A case of credit all round!

The Islamic Corporation for the Insurance of Investment and Export Credit has boosted its business enormously thanks in the main to its academic-cum-economist chief executive officer. MUSHTAK PARKER speaks exclusively to Dr Abdul Rahman El Tayeb Ali Taha

The Islamic Corporation for the Insurance of Investment and export Credit (ICIEC) has never had it so good. as the only multilateral export credit and investment insurance agency in the world that provides shariah-compliant insurance and reinsurance products, and a member of the Islamic development Bank (IDB) Group, which is based in Jeddah, ICIEC is contemplating a future with an increased capital from the current $240m to $640m, which would substantially improve its underwriting and reinsurance capacity.

Perhaps it is no coincidence that the Corporation’s business insured during the fi rst quarter 2011 increased by an impressive 56 per cent, reaching $630m compared to the $403m last year. With the awareness of the importance of export credit and political insurance increasing in the member countries of the IdB and new opportunities emerging as a result of the so-called arab spring in markets such as egypt and Tunisia, ICIeC indeed has its work cut out, especially as Takaful, the Islamic equivalent of mutual insurance, is projected to be the next major phenomenon that is beckoning to sweep the Islamic fi nance space.

Much of the credit for enhancing the awareness of export credit and political risk insurance in the IDB member countries must go to Dr Abdul Rahman El Tayeb ali Taha, the urbane academic-cumeconomist, who learnt his trade over the past three decades in senior positions at the World Bank in Washington dC, the Inter-arab Investment Guarantee Corporation and as director of trade finance at the arab Trade Financing Programme, an affiliate of the Abu Dhabi-based Arab Monetary Fund.

The Us-educated Dr Taha has spearheaded ICIEC for most of the time since it was established in 1994, first as general manager and then as chief executive officer. With the twentieth anniversary of ICIEC beckoning in 2014, it is as if Dr Taha has gained a second wind – perhaps buoyed by the prospect of increased demand for ICIEC products and services; the proactive support of his board of directors; the improving economic conditions in the aft ermath of the global financial crisis; and simply because of the realisation that there simply is much more to be done.

The driving ambition after all behind the establishment of ICIEC was to strengthen economic relations among member countries of the Organisation of Islamic Conference (OIC) especially through trade and investment. Given that intra-Islamic trade is a mere 14 per cent of the total trade of IDB member countries, the achievements of ICIEC are even more remarkable.

Indeed, ICIEC, according to Dr Taha, is keen to play a key role in enhancing economic trade among OIC member states and help achieve the new intratrade target of 30 per cent of total trade, which was proposed by the standing Committee for economic and Commercial Cooperation of the OIC in their recent meeting in sharjah in the UAE.

In this regard, ICIEC has managed to widen its membership base to 40 countries by the successful addition of albania and Ivory Coast in 2010. ICIEC expects another six countries to accede to its mem- bership in 2011, which should help ICIEC maintain its momentum as a trade facilitator.

At the same time, the IDB Group is encouraging greater linkages between group entities, which means that ICIEC can leverage on the potential export credit and political risk business generated from within the IdB Group. as part of the group synergy effort, says Dr Taha, ICIEC is working with other members of the group to leverage the complementarity of the group members’ products. Th e Corporation is working on devising mechanisms to collaborate closely with the Islamic Corporation for the development of the Private sector (ICD), the private sector funding arm of the IDB Group, on the investment side, and with the Islamic Trade Finance Corporation (ITFC), the standalone dedicated trade fi nance entity of the IDB Group, on the trade side.

Under Dr Taha’s watch, ICIEC has acceded to membership of the Berne Group and also has close links with MIGA (Multilateral Investment Guarantee Agency) of the World Bank Group. Th anks to ICIEC’s efforts, shariah-compliant export credit and investment insurance and reinsurance is now an accepted part of the global landscape.

“Yes, shariah-compliant export credit and investment insurance, though they still remain the specialty of ICIEC,” he explains, “has now become an acceptable part of the global trade and investment landscape. Knowing this fact, Berne Union members would always come to ICIEC for techni- cal help and partnership in transactions involving Islamic structures. We have already collaborated with MIGA on two investment insurance projects that were Shariah-compliant. Therefore, we see a huge potential in working with Berne Union members and other providers of credit insurance on the growing sub-industry of Islamic finance.”

One example of the co-operation between ICIEC and MIGA is the contract of reinsurance signed recently by ICIEC with MIGA for the Kadikoy- Kartal-Kaynarca Metro Project in Istanbul, of which MIGA is the primary insurer. The total financing requirement of the project, which was provided by a consortium of banks led by WestLB of Germany and which is the subject of this contract of reinsurance, is €222.6m. According to ICIEC, MIGA is providing insurance cover against the risk of Non-Honouring of Sovereign Financial Obligations (NHS FO) by the Municipality of Istanbul to cover the banks’ financing for a period of 9.5 years. In turn, ICIEC is providing €15m reinsurance support to MIGA.

This under-utilised capacity for export credit and political risk insurance is a cause for optimism because in a globalised world in which the compliance and risk management functions have assumed greater importance because of the excesses of the financial crisis – trade, business and investment insurance is set to dramatically increase.

Not surprisingly, Dr Taha is under no illusions that the Corporation needs to be well prepared and positioned to meet these new challenges. The capital increase, officially approved by the board of directors of ICIEC in June 2011 at its meeting in Jeddah during the 36th annual meeting of the board of governors of the IDB, emphasises Dr Taha, “will provide ICIEC with the required capacity to meet the expanding demand for ICIEC’s insurance services, achieve more diversification in our underwriting portfolio and to reach the critical mass in our business turnover. We anticipate that such increase will have a positive reflection on our insurance financial strength and result in more favourable reinsurance arrangements with our global partners”.

Indeed, international rating agency Moody’s Investors Service recently reaffirmed the Aa3 insurance financial strength rating (IFSR ) which was first assigned to ICIEC in April 2008 and confirmed in October 2009.

In the past, ICIEC’s underwriting capacity was constrained by the limitations of its capital base. Dr Taha is confident that this latest capital increase is enough to meet the growing demand for the Corporation’s business and product offerings going forward, especially as export credit and investment insurance seems to be taking off in a much bigger way in the IDB Member countries.

“Our member countries,” he maintains, “are witnessing an increasing demand for export credit and investment insurance services and we are striving in co-operation with the local ECAs to meet this demand. It is axiomatic that the capital increase will leverage our capabilities to meet significant volume of such demand momentarily. However, it is beyond any single insurer’s ability to satisfy a continuously increasing demand with its own resources.”

Another way also to deal with the growing demand is through capacity pooling, which, according to Dr Taha, was the prime reason behind the establishment of the Aman Union in 2010. The union, which is the industry body for export credit agencies (ECAs) of the IDB member countries and which is based in Beirut, currently comprises more than 17 such ECAs. The Aman Union as such provides its members with access to considerable combined capacity and valuable information synergies.

Last year, ICIEC saw a remarkable increase in its volume of business insured, which reached in excess of $1.97bn. Dr Taha remains confident that this growth is sustainable in 2011 through to 2012, especially in continuing difficult global economic conditions. Ironically, the difficulty regarding global economic conditions was one of the driving factors behind the demand for ICIEC products in 2010, as it resulted in a rising awareness of the role of export credit and investment insurance in mitigating the increasing risks of investing and selling products overseas especially post the financial crisis.

“We remain very optimistic with regard to the growth in demand for service in the future, and we anticipate a growing role for ECAs in closing the demand gap, which was caused by the retreat of the risk appetite of private insurers post the crisis,” explains Dr Taha.

Similarly, new commitments are a good indicator of demand for ICIEC products and services. This reached $3.25bn in 2010 and the expectation is that the flow of new business enquiries is on an upward trend. The rising level of new commitments for export credit and political risk insurance that the Corporation experienced during the past 10 years, with a compound average growth rate of 46 per cent, indeed underlines ICIEC’s positive expectations of the sustainability of demand for its products at least in the short term.

Dr Taha is unfased by the impact of the Arab Spring – the protests and demonstrations that are sweeping most of the MENA region – on ICIEC’s business, especially political risk and investment insurance. The events in the MENA region, he maintains, are expected to affect ICIEC’s business as similar to other insures of political risk. Nonetheless, ICIEC remains open for business in some of the affected countries where “we feel that the fundamentals are sound. Indeed, the Corporation is ready to take calculated risks in countries where the political crisis is contained. However, it is inevitable that the crisis will eventually generate more business. In short, the region has both challenges and opportunities, and ICIEC will deal with them accordingly”.

But out of the chaos in some of these countries there will be new opportunities in export credit, investment insurance and reinsurance (retakaful), especially in countries such as Tunisia and Egypt, where ICIEC already has a strong foothold. ICIEC confirms that opportunities for export credit, investment insurance and retakaful business are on the rise as a result of the recent political turmoil in the region. These countries have long been perceived to be stable, and that perception has been shattered by the quickly evolving situation. The natural upshot of the upheavals in the region, says Dr Taha, is to force exporters and investors to take note of the necessity of credit and political risk insurance. And the Corporation is already seeing a rise in inquiries and applications.

This is primarily for short term export credit insurance and some medium-term political risk insurance. Consistent with previous years, short-term operations comprised the bulk of ICIEC’s business in 2010, accounting for 89 per cent of total ICIEC business, whilst the remaining portion was attributable to medium-term and investment insurance operations, which is in line with the industry trend. Short term business, for instance, constituted 82 per cent of the new business of the Berne Union in 2009.

One short-term product that is gaining popularity is ICIEC’s Documentary Credit Insurance Policy (DCIP). In Turkey, for instance, ICIEC issued its first DCIP for Kuveyt Turk Participation Bank in October 2010, but by May this year it had already issued its third DCIP with another participation bank, Bank Asya, and more enquiries are coming in. Under this policy, ICIEC covers the Letters of Credit (LCs) confirmed by Bank Asya. ICIEC’s DCIP will help Bank Asya to extend its LC confirmation portfolio to additional banks all over the world, particularly in some challenging countries where Bank Asya would normally not confirm LCs without ICIEC’s support.

Similarly, in May 2011, ICIEC issued a DCIP to The Saudi British Bank (SA BB) in Riyadh that provides the bank with coverage for Letters of Credit (LCs) confirmed by it. This, says ICIEC, will enable SA BB to increase its capacity for LCs issued by foreign banks while helping it to manage some of its international bank risks effectively.

ICIEC is also developing its reinsurance capability. “The inward reinsurance, coming mainly from member countries’ ECAs,” confirms Dr Taha, “constituted 15 per cent of our business insured in 2010. Reinsurance Facultative Agreements (RFAs) have become one of our core products in the last few years, due to its relevance to ICIEC’s mandate of supporting Member Countries and their ECAs via capacity enhancements.”

The trend in product uptake is towards those that provide comprehensive risk cover, in the sense that they cover both political and commercial risks. With respect to investments, there is an increased demand for non-honouring of sovereign financial obligations, which indicates unease about continuity of regimes and their ability to meet financial obligations. With respect to the export credit side, ICIEC saw a skyrocketing rise in demand for contract frustration, pre-shipment and post-shipment risks.

Geographically speaking, the overall perception of risk in all emerging markets has increased, and not least in the MENA region. But due to perceptions of the European debt problems especially the bailout of Ireland, Portugal and Greece; and those of a lingering financial turmoil at the global level, the country risk of the OECD, which is usually a solid region, has been upped as well. Thus, the growth potential is high not only in the MENA region, but globally.

In the past, ICIEC lamented the underdeveloped export credit and investment insurance culture in IDB member countries. Dr Taha rues the fact there has not been much change in this perception. The fact remains that export credit insurance and political risk insurance is still not recognised as a widely accepted risk management tool in IDB member countries, he confides. However, ICIEC has taken several steps to disseminate awareness about the usefulness of these products. In this regard, ICIEC has arranged joint seminars with the central banks in several member countries. These were widely attended events and have been considered very useful by attendees that included central and commercial bankers in addition to exporters and investors.

ICIEC intends to put on more such events and is in active talks with central banks in various member countries. ICIEC is also promoting this through the AMAN Union and organises annual meetings with other partners. These meetings are also considered useful in spreading the word about ECA business. “At ICIEC we believe our efforts are paying off as more and more banks and traders tend to become aware about export credit and political risk insurance. Also, we should not underestimate the impact of the global financial crisis in raising awareness of the need to manage and mitigate credit and political risks,” says Dr Taha.

Looking ahead, ICIEC is involved with several exciting initiatives, which, if they take off, will have a profound impact on the Islamic finance industry, including the specialised area of export credit and political risk insurance. ICIEC is working on launching two unique products – an LC Guarantee Fund and a Sukuk Guarantee Fund – that would fill a major gap in the market.

Dr Taha confirms that ICIEC is still reviewing the feasibility of launching the LC Guarantee Fund, and are in discussions with some partner institutions on the structure and objectives of the fund. For the Sukuk Guarantee Fund, once the Corporation’s new capital increase takes effect, ICIEC may have enough insurance capacity to be able to consider launching such a fund, which would effectively act as a third party guarantee for Sukuk, especially Musharaka and Mudaraba sukuk.

Similarly, new developments in ICIEC underwriting requirements, especially relating to trade or investment in or out of non-member countries, has broadened the scope of its business expansion.

As per its mandate, ICIEC can cover only those investments that are taking place in its member countries. Whether the investment is originating from a member country or a non-member country is immaterial in this respect. The opposite was true of the export credit insurance, where the key requirement was for the goods being exported to be from a member country, or at least 20 per cent of value addition to have been made in a member country. To support the economic development of member countries, its board of directors last year revised the rules and allowed imports of strategic goods and food security items to be coverable in the scheme.

This, adds Dr Taha, has opened the door for a huge demand with the result ICIEC is now receiving applications from companies based in non-member countries that are planning on exporting strategic capital goods and food security related items to member countries. The vast majority of these applications are coming from European companies that are familiar with credit and political risk insurance products, but cannot source enough cover from their traditional providers.

A major challenge for trade finance facilitators is the uncertainty regarding capital requirements under the new Basel III provisions. International trade and trade finance under the Basel III provisions may suffer because of the stringent new capital requirements that have been proposed by the Bank of International Settlements (BIS). Similarly liquidity and leverage rules may also cause problems for banks offering trade finance.

The view that Basel III would be disproportionately tougher on the contingent (off balance sheet) exposures making trade finance more expensive especially so for the emerging market countries that are most dependent on trade, is shared by many in the banking and ECA world, says Dr Taha.

For banks, the biggest concern is the impact of the proposed leverage ratio, which would require banks to set aside 100 per cent of capital for any off-balance-sheet trade finance instruments, such as letters of credit. This is five times more than the 20 per cent credit conversion ratio used for trade finance in Basel II.

“It appears that in the new Basel III framework low-risk trade finance instruments are being lumped together with higher-risk off-balance-sheet items. This would eat up capacity and liquidity thereby limiting the funding availability for trade transactions. New capital regulations would also require banks to set aside capital for one year for any instruments, even if they have maturities under a year. Most trade finance instruments have maturities of about 90 days: this would triple the capital cost of such instruments. Furthermore, the ECA/Exim Bank loans are not considered in the definition of liquid assets thereby reducing the appeal of such products,” explains Dr Taha.

Overall, Basel III, which is targeted to be implemented in phases by 31 December, 2018, seems to challenge the importance and effectiveness of export credit and political risk insurance for the banking sector. ”

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