Origin, purpose, organisation and management of Islamic Development Bank.
The creation of the Organisation of the Islamic Conference (OIC) represented a major step in the consolidation of cooperation among Muslim countries. This in turn nurtured and strengthened the shared feeling among leaders of Islamic countries that efforts should be made to reinforce economic cooperation and promote as well as boost intra-trade among OIC member countries and that economic institutions operating in accordance with the Shariah should be established.
At the Second Conference of Foreign Ministers of Muslim countries, held in Karachi, Pakistan in December, 1970, the first formal discussion of the idea of establishing an Islamic financing institution took place. The Secretariat General of the OIC was assigned the task of studying this idea and the possibility of implementing it.
A 'Declaration of Intent' to establish the Bank was issued by the First Conference of Finance Ministers of the Islamic Countries which was held in Jeddah on 18 December, 1973 and signed by representatives of 23 OIC member countries. The Second Conference of Finance Ministers held in Jeddah, ratified on August 10 1974 the Articles of Agreement establishing the Bank. The inaugural meeting of the Board of Governors of the Bank took place in Riyadh on 26 July 1975. At this meeting, the Board of Executive Directors of the Bank was constituted and Dr. Ahmad Mohammad Ali of Saudi Arabia was unanimously elected President of the Bank. The meeting also approved the basic documents of the Bank. As per the decision of the meeting, the Bank started functioning on October 20, 1975.
At the end of 1991 the membership of the Bank was 44, compared with 22 at the time of inauguration in 1975. With the joining of the Republic of Azerbaijan in 1992, the IDB membership has now increased to 45 countries.
The purpose of the Bank is to foster the economic development and social progress of member countries and Muslim communities individually as well as jointly in accordance with the principles of Shariah.
Organisation and Management
The administrative organ of the Bank consists of Board of Governors, Board of Executive Directors, and the Management headed by the President. Each member country is represented on the Board of Governors by a Governor and an Alternate Governor. The Board of Governors meets once a year to review the activities of the Bank for the previous year and to decide the future policies.
The Board of Executive Directors is composed of eleven members, five of whom are appointed and six elected. Each of the five largest subscriber countries of the capital stock of the Bank appoints one Executive Director. The remaining six are elected by all the Governors other than those representing the above-mentioned five member countries. Executive Directors hold office for a term of three years and may be re-elected. The Board of Executive Directors is responsible for the direction of the general operations of the Bank and approves all financing operations.
The Management is composed of the President, three Vice Presidents, and an Adviser to the Bank. The President is elected by the Board of Governors for a renewable term of five years. He is the Chief Executive of the Bank and the Chairman of the Board of Executive Directors. The President conducts the current business of the Bank under the direction of the Board of Executive Directors.
The President is assisted by the Vice Presidents who are appointed by the Board of Executive Directors on the recommendation of the President. A Vice President holds office for such term, exercises such authority, and performs such functions in the administration of the Bank, as may be determined by the Board of Executive Directors. Currently there are three Vice Presidents of the Bank.
Financial Resources of the Bank
The Bank started its operation in 1975 with an Authorised Capital of ID 2 billion (ID stands for Islamic Dinar, the Unit of Account of the Bank, which is equivalent to one Special Drawing Rights (SDR) of the International Monetary Fund (IMF) and an initial subscribed capital of ID 750 million. In 1981, the member countries were invited to subscribe to the unsubscribed balance of the Authorised Capital. The Subscribed Capital thus went up to ID 1820.17 million 1981. "As a result of increases in the subscriptions of certain member countries, the Subscribed Capital stood at ID 2,028.74 million at the end of 1991.
Increase in Capital Stock
For quite sometime, need was felt for substantial increase in the resources base by the Bank in order to enables the Bank to participate more effectively in development efforts of its member countries. The Sixth Islamic Summit Conference held in Dakar, Senegal, in December 1991, decided to increase the Authorised Capital of the Bank and directed the Board of Governors of the Bank to formulate and adopt an appropriate plan for a substantial increase in the Authorised and Subscribed capital of the Bank. In pursuance of the direction of the summit the Executive Directors of the Bank in a special meeting held in February 1992, discussed various options for the proposed capital increase and prepared its recommendations for the consideration of the Board of Governors. Later in July 1992 a special meeting of the Board of Governors of the Bank was held in jeddah. The meeting decided to increase the Authorised and Subscribed Capital of the Bank from around ID 2 billion to ID 6 billion and ID 4 billion respectively.
The increase in capital will provide the Bank with resources which will enable it to expand its financing operations. It will also broaden the resource base of the Bank and strengthen its financial position, besides enabling it to enter the financial market on a more solid basis.
Financing Activities of the Bank
The Bank has been doing its best to meet the financial needs of its member countries for their development projects. Currently 44 member countries are making use of the IDB resources in one form or another. The extent of the efforts made over the years is indicated by the assistance given by the Bank to its member countries during the past seventeen years.
Unlike other multilateral financial institutions, the IDB finances its operations through a number of modes which are compatible with the Shariah. These modes of finance are Interest-Free Loans, Equity, Participation, Leasing, Instalment, Sale, and Profit Sharing. Apart from project financing through these modes, the bank also supports the development efforts of its member countries by providing finance in the form of technical assistance. In addition there are three schemes being run by the Bank, which are playing a significant role in promoting trade among its member countries. These are (i) Import Trade Financing Operation (ii) Islamic Bank's Portfolio (IDP) and Longer-Term Trade Financing Scheme (LTTFS). Moreover, the Bank has a Special Assistance Account from which funds are provided for special operations. Up to the end of 1991-92, financing approved by the Bank for different operations amounted to ID 9,389.13 million for a total of 1535 operations. The total amount approved by the Bank during this period for different forms of financing was as follows:
1. Project Financing: ID 2193.04 million (US $ 2635.53 million).
2. Technical Assistance: ID 62.36 million (US $ 74.03 million).
3. Import Trade Finance Operation: IS 6354.00 million (US $ 7653.74 million).
4. Islamic Bank's Portfolio: ID 289.20 million (US $ 401.79 million).
5. Longer-Term Trade Financing Scheme: ID 162.20 million (US $ 218.68 million).
6. Special Assistance Operations: ID 328.33 million (US $ 386.60 million).
Project Financing and Technical Assistance
At the initial stage, the modes of financing employed by the Bank were loan and equity. In 1977, the Bank began extending Lines of Equity to National Development Finance Institutions (DFIs). Its objective was to expand its equity financing activities to include small-scale enterprise. In the same year, leasing was also introduced. This mode became very important because of its flexibility. In order to eliminate some problems encountered in leasing, especially those resulting from continued ownership of the relevant assets by the IDB, the Bank introduced 'Instalment Sale' as a mode of financing in 1985. This mode is similar to leasing but entails the immediate transfer of ownership of the relevant assets to the buyer. The buyer can then subsequently pledge these assets as collateral, in order to secure relevant payment guarantee from private banks for the transaction. Profit Sharing, another mode of financing was introduced in 1978. Moreover, two types of lines of financing, namely, line of leasing and Line of Instalment Sale were introduced in 1983 and 1987 respectively.
Apart from project financing through various modes, the Bank also supports the development efforts of its member countries by providing Technical Assistance (TA) in the form of loan and/or grant for the identification, preparation and implementation of projects. TA is funded from the Special Assistance Account. Various initiatives are underway within the Bank to enhance the scope, size, and quality of Technical Assistance. Priority is given to least developed member countries, regional projects and member countries with high per capita income but with a relatively greater need for technical support.
Technical Assistance is usually provided through engaging consultants for undertaking preparing of feasibility studies, engineering designs, and tender documents for projects as well as their supervision and implementation. In addition, the Bank finances consultancy services to assist its own staff in project preparation and follow-up. Till the end of 1991, the Bank had approved a total of 161 Technical Assistance operations, involving an amount of ID 62.36 million (US $ 74.03 million) in 33 member countries.