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IDB to increase fundraising under MTN Program

05 October 2009
Following the successful launch of its recent $850 million 5-year international sukuk, the Jeddah-based Islamic Development Bank (IDB), the multilateral development bank (MDB) of the 57 Muslim countries, is set to increase its fundraising and resource mobilization under its MTN (medium-term note) Program from $1.5 billion to $5 billion.

Another initiative that is under serious consideration by the MDB, according to Mohammed Tariq, head of treasury at the IDB, "is to help the non-institutional investors to participate in IDB's international offering of its tradable sukuk. It is likely that some banks with a large client base in selected member countries will be given the mandate to place the sukuk with those clients who may be interested and who understand the risk and rewards of such investment."

"The agent banks will have the responsibility for identifying the clients and thus meet the 'Know Your Client (KYC)' requirements and get regulatory approvals to market the sukuk in their jurisdictions. The size or denomination of each unit for such investors is yet to be agreed but will depend on the advice of the banks and likely demand. A pilot program may be instituted to start with and further progress will depend on the outcome of such a program."

Tariq agrees that this could be an important development for the IDB especially in promoting its own financial inclusion policy which is partly aimed at greater participation of citizens of member countries in the financial product offerings of the IDB, subject of course to local regulatory and supervisory approvals.

The IDB, adds Tariq, is keen that its sukuk offerings "meet the Shariah requirements with a clear documentation as to the issue of risk, the role and details of underlying assets and has the liquidity in the market place in order that investors can easily exit or liquefy their investments at all times. Hence, it had chosen a number of international investment banks and member country banks to fulfill this role."

The IDB is delighted that its $850 million sukuk issuance was 2.4 times oversubscribed with 90 orders in the order book run by the mandated lead arrangers HSBC, Deutsche Bank, BNP Paribas and the two co-lead arrangers, CIMB of Malaysia and Bank Islam Brunei Darussalam. The $850 million sukuk issuance is considered by the MDB as a major success story as it has attracted a large number of international investors both in and outside IDB member countries.

"The IDB's fundraising has two strategic objectives," declares Tariq. "Firstly, to get a good pricing for its resource mobilization in view of its status as a 'AAA' entity rated by all the three largest rating agencies, namely S&P, Moody's and Fitch Rating, and having been accorded zero risk weighting under Basel-II and taking into account the pricing of its peer group of multilateral development banks.

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"Secondly, to attract a diversified range of investors to the sukuk, both by type and geographically. To a large extent, these objectives were met, though there is a considerable room for further improvement in the future. Ideally, IDB would like to create its yield curve by a regular issuance program of benchmark size issues and to enable dealings in its paper in secondary markets," he added.

The offering was well subscribed by 90 investors to the tune of $2 billion at a pricing of 5-year mid-swap plus 40 basis points to yield a fixed return of 3.172 percent per annum. The IDB issued a fixed rate sukuk due to the overwhelming demand for such an issue. To meet its pricing policy for financing member countries, the funds were swapped into the floating rate for the full 5-year term, at a fairly attractive rate.

In terms of geographic distribution, Asian investors accounted for 37 percent, European investors 24 percent whereas the GCC region accounted for 37 percent. Within Europe, there was a good take-up from Swiss investors, in particular.

Investors included central banks, banks, insurance and pension firms, hedge funds and two SWFs (sovereign wealth funds) from GCC (Gulf Cooperation Council) countries. However, the issuance was not under US regulation 144A, which meant that US institutional and individual investors could not participate directly, though many did do through their offshore entities. "The IDB," says Tariq, "would need to consider getting 144A registration in due course in order to attract a larger investor base as the US market is much deeper for fixed income securities."

The IDB sukuk is an investment product giving a good return, taking into consideration the very low level of risk, liquidity and asset backing of the underlying instruments. However, the MDB stresses that the investors are also indirectly helping the development agenda of the IDB, which is the socio-economic development of a large number of countries in most continents of the globe.

The proceeds of the IDB sukuk will be used inter alia to help member countries to mitigate the impact of the global financial downturn and the rise in commodity prices; and the expansion of financing of IDB projects in member countries.

By Mushtak Parker

© Arab News 2009

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