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IsDB and ICIEC Launch US$2bn Trade and Investment Guarantee Facility to Support Private Sector Recovery from COVID-19 Disruption

One of the unfortunate consequences of the economic impact of the COVID-19 pandemic is the severe disruption of private sector trade and commercial business, including that of small-and-medium-sized enterprises (SMEs), which form the backbone of most of the economies in the 57 member countries of the Islamic Development Bank (IsDB).

Export credit, commercial credit and investment insurance are the traditional risk mitigation tools but in many of the developing IsDB member countries the culture of trade and investment insurance provided by state or private sector export credit agencies (ECAs) and banks is under-developed and at best a “work in progress”.

The Berne Union (The International Union of Credit & Investment Insurers) recently reported a marked increase in payment deferrals and pre-claim situations in FH2020 by members. For FH2020 claims activity is relatively subdued with US$3.3bn being paid compared to US$3.2bn in the same period last year. But most of them expect to see COVID-related claims levels rising in 2021. The IsDB estimates that global GDP growth would fall by 0.5% – 1.5% as a result of the crisis, and according to the United Nations Conference on Trade and Development an estimated loss to the global economy of US$1-US$2 trillion in 2020. The International Labour Organisation also estimates a loss of 25 million jobs.

As such, the launch in October 2020 by the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), the ECA of the IsDB Group, and its parent of the COVID-19 Guarantee Facility, an innovative programme providing US$2 billion in support of the private sector, could not be more timely. The facility will be implemented by the two entities to support COVID-19 hit industries in the OIC member countries and to attract cross-border investments.

The COVID Guarantee Facility’s Framework Agency Agreement was signed by IsDB Group’s President, Dr Bandar Hajjar, and ICIEC’s CEO, Oussama Kaissi, in Jeddah in October, following its approval by the IsDB’s Board of Executive Directors in its 336th meeting in June 2020.

The Agency Agreement assigns clear roles and responsibilities between the institutions based on their specializations, laying the foundation for a new operational model for the systematic partnerships between IsDB and IsDB Group entities. This agreement is expected to set the tone for mainstreaming synergies between ICIEC and other IsDB Group entities beyond the COVID Guarantee Facility.

According to ICIEC CEO Oussama Kaissi “the framework agreement opens the door for new forms of cooperation between IsDB Group entities. ICIEC is very focused on addressing the challenges our Member Countries are facing in mitigating the repercussions of COVID-19 and we are dedicated to ensuring that the Corporation will meet all the framework’s requirements for the COVID-19 Guarantee Facility to be implemented successfully.”

This Guarantee Facility is separate to the US$150 million trade credit and political risk insurance capacity pledged by ICIEC in March at the onset of COVID-19 in supporting the efforts of member countries in their fight against the pandemic, and as part of the IsDB Group’s comprehensive US$2.3 billion COVID-19 financial rescue package.

ICIEC’s aim was to support its partners, i.e. Lenders, Investors, Manufacturers/ Exporters and ECAs, through its trade credit and investment insurance offerings instead of providing any direct funding facilities, and through partnerships with key stakeholders within the IsDB Group such as ICD, the private sector arm, and ITFC, the trade fund, and with national ECAs. 

To further facilitate its support for the private sector in member countries, the IsDB also signed a MoU in October with Standard Chartered Bank (Middle East) to participate in IsDB’s Restore Track Programme aimed at supporting member countries’ private sectors through stimulus packages to the economic sectors most impacted by the COVID-19 pandemic.

This agreement leverages on IsDB’s US$2Bn COVID Guarantee Facility to establish an operational cooperation framework for IsDB and Standard Chartered to facilitate financing arrangements to IsDB’s Member Countries.

The COVID pandemic has disrupted international financial channels and put pressure on hard currency inflows to Emerging Markets. This pressure led to considerable limitations of the private sector’s access to financial liquidity. Combined with the loss of income due to reduced demand, the health crisis poses unprecedented challenges to the private sector and especially SMEs.

Micro, small and medium-sized enterprises (MSMEs) are hardest hit by COVID-19 in several IsDB member countries and will deteriorate further. In IsDB countries, MSMEs have an even greater importance with a rate of 53.2 enterprises per 1000 population, which is more than twice the global rate of 25.2 enterprises per 1000 population.

“Global supply chains,” reminded Dr Hajjar, “stand disrupted as a result of poor trading conditions, with small and medium-sized enterprises (SMEs) being among the hardest hit. The economic crisis, compounded with dampened economic activity, commodity price crashes, lower tax receipts and low investments presents a huge risk to the Member Countries with a long-term impact on growth and productivity.”    

Through its cooperation with Standard Chartered Bank, IsDB aims to help alleviate some of these pressures by providing blended lines of finance to local banks at competitive prices. “I am glad to see our, already strong, relationship with Standard Chartered Bank further strengthened with this unique and innovative partnership. Standard Chartered’s funding expertise adds to the IsDB Group’s de-risking guarantees which will make a lasting impact for Members Countries,” stressed Dr Hajjar.

Both Dr Hajjar and M. Sunil Kaushal, Head of Middle East, Standard Chartered Bank, concur that these “out of the box” partnerships between multi-lateral development banks and the private sector are necessary to overcome the current challenges.

ICIEC’s reputation as the only dedicated Sharia’a-compliant ECA in the world was boosted in October when Moody’s Investor Services affirmed the Corporation’s Aa3 Insurance Financial Strength Rating (IFSR) rating for the 13th consecutive year with stable outlook. The rating, said Moody’s, reflects ICIEC’s position as the only Sharia’a-compliant multilateral export credit and investment insurer in the world and affirms the strong level of support and synergies the Corporation enjoys from IsDB Group and its member countries.

The report highlights the significant growth in business during H1-2020 with gross premiums increasing by 21% over H1-2019. Moody’s’ also acknowledged ICIEC’s low accumulation of claims, despite the negative impacts from the coronavirus pandemic, was a strength when comparing to other global credit insurers that experienced notable weakening in claims performance. To mitigate COVID-19 related risk, countries and corporates are tapping into ECA-related financing facilities. In the case of ICIEC, it has in recent months signed several agreements with ECAs to help facilitate trade, investment and guarantees flows with member countries.

This includes MoU’s signed with CESCE, the Spanish ECA; the UK Export Finance (UKEF), Austria’s OeKB and the Uzbekistan National Export-Import Insurance Company (Uzbekinvest). “During this time of economic uncertainty, ICIEC has placed high importance on building relationships with peer ECAs,” explained ICIEC’s Oussama Kaissi. “By working jointly, the Corporation and its partners can increase the reach and depth of service offerings, therefore enabling both parties to provide the best support possible to our member countries”.

The MoU with UKEF allows for both entities to enter into co-insurance, reinsurance or cooperation agreements to engage in strategic joint projects that support exports and investments from the United Kingdom into ICIEC’s 47 member countries. The partnership is beneficial for both institutions as they share an interest in promoting and supporting Islamic finance transactions. There is also potential for UKEF to risk-share with ICIEC and leverage on the Corporation’s preferred creditor status, across key international markets for UKEF’s support including UAE, Oman and Bahrain – all ICIEC member countries.

“This cooperation agreement strengthens the existing relationship the Corporation has with UKEF,” stressed Kaissi. “Despite, or perhaps due to the troubling times we’re living in, demand is growing for guarantees in OIC markets where credit and political risks pose a greater challenge. Having this partnership between two leading ECAs allows both institutions to take on larger projects with greater impact – better serving the citizens of ICIEC member countries.”

UKEF Director & Head of Business Development, Richard Simon-Lewis, reiterated that “UKEF is committed to the development of new relationships across new sectors, markets and regions which will expand the reach of its world class finance.  I therefore look forward to working with the ICIEC as we continue to help UK companies reach their full exporting potential by helping them to win, fulfil and get paid for international opportunities.’’  

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