By Stephanie Phang and Shanthy Nambiar
KUALA LUMPUR: The Islamic Development Bank, a lender formed by 55 Muslim nations, will set up a new Islamic trade financing institution to help boost trade among member-countries, its regional representative in Malaysia said yesterday.
The International Islamic Trade Financing Corp, to be based in Jeddah, Saudi Arabia, will have $1bn of initial capital, said Ahmed S Hariri, director of the bank’s regional office in Kuala Lumpur. It will have a regional office in Dubai.
“The volume of trade between the member-countries is rather modest,” said Hariri. “In order to increase this volume of intra trade, you need a specialised organisation that will focus on trade.”
Lenders including Jeddah-based Islamic Development and countries with large Muslim populations such as Malaysia are seeking to introduce more financial services that comply with Islamic law to serve the world’s 1bn Muslims.
Islamic religious law, or Shariah, prohibits payment and receipt of interest and bans investment in businesses such as tobacco, alcohol and gaming.
“The trend of Islamic finance is becoming firmly anchored, and basically goes with the privatisation drive in the Middle East and the building of the local capital market,” Michael Preiss, a senior investment adviser at Coutts Bank (Schweiz) in Singapore, said yesterday.
Preiss, a director at the Asian Bond Market Forum, spoke on the development of Islamic bonds and Asian markets at the International Islamic Finance Forum meeting in March in Dubai.
Islamic Development, made up of all but two members of the Organisation of Islamic Conference, will ask its board of governors to approve the plan at the bank’s 30th annual meeting in Putrajaya, Malaysia, next week, Hariri told reporters yesterday.
Trade between Organisation of Islamic Conference countries amounted to 11.5% of the group’s total trade, according to figures provided by the Islamic Development Bank. Having a specialized entity to provide trade financing may help boost the figure to 15% in 10 years, Hariri said.
Trade financing has been handled by a department within Islamic Development for the last two decades, Hariri said. Between January 1996 and February last year, the bank provided $20.8bn in trade financing.
Malaysia is the current chair of the 57-member Organisation of Islamic Conference, which includes Qatar, Saudi Arabia, Indonesia, Iraq, Iran, the UAE, Turkey, Pakistan, Afghanistan and Egypt.
The two-day meeting of the board of governors of Islamic Development will begin on June 23. An OIC Trade Forum and an investors’ conference will also be held next week in Malaysia.
The bank’s governors, who are finance ministers and central bankers, will discuss “issues that are facing member-countries such as globalisation” and poverty, Hariri said.
“We do realise the challenges of” the World Trade Organisation market opening agreements, “so we try to help our member-states in meeting such challenges,” Hariri said.
“Member-states have to develop their technical expertise, their competitiveness, the quality of their products to match the developed countries’ products and services.”
Islamic Development Bank will also admit a new member and discuss the election of the president, he said.
The five-year term of President Ahmed Mohamed Ali expires this year. The lender this month started marketing bonds that comply with the Qur’an’s ban on interest payments as part of a $1bn fund-raising plan.
Islamic bonds are backed by assets sold to a company created by the borrower to issue the securities. The borrower then rents back the assets.
The rental goes back to investors in place of interest. On maturity, the bond seller buys back the assets at an agreed price and investors are repaid the principal. – Bloomberg |
