News Column

Islamic finance supports equitable global growth

June 23, 2014







Khaled Al-Aboodi, CEO and general manager of the ICD.





Khaled Al-Aboodi, CEO and general manager of the Islamic Corporation for the Development of the Private Sector, speaks to Arab News.

JEDDAH: KHALIL HANWARE | ARAB NEWS STAFF

ICD has plans to set up SME funds with local partners for equity and quasi equity investments, and debt financing in small and medium enterprises (SMEs), according to Khaled Al-Aboodi, CEO and general manager of the Islamic Corporation for the Development of the Private Sector (ICD), the private sector arm of the Islamic Development Bank Group (IDB).

Specifically for Saudi Arabia, ICD established a fund for investment in SMEs and was successful in raising SR1 billion and invested SR100 million from its own funds, he told Arab News in an exclusive interview.

"Poverty reduction is one of the key objectives of ICD and our strategic intent is to focus on job creation through the support and development of SMEs in the member countries," he said, adding that given its firm roots in ethical and social values, Islamic finance has proven itself to be the tool of choice for promoting financial inclusion whereby a greater multitude of citizens will have access to financial services.

"This will automatically generate more economic activity and wealth creation whereby we should see a clear reduction in poverty," he added.



Following is the text of the interview:



What were ICD's achievements in 2013?

ICD recorded another year of positive results for 2013 not only in financial terms but, most importantly, in terms of promoting development of the private sector and promotion of the Islamic financial sector in its member countries, despite the many challenges arising from the broader economic and social environment in which it is operating. ICD currently has 52 member countries representing 1.5 billion people spanning across Africa, the Middle East and the Central and Southeast Asia. In addition to the enduring negative effects of the global financial crisis since 2009, some of these countries and regions are facing major social and political upheavals and some are even facing armed conflicts internally and some externally. Implementing ICD's strategy has therefore become a lot more complicated and risky. Nonetheless, we remain purely focused on our mandate to promote the development of the private sector in our member countries and I can say that we have been largely successful in contributing to the overall developmental needs of our member countries while observing our short-term strategic priorities and, of course, ensuring that ICD remains effective and relevant toward its long-term objectives.



In which countries and sectors was ICD most active in 2013 and 2014?

ICD approved 31 new projects and participated in 8 capital increases in its investee companies totaling an amount of $429.65 million during 2013, a record approval amount since inception of the corporation in the year 2000. Over the last 13 years, ICD has substantially expanded its operation across the Islamic world. ICD's accumulated gross approvals stand at $3 billion, which has been allocated to over 300 projects in various sectors. In line with its core strategy, ICD has been focusing more resources in the financial sector with the objective of fast tracking funds to the small and medium enterprises (SMEs) sector. It is well recognized and has been time-tested that SMEs are the engine of growth and the backbone of economies worldwide and as such deserve the full policy attention of governments and regulators, financial institutions and all other related stakeholders. In addition to providing lines of credit to local banks in its member countries, ICD has been more recently active in setting up funds to improve SMEs' access to term financing and equity investments. As an example, ICD established the first SME Investment Fund in Saudi Arabia, a SR1 billion Quasi Equity and Debt Shariah-Compliant SME Fund. This fund will invest in targeted SMEs showing high growth potential for contributing substantially to job creation among the youth and with a strong developmental impact to ensure overall social and economic stability. Another example is the Themaar SME Fund in Tunisia where ICD entered into a strategic partnership with the country's sovereign wealth fund 'Caisse de Depot de Tunisie' to set up a $30 millionEquity and Quasi Equity Shariah-Compliant Fund to support development of the SMEs' sector in Tunisia. These business models are now being replicated in other member countries where SMEs are facing similar challenges. These funds will not only provide investments and financing but will also be geared to provide a wide array of advisory and technical assistance to ensure the long-term success and financial viability of the beneficiary projects. For example, through these funds, ICD will be able to influence and introduce best practice corporate governance, risk management policies. ICD has also intensified its intervention in Africa with the establishment of Tamweel Africa Holding Company, which is managing ICD's investments in four Islamic Banks in West Africa. Moreover ICD has relocated some staff to Senegal to enhance its local presence and gain more local knowledge, both key elements in ensuring quality at entry for its projects in West Africa. ICD will also have a strong presence in the forthcoming IDB Gateway Office in Nigeria. In early 2014 ICD approved a $100 million line of financing for SMEs in Nigeria and I believe that having a permanent local presence will be important for the successful implementation of this credit facility. Nigeria has huge potentials and greater efforts are required in terms of improving awareness of the benefits of Islamic Finance among the general population and also promoting the development of Islamic finance as an important sector in the overall financial services sector of the country. ICD has also been active in various other sectors such as the industrial sector, oil and gas, energy projects, food and agri business, and real estate projects.



Where do you see the next market for Islamic finance?

I think that growth opportunities for Islamic finance are vast. Since the global financial crisis in 2009 we have seen Islamic finance clearly getting more and more acceptance across not only the Muslim world but also in the West for its resilience to withstand external shocks, its ability to impact the real economy and, most importantly, for its ethical and social dimensions. It is also recognized that Islamic finance is a comprehensive alternative financial system that can promote and support inclusive and equitable growth whereby the living standards of the poorer segment of the population can be uplifted to ensure that poor people live with greater dignity. The global Islamic finance industry has recorded double digits growth rates over the last few years and is expected to remain on this growth trajectory with total assets expected to surpass the $2 trillion mark by the end of this year. This growth is expected to be mainly driven by growing interest and awareness of Islamic finance and supply side dynamics by financial institutions; governments' aggressive spending on infrastructure; and active role played by government, regulatory agencies and multilateral bodies. More specifically, advanced Islamic banking markets in the GCC (Saudi Arabia, Bahrain, UAE, Qatar) and Asian (Malaysia and Indonesia) regions will evolve further and grow through the innovation of new products and services backed by regulatory advancement by the financial regulators. In addition, the growing interest of key global financial centers, such as London, Luxembourg and Dubai, to become global Islamic finance hubs will further accelerate growth and internalization of Islamic banking and finance.



What challenges ICD faces in various countries in funding projects?

We have seen very encouraging signs in many jurisdictions where government policy makers and regulators are providing a greater support to create an enabling legal and regulatory environment, which would be conducive for promoting Islamic finance and also ensuring the financial stability of the Islamic financial sector through specific Islamic finance legislation. Of course, challenges vary by country and by intensity, but in general, most jurisdictions are facing problems due to a number of fairly similar factors. For example, the lack of the required skilled Islamic finance human capital, lack of well-developed capital markets, lack of financial integration both regionally and internationally, poor capitalization of Islamic financial institutions, lack of liquidity and cash management tools and poor public awareness of Islamic finance products are all factors impeding the growth of the Islamic financial sector.

Name the sectors in which projects mostly need financing?

Again, the needs of member countries differ from country to country depending mainly on the general state of development of their economy. However, infrastructure projects in transportation and energy sectors are clearly seen as key to attracting foreign direct investments which in turn would generate further economic activity and growth across the economy whereby standard of living can be enhanced. In addition, health care, education, food production and transportation have seen historically severe under investments in most of ICD's member countries. Concerted efforts have to come from both governments, players in the private sector financing arena and all other stakeholders to remedy the dire situation currently prevailing in many member countries.



What role does ICD play in promoting the private sector?

ICD was established by the board of governors of the IDB in 1999 as an autonomous entity with the purpose of promoting private sector development in its member countries. Today, ICD is the leading multilateral financial institution offering a multitude of Islamic finance investment and financing products and continues to play an important role for the development of the private sector in its member countries. ICD has also been successful in mobilizing resources to bring highly needed investments in certain member countries through the comfort it provides to other foreign investors by its own participation in these projects. ICD also offers advice to governments and private sector organizations to encourage the establishment, expansion and modernization of private enterprises, the development of capital markets and the adoption of best management practices.



Which are the countries where ICD is involved in major projects?

ICD is currently implementing several key projects in Saudi Arabia (SME Fund SR1 billion, Mortgage Finance Company, etc.), Uzbekistan ($80 million line of financing for SMEs) and Nigeria ($100 million line of financing for SMEs) among many other projects in several other countries.



How will ICD-funded projects help in reducing poverty?

Poverty reduction is one of the key objectives of ICD and our strategic intent is to focus on job creation through the support and development of SMEs in the member countries. It is well recognized that the SMEs sector has a crucial role to play in a country's growth and development as witnessed in the developed world. Given its firm roots in ethical and social values, Islamic finance has proven itself to be the tool of choice for promoting financial inclusion whereby a greater multitude of citizens will have access to financial services. This will automatically generate more economic activity and wealth creation whereby we should see a clear reduction in poverty.



How is ICD supporting SMEs in Saudi Arabia and other countries?

ICD has a three-pronged approach to improving SMEs' access to financing and investments in its member countries. Firstly, ICD provides lines of credit to selected local banks in its member countries for onward financing of bankable SMEs projects. Secondly, ICD has established leasing companies in several member countries and has plans for many more to support SMEs mainly in machinery and equipment financing. Thirdly as mentioned earlier ICD is establishing SME funds with local partners for equity and quasi equity investments and debt financing in SMEs. Specifically for Saudi Arabia, ICD established a fund for investment in SMEs. ICD was successful in raising SR1 billion and has invested SR 100 million from its own funds.



What is ICD's strategy toward African states?

ICD's commitment to the development of the private sector in Africa remains firm. ICD has intensified its intervention in Africa with the establishment of Tamweel Africa Holding Company, which is managing ICD's investments in four Islamic banks in West Africa. Moreover, ICD has relocated some staff in Senegal to enhance its local presence. ICD is also in the process of establishing a regional leasing company, which will offer its services across West Africa. Islamic banking in West Africa does have huge potential. Large Muslim population coupled with other factors such as financial market growth, credit expansion and favorable regulatory reforms will help Islamic finance grow rapidly in the future.



Is ICD promoting food security-related projects?

Food security is also high on ICD's agenda and ICD is providing assistance to reduce the risk of food insecurity by promoting projects, which will ensure that member countries produce enough food to feed their own populations. ICD aims to achieve this through the establishment of a Food and Agriculture Business Fund, which it plans to have up and running soon. The target size of the fund will be $600 million. In addition to farming, it is efficiency not just in production processes but also in handling, which is vital as a lot of food is wasted in transit. Accordingly the fund will not only invest into the production or farming aspects, but it will also look into the value chain for investments in logistics and introducing technology to make sure more food is produced with less resources, especially water. ICD also recently teamed up with Emirates Futures to look into developing the halal food industry across its member countries and beyond.



What is the progress of ICD's home finance company?

In 2013, ICD sponsored a mortgage home finance company and successfully raised SR900 million in capital. The internal architecture for the company's operations has been developed and in May 2014 the Saudi Arabian Monetary Agency issued a provisional license for the company. We are now in the process of establishing the company with the Ministry of Commerce and Industry. We are also working in parallel to set up the company's offices and other establishment matters. The company head office will be based in Riyadh.



What is the result of the collaboration between ICD and Thomson Reuters for developing Islamic Finance Development Indicator?

In order to address the growing global demand for transparent and accurate industry information across global Islamic finance market, last year ICD and Thomson Reuters successfully collaborated to develop the first ever Islamic Finance Development Indicator - a single, composite numerical measure representing the overall health and growth of the Islamic finance industry worldwide. The indicator measures five key components - quantitative development, governance, social responsibility, knowledge and awareness.



How does ICD help in mortgage financing?

ICD has a strategy to support financial institutions in its member countries and mortgage finance companies are among the strategic targets. ICD is in a position to provide equity or debt financing to mortgage finance companies to help strengthen this vital sub sector. ICD can also provide technical support and advisory services to mortgage finance companies and regulators through its technical subsidiaries.



What future do you see for Islamic banks and Shariah-compliant financing?

I strongly believe that as the Islamic financial services industry continues to grow further into a dynamic and competitive global financial system, we must not lose focus on the ethical and social dimensions, which are at its roots. As Islamic finance moves into new markets, we need to ensure that it is inclusive and accessible to all, particularly the lower income groups and small businesses. It is only by bringing the financially underserved population into the economic mainstream that we can truly contribute toward more sustainable and equitable economic growth, which is at the heart of Islamic finance.


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Source: Arab News (Saudi Arabia)


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