ICD head gives interview to Arab News

Arab News had an interview with the CEO of the Islamic Corporation for the Development of the Private Sector, Khaled Al-Aboodi.  The ICD is the private sector arm of the Islamic Development Bank (similar to the relationship between the International Finance Corporation and the World Bank).  Here are a few sections that I thought were interesting: 

"While lack of access to finance by the private sector has opened new opportunities for ICD to support private sector development in a number of member-countries, a combination of factors such as social unrest in some member-countries, increased cost of funding and lingering effects of financial crisis has made it very difficult for ICD to operate as planned."

 ....

"ICD managed to approve 18 new projects and capital incease for three existing equity projects totaling 372.26 million in 1432H/2011. This was 58 percent higher than the previous year (2010), which reflects ICD's continuing robust support to private sector development in the member-countries. Equity investments accounted for the bulk of ICD's 1432H/2011 approvals, representing 38 percent of the total, followed by the line of finance (35 percent), long-term financing (22 percent), and short-term murabaha (5 percent). In terms of sectoral distribution, the three main beneficiary sectors were finance, industry and real estate, jointly attracting 85 percent of the total approvals. The financial sector accounted for the biggest allocation, totaling 201.26 million, or 54 percent of the 1432H/2011 approvals. In terms of regional composition, 31 percent of ICD's approved projects during 1432H were allocated to the Middle East North Africa (MENA) region, followed by South Asia (23 percent), Sub-Saharan Africa (16 percent), East Asia and Pacific (14 percent), and Europe and Central Asia (10 percent). In terms of recipient countries, ICD approvals were extended to 13-member countries, including three new countries - Algeria, Gabon and Turkmenistan. "

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"In the past year, ICD successfully closed the fund-raising for Tunisia and Saudi Arabia SME funds, and also for the Central Asia Renewable Energy Fund. Furthermore, ICD has approved establishment of a Food & Agriculture Fund and Fixed Income Fund, and successfully secured some mandates in Tunisia and Cameroon for capacity building and creation of Islamic windows within conventional banks."

...

"To fulfill our mandate, we support the private sector through the following ways: First, we assist them alone or in collaboration with other financing institutions the establishment and expansion of enterprises. Second, we can make direct investment, through Islamic instruments, in the subscription and purchase of their share capital. We also promote with participation of other sources of financing, including the structuring of syndication deals, underwriting of securities, joint ventures and other forms of association. Moreover, we can get involved in issuing mudharba, leasing and istisna'a bonds and other financial instruments. At the top of these, private sector firms may benefit from our advisory services and technical assistance programs."

 ...

"ICD's accumulated approvals since it began operation reached 2.17 billion by the end of 1432H/2011, which has been allocated to 218 projects. The corporation approved about 60 percent of its investments through two main modes of finance - equity and murabaha. The cumulative gross approvals of ICD by mode of finance include 766.07 million of equity, 535.77 million of murabaha, 526.5 million of ijara, 223.13 million of installment sale, and 119.14 million of istisna'a. "

"The financial sector accounted for the largest share, amounting to 783.7 million, or 36 percent of the accumulated gross approvals since inception. The industrial sector had the second largest share with a total approved amount of 596.1 million, representing 27 percent of the gross approvals. This was followed by real estate, with a total approval of 276.2 million (13 percent)."

One thing I think is notable is that the ICD is becoming involved with both SME financing and renewable energy financing, which I have mentioned as important areas for Islamic finance several times.  One question that arose for me when comparing the inception-to-date statistics with the 2011 data was what the breakdown in terms of structure used by the ICD.  The inception-to-date numbers break down by equity, murabaha, ijara, installment sale and istisna'a, but the 2011 data show equity, line of finance, long-term finance, short-term murabaha. The data are not comparable without making some perhaps heroic assumptions about what structure is used for "line of finance" and "long-term finance" (which may be murabaha and ijara, respectively, but could combine a number of different structures in each category). 

Click through to the full article to read the rest of the interview. 

Financing food and agriculture through Islamic finance

The Islamic Development Bank's (IDB) Islamic Corporation for the Development of the Private Sector (ICD) announced that it is partnering with fund manger Robeco to launch a $600 million agriculture private equity fund, $350 million of which will be raised by the end of the year.  The fund's investment focus is to "invest in projects that promote steady food supply [by making] private equity investments in food and agriculture projects as well as companies across various target countries in a Shariah-compliant way".  The CEO of the ICD, Khalid Al-Aboodi, said that the fund would "address the inefficiencies and wastage facing the food and agricultural sector throughout our member countries".  

The fund idea sounds to me like a great way to encourage Islamic financial institutions to finance projects which benefit a much larger number of people than building luxury resorts.  Food security is one of the most important issues facing many countries with high levels of poverty, so dealing with the issue using Islamic finance would be a way to demonstrate that Islamic finance does "get it" that financing activities that benefit people at all income levels is part of its ethical mandate. 

It is important, however, to clearly define the areas where the fund will focus, and identify investments at weak points in the food growing/distribution network so that it will accrue benefits to the investors as well as the people living in countries where financing is directed.  In particular, the fund should put a focus on not funding 'white elephant' projects that create a profitable cash flow for investors (e.g. from contracts with local governments to pay for services, but which are unable to provide a benefit to the population because other complementary infrastructure is absent). 

Addressing 'food and agriculture' sounds like a simple, narrow area, but it is easy to define investments in other areas that can be instrumental in reducing wastage, for example, in the food distribution process that could lead to significant 'mission creep' for the fund which would dilute its effectiveness.  For example, ensuring a reliable supply of electricity in rural areas where food is grown allows for refrigeration and freezing of food, which allows it to be distributed more widely, opening up markets for farmers.  From another direction, without a reliable supply of electricity, efforts to increase agricultural productivity in rural areas will accomplish little if most of the expanded productivity is lost to waste since it cannot be refrigerated or frozen and transported to the markets where it will be consumed.  

It is good to see the IDB's ICD put a focus on directing investors towards the Shari'ah-compliant financing of an area that can be hugely beneficial for the poor, while also having potential to deliver return to investors if it is done correctly.