Market Gaps and Risks in Developing Countries

The United Nations Conference on Trade and Development (UNCTAD) estimates that it will take between USD 5 to 7 trillion to achieve the Sustainable Development Goals (SDGs), with an investment gap of about USD 2.5 trillion in developing countries[1], leaving millions of people vulnerable.  This makes increasing financial flows to developing countries essential for building resilience and addressing the underlying causes of instability and underdevelopment.

Developing countries are often characterized by limited financial resources and political instability, leaving citizens vulnerable and investors facing heightened exposure to a variety of risks, including conflict and political crises. With the low capacity of governments in these countries to mitigate, manage, or absorb these risks, the challenge to attract the much-needed private sector investment to overcome chronic underdevelopment can be significant, as these high levels of political risk deter foreign investors from investing in these environments.

Private sector investments are critical for developing countries. They help strengthen an economy’s resilience to shocks, drive structural transformation, support the development of SMEs, and build the necessary infrastructure to deliver crucial services such as water, electricity, and telecommunications. However, the less developed a nation is, the more risk is associated with doing business there and the less attractive it is to foreign investors.

One critical reason for the lack of private investment in developing countries is the high levels of political risk. A study by the Multilateral Investment Guarantee Agency (MIGA) found that investors cite levels of political risk as the single most important constraint for investing in developing countries over the medium-term[2]. Political risk covers a range of perils, including political violence, war, breach of contract, and foreign currency inconvertibility. The economic impact of the COVID-19 pandemic is magnifying these political risks because of increasing unemployment and widening inequality, putting critical investments at risk and threatening to undo many years of socio-economic development. The key tool for investors to manage these political risks is through the use of Political Risk Insurance (PRI), and the demand for PRI has naturally increased following the instability caused by the global pandemic.

ICIEC’s Role in Mitigating Risk through Political Risk Insurance  

PRI is designed to meet the needs of investors and banks by providing protection against negative political impacts on otherwise sound commercial investments and is one of the many insurance products offered by ICIEC for its member countries. As foreign firms invest in OIC member countries they are often faced with new and unfamiliar environments with various risks and uncertainties. ICIEC insures against many of these risks, and its products allow firms to expand in higher-risk countries with otherwise attractive investment opportunities

ICIEC’s insurance products also mitigate the political risks involved in cross-border trade, providing support to exporters and banks, thus facilitating trade between member countries and the rest of the world. ICIEC also aims to facilitate and increase intra-OIC exports, encouraging businesses to take advantage of the diverse resources within the region.

ICIEC’s insurance is not only useful to firms seeking to access new markets but also for firms looking to increase exports and service delivery to their existing markets. Expansion in existing markets can also entail risks given the various economic, political, and social uncertainties, and the insurance ICIEC provides gives these firms the protection they need to expand their market share.

ICIEC’s risk mitigation services are especially crucial for developing countries, where market failures in regard to trade finance are known to be highest. ICIEC has provided much-needed PRI to its member countries that are classified as low Income and least developed through insuring various investments and trade transactions, and by supporting Issuing Banks to access international financial markets and build their trade finance capacity. Insuring transactions in developing countries ensures that businesses can execute their import or export transactions smoothly where foreign buyers or sellers might view them as high risk.  ICIEC also provides much-needed insurance for financing large development projects, particularly in high-risk investment countries where mobilizing large sources of finance can be risky without adequate mitigants. PRI insurance is part of a larger effort by ICIEC to support the development goals of its member countries, especially those that are least developed, and to contribute to the global achievement of the Sustainable Development Goals (SDGs).

ICIEC’s continued support for export transactions and investments in risky markets through PRI and risk mitigation ensures that developing nations have access to quality essential health care services, various employment opportunities, upgraded infrastructure for modern and sustainable energy services, and access to finance for SMEs. At the 10th annual Global Islamic Finance Awards (GIFA) that took place on September 14, 2020, ICIEC was awarded “The Global Islamic Export Credit and Political Risk Insurance Award for 2020”. This award marks the fourth time ICIEC has received this accolade since its introduction in 2016, with previous awards occurring in 2016, 2017, and 2018 respectively.

Supporting Developing Countries through COVID-19

ICIEC also stands ready to support member countries through the COVID-19 crisis, employing new measures to help manage short-term challenges, mitigate risks, and develop foundations for long-term growth. ICIEC’s COVID-19 response to date includes USD 150 million for insurance coverage as part of the Islamic Development Bank Group’s ‘Strategic Preparedness and Response Facility’ (SPRF). The SPRF is helping to curb the spread of the virus, build resilience in member countries response to outbreaks, and minimize the negative health and socio-economic impacts of the pandemic, especially on the most vulnerable populations. In addition to the SPRF, ICIEC has also collaborated with IsDB on the innovate USD 2 billion COVID-19 Guarantee Facility, designed to support the private sector.

The Islamic Solidarity Fund for Development (ISFD), the poverty alleviation arm of the IsDB Group, has teamed up with ICIEC to create a rapid COVID-19 response and resilience initiative focused on import dependent and developing member countries. The ‘ICIEC-ISFD COVID-19 Emergency Response Initiative’ (ICERI) is helping member countries meet essential import needs of pharmaceuticals, healthcare equipment, agricultural commodities, energy commodities, and other crucial materials and resources necessary to combat the negative impacts of the pandemic.

ICIEC’s full suite of PRI and COVID-19 solutions are available to exporters, importers, and financial institutions in its member countries to ensure that supply chains are intact, investments are protected, volatility is minimized, and that the health and livelihoods of citizens are protected.

[1] UNCTAD. (2014). ‘World Investment Report 2014’. https://unctad.org/system/files/official-document/wir2014_en.pdf.

[2] MIGA. (2011). ‘World Investment and Political Risk Report 2010’.

The Kingdom of Saudi Arabia assumed the G20 Presidency in December 2019 and set the theme of “Realizing Opportunities of the 21st Century for All” with a focus on: Empowering People, Safeguarding the Planet and Shaping New Frontiers.

The Islamic Development Bank Group (IsDBG) was invited by the Kingdom of Saudi Arabia’s G20 Presidency to participate as a regional multilateral organization in the 2020 G20 summit. As a member of the IsDB Group, the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) participated and contributed to the G20 throughout 2020.

ICIEC’s involvement focused on the Finance Track, especially the International Financial Architecture (IFA) Working Group. The Corporation supported the IsDB Group and the Saudi Presidency of the G20 by providing its technical expertise in investment and export credit insurance.

The 2020 G20 Summit was defined by the COVID-19 global pandemic and for the first time in the G20’s history, almost all events were held virtually. ICIEC had the privileged opportunity to attend alongside the world’s largest economies and international organizations as they gathered in March 2020, under the chairmanship of the President of the G20, Custodian of the Two Holy Mosques King Salman bin Abdulaziz Al Saud, to coordinate a global response to the pandemic.

In the Finance Track of the 2020 G20 summit, the pandemic’s negative effects on the global economy were addressed in the Framework Working Group on COVID-19 and Recovery. G20 Finance Ministers and Central Bank Governors developed an action plan to ensure that global economic activity continues to recover through financial policies, risk management, and the mobilization of funds.

As such, the IsDB Group implemented the comprehensive integrated Strategic Preparedness and Response Facility (SPRF) with an initial envelope of USD 2.3 billion. In addition to this initiative, in October 2020, ICIEC and IsDB jointly launched the innovative USD 2 billion COVID-19 Guarantee Facility to support the private sector to combat the pandemic. The Facility is being implemented jointly by IsDB and ICIEC to support COVID-19 hit industries in the OIC member countries and attract cross border foreign and local investments.

ICIEC’s CEO, Mr. Oussama Kaissi, stated that “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.”
In the Finance Track’s International Financial Architecture Working Group the G20 discusses the systems and institutions that provide and support international finance institutions (IMF, World Bank, regional development banks and institutions, investment and export credit agencies, and other specialized institutions). In late 2019, Br. Mohamud Khalif, Acting Director of the Underwriting Department at ICIEC, made a presentation on political risk insurance (PRI) and its role in supporting equity and debt investments in the IsDB’s member countries. The presentation spurred a detailed discussion on the subject of political risk insurance and its positive role in facilitating equity and debt investments in low-income countries.

Resulting from the PRI presentation and subsequent discussion, and in recognition of ICIEC’s expertise in Political Risk Insurance, the Corporation was mandated by the G20 Saudi Presidency to develop, in coordination with the MDBs, a Stock-Take on “Best Practices of MDBs and Specialized Multilateral Insurers in Political Risk Insurance for Equity Investments, Medium and Long-Term Debt Investments and other Insurance Solutions”. Br. Djamel Ghrib, former Advisor to ICIEC’s CEO, led the coordination of this exercise.

Political Risk Insurance’s catalyzing effect for private sector investment without causing debt levels to rise makes it a critical tool for advancing economic development in the Corporation’s member countries. ICIEC engaged organizations around the world through an online survey on the demand and supply sides of the PRI market for equity investments and debt investments. This study is a valuable resource for G20 Finance Ministers and Central Bank Governors to guide MDBs on the possibilities of expanding their insurance and guarantee offerings and enlarging their complementary role for equity.

IsDB Group and ICIEC participation proved valuable to the G20 process, as the leading Shariah compliant development finance group and the only Shariah compliant multilateral trade and investment insurer. The benefits of Islamic finance are increasingly recognized in global fora for their innovations and sustainability, particularly in times of crisis when conventional finance fails. For example, during the 2008-2009 financial crisis, Shariah-compliant equities performed far better than their conventional counterparts. Islamic finance is well positioned to finance the recovery from the pandemic, and it is to the benefit of the world that the G20 are starting to explore it. ICIEC had the privilege to spread awareness on Islamic finance at the G20.

ICIEC and IsDB Group’s involvement in the G20 process this year has been pivotal for the voice of Islamic finance to be at the G20 table. Since the IsDB Group is comprised of 57 member countries across four continents – touching the lives of 1 in 5 of the world’s population – IsDB and ICIEC stand ready to serve as advocates for Islamic finance in future G20 presidencies.

Introduction

The COVID-19 pandemic has presented our corporation, and governments around the world with unprecedented challenges. There is much to be learned from this period, as ICIEC strives to deliver on its mandate to facilitate trade, even under the most difficult circumstances. Going forward, it is important that we glean lessons from this difficult period, so that our corporation, and the economies of our member countries, are more resilient and adaptive to such economic shocks in the future. The pandemic has taught us about the importance of ICIEC’s support in periods of trade turmoil, the importance of increasing integration and cooperation among markets in the Global South, the need for prudent risk management in global trade, and the acceleration of the digital shift in worldwide commerce.

Protectionism

Over the course of the COVID-19 pandemic, the many decades of ever-increasing global integration have begun to reverse. The confidence that exporters and importers once had when doing business across borders had dimmed significantly in the early months of the pandemic. As it became clear that the virus would be with us for the foreseeable future, with no easy fix in sight, many nations turned more inward, particularly in regard to medical supplies and essential commodities, as 92 jurisdictions imposed a total of 215 export controls on medical supplies, while 62 jurisdictions had imposed a total of 62 export controls on food exports over the course of 2020.

This protectionism, and general unwillingness to trade essential goods, would hurt the least developed countries (LDCs) the most. These LDCs are often net food importers and do not manufacture the medical equipment necessary to support their needs while the pandemic limited their access to essential goods. As such, over the course of the pandemic-induced trade crunch, ICIEC’s role of facilitator for trade and investment was more important than ever before.

ICIEC’s export credit and investment insurance provides exporters and investors with the confidence to do business across borders. During 2020, our cover provided trust when it otherwise may not exist by providing trade partners with the comfort that the risk of non-payment was mitigated; such comfort is especially important in a time of economic uncertainty. We learned that our role is most critical when the trade atmosphere is characterized by barriers and reluctance to trade. The trade transactions facilitated by our insurance cover promoted development, kept the wheels of economic progress turning, and improved the livelihoods of those in our member countries that would otherwise not have access to the essential goods that they needed.

Trade is the engine of the international economy, and the key mechanism by which we are able to gain access to all of the goods we need. As such, ICIEC will continue to address protectionism and reluctance to trade as it continues to facilitate trade among businesses in the OIC and beyond.

The need for strategic south-south trade

With countries in the Global South struggling to access medical equipment and critical goods such as food from their trade partners in more developed countries, the pandemic highlighted the need for enhanced South-South trade. With nations in the Global North hesitating to sell essential goods to other nations, the pandemic showed that North-South trade could not always be relied upon, and that nations would have to diversify their supply chains in order to have consistent access to essential goods.

At ICIEC, promoting trade and investment within our member countries and within the OIC is among our top priorities. Although recent protectionist measures and the breakdown of supply chains presents serious concerns, the OIC region has the potential to insulate itself from such severe trade shocks going forward by working together. By relying on our partners in the OIC, and in the Global South more broadly, not only do we develop one another’s economies, but we also ensure that they are more resilient and self-sufficient. Over the course of the pandemic, ICIEC worked to deepen regional trade and investment ties, across the OIC. This commitment to deepening south-south and intra-OIC trade and investment led to ICIEC supporting USD 5.1 billion of intra-trade and intra-investment among OIC countries in 2020. Of that USD 5.1 billion, USD 4.5 billion supported intra-trade among OIC countries and USD 588 million supported intra-investment among OIC countries.

Economies in the OIC and the Global South more broadly are growing, increasingly diversified and better able to meet consumer demands than ever before. With increased trade integration among such countries, their resilience will greatly improve. For example, OIC member countries are vulnerable to distant trade partners suddenly refusing to trade certain goods. By trading with their partners in the OIC instead, OIC member countries can build more reliable trade relationships that are characterized by greater cultural, political and economic similarities. Importantly, such trade will spur further development in such countries, allowing them to produce more sophisticated goods, which they often rely on the Global North to supply. As our interests are aligned, the unity that comes from such alignment allows us to much better weather crises as our nations are able to lean on one another, thereby providing greater business continuity and protecting the economic livelihoods of our people in the process.

Cooperation and collaboration

COVID-19 has greatly damaged the global economy. Supply chains have come under pressure, trade has declined, and interest in cross-border investment has waned sharply. All of these factors have greatly hampered the speed of the world economy’s recovery. While some governments have successfully implemented policies to manage the pandemic and protect businesses and citizens, many have found it challenging to keep economic activity afloat while keeping their populace safe. The pandemic has taught us at ICIEC the importance of cooperation and collaboration in delivering health, safety, and economic security to citizens across the OIC. With a crisis such as COVID-19, that can grow exponentially, a coordinated response is crucial. As the presence of the virus expands, so too do the disastrous health and economic implications that come with it. As such, ICIEC has diligently worked with its partners to address the effects of the pandemic in the OIC.

As the multilateral export credit and investment insurance arm of the Islamic Development Bank (IsDB) Group representing 47 countries across the OIC, partnering with our sister institutions in the IsDB Group is a crucial way by which we work to overcome the pandemic. The COVID-19 pandemic decimating economies in the OIC countries has only strengthened intra-IsDB partnerships as our organizations work to protect the livelihoods of the citizenry across the OIC. As an example, ICIEC participated in the IsDB Group’s ‘Strategic  Preparedness and Response Program (SPRP)”, through which ICIEC’s contribution of USD 150 million in credit and political risk insurance is helping to facilitate imports of strategic commodities, protecting investments, and minimizing volatility in member countries. Recently, ICIEC has partnered with the poverty alleviation arm of the IsDB Group, the Islamic Solidarity Fund for Development (ISFD), to establish the ‘ICIEC-ISFD COVID Emergency Response Initiative’ (ICERI). The fund has structured a concessional all-in pricing mechanism to help preserve the flow of essential imports to OIC countries. Through our OIC partnerships, we have ensured that our citizenry has better access to essential goods, and that the business continues flowing, thus softening the blow that COVID-19 has had on our member country economies.

ICIEC not only has worked to mitigate the effects of COVID-19 by partnering with fellow IsDBG institutions, but also by partnering with fellow ECAs. By covering investments in coordination with partner ECAs, ICIEC supports the development of its member countries, thus helping them better insulate themselves from the effects of economic crises as these projects can provide employment, improved infrastructure, and a better quality of life for citizens.

Through close cooperation with national ECAs, ICIEC is able to provide them with additional insurance capacity through facultative and treaty re-insurance mechanisms. ICIEC offers technical assistance and supports national OIC ECAs to launch new insurance instruments by providing tailored co- and re-insurance support and facilitating smart partnerships with other development players. Through expanded trade coverage under coinsurance and reinsurance agreements, firms in member countries can access new markets, grow in existing markets and in the process generate employment and economic growth, giving a much-needed economic boost to ICIEC member countries.

Over the course of the pandemic, ICIEC has made efforts to form new partnerships, while strengthening existing ones. To this effect, ICIEC has signed four new MoUs, cooperating with national ECAs from both MCs and non-MCs. These were with Uzbekistan’s Uzbekinvest, Austria’s OeKB, the U.K.’s UKEF, and Spain’s CESCE. These MoUs provide the opportunity to enter co-insurance, reinsurance, or cooperation agreements, to engage in joint projects that support exports and investment, and to participate in capacity building and technical assistance programs. Such partnerships are crucial for supporting economic interest in the OIC region as they allow both OIC, as well as foreign actors to more safely and easily do business with OIC markets.

Overall, the COVID-19 pandemic has showed us that together we are stronger. ICIEC enacted this lesson by forging new partnerships and participating in strategic initiatives which would allow it to have a greater effect in mitigating the crisis than would otherwise be possible. This direction of increased integration and partnership is one which ICIEC will continue to pursue long after the COVID-19 crisis has been overcome.

Risk Management

ICIEC’s export credit and investment Takaful allows for customers to better manage the risk of doing business across borders, thereby providing them with the confidence to trade and invest with foreign actors. Its cover provides protection against negative political, economic and non-payment risks, on what would be otherwise attractive trade transactions and investments. Over the course of the pandemic, we have learned how crucial the risk mitigation we provide is in order to ensure business continuity. Our cover provides support to exporters, investors and financial institutions as it reduces the downside risk of transacting, thereby increasing these entities’ trust that they will receive the money they are owed. The large degree of demand for our support, despite a challenging economic environment, was exemplified through our USD 9.9 billion in business insured.

ICIEC insures against a range of commercial and political risks which would lead to non-payment, such as insolvency of the buyer, currency inconvertibility and transfer restrictions, contract frustration etc.. This carries a number of benefits for exporters, including balance sheet protection, increased international sales, improved access to working capital, and many others. Over the course of COVID-19, with insolvency rates high and rising, and with the risk of non-payment looming, such risk mitigation was essential. By covering such risks, ICIEC was able to support trade and investment in 34 member countries, while having its products utilized by a total of 764 entities.

By reducing the risk of international trade and investment transactions, ICIEC has been able to facilitate business that otherwise might not have taken place over the course of the pandemic. Of course, this benefit is of value to businesses and governments alike, especially while their economies are suffering against the backdrop of the COVID-19 pandemic. By spurring such business, ICIEC is able to ensure a better quality of life for the citizens in its member countries.

Shifting to a digital economy

The COVID-19 pandemic has greatly accelerated the digital transformation in business, with companies increasingly moving their services, products, and operations online in order to adapt to the new normal that is imposed by the pandemic. ICIEC has worked to support economies in the OIC as they make this digital shift.

As governments have sought to minimize infection risk by enforcing social distancing measures – and in some cases lockdowns – citizens and businesses have been relying on technology, to continue essential tasks, stay connected with each other and to do business across borders. Through ecommerce, companies and consumers have been able to avoid the risk of infection that exists when shopping at a brick-and-mortar storefront. To illustrate the extent of the digital revolution catalyzed by COVID-19, in Saudi Arabia, the value of the ecommerce market in 2020 amounted to USD 5.5 billion, as compared to USD 3 billion in 2017. Across the Middle East more broadly, the value of the ecommerce market was valued at USD 17.1 billion in 2020, as compared to USD 10.3 billion in 2017. Many corporations have transitioned to allow employees to work from home with videoconferencing platforms. These platforms have become a mainstay for businesses and households worldwide, allowing for a continuity in business and communication that would otherwise not be possible.

In order to take advantage of these technologies, the surrounding telecommunications infrastructure must be in place. ICIEC understands the importance of developing the technical infrastructure needed to facilitate the adoption of digital technologies by businesses across the OIC. In 2020, ICIEC provided nearly USD 586 million toward supporting telecommunications infrastructure, which is necessary to facilitate the digital shift. This included EUR 50 million in cover for a telecommunications project in Indonesia that was intended to expand access to 4G coverage from 40% of the population to 90%. The completion of this project ensured that more businesses and citizens located in rural areas had the necessary access to internet and data coverage in order to do business online. Through such support, Indonesian businesses had access to new international markets, while consumers had access to goods that may be challenging to find locally especially in the presence of the COVID-19 environment.  Additionally, such access to digital mediums and platforms gives both businesses and consumers greater access to large volumes of data, which helps to inform better decisions in both their selling and buying.

The digital shift during COVID-19 has not only been characterized by the marketplace moving online, but also by the increased importance of having access to large and accurate volumes of data. With COVID-19 restrictions imposed, consumers and businesses often cannot assess counterparty risk in-person. If you are a consumer, you cannot assure the quality of a product you are buying online from a manufacturer that may be thousands of miles away, while at the same time, if you are an investor, you cannot visit a host-country to see the business conditions firsthand. Digital platforms and databases can alleviate these risks as they are able to store large aggregations of datapoints that can help a business or consumer determine whether a transaction is risky. Such a function is especially important for bolstering the volume of lending, and thereby spurring development in most OIC countries. Many OIC countries struggle with insufficient credit information. Large and reliable volumes of credit data are instrumental for gaining an understanding of the state of business activity in any country. Inspired by the successful databases that ICIEC helped develop in cooperation with the Aman Union, ICIEC is in the process of developing an OIC Business Intelligence Center (OBIC) to provide comprehensive credit information for OIC member countries.

The OBIC will harness AI and blockchain technology in order to deliver credit information that is more accurate, convenient, predictive, and quickly accessible. The center will be a significant value-add to ICIEC’s mission of enhancing trade and investment across the OIC. The OBIC will provide meaningful benefits to member countries, including an increase in intra-OIC trade and investment volumes, along with greater financial inclusion for MSMEs and the unbanked citizens across the OIC. The OBIC is slated to boost private sector lending in the least developed OIC member states by an estimated USD 670 billion a year.

COVID-19 has dealt severe blows to the global economy. Supply chains collapsing, international trade sharply declining, and global investment appetites drying up have further exacerbated the challenges for recovery. Essential workers have been forced into unsafe conditions, while many others have found themselves unemployed. While some governments have successfully implemented policies to manage the pandemic and protect businesses, many countries have struggled to keep economic activity afloat. The pandemic has exposed deficiencies in both national economies and the global economy, while highlighting the importance of mutual coordination and strategic multilateral responses to ensure the health, safety, and economic security of citizens worldwide.

The economies of ICIEC’s Least Developed Member Countries (LDMCs) have been particularly affected by the pandemic. A primary driver of the affects being the striking drop in foreign trade. World trade had already slowed prior to the COVID-19 pandemic due to geopolitical tensions, regional conflicts, and trade wars, with both exporters and investors feeling cautious regarding trade in uncertain conditions. This slowing of trade advanced to a near halt when crisis mitigation efforts led to disruptions to economic activity such as closed borders and fractured supply chains, plummeting the value of the international trade in goods by 27% as of April 2020 according to UNCTAD figures.

ICIEC LDMCs have seen particularly poor economic situations, highlighted in UNCTAD data showing exports from regions well represented by ICIEC members such as the Middle East and South Asia, Africa, and Central Asia, declining by 40%, 36%, and 27% respectively as of April 2020. Greatly contributing to this decline has been the drop in oil prices, as trade in energy products declined by 39%, sharply contracting the economies of energy-export reliant countries. Meanwhile, imports in these regions dropped by 23%, 21%, and 18%, limiting access to crucial goods and supplies for citizens and businesses.

Partnering with IsDB peers

As the multilateral Export Credit Agency (ECA) representing 47 countries across the OIC, and a member of the Islamic Development Bank (IsDB), ICIEC is a key player in many IsDB Group initiatives and often partners with peer IsDB members for events, cooperative agreements, and a number of other strategic initiatives. The COVID-19 pandemic wreaking havoc in OIC countries has only further encouraged intra-IsDB partnerships in efforts to strengthen the organization’s response to the crisis.

ICIEC’s immediate response to the pandemic was to participate in IsDB Group’s ‘Strategic Response Preparedness Fund”, where the Corporation’s contribution of $150 million in credit and political risk insurance is helping to sustain imports of strategic commodities, protect investments, and minimize volatility in Member Countries.

ICIEC also partnered with the Islamic Centre for Development of Trade (ICDT) to co-host a webinar to disseminate information from OIC ECAs regarding their local situations and their institutions approach and actions in response to COVID-19.

More recently, ICIEC has partnered with the poverty alleviation arm of the IsDB Group, the Islamic Solidarity Fund for Development (ISFD), to establish the ‘ICIEC-ISFD Covid Emergency Response Initiative’ (ICERI). The fund has structured a concessional all-in pricing mechanism to help preserve the flow of essential imports to OIC countries.

Partnering with National ECAs

Another essential means by which ICIEC is catalyzing trade and investment in a sluggish global market, strengthening coverage for struggling businesses, and facilitating economic recovery from the pandemic in MCs is through strategic partnerships with national ECAs. ICIEC has long pursued partnerships to meet the UN Social Development Goal (SDG) number 17, the purpose of which is to foster partnerships that help achieve the goals. To achieve this goal prior to the pandemic, ICIEC created agreements with banks, investors, corporates, and national ECAs that encourage investment and exports in unlikely and risky markets, having as of 2019 secured 82 partnerships to insure USD8.4 billion in exports and USD1.6 billion in national ECA business.

Through partnerships and agreements ICIEC’s insurance products reduce export risks and provide financial space to large firms, as well as small and medium enterprises (SMEs), to obtain access to working capital while minimizing lending risk. For SMEs, financial risk of lending is significantly reduced, and access to much needed investment capital allows the SME to expand and grow into new markets. Furthermore, by underwriting investments in strategic sectors and projects in coordination with national ECAs, ICIEC supports the development agendas of its member countries. The investment projects often provide employment, enhanced, modern and efficient infrastructure, and a better quality of life for citizens.

Through close cooperation with national ECAs, ICIEC is able to provide them with additional insurance capacity through facultative and treaty re-insurance mechanisms. ICIEC offers technical assistance and supports national OIC ECAs to launch new insurance instruments by providing tailored co- and re-insurance support and facilitating smart partnerships with other development players. Through expanded trade coverage under coinsurance and reinsurance agreements, firms in member countries can access new markets, grow in existing markets and in the process generate employment and economic growth, giving a much-needed economic boost to ICIEC member countries.

The pre-pandemic partnership between ICIEC and Turk Eximbank exemplifies the benefits of ECA cooperation. In 2019, ICIEC and Turk Eximbank signed a Memorandum of Understanding (MoU) which allowed risk sharing between institutions, credit enhancement of Turk Eximbank’s financing and borrowing, increased information sharing, joint marketing efforts, and cross-training. The partnership between ECAs has been highly valuable for Turkish businesses, allowing them greater access to transactions with ICIECs African MCs. Furthermore, the partnership is providing long-term economic prospects for Turkey’s growth through SMEs by enhancing loan coverage, exemplified in ICIECs EUR 180m cover for a loan to Turk Eximbank which the bank is using to expand the SME sector.

Forging New Relationships in Response to COVID-19

Understanding the value of partnerships in expanding trade, strengthening coverage, and growing economies, ICIEC has made efforts to forge new partnerships, in addition to strengthening existing ones, throughout the pandemic. ICIEC has signed a number of new MoUs, cooperating with national ECAs from both MCs and non-MCs. The Corporation’s CEO, Mr. Oussama Kaissi, addressed the importance of fostering partnerships during the pandemic, stating:

“During this time of economic uncertainty, ICIEC has placed high importance on building relationships with peer ECAs. Despite, or perhaps due to the troubling times we are living in, demand is growing for guarantees in OIC markets where credit and political risks pose a greater challenge. By working jointly, the Corporation and its partners can increase the reach and depth of service offerings, therefore enabling all parties to provide the best support possible to our member countries”.

Four MoUs have been signed by ICIEC the pandemic began with non-MC national ECAs, including Uzbekistan’s Uzbekinvest, Austria’s OeKB, the U.K.’s UKEF, and Spain’s CESCE. The MoUs provide benefits to the agreeing entities such as the opportunity to enter co-insurance, reinsurance, or cooperation agreements, to engage in strategic joint projects that support exports and investment, and to participate in capacity building and technical assistance programs. Of the opportunity to partner with European ECAs during the pandemic, Mr. Kaissi proclaimed “The partnerships are a critical move to demonstrate the dynamic and growing market potential that exists in the OIC despite perceived risk, thus incentivizing more western countries to consider the OIC region for foreign direct investment and trade.” Much like the pre-pandemic partnerships, these partnership advance both parties’ respective operational mandates of providing insurance support for trade and investments and will foster jobs and projects to boost the economies of ICIEC member countries.

While the world is in a state of uncertainty, ICIEC is using successfully tested methods to help stabilize OIC states and grow their economic prospects. There is ample room for future partnerships between ICIEC and national ECAs, and the success of these partnerships will be critical to economic recovery following the pandemic. While the longevity of the crisis is a great unknown, and further issues could arise that change the economic landscape once again, ICIEC will continue to seek intuitive solutions and work with strategic partners to protect and develop the economies of the OIC states.

The World Goes Digital

The COVID-19 pandemic has caused social and economic disruption across the globe, sparing no country or industry from its effects. Pandemics and infectious disease are now considered the top perceived risk worldwide and it’s reported that COVID-19 has accelerated the impact of existing risks, such as geopolitical instability and cybersecurity. What would typically have unfolded across many years is now taking place over just a few months. Risks are not the only trend the pandemic has accelerated, however. The digital transformation that has been marching forward over the past two decades has turned into a sprint since the onslaught of the crisis.

As governments around the world have responded to the pandemic risk by enforcing strict social distancing measures, and in some cases full-blown lockdowns, citizens have been relying heavily on technology to continue essential tasks and stay connected with each other. A number of important in-person political and business events have been shifted to virtual mediums, such as the global G20 summit. Many corporations have transitioned to allow employees to work from with popular videoconferencing platform, Zoom, becoming a staple for corporates and households worldwide. Its revenue has tripled in 2020, proving that technology is being called upon to meet market needs more than ever before.

Supporting Businesses through Digital Means

For many businesses, one consequence of the COVID-19 crisis has been a dramatic uptick in their need to use digital technologies that help reduce face-to-face interactions and safeguard customer and employee health and well-being. It’s been reported that businesses in the retail sector are far more likely to survive the economic challenges posed by the pandemic if they welcome the technological advancements. These digital technologies include consumer-facing applications such as grocery and food delivery services, business-to-business e-commerce applications, and videoconferencing applications.

These technological advancements also allow businesses to expand their outreach to more remote markets and allows consumers in those markets increased access to goods without having to travel to the nearest city. Digital information systems can also help businesses to better organize data to track revenue and expenses, and to better understand their customers to make more informed predictions for trends in the market.

ICIEC understands the need to support Member Countries in developing the technical infrastructure to support these technologies and the need to support businesses looking to finance digital technologies in response to the crisis. So far this year, the corporation has provided nearly USD 419 million toward supporting infrastructure and USD 3.9 billion toward energy support, including EUR 50 million in cover for a telecommunications project in Indonesia that expanded access of 4G coverage from 40% of the population to 90%. The completion of this project ensures that more citizens living in rural areas have increased access to more reliable internet and data coverage, enabling them better access to online information, digital marketplaces and financial services with less latency, driving the country to shift to a more digital economy.

Advancements in Fintech

The benefits of rapid technology advancement also extend to the financial sector. Banks have traditionally had limited knowledge of their client transactions, with insurers such as ICIEC receiving a fraction of that knowledge. This led to an incomplete and outdated view of insurer’s performing assets, and ultimately an inability to predict when a transaction was likely to go awry. 

For the past decade, advancements in financial digital technology (fintech) have been challenging the traditional boundaries of banking. Fintech is changing the way banks collect and store credit information, allowing insurers to be layered in when reporting significant data. In addition to increasing the efficiency of capturing and organizing data, many financial institutions, including insurers, are utilising artificial intelligence (AI) to make advanced predictions on client behaviour and transaction success. Fintech is also allowing clients to conduct their business remotely and track their accounts on-demand, providing more efficient and transparent customer service.

Though advancements in fintech have come a long way, many banks, particularly in low income and least developed countries, are still deficient in investing in and utilising these technologies – setting them back in comparison to the global trends. In addition to supporting Member Countries in implementing technological infrastructure, ICIEC recognizes that there is always room for improvement in our own information technology and has taken on a number of initiatives to mitigate this.

ICIEC’s Digital Progress

Most OIC countries suffer from insufficient credit information. Large and reliable volumes of credit data are instrumental for a holistic picture of business activity in any country. Inspired by the successful databases that ICIEC helped develop in cooperation with the Aman Union, ICIEC is in the process of setting up an OIC Business Intelligence Center (OBIC) to provide comprehensive credit information for OIC member countries.

The OBIC will provide meaningful benefits to Member Countries, including an increase in intra-OIC trade and investment volumes, along with greater financial inclusion for MSMEs and the unbanked citizens across the OIC. The OBIC is slated to boost private sector lending in the least developed OIC member states by an estimated USD 670 billion a year.

The OBIC will make use of advanced technology as it will employ AI solutions to deliver credit information and predictions, with integrated blockchain technology facilitating greater accuracy, convenience, and speed. The center will be a significant value-add to ICIEC’s mission of enhancing trade and investment across the OIC. The launch of the center is slated for late 2020.

In addition to the OBIC, ICIEC has begun the implementation process for a new Takaful System, aimed at improving the institutional performance, capacity and responsiveness of the Corporation through the digitization of many of ICIEC’s business processes. ICIEC expects that its new system will play a crucial role in fulfilling the goal to increase both the volume of intra-OIC trade and the volume of investment into Member Countries, in line with its 10- Year Strategic Plan. Additionally, the Takaful System will ensure that Takaful products are both easier to access and easier to use. The system is predicted to improve ICIEC’s efficiency and customer service experience by way of shorter processing times and improved information availability, making ICIEC’s products more attractive to prospective customers. The implementation of the Takaful system began in April of 2019 and is anticipated to be fully functional by late 2020.

Lastly, an often overlooked, but incredibly important aspect of advancement in fintech is the awareness, knowledge, and understanding of its impact. It’s important for insurance practitioners and finance professionals to be educated on the role fintech can play in their business. ICIEC plays a major role in the Aman Union Academy, a flagship professional development program for the Corporation. The Academy offers a course on the implications of digitalisation in terms of fintech, insurance technology (insuretech), and on how to best structure transactions using digital mediums.

Climate change is one of the defining challenges of our times and represents one of the most complex issues that the international community has ever faced. The physical impacts of climate change are already having profound and often devastating effects on societies around the world by adding significant stress to food production, water supplies, health services, and economic growth. Climate change will create numerous problems for developing countries and vulnerable communities in particular, as it will disproportionately affect the communities that contributed least to the problem, threatening to erase years of significant development gains made in these countries. Our Member Countries are no less susceptible to these diverse challenges.

With 47 Member Countries spread throughout the OIC region, and with the geographical coverage of our Member Countries spanning from South America to Asia and from Eurasia to Sub-Saharan Africa, our Member Countries are located in some of the world’s most climate vulnerable regions. ICIEC is committed to assisting each Member Country in their development goals, and an important part of this assistance is to help mitigate and adapt to the threats that climate change poses for its Member Countries. ICIEC understands that failing to mitigate and adapt to the effects of a warming planet and increasingly extreme weather patterns could undermine gains made to alleviate poverty, improve health, promote education, and boost prosperity across the Member Countries.

Stabilizing warming to 2 degrees Celsius or less is critical and will require both significant policy support and financial investments. ICIEC is in a unique position to help close the financing gap for climate-related projects and investments in its Member Countries, especially considering that many of the Member Countries might struggle to attract capital for such investments on their own. ICIEC has proven it has the capacity to de-risk and crowd-in additional investment for climate-resilient projects, and it is working consistently to improve its capacity as a climate finance provider. The Corporation has increasingly provided support for projects that strengthen its Member Countries against the threat of global warming, helping them both prepare for and adapt to the many challenges of a warming planet, and reduce vulnerability and the costs resulting from the impacts of climate change.

Notable ICIEC Climate Projects and Investments

While ICIEC still provides insurance for fossil fuel transactions due to the centrality of fossil fuels to its Member Countries’ economies, the Corporation also plays a catalytic role in facilitating renewable energy projects. ICIEC provides support for strategic investments in renewable energy, assisting with the import of technologies and their use in national infrastructure projects, like the creation of solar energy systems and wind farms. Some of the high-profile renewable energy projects that ICIEC has supported in the past include the world’s largest solar parks in Egypt, wind-power projects in Turkey, and coast protection works in Benin to protect the country from the effects of sea-level rise.

More recently in Q3 of 2020, ICIEC provided insurance cover for the construction of a new energy-efficient football stadium in the Republic of Senegal. This EUR 143,480,177 infrastructure project includes the construction of a 50,000 seat capacity football stadium and two training grounds with a system to produce and store solar energy to cover all the energy requirements. The development of this project will bring many economic benefits to the local and regional communities while still taking into consideration the climate change risks and opportunities at every step. This project is an example of how ICIEC can leverage its products to effectively crowd-in private sector capital for climate-related projects, and it represents a critical step towards Member Countries becoming more climate-resilient and energy-efficient.

Q3 results show that ICIEC has contributed over USD 418 million toward infrastructure and over USD 3.9 billion toward energy support this year alone, demonstrating the enormous capacity and potential that ICIEC has for becoming a leader in financing ‘green’ projects and infrastructure for decades to come. ICIEC understands that without capital being directed towards climate resilience, the projected perils of climate change will become a grim reality, not only for ICIEC’s Member Countries but for the world at large.

Looking Ahead

It appears difficult to remain focused on the challenges of climate change as the world still grapples with its response to the COVID-19 pandemic, but we cannot lose sight of our climate goals, even during these uncertain and unprecedented times. ICIEC will continue to offer strong leadership in climate finance and remain a reliable partner by turning uncertainties into manageable risks. In this complex and challenging environment, each country forges a path towards sustainable development specific to its context, but building climate-resilience must be a part of every country’s path forward. As we look ahead, especially in light of the current global pandemic, we must turn our attention to how we can build back better to create climate-resilient sustainable development for our Member Countries. There is great potential to be realized in how the OIC countries respond to climate change, which if harnessed properly will lead to economic and social prosperity for the people living within our OIC Member Countries. ICIEC will continue to work towards achieving this potential.

Risks are unavoidable in almost any business activity but are particularly important in navigating global trade, banking, and insurance. Credit risks, political risks, and environmental risks must be consistently monitored and can quickly become major deterrents for banks, businesses, and foreign investors when considering potential transactions – leaving significant market gaps for countries and businesses that are viewed as being particularly risky. Providing risk mitigation solutions for OIC countries is the driving force behind ICIEC’s formation over 25 years ago.

As a multilateral investment and export credit insurance provider for over 47 Member Countries, ICIEC understands the vital importance of tracking risks to stay ahead of the trends and maintain stable trade flow. The onslaught of the global pandemic this year has caused major challenges to economic activity in just a few months. These unprecedented effects have highlighted the importance of ICIEC’s efforts to analyze and measure perceived risk – especially when planning for long-term recovery.

The stark contrast between the World Economic Forum’s Global Risk Report from January of this year and  AXA’s Future Risks Report 2020, published more recently in October demonstrates the extraordinary change in risk priorities across the globe. In only a matter of months, the number one risk perceived by both experts and the general public has shifted from climate change and extreme weather conditions to public health. This comes as no surprise considering the COVID-19 virus, and the economic and social damage it brings, has shocked and challenged governments, citizens, and businesses across the world.

COVID-19 required urgent adaptations to mitigate the negative implications of the virus from both a health and economic standpoint. This rapid response automatically heightened awareness and the anxieties surrounding pandemics and infectious diseases. Previously considered a distant and unlikely risk, pandemics are now being viewed as an immediate and deadly threat to the entire global population. Leading experts warn that infectious disease is the risk presenting the greatest threat to society over the next five to ten years.

Encouragingly, these same experts believe that governments are now more prepared to tackle pandemics and infectious diseases.. Although the pandemic is unprecedented, most governments around the world have acted quickly and decisively when employing initiatives that address the immediate impacts of COVID-19. That being said, it remains to be seen how well the same governments will be able to address the long-term challenges that may follow in the coming months.

The Islamic Development Bank Group devised the ‘Strategic Preparedness and Response Facility’, which provided US$2.3 billion to mitigate the negative health and socio-economic impact of the pandemic in OIC countries – including USD 150 million for ICIEC insurance coverage.

With the increased perception of public health and infectious disease comes a decrease in the perception of climate change as an important and time sensitive risk. While it remains a high priority for most countries and experts, there is some worry that this longer-term threat will become overshadowed by the short-term challenges surrounding the pandemic. ICIEC recognizes the importance of addressing climate change within member countries and is dedicated to maintaining focus on environmental sustainability while simultaneously responding to more immediate challenges in response to the pandemic.

Top 5 Emerging Risks:

1. Pandemics and infectious diseases
2. Climate change
3. Cybersecurity risks
4. Geopolitical instability
5. Social discontent and local conflicts

(AXA, Future Risk Report 2020)

In terms of perceived risks, the pandemic isn’t considered the greatest threat solely because of the risk to public health. The crisis also further exacerbates the trends that were already in place, such as public debt, cybersecurity, geopolitical tensions, unemployment, and inequality. Due to the speed and severity of the pandemic, what would typically have unfolded over many years is instead taking place over just a few months. This acceleration is causing larger and more immediate disruptions, exemplifying that risks are complex, interconnected and interdependent – that there is increasing potential for risks to influence each other in unpredictable ways.

What does this mean for trade credit insurance? Trade credit insurance will remain essential in supporting trade flows and supply chains that are crucial for economic recovery, providing security to businesses and investors. Insurance providers can expect a sharp increase in market demand and should be open to supporting businesses in mitigating these risks. However, they should also exercise caution, as claims are expected to increase alongside this market demand and the long-term implications of the pandemic are still ultimately unknown.

ICIEC has partnered with the poverty alleviation arm of the IsDB Group, the Islamic Solidarity Fund for Development (ISFD), for the ‘ICIEC-ISFD Covid-19 Emergency Response Initiative’ (ICERI) in response to COVID-19. The fund has structured a concessional all-in pricing mechanism to help preserve the flow of essential imports to OIC countries.

In an increasingly uncertain world with more complex and connected risks, ICIEC believes that insurance solutions can offer protection, expertise, and clarity, contributing to businesses’ peace of mind and collective member country recovery.

Considering the challenges posed this year, ICIEC has maintained a strong performed so far in 2020 – reporting 7.3 billion USD in business insured at the end of the third quarter. Down only 4% from 2019’s robust results.

References:

• AXA, Future Risk Report 2020: https://www.axa.com/en/press/publications/future-risks-report-2020
• World Economic Forum, Global Risk Report 2020: http://www3.weforum.org/docs/WEF_Global_Risk_Report_2020.pdf

The COVID-19 pandemic has created a devastating global health crisis, leaving no country or citizen spared from the ensuing economic and social repercussions. The necessary lockdown measures employed by governments have greatly impacted global supply chains and trade flows, leaving import-dependent countries vulnerable. The pandemic has also exacerbated the risk environment and stymied investment, particular for countries with already fragile economies.

In an effort to combat the challenges posed to select member countries, ICIEC and the Islamic Solidarity Fund for Development (ISFD), the poverty alleviation arm of the IsDB Group, have collaborated to create a rapid COVID-19 response and resilience initiative which is prioritized for certain IsDB member countries to meet their import needs of medicine, medical equipment, food supplies and other essential commodities. Eligible countries were determined by their level of import dependence.

ISFD has allocated a grant of up to USD 400 million to ICIEC, which is being utilized to subsidize the premium on the insurance cover to facilitate the procurement of medicine, medical equipment, food supplies and other essential commodities to eligible countries.

IsDB Group President and Chairman of the ISFD Board of Directors, Dr. Bandar M. H. Hajjar, addressed the need for IsDB Group support in his statement. “In the face of the rising protectionism that has been further fueled by the pandemic as well as the associated economic cost for our member countries, IsDB Group recognizes the need to mobilize relief for OIC countries that are heavily reliant on imports, especially for essential commodities such as pharmaceuticals and food supplies. ISFD’s contributions to the ICERI are an effort to work jointly with ICIEC to expand capacity for maintaining these vital trade and investment flows.”

In a separate statement, ICIEC CEO, Oussama KAISSI, echoed the sentiment, “ICIEC is committed to supporting the OIC member countries in their recovery from the Covid-19 Pandemic. The Corporation is pleased to collaborate with ISFD, utilizing IsDB Group synergy to enhance both organizations’ capacity to support relief efforts. The ICERI is prioritizing transactions for urgent imports, ensuring citizens have access to critical commodities through these challenging times.”

The ICERI will provide insurance support for the procurement of two urgent needs:

1. Medical equipment, pharmaceutical products and other related items that are needed for the fight against the COVID-19. Including but not limited to, protective gear, testing kits, sanitizers, ventilators etc.
2. Essential commodity items, including essential food supplies and energy commodities

An implementation team composed of representatives of ISFD and ICIEC was established to set the procedures for the ISFD Grant allocation to eligible transactions. The operational tasks of insuring and monitoring the transactions is being undertaken by ICIEC in its regular course of business. ICIEC is committed to prioritizing the transactions related to combating COVID-19 and is trying to augment the impact of ISFD’s grant as much as possible. Most of the transactions funded through the ICERI are being led by the eligible member countries’ Governors and Ministries of Health, as they have close insight on the most urgent needs for their respective countries.

ICERI is meant to target two of the IsDB Group’s ‘3 R’s’:

• R1: Respond through immediate disbursing actions to assist Member Countries’ in acting quickly to mitigate the adverse impact of COVID-19
• R2: Restore via medium term actions to strengthen health infrastructure and economic systems to overcome the pandemic’s peak.

Projects

A number of strategic projects have already been supported through the ICERI, including ICIEC’s USD 9 million in LC confirmation insurance to BMCE Bank of Africa Morocco to secure urgent imports of strategic commodities to Senegal. The COVID-19 pandemic, combined with flooding, has caused a serious supply chain disturbance and economic distress in the country.

ICIEC extended USD 5.5 million in coverage to the State Bank of India’s Singapore branch through the ICERI for the critical importation of wheat to address food security for the citizens of Bangladesh.

To address Tunisia’s energy security, ICIEC provided USD 4.75 million in cover to European-based bank, CHAABI, and USD 19 million in coverage to BMCE Bank of Africa Morocco through the ICERI. A Bank Master Policy was provided for both of these transactions to support the import of fuel to Tunisia’s state-owned electricity production, transport and distribution centre, Société Tunisienne de l’Electricité et du Gaz (STEG).

Through the ICERI, ICIEC has also extended USD 30 million in cover with a Bank Master Policy with Kuwait Finance House. The financing is being used by Egypt’s Ministry of Finance to import crude oil and refined petroleum.

Since the inception of the Islamic finance industry in the 1970s, there has been steady growth in the demand for Shariah-compliant products and services. The industry’s total assets reached a high of USD 2.5 trillion globally in 2019. But given the challenges posed by the COVID-19 pandemic, the volatility in oil prices and the uncertain macroeconomic environment, the Islamic finance industry faces unprecedented challenge to its development in the coming months and perhaps even expanding over the next few years.

While it is known that the COVID-19 pandemic will have implications across all financial markets, the effects on the Islamic finance market have the potential to be more severe and create deeper impact. This is mainly due to the fact that the current crisis is affecting small and medium enterprises (SMEs) as well as low income and minimum wage individuals particularly hard. In comparison to conventional banking, Islamic finance has much larger exposure to SMEs, microfinance, and retail lending, exposing them to greater risk of client default or increased claims.

However, Islamic finance has proven to be resilient due to the nature of its offerings and instruments. Islamic banks were able to demonstrate this resiliency in surviving the 2008 global financial crisis with minimal impact. The main reason Islamic financial institutions weren’t affected to the same degree as conventional banks is that Islamic banks provide interest free services and prohibit executing unethical and high-risk transactions. The Islamic banking system also encourages transparency between institutions and their customers. In addition, all cash flows are attached to real assets in the economy — this means that it’s very difficult to create unsustainable levels of debt, as can be seen with conventional banking where debt can be created without much of a limit. These principles insulated Islamic finance institutions from the risk of bankruptcy which many conventional banks faced during the last crisis.

With that said, the future of Islamic finance is ultimately unknown. There is ample room for growth and for Islamic banking solutions to become critical in aiding the recovery following the crisis, but there are many challenges that must also be faced to witness this potential growth. The ultimate outlook will depend on the longevity and severity of the COVID-19 pandemic and its resulting effects – particularly in OIC countries.

Responding to COVID-19 through Islamic Finance

As global governments and development institutions respond to the COVID-19 pandemic, a diverse, dynamic and inclusive set of stakeholders must be engaged to address the enormous challenge of providing support. The UN Secretary-General’s Call for Solidarity outlines three components: tackling the health emergency; focusing on social impact in the response and recovery; and helping countries recover more sustainably for the long term. ICIEC and the Islamic Development Bank (IsDB) mirror these components in their commitment to the 3 Rs – Respond, Restore, and Restart.

Solutions like social distancing policies and government enforced lockdowns are flattening the infection curve at the cost of steepening the recession that is leading the financial system into potential crisis. Economic shutdown has created issues for both supply and demand, creating shocks that reverberate through the global economy. Industries across most sectors have had to cut down production, resulting in job losses. Due to this, both business and civilians are facing significant cash flow constraints.

Islamic finance is an interest free system that is responsible, ethical, sustainable and shock-preserving, thus positioning it well to be part of the COVID-19 response. Islamic financial institutions offer a range of financing instruments that can positively impact every group from SMEs in least developed countries to policy makers in highly developed countries. In April of 2020, the United Nations Development Program (UNDP) highlighted several Shariah-compliant financing instruments that could be part of the integrated pandemic response plan to help countries prepare, respond, and recover from the pandemic.

In the short-term recovery, there is potential for Zakat to be an important component of national and NGO emergency support programmes. Donors typically require that Zakat be disbursed within one year of being given. The focus on immediate benefit is well suited for a crisis response and Zakat donors support both the economically insecure and people living in poverty, an area of increased attention in the pandemic. Zakat donors also often give cash transfers, which can be especially important for liquidity in emergencies.

For the response and recovery in the medium or on-going term, the financing of equipment, resources, and other sources of livelihood through trade finance is a key mechanism in which Islamic banks and financial institutions can support recovery. Social Sukuk and impact investing – private investment prioritizing businesses with social impact – can play a central role in the recovery. Aligning financing activities with the SDGs is another significant opportunity for Islamic banks. Takaful trade credit insurance solutions (as provided by ICIEC) are a critical offering to keep trade flowing.

For long-term recovery and resilience, Waqf endowments can be important contributors to long-term resilience. With Waqf, financial or non-financial assets such as land or buildings are permanently dedicated to social purposes. This can be an important way for stakeholders to contribute to social infrastructure that serves the SDGs and recovery over the longer term. SDG-aligned Sukuk can also be an important source of long-term capital for governments and companies. Unlike conventional bonds which are essentially debt, the underlying asset in Sukuk may be an alternative as Sukuk grants partial asset ownership. ICIEC CEO Oussama Kaissi spoke on ICIEC’s role in enhancing new entrants to the Sovereign Sukuk Origination Market.

“By accessing Sukuk, companies can increase their investor base through stronger ratings, raise loan tenors and decrease borrowing costs,” he claims. ICIEC’s Sovereign Sukuk Insurance Policy provides credit enhancement in transactions involving sovereign and sub-sovereign entities. It insures the Sukuk investor against default on Sukuk issued by sovereign entities of member countries.

Looking to the Future

COVID-19 is shifting the dynamics in the industry. The necessary public health measures have created the need for businesses to change their course of action and overall outlook for the future. Beyond the immediate economic implications, COVID-19 is creating new opportunities by forcing the Islamic finance industry to adapt to rapidly evolving market conditions and speeding up the pace of emerging trends in socially responsible investing, sustainability, and digitalization to mitigate the impact of the outbreak.

Even before the COVID-19 pandemic, Islamic banks have been trying to catch up with conventional banking counterparts by stepping up investment in digitalization to reduce operating expenses, boost revenue and automate internal processes. As financial institutions around the globe implement remote work policies and homebound safety measures, there has been a considerable increase in digital banking transactions and activity, which in turn is providing added force to drive the digital transformation push across Islamic banks. This includes increased automation of processes to minimize the need for human contact as well as digital structures for liquidity management.

Against the backdrop of the COVID-19 pandemic, fintech will continue to play a significant role in the industry’s development in the coming years by improving access to financial services and transforming Islamic social finance. Fintech is an area in which IsDB and ICIEC have already made significant strides in developing. The OIC Business Intelligence Center (OBIC, an initiative which aims to provide accessible and affordable business information and credit data on businesses across the OIC) has been approved and is currently underway.

There are other challenges Islamic banking must face in order to boost growth. Islamic finance is still lacking a global set of standards that is accepted by all stakeholders. In an effort to produce a solution, the United Arab Emirates Ministry of Finance, the Islamic Development Bank, and the Dubai Islamic Economy Development Centre (DIEDC) have recently established a partnership to develop an international legislative framework for Islamic finance. The goal of the framework is to accelerate the growth of the Islamic finance industry and reduce discrepancies around the globe. The partnership will hopefully lead to the standardization of Sukuk by factoring in the requirements of regulators, Sukuk issuers, and investors. When Sukuk becomes comparable to conventional instruments, from a cost and effort perspective, Sukuk is believed to find a more prominent place in the global financial ecosystem.

Prior to the pandemic, the Islamic finance market was poised for strong performance in 2020, but COVID-19 and lower oil prices changed the outlook. Despite the challenging conditions, rating agency Standard & Poor’s has projected that the Islamic finance industry will still show low to mid-single-digit growth in 2020-2021 after the 11.4% growth in 2019 led by strong performance in the Sukuk market. The global rating agency also predicts that the volume of issuance will reach $100 billion in 2020 compared with $162 billion in 2019. S&P claims that coordination between different stakeholders and institutions is key to the industry leveraging these opportunities for sustainable growth. In other words, teamwork is essential. As a leader in multilateral Shariah-compliant insurance solutions, ICIEC stands ready to unite with relevant partners and grow the Islamic finance industry.

With 47 Member Countries spread throughout the OIC region, ICIEC works with nations at various levels of development. Despite great general progress in OIC countries, some of the Corporation’s Member Countries are still considered low income and least developed, while others have been experiencing robust economic growth and fulfilling their development agendas. No matter the country’s Human Development ranking, ICIEC is committed to assisting each Member Country in their development goals.

ICIEC’s development role is to provide support and facilitate the achievement of development agendas within our Member Countries, with the ultimate goal of facilitating trade and meeting national objectives. ICIEC works to fulfill this role by offering insurance solutions to mitigate foreign direct investment and trade-related political and commercial risks and protect businesses from the negative impacts these risks can pose.

Measuring the impact of ICIEC’s footprint on development in the real economy is extremely important in determining our level of success in achieving our vision of promoting sustainable economic development within Member Countries. Employing the United Nations Sustainable Development Goals (SDGs) as important signposts to shape strategy, ICIEC has made a commitment to document and assess the impact of our activities and thereby promote transparency with the Corporation’s beneficiaries – namely Member Country citizens.

In order to facilitate this transparency, each year ICIEC releases an Annual Development Effectiveness Report (ADER). The ADER provides a complete overview of the Corporation’s efforts toward development – including ICIEC’s total contribution to individual sectors, presenting case studies to explain the impact of specific projects, and discussing the outlook for the upcoming year. ICIEC is pleased to announce the release of the 2019 ADER, which details last year’s most impactful projects and the contribution to sustainable development that ICIEC has made in member countries last year.

In addition to the annual release of the ADER, the Corporation has recently begun work to develop an impact webpage as an addition to the Corporation’s website. The page will explain how ICIEC measures its development impact and its contribution to the SDGs, as well as provide timely updates on the most impactful projects supported.

To give just one example of ICIEC’s development impact, earlier this year, the Corporation provided EUR 120 million cover against the non-payment of a loan facility provided to the Government of Côte d’Ivoire for the renovation of a school and the construction of 22 additional classrooms. This project is part of a social program that the Ivory Coast’s Government is implementing to fight poverty and illiteracy, addressing SDGs 1 and 4 – zero poverty and quality education. The project will enhance the school’s capacity and enable more children access to education – allowing them a greater chance at employment and prosperity later in their lives.