Capital Markets (Investor Information)

About the Islamic Development Bank – IDB
Regular issuer of high rated sukuk in global market…..

The Islamic Development Bank (IDB) is a Supranational Developmental Bank, established in 1975 with its headquarter located in Jeddah, Saudi Arabia. IDB is owned by 56 member countries of the Organization of Islamic Cooperation (OIC) that span across the Middle East, Africa, Asia and Europe. The IDB’s primary objective is to foster the economic development and social progress of member countries and Muslim communities in non-member countries. more...>>

Credit Profile
AAA rated institution by three international rating agencies…..

IDB is rated AAA by the three major Rating Agencies (Standard & Poor's, Moody's, and Fitch). It has been designated as a Zero Risk Weighted Multilateral Developmental Bank (MDB) by the Basel Committee on Banking Supervision and the Commission of the European Communities. In the recent rating exercise, Rating Agencies highlighted the IDB's key strengths as follows:

Sukuk in Brief
A secure return through an ethical investment…..

Sukuk commonly refers to the Islamic equivalent of bonds which essentially falls under fixed income securities definition. Since it perfectly fits into the bond infrastructure and system, Sukuk has witnessed exponential growth within short period of time. However, as opposed to conventional bonds, which merely confers ownership of a debt without any underlying assets, Sukuk grants the investor a share of profit from an income generating asset or project, along with the investment risk. As such, Sukuk securities should adhere to the Shari’ah principles, which prohibit the charging or payment of interest against the invested amount but rather sharing the return on the investment.

The emergence of Sukuk has been one of the most significant developments in Islamic capital markets in recent years. Put simply, Sukuk instruments act as a bridge. They link their issuers, primarily sovereigns and corporations in the Middle East and Southeast Asia, with a wide pool of global investors, many of whom are seeking to diversify their holdings beyond traditional asset classes.

Depending on the underlying assets or projects, sukuk could come in various forms and structures which fit both the Issuers’ requirement and Investors’ appetite. Both domestic and foreign investors buy Sukuk having various structures approved by Shari’ah boards of Islamic scholars.

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Capital Markets Objectives
Multi-pronged objectives……….

Apart from funding its operational business activities, the IDB sukuk issuance also serves the following objectives:-

Sukuk MTN Program
Transforming investment. Transforming lives….

The Islamic Development Bank (IDB) is a regular issuer of Sukuk in the global markets. Except for its debut sukuk issued in 2003, at present all IDB Sukuk are issued under its Medium Term Notes program which is registered and approved by the Financial Services Authority/United Kingdom Listing Authority (UKLA). The MTN program requires periodical renewal which must be cleared by the UKLA before subsequent sukuk issuance being made within the approved program limit. The IDB sukuk is currently listed on the London Stock Exchange, Bursa Malaysia (Exempt Regime), Nasdaq Dubai and Borsa Istanbul. The MTN program was established in 2005 with the initial size of US$ 1.5 billion initially and in tandem with its operational growth projection and demand, it has been upsized several times to reach the level of US$ 10 billion now. The MTN Program is also rated “AAA” by the international rating agencies.

On the offering format, thus far the IDB Sukuk is offered in the Reg S format and is opened for subscription to investors in many countries globally. Sovereign Wealth Funds, Central Banks, Pension Funds, Insurance Companies, Sukuk Funds and Investment Banks are the main investors of the IDB Sukuk. IDB Sukuk is rated triple-A by all the three rating agencies.

Sukuk issued by the IDB under the MTN Program are denominated in various currencies, maturity of more than one year and issued in the form of Public Issuance and Private Placement. The likely tenure of a Sukuk could be 5-7 years and could be issued in fixed or floating rate basis, depending on market conditions and investors preference. The Public issuance are denominated mostly in US Dollar. The Public issuance is aimed to establish IDB’s own benchmark yield curve in the markets across various maturity spectrum with a view to achieve the competitive pricing for its Sukuk, if not better at least to be on par with its peer MDBs, the benefit of which will be passed-on to it member countries in the form of competitive mark-up for projects financing. Besides for fund raising, IDB sukuk is also aimed to promote the development of Islamic finance industry in general and the Sukuk markets in particular by increasing the supply of high quality sukuk which can be actively traded in the secondary markets.

The Private Placement is primarily aimed to meet the specific need of certain type of investors in terms of maturity, profit rate and currency structures. The Sukuk issued through private placement enjoy the same features as the Public issuance in terms of rating and listing depending on the specific preference of the investors.

Local Currency MYR MTN Program
Promoting local currency capital market..….

In addition to the USD MTN program, IDB also established a local currency MYR 1.0 billion MTN program in Malaysia for the purpose of financing projects in local currency. Thus far, 3 tranches of MYR sukuk have been issued amounting to MYR700 million. The 10-year MTN program was established in August 2008 and will expire on August 2018. The program is registered with the Securities Commission of Malaysia and the sukuk is listed and tradable on Bursa Malaysia under the Issuer/SPV name of Tadamun Services Berhad.

Sukuk Endorsements
Recognized marketable assets………

Besides being rated “AAA” by the three international rating agencies, other achievements and endorsements which essentially manifestation of transparency and credit quality of IDB sukuk are as follows:-

Expanding Yield Curve
Easy reference for price discovery…………

IDB is committed to diversify its investor base across the globe to ensure sustainability of its external resource mobilization program especially during the adverse financial condition as well as to promote the Islamic finance industry at the international level. In this regards, having established secondary trading yield curve across various maturity profiles would amongst others help both investors and issuers in the price discovery process. At this juncture, IDB sukuk has up to 5-year secondary trading yield curve which is beneficial for the new investors especially as a guide in their investment decision. Moving forward, IDB will strive to further expand its yield curve beyond the 5 year maturity horizon.

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Sukuk Structure
Asset-based Shariah compliance investment avenue….

The current IDB Sukuk MTN program is based on Wakalah structure whereby on each sukuk issuance date, the IDB as the seller of the financial and/or investment assets will sell those assets to the SPV, being the Issuer and Agent for the Sukuk holders. The sale proceeds shall be used by the IDB to fund its business operation. The asset sold to the SPV would become the underlying sukuk asset, to be jointly owned by the sukuk holders. The IDB will be appointed as Wakel to manage and administer the sukuk assets as per the agreed terms and condition. The sukuk asset minimum tangibility ratio shall at all-time be observed to adhere to the secondary market tradability condition for sukuk trading at the market prices as approved by the Shari’a rules.

On each periodic distribution date; quarterly, semi-annually or annually, the Wakel will collect and distribute income generated from the sukuk asset for distribution to the sukuk investors. Any excess of income shall be retained by the Wakel as an incentive bonus.

On maturity date, IDB being the Obligor under this transaction with AAA credit rating, shall buy back the sukuk certificate/assets from the SPV and cancel the sukuk certificate. The SPV shall then distribute the cash proceeds the the sukuk holders.

Besides the above structure, to further diversify its investment product offering, IDB is continuously exploring other sukuk structure that fits its funding need and suits investors demand and will be offered to the market when it deem fit.

The current IDB sukuk structure is further elaborated in the following diagram:-

IDB Sukuk Structure

IDB’s Capital Market Achievements
Reflection of high credit quality securities….

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Investing in IDB Sukuk
A strong, stable pioneer…

Since completion of its first issuance of Sukuk in 2003, IDB has become a beacon for investors and issuers who are interested in unlocking the potential of the Islamic finance market. IDB’s relationships with a broad range of partner institutions, development agencies and investors give it a comprehensive view of conditions around the globe, which the Bank uses for the benefit of its member countries.

IDB’s capital base is built on several pillars. It receives exceptionally strong support from its member countries. This provides the Bank with a high level of liquidity and flexibility, allowing it to adapt easily to changing market conditions. IDB is rated AAA by the three major rating agencies (Standard & Poor’s, Moody’s and Fitch), and has been designated as a Zero Risk Weighted Multilateral Development Bank (MDB) by the Basel Committee on Banking Supervision and the Commission of the European Communities. Besides IDB’s strength of its capital base, low leverage and other factors make it a suitable financial institution to partner with.

As a pioneer in Sukuk, IDB serves as an important reference point for other institutions. IDB issued its first Sukuk of US$ 400 million in 2003 which was followed by an issuance of US$ 500 million in 2005 and MYR 400 million in 2008. Since 2009, IDB has been very active in the Sukuk markets issuing Sukuk in almost every year to achieve its objectives. Besides mobilizing resources form the markets through Sukuk issuances, IDB also carries out other forms of fundraising with short- and medium-term durations by way of Reverse Murabaha and Wakala placement.

Funding Activities
Presence recognized by high quality investors…..

IDB mobilizes external resources from the global capital markets based on its annual resource mobilization plan approved by its Board of Executives Directors at the beginning of the year. The plan takes into account the need to fulfil the funding need of its operation and maintaining sufficient liquidity buffer that will enable the Bank to continue its operations under normal market condition for the next 18 months and further strengthen to withstand the stress test for at least the next 12 months, in case its access to the markets is somewhat restricted and/or denied, due to internal or external factors beyond its control. The net cash requirements for each year is predominantly composed of net operational disbursements requirements, administrative expenses, repayments of maturing liabilities and the need to maintain the minimum prudential liquidity level.

For about 30 years of its operation, the IDB’s financing operations were funded primarily from its shareholders’ equity. However, with the increase in demand for resources to finance developmental projects from member countries, IDB resorted to resources from the market by issuing Sukuk to complement its shareholders' equity. Apart from complementing its internal resources, Sukuk issuance is also aimed at promoting the development of Sukuk industry in the global capital market. The annual resource mobilization plan is developed within the existing liquidity policy of the Bank to ensure that besides meeting the liquidity requirement in a timely manner, it is executed in a way to achieve the most attractive cost of fund from the markets which would eventually be passed on to the member countries.

The IDB sukuk issuance exercise is monitored and guided by its multi currencies MTN Program which is periodically updated and upsized in tandem with the prevailing funding need.
In 1435H , IDB mobilized a total of about US$ 4.4 billion equivalent to meet its funding requirement for that year. The details are as follows :

table 1
Public Series 16 5 Mar-14 Mar-19 USD 1,500,000,000
Private Placement Series 17 3 Apr-14 Apr-17 USD    100,000,000
Private Placement Series 18 5 Jul-14 Jul-19 USD 1,000,000,000
Public Series 19 5 Sep-14 Sep-17 USD 1,500,000,000
Private Placement Series 20 3 Oct-14 Oct-17 EUR    300,000,000

table 2
1426/ 2005 Public Series 1* 5 Jun-05 Jun-10 USD    500,000,000
1429 /2008 Public MYR Series 1* 5 Aug-08 Aug-13 MYR    300,000,000
1430 /  2009 Private Placement MYR Series 2* 5 Mar-09 Mar-14 MYR    100,000,000
Private Placement Series 2* 3 Sep-09 Sep-12 SGD    200,000,000
Public Series 3* 5 Sep-09 Sep-14 USD    850,000,000
1431/  2010 Private Placement Series 4 10 Sep-10 Sep-20 SAR    937,500,000
Series 5 10 Sep-10 Sep-20 SAR    937,500,000
Public Series 6 (Final Terms 6) 5 Oct-10 Oct-15 USD    500,000,000
1432 / 2011 Private Placement Series 7 5 Feb-11 Feb-16 GBP      60,000,000
Public Series 8 (Final Terms 8) 5 May-11 May-16 USD    750,000,000
1433  /2012 Private Placement Series 9 5 Jan-12 Jan-17 GBP    100,000,000
Public Series 10 (Final Terms 10) 5 Jun-12 Jun-17 USD    800,000,000
Private Placement Series 11 3 Aug-12 Aug-15 GBP    100,000,000
Series 12** 3 Oct-12 Oct-15 USD    300,000,000
Series 13 5 Oct-12 Oct-17 USD    500,000,000
1434 /  2013 Private Placement Series 14** 5 Mar-13 Mar-18 USD    700,000,000
Public Series 15 (Final Terms 15) 5 Jun-13 Jun-18 USD 1,000,000,000
Public MYR Series 3 5 Jul-13 Jul-18 MYR    300,000,000
1435  / 2014 Public Series 16 (Final Terms 16) 5 Mar-14 Mar-19 USD 1,500,000,000
Private Placement Series 17 3 Apr-14 Apr-17 USD    100,000,000
Private Placement Series 18 5 Jul-14 Jul-19 USD 1,000,000,000
Public Series 19 (Final Terms 19) 5 Sep-14 Sep-19 USD 1,500,000,000
Private Placement Series 20 4 Oct-14 Oct-18 EUR    300,000,000

Note : * Matured ** Redeemed

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Funding Strategy
Diversification as strategy….

IDB’s funding strategy seeks to diversify across markets, products and maturities to ensure availability of sufficient funds at the most competitive cost at all times to meet operational and developmental funding needs of it member countries while being responsive to investor demand. The strategy also seek to ensure sufficient liquidity buffer to withstand market volatility under the stress test scenario.

  1. Benchmark public sukuk issuance: To ensure its footprint in the global capital market space, IDB committed to issues at least once public issuance per year with minimum size of US$1 billion per issue;
  2. Local Currency issuance: IDB is committed to the development and support of the domestic capital markets of its members. It is also as part of the currency exposure risk mitigating strategy to fund its local currency project of member country. IDB has established a MYR1 billion sukuk MTN Program in Malaysia to finance its MYR project. Similar approach will be applied to any member countries wishing to replicate the model, if not for the funding need, at least to support the local currency sukuk market,
  3. Private placements: IDB customizes issuance to meet investor needs with regard to currency, size and tenor. It is a strategy applied to penetrate new sukuk investors around the globe, in a smaller ticket, denominated in their preferred currency, tenor and rates which could not be accommodated via the public issuance;
  4. Money Market: As a complement to the above medium to long term resource mobilization strategy, apart as a short term bridger of the funding gap, as and when the need arises, Reverse Murabaha and/or Wakalah placement is applied to accept short and medium term investment. It is also served as a market for investors looking for highly rated Islamic investment avenue;
  5. Product diversification : As an Islamic financial institution as further articulated in its Article of Agreement, IDB needs to strike a balance between business need and adherence to Shari’a compliant. Thus, continuous effort is in place to further diversify its investment product offering to fulfil the variety of investor needs.

Liquidity Policy
Best practices as guiding principles……

One of the governing policies for IDB resource mobilization plan is its liquidity policy which is continuously reviewed and updated to ensure adoption of the best practice and governance. Having resort to more external resources would essentially means ensuring availability of better liquidity management to ensure sustainability, efficiency and cost effective resource mobilization exercise and timely payments of those financial obligation under normal and stress financial climate. The current liquidity policy essentially covers three different portfolios serving different purposes.

First, the Stable Portfolio (SP), behave like a reserve buffer, is a forward looking and predominantly equity funded pocket covering almost half of up to next three years net cash requirement. Until the portfolio is fully equity funded, if not done so, it will be temporarily covered by the medium term external resources which will be replaced with future incoming equity. The fund would remain untouchable and intact within the set ceiling and would only be deployed in case of financial distress. In case the IDB is denied access to the market due to whatever reasons, it is envisaged that, the portfolio should be able to fulfill all of IDB’s obligation for up to 18 months under normal business environment or up to 12 months under distress financial climate. The fund will be invested in long dated, high quality investment grade assets as articulated in Liquidity Risk Management guidelines.

Second, the Core Operational Portfolio (COP), is essentially the main operational disbursement portfolio for the current year net cash requirement. Even though this could also be equity funded, it would be mainly financed by the external resources and in fact IDB’s yearly resource mobilization plan would be based on this portfolio requirement. While waiting for the actual disbursement to take place, the fund will be invested in liquid securities; mainly money market/murabaha placement of less than 12 months or any other liquid securities.

The third one is the Technical Operational Portfolio (TOP), which is meant for the daily disbursement needs for up to 1 - 2 months disbursement requirement. The portfolio consist mainly the cash balance or very short term money market/murabaha placement.

Even though the overall liquidity requirement would be set and pre-determined at the beginning of the year based on the overall funding needs of the bank, the overall portfolio position would still be closely monitored and reviewed to ensure immediate portfolio position re-alignment in case there is significant upward or downward movement along the period under review.

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Last Updated : Jan 2015, Capital Markets Division