LONDON, 26 February 2007 — The commencement of operations on Saturday by the International Islamic Trade Finance Corporation (ITFC), the latest member of the Islamic Development Bank (IDB) Group, following the inaugural meeting of its General Assembly in Jeddah, marks an important new departure for the supposed multilateral development bank (MDB) of the Islamic world.

For the first time, the function of trade finance at the main IDB institution has been separated from its development and project finance activities. In the 30 years of the IDB’s existence, trade finance took precedence in the allocation and disbursement of the MDB’s resources. In fiscal year 2004, for instance, trade finance accounted for $2.838 billion of total financing approved, compared with $2.017 billion for project finance. In 2005 though, this trend started to reverse with trade finance accounting for $1.735 billion and project finance for $2.24 billion, respectively.

Surprisingly and perhaps not unexpectedly, there has been no mention in the official ITFC releases relating to the position of general manager or chief executive officer of the corporation. The senior management appointments of the ITFC will be vital especially to steer the corporation toward a market-oriented business strategy and work ethic.

Some Islamic bankers, who have experience in dealing with the IDB, hope that this separation of functions through the establishment of the dedicated ITFC would give trade finance a more focused approach at the MDB, whose reputation for bureaucracy and the drawn out time to turnaround enquiries relating to financing and deals has become legendary in the sector. In fact, many bankers prefer to deal with IDB affiliates such as the Islamic Corporation for the Development of the Private Sector (ICD) and the Islamic Corporation for the Insurance of Export Credits and Insurance (ICIEC) because of their more professional and market-oriented approach.

One manager of structured trade finance at an Islamic bank outside the GCC confided: “We have just completed a trade finance deal involving the IDB Group and other investors. Things are improving slowly at the IDB, and we prefer to deal with entities such as the ICD and ICIEC where the turnaround time is much quicker.”

Some 47 IDB-member countries and eight financial organizations have signed the articles of association of the ITFC, which has a subscribed capital of $500 million of which the IDB has put up $300 million from its own resources and the rest comprising the current assets of the Islamic Banks’ Portfolio (IBP) and the Export Financing Scheme (EFS) of the IDB. The ITFC, initially approved by the Board of Governors of the IDB at their 31st Annual Meeting held in Kuwait in May 2006, has an authorized capital of $3 billion.

Under its articles of memorandum, the ITFC can go to the market independently from the IDB Group to raise funds through deposits, placements and “any other means of resource mobilization.” The mandate of the ITFC is indeed ambitious — boosting intra-OIC trade from the current 13.5 percent to 20 percent by 2015.

Such a mandate is not only about financial resources. More importantly, it is also about efficacious modes of financing and the enabling legislation to facilitate them in member countries; about competitive rates for mark-ups and returns, at least comparable to those in conventional trade finance; about injecting an inbuilt flexibility in setting these mark-up and return rates to reflect the competition in the conventional markets of movements in interest rates; about extending the basket of commodities eligible to be financed; about extending the basket of currencies to be used to finance the trade operations away from the US dollar to include the euro and the Japanese yen; about improving trade and business information flows between member countries to facilitate a greater number of deals; about widening the trade relationship to include third-party suppliers or buyers who are from non-member countries; and about institutional capacity building and human capital development, especially the new generation of Islamic trade finance experts.

To effect these challenges successfully, the senior management of the ITFC, in the words of Malaysian premier Abdullah Badawi, would have to be “towering personalities”.