(The following statement was released by the rating agency)
-- Following a review of the Islamic Development Bank (IsDB) under our
revised criteria for multilateral lending institutions, we have affirmed our
'AAA/A-1+' ratings on the bank.
-- IsDB's stand-alone credit profile is 'aaa', reflecting our assessment
of its "very strong" business profile and "extremely strong" financial
profile, as our criteria define these terms.
-- The stable outlook reflects our expectation that the bank will
maintain its strong credit metrics.
On Jan. 14, 2013, Standard & Poor's Ratings Services affirmed its 'AAA'
long-term and 'A-1+' short-term issuer credit ratings on the Islamic
Development Bank (IsDB). The outlook is stable.
The ratings on IsDB are based on its "very strong" business profile and
"extremely strong" financial profile, as defined in our revised criteria for
multilateral lending institutions (MLIs; see "Multilateral Lending
Institutions And Other Supranational Institutions Ratings Methodology,"
published on Nov. 26, 2012, on RatingsDirect on the Global Credit Portal).
Under these criteria, we also assess the bank's stand-alone credit profile
(SACP) at 'aaa'.
Our assessment of IsDB's "very strong" business profile reflects the bank's
important role in promoting economic development across Muslim countries and
communities, its strong relationship with shareholders, and our expectation of
continued preferred creditor treatment.
We note that the bank does not distribute dividends to members from its
earnings, as per its articles of agreement. However, IsDB's voting
shareholders are also borrowing members, and, as such, can have an important
influence in decision-making. Since 2007, the bank's management has been
implementing a comprehensive reform plan targeting strategy, organization, and
IsDB's capital comes from the contributions paid by member countries, as well
as its retained earnings. The fourth general capital increase (GCI) was
approved in 2006, raising the bank's subscribed capital to Special Drawing
Rights (SDR) 15 billion. Preliminary unaudited figures for financial
year-ended Nov. 14, 2012, indicate that the bank's subscribed capital stood at
156% of assets, while the paid-up capital was 40% of total assets.
Shareholders have supported the bank through regular GCIs, albeit with some
delays in the payment of due capital instalments by a few member countries.
Furthermore, some member countries, including Nigeria and Qatar, have raised
their shareholdings in the bank through special capital increases raising the
bank's subscribed capital to SDR18 billion. The bank's board of governors is
expected to approve the fifth GCI this year.
The bank was able to scale up its lending operations by doubling the annual
growth rate to 30% from 15% between 2009 and 2011, in response to the global
economic crisis. Despite its activities in more risky countries compared with
some of the other 'AAA' rated MLIs, IsDB's operational portfolio has performed
well and the bank's audited financial statements have never reported any
write-off of any public sector exposure. The bank has historically benefited
from its government borrowers giving it preferred creditor treatment, and we
expect that it will continue to do so.
Our assessment of IsDB's "extremely strong" financial profile factors in its
extremely high capitalization, leading to a Standard & Poor's risk-adjusted
capital (RAC) ratio (our primary measure for assessing capital adequacy) of
30% before adjustments at financial year-end 2011. The bank's RAC ratio
increases to 65% when we take into account adjustments specific to MLIs under
our new criteria. These are primarily our expectation that IsDB's sovereign
borrowers will pay their debt to the bank in preference to their commercial
debt, our application of a cap on the risk weight of high-risk exposures, and
our adjustment for the geographic diversification of the bank's exposures. In
general, our risk-weighting of IsDB's Sharia-compliant risk assets do not
differ from our risk-weighting of a commercial bank's loan portfolio. The
countries with the five largest exposures constitute only 30% of overall
sovereign exposures at financial year-end 2011, rendering IsDB's credit risk
much less concentrated than similarly rated MLIs'.
IsDB has typically relied on capital increases and retained earnings to fund
its operations, but is increasingly issuing bonds (sukuks) both as private
placements and in the market, with a view to fostering the global sukuk
market. Our funding and liquidity ratios for IsDB indicate that the bank would
be able to fulfil its mandate for at least one year, even under extremely
stressed market conditions (excluding undisbursed commitments). The lack of
access would, however, require the curtailment of new disbursements after six
months. Operationally, IsDB's liquidity needs are planned well ahead of actual
disbursement, given the typically long-term life cycle of the projects it
finances, and therefore we do not expect them to exceed liquidity sources.
Furthermore, IsDB can tap the liquid resources of the Special Account
Resources Waqf Fund (an endowment fund held separate from IsDB's balance
sheet), further strengthening its liquidity position.
Under our revised criteria, we do not factor in IsDB's callable capital as
extraordinary shareholder support because all of its shareholders are rated
below IsDB's SACP. However, should the bank's SACP weaken to 'aa' or below, we
could assign uplift based on extraordinary support from shareholders rated
'AA', all things being equal.
IsDB commenced operations in 1975 with a mandate to foster economic
development and social progress of its member countries as well as Muslim
communities in nonmember countries. IsDB operates in accordance with Sharia
principles (Islamic law) and has a leading role in promoting the development
of the Islamic finance services industry.
IsDB has gradually increased its number of shareholders, from 22 members at
inception to 56 members currently. Membership spans four continents covering
different regions: 22 members in Sub-Saharan Africa, 17 in the Middle East and
North Africa, 16 in Europe and Asia, and one in Latin America. The basic
prerequisite for membership is that the prospective country is already a
member of the Organization for Islamic Cooperation, pays the first instalment
of its minimum subscription to the capital of IsDB, and accepts any terms and
conditions that may be agreed on by the bank's board of governors.
The stable outlook reflects our expectation that IsDB's financial profile will
remain "extremely strong" over the coming months. We also anticipate that the
bank will continue to enjoy preferred creditor treatment and other strong
We could lower the ratings if the bank's financial or risk management profile
weakens, or if we see a material weakening in the bank's sovereign lending
book (for example, as a result of rising political and economic risks in the
region), or the loss of preferred creditor treatment.
Related Criteria And Research
All articles are available on RatingsDirect on the Global Credit Portal,
unless otherwise stated.
-- Into The Weeds Of The Revised Multilateral Lending Institutions
Criteria, Dec. 19, 2012
-- Multilateral Lending Institutions And Other Supranational Institutions
Ratings Methodology, Nov. 26, 2012
-- Islamic Development Bank, Sept. 25, 2012
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Supranational Special Edition 2011, Sept. 23, 2011 (for more details
-- Bank Capital Methodology And Assumptions, Dec. 6, 2010
Islamic Development Bank
Issuer Credit Rating
Foreign Currency AAA/Stable/A-1+
IDB Trust Services Ltd.
Senior Secured* AAA
Senior Unsecured* AAA
Tadamun Services Berhad
Senior Unsecured* AAA
*Guaranteed by Islamic Development Bank
(Caryn Trokie, New York Ratings Unit)