January 14, 2013 / 2:51 PM / 7 years ago

TEXT - S&P affirms Islamic Development Bank

(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.

Rating Action
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 
shareholder support.  

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

Ratings List
Ratings Affirmed

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)
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