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Friday, 22 June 2012

Fitch affirms Islamic Development Bank

June 21 - Fitch Ratings has affirmed the Islamic Development Bank's (IsDB)
Long-term Issuer Default Rating (IDR) at 'AAA' with a Stable Outlook and
Short-term IDR at 'F1+'.

IsDB's ratings are underpinned by strong intrinsic features, primarily by 
excellent capitalisation. IsDB is one of the most highly capitalised 
multilateral development banks (MDBs) covered by Fitch. The ratio of equity to 
assets has remained above 60% since inception (64.1% at end-1432H, equivalent to
25 November 2011 in the Gregorian calendar), mainly thanks to regular capital 
inflows from shareholders and steady yet moderate profits. The ratio of debt to 
equity is low, at 49.2% at end-1432H. The bank also maintains a comfortable 
level of liquid assets, which more than fully covered its short-term liabilities
at end-1432H.

Credit risk is moderate. The IsDB mainly extends project financing guaranteed by
member states or state-owned banks to finance infrastructure or social services.
Due to compliance with Islamic finance principles, most financing is 
asset-backed. As with other MDBs, activity is mostly focused on speculative 
grade borrowers (63.7% at end-1432H) but the bank benefits from 
preferred-creditor status on sovereign-guaranteed operations, therefore keeping 
impaired operations at a minimum. It limits concentration risk as it operates in
a diversified number of countries and abides by strict country and single 
obligor limits. The five largest borrowers accounted for 32.8% of equity at 
end-1432H, a lower level than most peers.

Fitch deems other risks under control. Credit risk on treasury assets is 
mitigated by the recourse to short-term investments in a diversified range of 
instruments and banks. Interest rate risk and foreign exchange risk are strictly
hedged. The bank's risk on equity investments is higher (equity stakes and fund 
participations accounted for 16.2% of total operations at end-1432H and have 
suffered significant unrealised losses recently) but remains manageable given 
the bank's long-term investment horizon and comfortable cushion of equity. 

Shareholders' support is also supportive of the rating. IsDB's capital is owned 
by 56 countries, all members of the Organisation of Islamic Cooperation, which 
have committed to provide callable capital in case the bank should require it to
honour its liabilities. Although the proportion of highly rated callable capital
is lower than for peers (with 43.4% of callable capital being rated 'AA-' or 
above at end-1432H), willingness to support is strong as illustrated by 
continuous capital inflows to the bank.

The bank undertook countercyclical action in 2009-2011, significantly increasing
its loan portfolio. It has temporarily slowed its growth rate in 1433H but 
intends to significantly reinforce the use of its capital resources in the 
coming years. This should affect capitalisation and leverage but Fitch expects 
the IsDB to preserve its cautious prudential framework.

Downward pressure on IsDB's ratings would occur if Fitch observed a pronounced 
deterioration of asset quality or a sudden and unexpected deterioration in 
capitalisation and leverage.

The IsDB is based in Jeddah, Saudi Arabia. It was established in 1975 with the 
aim of fostering economic development and social progress, and provides project 
and trade finance as well as technical assistance to its member countries. It 
employed 739 staff at end-1432H and operated through four regional offices in 
Morocco, Malaysia, Kazakhstan and Senegal. 

Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

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