutions with cross-border operations, I'll give a short summary of what the ICIEC does.

At its core, the ICIEC is a takaful provider, but with multilateral backing from the Islamic Development Bank and its member countries (which were the reason it received a Aa3 rating from Moody's). The ICIEC writes insurance policies covering several types of products, from political risk to reinsuring export credit agencies from its member countries to export credit risk arising from non-payment by customers to which a company exports its product (or a company receiving a letter of credit from a financial institution).

The ICIEC receives takaful (and re-takaful) premiums from its customers and also has paid-up capital from the Islamic Development Bank and its member countries. These two sources of funds are kept segregated and accounted for separately in the financial statements (which are available as part of its annual report on its website). The insurance policies written by the ICIEC totaled $2.54 bllion in September 2010 compared with $1.2 bllion in the same period in 2009. In exchange for these insurance policies, the customers pay a down payment and a stream of monthly premiums. These go into the policyholder fund. The paid up capital is kept in the shareholders fund.

These two funds are invested in Shari'ah-compliant investments, primarily commodity murabaha with financial institutions (which the ICIEC describe as "reputable banks" and they believe "no credit loss is likely to occur"). A portion of the portfolio is invested in sukuk, equities and other investments including the IDB Unit Investments Fund. The profits from these investments (in the policyholder's fund), along with current premiums are used to cover claims and operating expenses (with the exception of the management fee paid to the IDB for its management of the shareholders' fund). Any excess is carried forward as a reserve against future losses. If the losses plus operating expenses deplete the policyholder's fund, the shareholder's fund provides a qard hasan loan to the policyholder's fund. These loans are repaid based only on future surplus in the policyholder's fund. In addition, when a claim is paid, the ICIEC recovers what it can from the defaulting party, which offsets the cost of the claim.

Now, we return to the significance of the ICIEC move to expand its capital to finance the growth in business. When businesses that want to avoid conventional export credit and political risk insurance, they have two options: the ICIEC and a private sector insurer. Because of the backing from member countries and the IDB, the ICIEC has relatively less counterparty risk than a non-multilateral insurer. This should encourage greater cross-border flows, either through direct investment (FDI) or export activities.

This insurance is not limited to goods-producing industries; it can support Islamic financial institutions' expansion across borders as well by reducing certain risks of moving outside the bank's home country. There seems to be a growing harmonization of Shari'ah standards between the GCC and Malaysia (for example the Cagamas-Al Rajhi Bank Sukuk ALIM) and the growth of Malaysian Islamic banks outside of Malaysia (for example, into Indonesia). Both should support the growth in demand for the ICIEC takaful product.

In addition, there has been a lack of connection between the global halal industry and the Islamic finance industry, something that has been well articulated by Rushdi Siddiqui among others. Growth by the ICIEC could provide a way for the global halal industry to connect and recognize the benefits from the Islamic finance industry. This is more likely now that the ICIEC has begun providing export credit insurance for companies in member countries exporting to non-member countries.

The way for the Islamic finance industry and the halal industries to become familiar with one another is not necessarily through large sukuk, expensively created by Islamic banks, but the more mundane support that the export credit takaful can provide. Expanding the capital of the ICIEC to support its growth should help.

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