In the wake of the impact of the continuing global financial crisis, the euro zone debt crisis and the so-called Arab Spring - and their economic impact on global and regional markets including member countries of the Islamic Development Bank (IDB), the Jeddah-based Islamic Corporation for the Development of the Private Sector (ICD), the private sector funding arm of the IDB Group, is embarking on a new strategy to take its financing directly to its constituencies and to make its financing impact more on the real economy through the generation of employment and promoting growth. This includes opening regional offices; setting up two new departments at the ICD; launching more Ijara (leasing companies) in diverse markets such as Albania, Saudi Arabia and Algeria; establishing SME investment funds including a SR1 billion fund for Saudi Arabia; and establishing a mortgage finance company in Saudi Arabia in anticipation of the long-awaited mortgage law. (source)
The man driving the changes at ICD is CEO and general manager, Khaled Al-Aboodi, a member of a new breed of Islamic development bankers. He is presiding over a mandate which potentially is as important of its parent, especially in linking the connect between Islamic finance and the real economy through supporting Islamic financial institutions to extend financing to small-and-medium-sized enterprises (SMEs). Under his watch, the ICD has been transformed from a predictable institution, to one setting the Islamic finance agenda in the member countries in which it operates. Here Khaled Al-Aboodi discusses with Arab News, the latest developments at ICD; its new business development and partnership strategy; its economic impact assessment of its financing and projects to create employment and promote growth, and the exciting new initiatives in Saudi Arabia, Indonesia and beyond.
Excerpts:
How have the continuing global financial crisis and the euro zone debt crisis impacted on the business of the ICD?
The demand is there, especially from our existing clients and markets, where local banks because of the impact of the crisis are not so keen to provide additional financing to businesses. We are keen to facilitate this from our perspective. But we have seen a slowdown in the number of new projects coming to us. We are very clear about the projects that we are financing - they have to satisfy the criteria of our financing policy which includes serving the real economy and generating jobs, especially youth employment.
Given the changing global and regional circumstances, especially in member countries, is the ICD facilitating a faster and more urgent processing of the requirements of its member countries and its clients?
This is part of our new strategy. This year we have set up a new department called the Business Development and Partnership Department - to facilitate a faster partnership to market process. We are also expanding our presence through the establishment of regional offices so that we are not just operating from out head office in Jeddah but in the core areas of our member countries. We have established a presence in Almaty in Kazakhstan through the regional offices of the IDB and in the process of setting up in Dakar in Senegal and in Morocco.
We are also expanding into new markets. This business development and partnership department will also help us originate new projects. It is not just people approaching us with new projects or requests. Our regional officers will see out projects and are expected to present a complete project proposal to us for consideration. Having a presence in the region overcomes all sorts of delays including time differences and business hours. For instance some member countries have a different weekend compared with the head office in Jeddah. All this is part of the new strategy and we are experiencing good results already in this respect with a good pipeline of projects going forward especially in Indonesia.
Can you expand on your cooperation with Indonesia? I believe the ICD has recently signed a Memorandum of Understanding (MoU) with an Indonesian entity under this cooperation.
The IDB had a Indonesia Day in May this year in Jakarta during which it signed a strategic partnership agreement (SPA) under its member country partnership strategy (MCPS), a new initiative launched by the IDB in 2010 to identify, target, allocate, implement and evaluate its financing more efficiently in member countries. During this meeting, ICD signed a MoU with Lembaga Pembiayaan Ekspor Indonesia (Indonesia Eximbank), to jointly explore investment opportunities in Indonesia and other IDB member countries.
Under the SPA, both parties agreed to undertake joint strategic collaboration in the co-financing of selected Indonesia projects as well as syndication and other related areas that benefits the private sector as well as the country. This will also pave the way for Indonesia's private sector in expanding their business to new and emerging markets especially to OIC countries.
The first project to emerge from this cooperation agreement is a textile project with (Sritex Group) in Indonesia for which have been appointed the Mandated Lead Arranger (MLA) for a $140 Million syndicated Islamic project finance facility. ICD and Eximbank will both participate in the financing and the rest will be raised from other participants including local and regional banks and some of our interested clients. The ICD is committing $40 million which would not have been possible if we had just looked at this project sitting in Jeddah. We already have a financing syndication in place, and hopefully we will finalize the financing later week sometime. We hope to have a permanent presence in Jakarta through the IDB's office in Indonesia.
Because of language and differences, Indonesia can be a trying place to do business.
After working with Indonesia for years from Jeddah we cannot always blame the country. There are many issues at work. Times are also different today and there is a different understanding in the way to do business. There are huge opportunities in Indonesia. You see the GDP growth in this country - it is about 7 percent to 8 percent right now. It is one of the Asian tigers and a lot of things are happening over there.
Are there any other projects or consolidations you are coming up for the next year?
Our Ijara (leasing companies are progressing very well. We have currently three Ijara companies - one in Azerbaijan, one in Sudan and one in Uzbekistan. We are setting up three more including one in Albania, one in Algeria and one in Saudi Arabia. We are also looking at other markets but we are not there yet.
One of the issues coming out of the so-called Arab Spring countries is the dire problem of the lack of jobs, especially youth unemployment. What is the ICD doing to contribute to job creation through its financing and projects programs?
We are very aware of the impact assessment of the projects we are involved in especially in generating growth and jobs. As part of our new strategy, we have set up a new department within ICD to look into these issues including evaluating the performance of our projects in contributing to job creation. There has been a lot of talk about the growth model of the World Bank/IMF which helped countries some of them to achieve double digit growth but where the impact was not felt at the level of ordinary people. We are looking at a growth model where we can be satisfied that our financing has an economic impact on the ordinary people.
Another important part of our strategy is to finance small-and-medium-sized enterprises (SMEs) directly. In the past we gave lines of credit to banks which would then extend financing to SMEs. We are also using our Ijara companies to facilitate financing directly to the SMEs and through the creation of SME investment funds. We are establishing the first SME Investment Fund in Saudi Arabia which will be a SR1 billion Shariah-compliant SME fund, which will be the first of its kind. We will be financing companies that are not big enough to progress on their own. We are very excited about this fund. It is our first test and we will take this concept to other member countries later. It will involve a lot of technical assistance in terms of business processes, financial reporting, ownership structures etc. The goal is once the companies are restructured and on a sound footing, ICD will exit the investment. We want to leave a sound company that would be able to attract future lines of financing from ICD or local banks.
Will these funds target certain sectors or industries?
Of course all the investments will be done on a Shariah-compliant basis. This is an important test for us. We are thinking of focusing on the small real estate developers who are building say 30 to 40 villas. They have a good business model but they are relaying on their own resources. It takes them a year to turnaround their projects. We want to support them, transform them and finance them as and when required. Real estate sector is important because it is also moving the other sectors such as the construction and the building materials industries. The demand for housing units is there. The annual gap for housing in Saudi Arabia is about 150,000 units.
So is the market still waiting for the Saudi Arabian mortgage law to be adopted?
That affects our other project, the mortgage finance company which we are setting up with other partners. We have not incorporated the company because we are waiting for the mortgage law to be adopted. We have now taken the decision to go ahead to establishing the mortgage finance company which will of course be Shariah-compliant. We are hoping it will be finalized by the early part of next year.
You will have several competitors in this space. Will this company focus exclusively on the Saudi mortgage finance market?
Yes there are also Saudi Home Loans Company; Deutsche Gulf Finance, Tamweel and Amlak. I do not think the Saudi Arabian Monetary Agency (SAMA) will give any more licenses in the Islamic mortgage finance market space. We will focus on the Saudi market. The housing sector is the big mover in the Kingdom. The Government has announced that it will be spending SR250 billion on this sector over the next 10 years. The Kingdom's demography is also very young. The housing gap is 150,000 units a year. What would make the sector really flourish is the adoption of the mortgage law.
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