We caught up with Mr Mohamud Khalif, ICIEC’s Senior Manager for Underwriting, to shed more light on ICIEC’s core business function, emerging insurance trends, ICIEC’s role in the Berne Union and the department’s future goals.
Q: Can you please tell us about yourself and, more broadly, your role at ICIEC?
MK: My official title is Senior Manager, and I have been with ICIEC for close to 19 years. I joined the Corporation as a young professional, and in the beginning, I also did some work within the Islamic Development Bank (IsDB) itself. Over the years, I’ve had the opportunity to work in several different positions with ICIEC, gaining experience across various functions, including conducting country risk assessments as part of the Risk Management department at the time. Currently, I head the Corporation’s Underwriting department, a team of 15 people in total, and I also work very closely with the departments of Business Development, Risk Management, Reinsurance, and Legal. The Underwriting department is divided into two teams: one team deals with underwriting activities for commercial risk transactions, and the other deals with underwriting for sovereign risk, sub-sovereign risk, and state-owned enterprise risk.
Q: As the Head of Underwriting, can you briefly describe underwriting and its role in ICIEC’s broader mandate?
MK: Underwriting is a core function of any insurance institution. The role of the Underwriting department at ICIEC is to receive applications submitted by potential clients and review their project and transaction documentation to assess the risk associated with the transaction. The risk assessment outcome is firstly to evaluate if ICIEC should cover the risk and issue a policy to the client. The second outcome is deciding which of ICIEC’s policies or products would be most suitable for the client and transaction and which risks or perils should be covered under the policy. We then decide the tenor, how long we should cover the risk, and under what terms and conditions we should cover, including the pricing. In summary, our department determines what type of risks we should take, the magnitude of the risks ICIEC can underwrite, for how long, and at what price.
Underwriting is essential more broadly within ICIEC’s mandate; underwriting is crucial as it supports our clients by assuming some of the transaction risks, especially when conducting cross-border business. When businesses engage in activities in new countries, they don’t know the culture, rules, laws, and systems work. They sometimes have insecurities about their ability to succeed in that country. In these situations, businesses typically undertake feasibility studies to assess the project’s profitability and how they will help the host country through job creation, facilitate the transfer of technology and many other benefits. However, what these businesses cannot manage is the political risk. This is where ICIEC’s underwriters come in with our knowledge of and relationships with, Member Countries. Throughout the whole transaction, we develop strong relationships with all the parties involved, including project staff on the ground and key government officials. This puts us in a privileged position to help avoid any potential problems, in addition to the insurance we provide. For example, we actively engage with the involved parties and resolve the matter when something goes wrong. In some cases, we can even arrange meetings between our CEO and the respective minister of finance, for example, to resolve any issues or disputes.
Q: What is ICIEC’s risk appetite like in the current market?
MK: Risk appetite is not something static but is rather dynamic. It is affected by the economic and political environment at the global, country and sector levels. Last year, our risk appetite was revisited to support most impacted member countries due to the pandemic. Now, as the pandemic is slowly clearing up and we see the mass roll-out of vaccines, our risk appetite is returning to the normal baseline again. In general, I can say that our risk appetite is determined through a defined written process. Thus our risk management department determines our level of risk appetite scientifically, analyzing available information at different levels.
Q: What are some of the trends in structuring transactions you have observed recently? Are there any new players, or is there any shift in the share of risk being taken on by other players, e.g. ECAs, private financial institutions etc.?
MK: The COVID-19 pandemic certainly has had a visible impact on the different players in the market. The risk appetites of private financial institutions have decreased significantly. As a result, ECAs and multilateral development finance institutions, including ICIEC, have done a great deal of work filling the gaps left by the private sector players taking more of the share of financing. Member Countries’ governments also played a crucial role by providing stimulus measures to the economy, specifically towards the trade and investment sectors, which also helped mitigate some of the risks caused by the pandemic. Without government interventions, the impact of the pandemic would have been much worse on the economy.
Furthermore, COVID-19 had far-reaching implications for the trade and investment industries globally. We know, for instance, that trade declined in 2020 by close to 10%, whereas some studies indicate that FDI went down by about 40%. These declines were much higher than those observed during the global financial crisis in 2008-09. The upshot of the pandemic and the panic it created scared away a lot of the private sector capital used to support development projects, especially those in countries already perceived to be high risk even before the pandemic. This led multilateral development institutions such as ICIEC and other Islamic Development Bank entities to take center stage and modestly try to fill the gaps left by the private sector capital flight. The trend emerging from this process has been the numerous initiatives that MDBs and ECAs have implemented to provide support to projects that traditionally would have been able to access private finance before the pandemic.
Q: What are some sectors or regions you see the potential for growing ICIEC’s support?
MK: The majority of ICIEC’s Member Countries are developing or emerging economies, which means there is a high potential for growth in these countries. Thus, the need for support from institutions like ICIEC is quite significant. Recently we have seen increased demand for Political Risk Insurance (PRI) in several regions, such as with our three Central Asian Member Countries. We have also seen increased demand in Sub-Saharan Africa, specifically in Cote d’Ivoire, Senegal and Nigeria. In the MENA region, with the political situation getting better in Libya, we expect demand to pick up very quickly, resulting from the need for reconstruction in the country. Indeed, we are ready to play our part in supporting that reconstruction process in the future. We also see a lot of demand in South Asia. In Bangladesh, for example, the economy has been growing very fast, specifically in the banking sector and the textile sector. We also see some increased demand in Indonesia as well. There is a lot of potential for ICIEC services right now.
The global integration of economies is fueling this demand. Many Member Countries are now more in touch with the rest of the world from a business perspective. For example, many Member Countries are trading capital goods with non-Member Countries. We often see this quite often, whether it is exports from these Member Countries or imports of strategic commodities and capital goods.
We see an increase in demand in the health sector, of course stemming from the pandemic. We also see growth in digital technologies because of the new trends emerging as the result of lockdowns. For example, new technologies to adapt operations for people working from home. Another sector in which we see growth picking up is renewable energy. The push for this happening globally, to mitigate against climate change, but the real action is trickling down to Member Countries through climate-related transactions. These are the main sectors in which we see a lot of growth and potential happening.
Q: ICIEC is an active member of the Berne Union; what do you see as ICIEC’s main contributions to the Union, and what are some of the benefits ICIEC gets from being a member?
MK: The Berne Union is an important association for ICIEC. It compromises Investment and Export Credit insurers worldwide from both the private and public sectors (national ECAs and specialized multilateral insurers, like ICIEC). The Union organizes annual meetings which serve as learning and networking opportunities for ICIEC staff. Being a member of the Union affords ICIEC numerous opportunities for actual collaborations. For example, we work with non-Member Country ECAs in Russia, China, the US, Netherlands, France, Belgium, and ECAs in our Member Countries through the Berne Union. In terms of what we contribute to the Union, we partake actively in all the meetings, send staff in for training, and share industry data and information. Over the last two years, we have been a member of the Management Committee, which means we are part of the decision-making process of the leadership of the Union itself and are a very active participant. Previously, ICIEC held the Vice-Chair position for the short-term committee, the biggest committee in the Union. We also actively participate in data collection and surveys used for publications. Lastly, we provide ideas and topics for discussion and use the Union as a platform for us to showcase what we are doing. In these areas, we see opportunities for collaboration among members. So, the Union for us is a forum that we believe is very helpful for us and at the same time, ICIEC plays a crucial role in making it a lively and valuable forum for everyone.
Q: What are some of the short- and long-term goals for ICIEC’s underwriting?
MK: To summarize, we would like to improve our overall efficiency and cost-effectiveness. The most crucial function of an underwriting department is always the quality of the underwriting, the efficiency by which it is done, the cost-effectiveness, and the results achieved. We have sound quality underwriting and robust results. As such, our short- and long-term goals are to increase the efficiency to serve our clients. Currently, we are expecting to roll out a new digital system to do so. Here it is important to note that our department has two sets of clients – internal and external. The internal clients are our colleagues in the business development unit prospecting for business opportunities that they bring to us to process. However, there are some aspects where we are inefficient in developing the deal. Efficiency and timeliness are essential. Additionally, as a development institution, we also have to be very selective in the projects we choose. We have to make sure that the projects we choose have a clear and measurable development impact. Hence, our long-term goal is to enhance the collaboration agreements with our Member Countries, peer institutions, private sector insurance providers, companies, ECAs and all the other stakeholders in this industry.
The role of FDI in MENA countries
Since the early 2000s, Foreign Direct Investment (FDI) to the Middle East and North African (MENA) region has provided substantial capital and support for national development projects in MENA countries. Sectors such as oil and gas, real estate, coal, chemical manufacturing, services (particularly in tourism and hospitality), and renewable energy have been the primary recipients of this FDI, with the majority of investments coming from the United States, France, the United Kingdom, Italy, China, Japan, India, Germany, and Austria.[1]
Greenfield investment is a type of FDI in which a parent company creates a subsidiary in a different country and builds its operations from the ground up, creating jobs and contributing to economic growth. Greenfield investments represent over 80% of total FDI projects in most MENA countries, creating more than 50,000 jobs to date in Algeria, Egypt, Morocco, Saudi Arabia, Tunisia and the United Arab Emirates. On average, these investments represented 4.86% of MENA GDP from 2003-2012.[2] Gulf Corporation Council (GCC) countries are a significant source for these greenfield investments in their fellow MENA countries, contributing significantly to intra-OIC relations.
Though FDI has provided significant development support to MENA countries, it has become relatively stagnant over the last decade. On average, countries in the region struggled to secure FDI following the 2008 global financial crisis and the Arab Spring movements of 2010-2011. While inward FDI did eventually rise again in 2015, inflows plateaued by 2018, still only reaching less than half the levels of total FDI inflow found in MENA countries at their peak in 2007. Conflict-ridden countries in the MENA region have experienced further difficulties attracting FDI, reporting negative FDI inflows. By 2019, net FDI inflows to the MENA region sat at a mere USD 57.8 billion compared to USD 126.5 billion in 2007.
Factors influencing FDI into MENA countries
Several factors influence FDI flows to MENA countries. Former colonial ties, religious affiliation, and the use of a common language all act as major influences in ways unseen in the rest of the world. Furthermore, differences between the economies of oil-producing and non-oil producing MENA states play a significant role in attracting FDI. Generally, non-oil producing MENA countries attract more significant greenfield investment than their oil-producing counterparts. This can be attributable primarily to oil-producing countries utilizing their abundant in-country oil resources to generate national capital instead of seeking foreign sources.
The most significant factor influencing the limitations witnessed for FDI in many MENA countries is the perceived risk associated with the region, which results in heightened concern from foreign investors regarding immediate and long-term regional stability. These risks can include political instability, low GDP, and infrastructure deficiencies, amongst others. To mitigate against these risks and counter the decline of FDI in the region, various MENA governments have advanced policy reforms, using policy and regulation to promote and facilitate the return of foreign firms and money. Such reforms have led many MENA states to revise investment legislation, ease market entry, streamline regulations in business operations, strengthen investment promotion agencies (IPAs), and adopt policies to direct investment into under-performing regions. However, despite these efforts, many MENA governments have been unable to secure FDI at levels equal to that found amongst other emerging and developing economies, limiting sustainable development in the region. While the MENA region currently has the market, resources, and human capital potential required to attract FDI at high levels, it faces significant challenges that hinder incoming FDI’s flow and effectiveness.
MENA’s FDI and COVID-19
The onset of the COVID-19 pandemic further exasperated the issues regarding FDI inflows to the MENA region. No nation was spared from the economic impacts of the virus, as all governments had to close borders and implement lockdowns and quarantines, grinding global economic activity to a halt and causing a contraction of the global economy by 3.3% in 2020.[3] Furthermore, as a result of the pandemic, global FDI flows fell by 35% from US$ 1.5 trillion in 2019 to US$ 1 trillion in 2020.[4]
Early estimates suggested the MENA region would lose up to 45% of its FDI inflows in 2020, though varied outcomes have been suggested since this prediction. [5] Such concerns were raised primarily in response to the impact of the pandemic on greenfield investments, which had already dropped by 80% in the first six months of 2020. This was a drastic loss compared to the anticipated reduction in greenfield investments in other emerging and developing economies (42%) and amongst OECD countries (17%).[6] The projections were based on significant greenfield investment-reliant industries such as tourism and manufacturing being hit particularly hard due to lockdowns and border closures.
As oil prices dropped, greenfield investments from the GCC oil-producing countries to their MENA neighbours were also anticipated to fall drastically, primarily affecting the region’s real estate (65% of investments) and energy (14% of investments) sectors.[7] Despite these bleak projections, greenfield investment drops appear to primarily result from projects being put on hold rather than being cancelled or shelved, meaning a greater likelihood of FDI bouncing back in the region.
Despite bleak early projections, states throughout the MENA region have experienced positive and negative FDI inflows during the COVID-19 pandemic. FDI flows to West Asia increased by 9% in 2020. Meanwhile, North Africa saw FDI inflows contract by 25%. These variations in FDI have largely been sector-driven, with specific sectors seeing higher or lower investments due to the pandemic-based valuations of different industries.
Many MENA countries have worked to support select industries based on these disruptions. Some states are positioning themselves as premier destinations for FDI in specific industries. For example, the Tunisian government is encouraging international automobile manufacturers to refocus their funds away from the Chinese and American markets into the country through implementing various investment-friendly policy and regulation schemes. Furthermore, states are revising investment laws to focus on priority sectors and improve regulatory and institutional structures that facilitate increased FDI. Turkey is extending a specialized free zone programme encouraging investment in software and ICT activities to include other high value and technology-intensive activities, resulting in Ford’s recent construction of USD 2.6 billion electric automobile assembly plant.
ICIEC and FDI in MENA
ICIEC’s mandate is to bolster economic growth and sustainable development in its 47 Member Countries. With much of its Membership located within the MENA region, the Corporation is a significant support for attracting FDI flows to MENA countries, specifically for projects that boast substantial developmental impact. ICIEC supports FDI by providing investment cover against the potential risks that lead to barriers for investors through its Preferred Creditor Status and the Corporation’s Political Risk Insurance (PRI) products, namely its Foreign Investment Insurance Policy (FIIP) and Non-Honoring of Sovereign Financial Obligations (NHSFO). ICIEC’s cover helps to provide investors with increased security.
Since the Corporation’s inception in 1994, ICIEC has provided more than USD 78 billion in total business insured, including USD 15.6 billion toward investment protection. In 2020, ICIEC provided a total of USD 9.86 billion cover for trade and investment across its 47 Member Countries. Over USD 6 billion of this total is being used to provide insurance cover for transactions in the MENA region, and USD 1.98 billion is being used specifically for investment insurance cover.
ICIEC has been highly active in promoting FDI in MENA countries, providing cover for several notable investments. One such example is ICIEC’s USD 68 million FIIP cover for the construction and operation of the Benban Solar Complex in Aswan, Egypt. ICIEC’s support for this transaction promoted FDI inflow to the MENA Member Country and contributed to the growth of renewable energy sources, bolstering the nation’s energy security. ICIEC also provided USD 32.5 million in NHSO cover for the Sharjah waste-to-energy (WtE) project in the United Arab Emirates, earning the Project Finance International (PFI) Award for the Middle East Clean Energy Deal of the Year in 2019. Meanwhile, ICIEC won the PFI award for Turkish Deal of the Year in the same year for its various levels of insurance cover toward the construction of the Çanakkale bridge in Turkey, which is set to have an immense impact on both trade and development in Turkey.
As vaccines become more available and MENA countries reopen their borders to trade and promote their industries to investors, ICIEC will continue to work with our Member Countries in the region to facilitate the return of FDI. Though most MENA governments are currently working to provide responses negating the immediate impact of COVID-19 on trade and investment, now is an opportune time to implement ambitious long-term programs that encourage further investment into the region. ICIEC is ready to help MENA governments attract high-quality investments that increase jobs and capital within the region and promote an inclusive, sustainable, and resilient recovery. While the pandemic has posed a difficult stretch for FDI, ICIEC and its MENA Member Countries will work together to ensure the next decade is one of prosperity and openness for MENA-oriented FDI.
https://www.brookings.edu/blog/future-development/2019/12/13/encouraging-transformations-in-central-asia/#:~:text=Nearly%2030%20years%20ago%2C%20the,the%20middle%20of%20the%201990s
https://www.forbes.com/sites/arielcohen/2020/12/08/foreign-investment-in-renewables-and-beyond-the-last-best-hope-for-central-asias-economic-recovery/?sh=26368a2f5ebf
https://read.oecd-ilibrary.org/view/?ref=134_134467-ydi12subjo&title=Investment-in-the-MENA-region-in-the-time-of-COVID-19&_ga=2.157186872.245605971.1622493830-457525634.1622493830
https://www.iemed.org/publication/fdi-in-the-mena-region-factors-that-hinder-or-favour-investments-in-the-region/
Central Asia as a Strategic Region for Trade and Investment
The geographical region widely considered as Central Asia comprises Kazakhstan, Azerbaijan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan. The diverse region boasts a mix of upper-middle- and low-income countries with significant strategic importance due to their geographic location and abundant natural resources[1]. The region has a long history as a central area for global trade, dating back to the Silk Road trade network during China’s Han Dynasty over 2000 years ago. These historic routes extended more than four thousand miles from China to Europe, connecting eastern and western markets and putting Central Asia at the epicentre of trade and globalization, generating immense wealth[2].
The modern-day Central Asia region still benefits from its strategic geographic position between China and Europe and the abundant natural resources, low public debt, a young population, and a growing labour force found in the countries that comprise it. These countries have also benefited through their increased integration into the global economy over the last decade, driven mainly by natural resources and labour. During the 2000s, the Central Asia region emerged as one of the most dynamic global economic regions, trading goods and services globally to help support domestic demand, reduce poverty, and share prosperity throughout the region. These resource-rich countries have already achieved or are approaching the upper-middle-income status, mainly on the back of solid demand for their natural resources[3].
Being such an important geopolitical and economic region, Central Asia has been swiftly developing; thanks to foreign direct investments (FDI), the gross inflow totalled $378.2 billion between 2007-2019[4]. The European Union (EU) countries invested 40 per cent of total FDI in Central Asia. China has been developing logistics and transit routes through projects as part of its Belt and Road Initiative (BRI), sometimes referred to as the New Silk Road. In addition to investments, the EU and the United States provide significant grant funds to support public and political institutions, projects for environmental protection, and civil society development. The EU alone provided the region with approximately $1.2 billion in aid between 2014 and 2020[5]. These initiatives recognize the importance being placed on integrating Central Asian countries into the global economic arena.
Economic Development and Opportunities in the Region
While the investment activities in Central Asian countries have been picking up, there are still significant opportunities for economic growth and sustainable development within the region. With its plethora of natural resources and location as one of the main transit passages between EU countries, China, and Russia, the region has many inviting attributes for further investments.
Despite being a central trade route between Europe and China, improving conditions for trade within the Central Asia region itself is particularly critical, given some of the inherently challenging conditions. The economic structure of Central Asia is one of low density and long distances. The combined population of the countries in Central Asia is approximately 75 million[6], spread unequally over a relatively large geographical area, including large deserts and high mountains with limited connectivity[7]. The landlocked and remote location of the Central Asia region paired with its rugged topography means there are additional transport costs and transit times needed for regional and international shipments within the region[8].
Despite these barriers, the economic expansion of other nearby countries, such as China and Russia, creates an unprecedented opportunity for Central Asia to emerge as a hub for trade and commerce. The region should benefit from closer intra-regional connectivity, deeper ties with traditional partners, and growing trade relations with some fast-growing nearby economies such as China, India, and Turkey[9].
Although each Central Asian country pursues its own individual development paths, they share similar challenges regarding cross-border resource management, underinvestment in sustainable infrastructure, and economic diversification and growth challenges. Since Central Asian countries are all relatively small economies, they will need to promote regional trade policies and closely integrate into the international trading system to achieve sustainable economic development[10].
ICIEC’s Role in Central Asia
Currently, three of the five Central Asian countries are ICIEC Member Countries – Kazakhstan, Turkmenistan, and Uzbekistan. ICIEC supports trade and investment flow for these Member Countries by providing insurance solutions to mitigate political and commercial risks. Through its range of solutions and its preferred creditor status, ICIEC also assists Member Countries in attracting FDI for projects in critical sectors for their sustainable development and national objectives.
ICIEC plays a critical role in promoting intra-OIC trade between Central Asian Member Countries and Member Countries in other regions. As part of its mission, ICIEC seeks to increase global trade integration, foster cooperation among markets in the Global South, and support in periods of trade turmoil. To achieve this, ICIEC is working closely with its IsDB Group peers, namely IsDB, ITFC and ICD, to enhance the Group’s synergy and expand joint operations in Central Asia.
Kazakhstan
Kazakhstan attained ICIEC Membership in 2003. Since joining, ICIEC has insured a total of USD 1.94 billion for trade and investment in Kazakhstan: USD 996 million in coverage for the import of strategic goods into Kazakhstan and USD 939 million in cover for exports out of Kazakhstan.
During this time, ICIEC has maintained an excellent relationship with Kazakhstan’s national Export Credit Agency to help them support their national exports. In 2014, ICIEC signed a Memorandum of Understanding for cooperation with KazakhExport to promote collaboration and expand the insurance capacity of both institutions. In 2015, ICIEC extended USD 21 million in reinsurance support to KazakhExport to export locomotives to Azerbaijan Railways.
In 2020, ICIEC worked with Eurasian Machinery, the official distributor of Hitachi Construction Machinery (HCM) in Kazakhstan and Central Asia, extending USD 9.5 million in Specific Transaction Policy, covering 80% of the total sales contract and assisting in the import of capital goods. This cover provided Eurasian Machinery with four Hitachi excavators to the Kazakhstan mining sector and helped support Kazakhstan’s mining sector by increasing production capacity and securing new jobs.
ICIEC is also closely following the PPP projects in Kazakhstan and is contacting the Kazakhstan PPP Center and international banks to support PPP projects in Kazakhstan.
Turkmenistan
Turkmenistan is the most recent Central Asian country to join ICIEC membership in 2019. Since then, ICIEC has been growing its presence within the country, seeking opportunities to promote foreign direct investment, expand Turkmenistan’s exports, and prioritize support for projects that contribute to Turkmenistan’s strategic development goals. The Corporation stands ready to catalyze support in Turkmenistan by mitigating political and commercial risks for trade and investment by providing its Shari’ah compliant insurance solutions for banks, corporates, export credit agencies, and other insurers.
Currently, ICIEC is engaging with several international banks to support transportation and agricultural sector projects.
Uzbekistan
Uzbekistan joined ICIEC Membership in 2019. ICIEC has since facilitated several seminal sustainable development projects in Uzbekistan, amounting to USD 126 million in total cover. ICIEC contributes to foreign direct investment and advances Uzbekistan’s specific development goals by facilitating investments in strategic sectors.
In one such project, ICIEC provided a total cover of USD 54 million in Specific Transaction Policy for transactions between two of China’s largest telecommunications equipment manufacturers and Uzbekistan’s state-owned telecommunication operator in line with the Government’s National Development Strategy for 2017-21. The two projects involved modernizing the mobile broadband access network in the Eastern and Western regions of Uzbekistan, expanding the data storage and processing centre, and supporting new technology that will increase access to critical services.
ICIEC’s continued support of infrastructure-related projects in Uzbekistan can help mobilize the private sector and financial resources from abroad. For example, ICIEC is in contact with the PPP Development Agency and international banks to explore opportunities to support PPP projects such as energy and hospital projects in Uzbekistan. ICIEC is cooperating with international banks for their lines of finance to Uzbek banks and entities. ICIEC is also in dialogue with the Investment Promotion Agency under the Ministry of Investments and Foreign Trade to sign an MoU to attract FDI into the country.
In June 2020, ICIEC and Uzbekinvest, the Export-Import Insurance Company of Uzbekistan, signed a Memorandum of Understanding that supports joint efforts, expanding the insurance capacity of both institutions.
Looking Ahead
The diverse natural resources, plentiful human capital, and burgeoning SME sector in the Central Asia region are grabbing investors’ attention, providing many promising future opportunities. To enhance growth and overcome the existing challenges of a lack of sustainable infrastructure and economic diversification, the Central Asia region will have to implement new policies and strategies and lean on political risk insurers, such as ICIEC, to support ventures into new markets.
Greater infrastructure development could give Central Asian economies a critical boost by enhancing growth, poverty eradication, climate change mitigation, and recovery from the impacts of the COVID-19 pandemic. Effective infrastructure projects, such as ICIEC’s reinsurance support to KazakhExport to export locomotives to Azerbaijan Railways, can induce positive spillover effects on economic growth, employment, and trade. The Central Asia and Caucasus region require a combination of the soft and physical infrastructure to achieve a sustained growth pattern. This will require financing solutions and new funding sources to tackle the region’s infrastructure investment gap. Along with infrastructure development, regional connectivity barriers need to be scaled down so that potential inter-, intra-, and extra-regional trade can be expanded[11].
Central Asian countries and their respective governments should also seek to expand economic diversification, having primarily integrated with the world economy through their natural resources, which account for about 65 per cent of exports in Kyrgyzstan, Tajikistan, and Uzbekistan, and more than 90 per cent in Kazakhstan and Turkmenistan[12]. This heavy reliance on a few primary commodities exports makes the Central Asian region vulnerable to abrupt swings in volatile world prices for these commodities and complicates economic management. To counter this, some of Central Asia’s more advanced economies have already begun pursuing economic diversification and advancement accompanied by structural reforms to invite further new investments in the region[13]. This will help expand FDI flows beyond extractive industries. ICIEC’s services in the region can also expand FDI flows and foster economic diversification by supporting local exporters of non-oil commodities in reaching new markets.
ICIEC will continue to support its Member Countries, businesses, and citizens in the Central Asia region by facilitating sustainable development projects in both soft and hard infrastructure, by encouraging investments in strategic sectors, and by offering a range of risk mitigation solutions to help increase global trade integration and prosperity in the region.
[1]https://www.worldbank.org/en/region/eca/brief/central-asia
[2]https://www.cfr.org/backgrounder/chinas-massive-belt-and-road-initiative
[3]https://www.wto.org/english/thewto_e/acc_e/Session1SarojKumarJha12stCenturySilkRoad.pdf
[4]https://astanatimes.com/2020/12/fdi-to-central-asia-reached-378-2-billion-over-past-13-years/#:~:text=NUR%2DSULTAN%20%E2%80%93%20The%20Central%20Asian,of%20which%20totaled%20%24378.2%20billion.&text=FDI%20to%20Kazakhstan%20reached%20%243.6,important%20geopolitical%20and%20economic%20region
[5]https://astanatimes.com/2020/12/fdi-to-central-asia-reached-378-2-billion-over-past-13-years/#:~:text=NUR%2DSULTAN%20%E2%80%93%20The%20Central%20Asian,of%20which%20totaled%20%24378.2%20billion.&text=FDI%20to%20Kazakhstan%20reached%20%243.6,important%20geopolitical%20and%20economic%20region
[6]https://www.worldometers.info/world-population/central-asia-population/#:~:text=Countries%20in%20Central%20Asia&text=The%20current%20population%20of%20Central,among%20subregions%20ranked%20by%20Population
[7]https://www.wto.org/english/thewto_e/acc_e/Session1SarojKumarJha12stCenturySilkRoad.pdf
[8]https://www.adb.org/sites/default/files/publication/29927/central-asia-trade-policy.pdf
[9]https://www.wto.org/english/thewto_e/acc_e/Session1SarojKumarJha12stCenturySilkRoad.pdf
[10]https://www.adb.org/sites/default/files/publication/29927/central-asia-trade-policy.pdf
[11]https://www.adb.org/sites/default/files/publication/688061/adbi-book-developing-infrastructure-central-asia.pdf
[12]https://www.brookings.edu/blog/future-development/2019/12/13/encouraging-transformations-in-central-asia/#:~:text=Nearly%2030%20years%20ago%2C%20the,the%20middle%20of%20the%201990s
[13]https://www.forbes.com/sites/arielcohen/2020/12/08/foreign-investment-in-renewables-and-beyond-the-last-best-hope-for-central-asias-economic-recovery/?sh=26368a2f5ebf
The World Health Organization (WHO) declared a Public Health Emergency of International Concern on 30 January 2020 due to the fast spread of COVID-19. With the threat of a pandemic looming and noting the crumbling health infrastructure in Côte d’Ivoire, on 5 March 2020, Deutsche Bank and ICIEC signed a financing facility agreement to support Côte d’Ivoire’s health infrastructure through the construction of two new regional hospitals as well as five new medical units in five additional hospitals. The agreement was signed a few days before the WHO declared the pandemic on 11 March 2020; the same day, the first case of COVID-19 was detected in Côte d’Ivoire.
Mr Raphael Fofana, Underwriter in ICIEC’s Underwriting Department, Sovereign Risks Division, provided some insight on the Corporation’s involvement in this award-winning project.
Q: Could you please briefly introduce the overall project and financing structure?
RF: Of course. The government of Côte d’Ivoire mandated Deutsche Bank to mobilize financing of around 142 million Euros to fund the construction of two regional hospitals, with approximately 200 beds each. One of the hospitals is located in Adozpé (100 KM north of Abidjan) and Aboisso (100 KM east of Abidjan). The project also funded five new medical units in five additional hospitals located across the country.
Deutsche Bank sought insurance from ICIEC for capital relief to more comfortably finance the transaction given the size. ICIEC’s cover provides Deutsche Bank with increased security against the risk of default. If the bank were to fund such a transaction without ICIEC’s cover, the transaction would have been too expensive for the Government of Côte d’Ivoire to bear.
Q: Why was ICIEC sought as a partner over other insurers?
RF: ICIEC was the clear choice of insurer for this project from the start. Based on the considerable value of the transaction, few insurers would have the risk appetite for this project in the first place. As a long-standing partner and client of ICIEC, Deutsche Bank is familiar with the unique added value we offer as a multilateral institution. We have additional tools to make our clients more comfortable.
One such unique aspect of our coverage is ICIEC’s Preferred Creditor Status (PCS), which helps ICIEC mitigate the risk of default in transactions. When a government knows that ICIEC is involved in a project, they are less likely to default on payments. And, if for any reason they do default, and they only have a limited amount of funds available to pay us or any private banks involved, they would be required to pay us before other creditors.
Our clients also appreciate that we hold high standards and implement a rigorous due diligence process in terms of developmental impact and environmental and social issues. ICIEC brings a development lens to the transaction because we make sure that the projects we support are impactful and that the results of our transactions benefit a broader population of our Member Countries.
Q: What was the developmental rationale for ICIEC to get involved in this transaction, and how does it align with Côte d’Ivoire’s national development plans?
RF: Under Côte d’Ivoire’s President, Alassane Ouattara, who was elected in 2010, the construction and renovation of the country’s hospitals were highlighted in the country’s national development plan. An additional, and more specific, National Health Development Plan was also prepared with the clear objective to build and renovate hospitals with an estimated cost of EUR 1.5 billion. The two hospitals and five medical units covered in this project are part of this program.
When assessing the project, ICIEC recognized the priority placed by the government of Côte d’Ivoire on renovating the existing healthcare infrastructure and building new facilities. It was an easy choice for us to proceed. As a multilateral insurer, part of our role is to support the private sector in financing seminal Government projects and bolster investments in critical sectors. In addition to this project, we support Cote d’Ivoire in constructing a potable water plant and renovating the country’s education infrastructure.
Q: What was the development impact of this project on the healthcare sector?
RF: The state of healthcare infrastructure in Côte d’Ivoire before this project was less than ideal. Malaria, yellow fever, sleeping sickness, leprosy, trachoma, and meningitis are all endemic to the Member Country. While government programs exist to control these and other diseases, the healthcare sector suffered from insufficient and deteriorated infrastructure. Therefore, strides in the government’s National Health Development Plan, of which this project is a part, significantly impact citizens’ access to healthcare. The project created 400 new hospital beds in the two hospitals and brought in state-of-the-art equipment and facilities, enhancing access to and healthcare quality in the typically underserved regions. Additionally, five new medical units in five other hospitals have been built. By insuring the financing of this project, ICIEC is supporting better health and well-being for citizens of our Member Country.
Q: What was the development impact of this project beyond the healthcare sector? Are there any links to SDGs you can make?
RF: The development of basic infrastructure in the health sector is crucial to achieving sustainable development and empowering communities in Côte d’Ivoire and beyond. The two new hospitals contribute to job creation, employing around 600 local people and fostering a micro economy in the surrounding areas. The construction element of the project also facilitates the trade of services and human capital between Côte d’Ivoire and Morocco.
By insuring the financing for the hospitals and medical units, ICIEC contributes to the achievement of the United Nations’ Sustainable Development Goals (SDG), specifically to SDG3 – Ensure good health and well-being for all. However, the project contributes broader impacts to SDG1 – End poverty in all its forms everywhere; SDG9 – Build infrastructure, promote sustainable industrialization and foster innovation; and SDG10 – Reduce inequalities between social categories.
Q: What were some additional unique features of the project that piqued ICIEC’s interest?
RF: An extraordinary bonus feature of this project was that it is an intra Organisation of Islamic Cooperation (OIC) investment. The Engineering, Procurement, and Construction (EPC) contractor was Moroccan. As Côte d’Ivoire and Morocco are both OIC members, this makes the transaction eligible to be classified as an intra OIC investment. This is precisely the collaborative type of transactions that ICIEC seeks to encourage.
Another unique feature of this project was the sheer size of the transaction. It is the most significant direct cover for the healthcare sector in ICIEC’s history, and the largest transaction ICIEC has closed in Côte d’Ivoire.
Q: This project started right when the COVID-19 pandemic started. How has the project contributed to Côte d’Ivoire’s COVID-19 response?
RF: The COVID-19 pandemic is ongoing in Côte d’Ivoire, and the two new hospitals will naturally be used as part of the national response. They will be operational any day now and will, of course, receive and treat COVID-19 patients as necessary. There will also be some designated facilities for COVID-19 testing and treatment.
The five additional medical units have also been integrated into the national response since their respective operationalizations. In these critical times, any reinforcement to the healthcare system will significantly impact citizens.
Q: Were there any specific challenges or lessons learned you would like to reflect on?
RF: On the financing side, it was very straightforward. There is direct financing from a bank to the government, and ICIEC provides insurance against the government’s default. This is something we inherently do.
The main challenge was in the execution of the project, which took place in the middle of the COVID-19 pandemic. The construction was planned before the virus took the world by storm. While the crisis created a sense of urgency given the critical nature of the healthcare infrastructure being developed, there was a period of adjustment to ensure workers’ safety and mitigate any challenges to the logistics, such as access to materials.
Q: Finally, this project won the Islamic Finance News Sovereign & Multilateral Deal of the Year 2020; can you tell us about what made this project so notable?
RF: This reflects how dire the healthcare situation in Côte d’Ivoire was before the project and highlights just how impactful investments in critical sectors could be. The size of the transaction and the intra-OIC nature of the project also contributed to this becoming a high-profile and award-winning project. ICIEC is proving that there is a need for Shariah-compliant insurance solutions and demonstrating how impactful its involvement can be.
With OIC membership currently spanning 57 countries across Africa, Asia, Middle East and Latin America, ranging from Indonesia to Suriname, the Organisation of Islamic Cooperation (OIC) is a grouping of countries containing diverse economies in terms of structure and size. Amongst these economies, significant volumes of trade and investment flow, with potential for a substantial increase. The OIC market also provides immense opportunities for trade and investments, given its growing demographics. The current combined population of OIC Member Countries sits at 1.8 billion people. Recent reports suggest that this number will witness population growth across all age groups over the next 30 years, with a crucial increase in the working-age population of 15-64 years (see figure 1).
Figure 1: OIC Member Countries Population by Age Group, 2015 & 2050
Source: UN World Populations Prospects
This key demographic age group is expected to constitute more than 50% of OIC’s population by 2050. It will allow OIC Member Countries to benefit from what is referred to as « the demographic dividend[1]« . Demographic dividend occurs when a country’s population has a low child and old-age dependency ratio and a high working-age population. There is a correlation between creating adequate job opportunities to sustain the working age in countries with a sizeable working-age group and increased income per capita. The increase in income generation would result in increased consumption and higher savings rates, translating into significant economic growth. Alongside a growing population comes the demand for infrastructure development, goods, services and increased food security. This demand presents an opportunity for businesses in OIC Member Countries to grow.
The current snapshot of intra-OIC trade and investments
In alignment with the growing opportunities in the market, the share of intra-OIC trade has also been growing in recent years, from 17.3% in 2011 to 19.6% in 2020 (see figure 2). Intra-OIC export flows have been steadily increasing, from USD 260 billion in 2016 to USD 327 billion in 2019. The top exporters are Malaysia, United Arab Emirates, Saudi Arabia, Türkiye, and Indonesia, collectively accounting for 62.7% of all OIC exports[2].
Although intra-OIC trade has been growing in recent years, the current level of trade integration among OIC Member Countries is still lower than is desired. At the 13th Islamic Summit held in April 2016 in Istanbul, the Committee for Economic and Commercial Co-operation of the OIC (COMCEC) adopted a New Ten-Year Plan of Action to achieve a 25% intra-OIC trade share by 2025. Currently, only 28 of the OIC’s 57 Member States have attained the target of a 25% intra-OIC trade share. Given that the current figure for the OIC is 5% below the target, there is still much room for improvement. Increasing the share of intra-OIC trade is a strategic objective as it allows the region to be more resilient in the face of trade shocks, such as the one engendered by the COVID-19 pandemic. In times of crisis, it is much easier to collaborate with international partners and neighbours committed to your same ideals, customs, economic models and culture. By increasing intra-OIC trade, ICIEC will be able to fortify OIC economies, reduce their exposure to volatility, and better protect the lives and livelihoods of countless people across the Ummah.
Figure 4: Share of intra-OIC trade, 2011 – 2020
Source: Calculated using IMF Directions of Trade Statistics (DOTS)
OIC’s leading exporters and importers are concentrated in these same five countries (see figure 3 and 4). Exports are traditionally concentrated in mineral fuels and non-fuel primary commodities, which tend to involve the least technological intensity. For sustainable and long-term economic development, OIC Member Countries need to diversify exports into other sectors, hedge export revenues against volatile commodity prices.
ICIEC’s role in facilitating intra-OIC trade and investments
ICIEC plays a crucial role in promoting intra-OIC trade and investment through the strategic provision of its insurance cover. ICIEC’s Documentary Credit Insurance Policy, Credit Insurance Products, Bank Master Policy, and other solutions bridge the market failures that often inhibit intra-OIC trade and investments. These instruments catalyze impact for export sector development, Shari’ah compliant financial sector development, and support member country and human development.
In providing risk mitigation instruments and facilitating access to trade finance, ICIEC supports exporters of all sizes to grow their businesses and ultimately supports Member Countries to prosper economically. ICIEC’s presence in the financial market increases the capacity of its partner financial institutions in OIC countries to offer Shari’ah-compliant insurance services and access to finance, further setting an example as the only multilateral Takaful credit insurer. At the same time, ICIEC’s Sovereign Sukuk Insurance Policy aims to strengthen Islamic Finance capital markets and mobilize Shari’ah-compliant capital for strategic investment projects in Member Countries. ICIEC also promotes intra-OIC trade and investments by underwriting investments in strategic sectors, particularly in the least Developed Member Countries that are at higher risk and therefore not as attractive to traditional market players. By facilitating trade within OIC, ICIEC strengthens the organization and provides equal opportunities for all OIC Member Countries to trade.
Since its inception, ICIEC has insured USD 68.5 billion in imports and exports. In 2020 alone, the Corporation insured USD 4.47 billion of intra-OIC trade. ICIEC’s insurance enables Member Countries to import strategic goods such as food, export products that generate foreign currency revenue for the country and strengthen strategic sectors through infrastructure development. ICIEC’s insurance, which helps to catalyze intra-OIC trade, is also critical for assisting Member Countries in reaching the 25% intra-OIC trade target set by COMCEC for 2025, thereby enhancing regional economic integration and resilience.
Looking ahead, ICIEC is continuing to expand its operations in OIC Member Countries to strengthen intra-OIC trade. ICIEC has also instituted several initiatives to support the least developed Member Countries to participate more effectively in trade.
Toward Resilience and Prosperity Across the OIC
Enhancing the quantity of intra-OIC trade has been central to ICIEC’s operations since its inception. 2020 has exemplified just how vital this aim is to every Member Country in the OIC. The year showed OIC economies’ supply chains and trade partnerships with other actors across the globe are more fragile than once believed. There is a growing need to increase the Intra-OIC trade to bolster the resilience and prosperity of ICIEC’s Member Countries’ economies. The untapped potential of intra-OIC trade and investment can more easily be achieved through ICIEC’s steadfast dedication to ensuring that potential OIC trade partners can engage in trade and investment transactions and by being a powerful risk mitigant. As OIC countries lean on one another to exchange goods and services, the Ummah will be more economically secure, resilient to outside shocks and in harmony with its partners.
[1] https://demographicdividend.org/
[2] https://sesricdiag.blob.core.windows.net/sesric-site-blob/imgs/news/2461-SESRIC-Trade-Goods.pdf
2020 Recap
The year 2020 will always be associated with the global COVID-19 pandemic and the resulting socio-economic fallout worldwide. Like other industries, the trade credit and political risk insurance industry experienced broad and deep impacts financially, operationally, and strategically. Trade credit and political risk insurers had to adapt quickly to mobilize tools and develop policies that would maintain essential trade flows of goods and services and help alleviate the economic impacts of the pandemic. The OECD estimates that 2020 saw a reduction of global GDP by 3.4% and a global trade contraction by 10.9%[1]. Such negative economic outlooks remain concerning for many governments and businesses.
Aside from the pandemic, other factors were at play in 2020, including macroeconomic conditions, geopolitical developments, and technological advancements, which also affected trends in the insurance industry and forced insurers to rethink their core strategies, including which products they offer, which markets they serve, and how they operate.
Challenges and Risks
It comes as no surprise that 2020 ranked pandemics and infectious diseases as the top perceived risk in the insurance market worldwide. The pandemic also accelerated the perception of other existing risks, such as public debt, cybersecurity, geopolitical tensions, unemployment, and inequality. Due to the speed and severity of the pandemic, scenarios that would typically have unfolded over many years instead took place over just a few months. These jolts increase the potential for risks to influence each other in unpredictable ways.
The pandemic’s initial shock in early 2020 saw a sharp increase in the number of insolvencies and the number of claims reported by credit insurers, but this decreased later in the year, thanks to the support that governments, and importantly, the coordinated nature of the responses, across the world offered to businesses[2]. Swift government assistance helped credit insurers improve their resilience to shocks and withstand most of the negative impacts on their business. However, there are concerns that a future reduction in government support could trigger economic instability and a spike in claims.
Overall, in 2020 the insurance industry had to develop innovative ways to mitigate the risks caused and accelerated by the pandemic. Trade credit insurance remained essential in 2020 for supporting trade flows and supply chains that are crucial for economic recovery, providing security to businesses and investors. However, the long-term implications of the pandemic are still ultimately unknown, and caution is still highly warranted going forward.
ICIEC’s Response to the Challenges and Risks
In the face of the global pandemic, ICIEC was fast to respond, forging strategic partnerships, ensuring the continuance of critical trade flows, and creating innovative solutions to help mitigate the fallout in Member Countries. ICIEC had to adapt quickly to the challenges of the COVID-19 pandemic to ensure the economic and social stability of its Member Countries by introducing several measures and initiatives to combat the negative impact of the pandemic on the economies of the member countries. These measures included introducing new products and insurance capacity. ICIEC’s total amount of business insured for 2020 amounted to USD 9.86 billion.
As part of the Islamic Development Bank Group’s ‘Strategic Preparedness and Response Facility’ (SPRF), ICIEC’s COVID-19 response to date reached USD 450 million in insurance, helping to minimize the adverse health and socio-economic impacts of the pandemic in Member Countries, especially for the most vulnerable populations. In addition to the SPRF, ICIEC also collaborated with IsDB on the innovative USD 2 billion COVID-19 Guarantee Facility designed to support the private sector and the Islamic Solidarity Fund for Development (ISFD) to create the ICIEC-ISFD COVID-19 Emergency Response Initiative’ (ICERI). The ICERI is a rapid COVID-19 response and resilience initiative with USD 400 million in funding, supporting import-dependent and developing Member Countries. These collaborative efforts continue to help Member Countries meet their 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.
Successes and Opportunities
The disruptions caused by the COVID-19 pandemic in 2020 also presented opportunities for the export credit insurance industry to position itself in line with new societal realities and market needs. One of the most significant opportunities to arise from the pandemic is the digital transformation’s acceleration in the insurance market that started over the past two decades. At the onset of the pandemic, the industry underwent rapid virtualization of operations to meet employee and client needs. This progression will enable data-driven transformation across the industry and cost-efficient organizational models in the future.
Besides implementing technology for ICIEC’s Business Continuity Management throughout 2020, ICIEC worked on implementing a new IT System to improve institutional performance, capacity, and responsiveness by digitizing its business processes. This new system will play a crucial role in increasing the volume of intra-OIC trade and the inflow of investment into Member Countries, in line with ICIEC’s 10-Year Strategic Plan. Additionally, the IT System will ensure that Takaful products are easier to access and easier to use. The system will improve ICIEC’s customer service experience through shorter processing times and improved information availability, making ICIEC’s products more attractive to prospective customers.
The increased digitization will bring about transformational changes to the industry by reducing operating expenses, automating internal processes, and boosting revenues. While the effects of the pandemic will be felt for years to come, and considerable uncertainty remains, including lingering obstacles to growth and profitability, there are still reasons to be cautiously optimistic for the future of the insurance market.
Early 2021
The 2021 overall outlook for the trade credit and political risk insurance market remains unclear as the effects of the pandemic still need to materialize fully. However, many of the trends witnessed in 2020 are continuing into the new year, presenting continued challenges and abundant growth opportunities. There is a lot of hopefulness worldwide as vaccines and control measures are slowly starting to have positive effects in some regions.
The uncertainty and protectionism in global trade sparked by the pandemic are poised to continue increasing the demand for trade credit products. The rise in focus toward protecting and mitigating risk from non-payment risks and expanding trade into different regions are becoming major growth factors in the market[3].
In a survey conducted by Trade Finance Global of trade credit members of the International Credit Insurance & Surety Association (ICISA), most respondents anticipate an increase in demand for credit insurance cover in 2021, and growth is expected for political risk underwriters in OECD countries. This survey also saw the majority of underwriters expecting an increase in claims paid, as well as the expectation that payment defaults will rise sharply this year[4]. Pricing is also likely to be affected by the COVID-19 pandemic. New types of covers will likely be developed this year in response to the pandemic, such as the launch of more parametric policies.
While the pandemic continues to dominate the policies and strategies of the insurance market in 2021, we can expect related and unrelated trends to make an impact. Environmental, social, and governance (ESG) concerns will likely take centre stage, focusing on promoting sustainability and the continuing digitization of the industry.
Looking Ahead
The long shadow cast by the pandemic will impact the assessment of future risks and opportunities when looking forward to the rest of 2021 and beyond. For the coming year, political decisions on COVID-19 and climate change will significantly impact risk. The biggest challenge is the ability to prepare for many unknowns as economies struggle to recover and the distribution of vaccines continue across the globe. Even as world economies recover their footing, it is unlikely that the market will go back to the previous ‘normal’ with the end of the global outbreak.
Due to the challenging economic conditions ahead, insurers should adopt strategies and policies to accelerate long-term recovery and growth. How insurers’ respond not just to the impacts of COVID-19 but the longer-term shifts in technology, the economy, and consumer preferences will be critical. Generating continuous innovation in insurance policies, strategies, operations, products, and customer experience could turn out to be the biggest differentiator in 2021 and beyond.
Despite all the uncertainties, the outlook for the years to come still shows growth opportunities. According to the Global Opportunity Analysis and Industry Forecast, 2020–2027, the compound annual growth rate (CAGR) of the trade credit insurance market estimated to grow at 8.6% from 2020 to 2027, and the market value of the trade credit insurance market projected to reach USD 18.14 billion by 2027[5].
The Islamic Finance Market
The COVID-19 pandemic caused many challenges for the Islamic finance market, especially with the current volatility in oil prices and the uncertain macroeconomic environment. Islamic finance also has a much larger exposure to SMEs, microfinance, and retail lending, exposing it to a greater risk of client default or increased claims entering 2021. However, the outlook for Islamic finance remains promising in the new year, as it has proven to be resilient to previous crises due to the nature of its offerings and instruments.
Islamic banks encourage transparency between institutions and their customers, and they continue to provide interest-free services and prohibit unethical and high-risk transactions. In addition, all cash flows are tangible assets in the economy, which makes it very difficult to create unsustainable levels of debt, unlike conventional banking, where debt is created without much of a limit. These principles will likely insulate Islamic finance institutions from the risk of bankruptcy in the coming year, even in the face of so much economic uncertainty.
The impacts of COVID-19 are also 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. There is ample room for Islamic banking solutions to become critical in aiding the recovery following the crisis, aiding in the industry’s growth. The ultimate outlook will depend on the longevity and severity of the COVID-19 pandemic and its effects – particularly in OIC countries.
ICIEC’s Focus for the Year
As a leader in multilateral Shariah-compliant insurance solutions, ICIEC has been working to mitigate the effects of COVID-19 in Member Countries. The Corporation stands ready to unite with relevant partners and continue to grow the Islamic finance industry throughout 2021.
ICIEC continues to serve its mandate of promoting cross-border trade and support foreign direct investment (FDI) by providing risk mitigation and credit enhancement solutions to Member Country exporters selling to buyers across the world, to investors from around the globe investing in Member Countries, and to international exporters selling to Member Countries in transactions for capital goods and strategic commodities.
ICIEC’s promotion of intra-OIC relationships will remain essential in the year to combat the rise of protectionism as a trend in global trade. Many nations turned inward and implemented protectionist policies throughout the pandemic, especially regarding medical supplies and essential commodities. Several ICIEC’s Member Countries, classified as Low-Income Countries (LICs), has been hit the hardest by these protectionist policies. ICIEC will continue to address the effects of protectionism throughout 2021 by facilitating trade among businesses in the OIC and beyond. One such example is ICIEC’s support of the Arab-Africa Trade Bridges (AATB) Program. AATB is a multi-donor, multi-country, and multi-organizations program designed to leverage new trade partnerships, strengthen existing ones, and increase trade and investment flow between the Arab and African regions. ICIEC supports the AATB Program with investment and export credit insurance for Islamic Countries to strengthen the economic relations between OIC member countries.
ICIEC will also continue to support its Member Countries by continuing its COVID-19 funds and initiatives, aiming to mitigate challenges while also delivering development impact. One of ICIEC’s key strategic priorities is to support Member Countries in achieving their development agendas. ICIEC continues as well to support the achievement of the UN’s Sustainable Development Goals (SDGs). ICIEC continues to act as a catalyst for private sector capital to be mobilized and directed towards the achievement of the SDGs, which will have profound positive impacts in the OIC region and the rest of the world as they recover from the fallout of the pandemic. The pandemic provides an opportunity to recover more sustainably by growing economies, job creation, combating climate change, reducing inequality, and improving public health. ICIEC remains committed to prioritizing projects in Member Countries to build a more vital, resilient and inclusive ecosystem.
[1] https://www.oecd.org/coronavirus/policy-responses/trade-finance-in-the-covid-era-current-and-future-challenges-79daca94/
[2] https://www.moodys.com/research/Moodys-affirms-the-ratings-of-five-trade-credit-insurers-with–PR_1000004086
[3] https://www.alliedmarketresearch.com/trade-credit-insurance-market-A08305
[4] https://www.tradefinanceglobal.com/posts/what-does-2021-hold-in-store-for-credit-insurance/
[5] https://www.alliedmarketresearch.com/trade-credit-insurance-market-A08305
An interview with ICIEC’s Head of Reinsurance, Rahmatnor bin Mohamed
ICIEC was established in 1994 under the Islamic Development Bank Group to promote international trade and facilitate foreign direct investment in OIC countries through the provision of Shari’ah-compliant trade credit and investment insurance. For over 27 years, ICIEC has built its trusted reputation as a leading multilateral insurer, catalyzing trade and investments in its Member Countries. ICIEC aims to bridge market gaps and step in where the private market capacity and risk appetite has limitations. In addition to serving corporates and banks across ICIEC’s Member Countries, the Corporation also works with national, regional, and multilateral Credit and Political Risk insurers to create additional insurance capacity for mega and higher-risk projects through active use of reinsurance.
Reinsurance has become one of ICIEC’s staple products. Through its reinsurance solutions, the Corporation offers risk-sharing support to Member Country ECAs and enhances their capacity to catalyze development. To provide deeper insight into the Corporation’s reinsurance activities, ICIEC’s Head of Reinsurance, Mr Rahmatnor bin Mohamed, responded to some questions regarding the use and provision of reinsurance and the future of the reinsurance market.
Since taking on the role in 2008, Mr Rahmatnor bin Mohamad has led ICIEC’s reinsurance team and is responsible for overseeing all reinsurance activities.
What is reinsurance, and why is it used?
Rahmatnor: Essentially, reinsurance is insurance for direct insurers. It is an enabling partnership with the Reinsurers allowing Insurers to share risk and increase capacity. Reinsurance is a tool used by insurance companies providing them with financial flexibility. Reinsurance, therefore, can be seen as « shadow capital », extending an insurer’s risk appetite and capacity.
What is the importance of reinsurance for ICIEC, and how do ICIEC’s clients and partners benefit from it?
Rahmatnor: ICIEC is in the business of providing Trade Credit and Political Risk Insurance (TC&PRI). For businesses conducting trade and making investments in an uncertain economic and political environment can be challenging. To manage these risks, companies around the world rely on TC&PRI. Credit Insurance provides coverage for a range of commercial and political risks that might lead to non-payment risk. In contrast, Political Risk Insurance covers political violence, Breach of Contract, War, expropriation, and currency inconvertibility, as well as Non-honoring of Sovereign Financial Obligation. It helps mitigate the financial blow from the loss or damage of commercial assets, income or property due to political events. While commercial and political risks are often difficult to predict, TC&PRI can provide peace of mind for policyholders.
Due to the current global political and economic environment and the higher-risk nature of some of ICIEC’s Member Countries, insurers providing cover for commercial and political risks may be hesitant to cover risks in certain instances.
Multilateral Insurance Institutions like ICIEC can be better suited than private insurers or ECAs to issue an insurance policy covering high-risk investment and trade destinations due to our mandate, political leverage, financial capacity, and ownership structure. As such, ICIEC and other multilateral insurance providers can expand the total market capacity for these destinations by seeking outward reinsurance or providing inward reinsurance to private insurers and ECAs, helping to boost investment and trade in high-risk states and regions. Inward reinsurance for ICIEC refers to when an insurance provider or national ECA seek ICIEC’s support to reinsure a risk they have covered, thus sharing the risk between the insurer and ICIEC as a Reinsurer. Usually, ICIEC shares the risk on inward reinsurance arrangements based on a predetermined agreement in these cases. Outward reinsurance is when the Corporation seeks to share risk or expand its insuring capacity for a particular project or portfolio. When ICIEC pursues outward reinsurance, it then looks for partners from the larger reinsurance market, such as the Lloyd’s of London. With outward reinsurance, we can enhance our capacity to take on additional risk and increase our capacity to insuring significant investments volumes and trade transactions.
When does ICIEC seek outward reinsurance?
Rahmatnor: ICIEC reinsures all its transactions via a treaty program and facultative arrangement or both. ICIEC seeks outward facultative reinsurance for megaprojects and trade transactions considered too large for ICIEC to undertake alone. This determination is based on actuarial assessment and risk profiling. ICIEC seeks to support these large-scale projects expressly if they deliver significant development impact, enabling the Corporation to fulfil its mandate. ICIEC’s main partners for outward reinsurance are from the European continent and Bermuda. However, ICIEC constantly explores the availability of rated security in non-traditional markets. These non-traditional reinsurance markets provide needed capacity for specific risks that otherwise cannot be insured on the continent and UK. ICIEC enjoys strong partnerships with other multilaterals who share similar mandates with ICIEC and, as such, often share risks. Our Strategy is to pursue all avenues that may secure additional risk capacity for ICIEC and make sure we have several options.
How is ICIEC benefiting from reinsurance treaties?
Rahmatnor: ICIEC has several treaty programmes covering all lines of business underwritten by the Corporation. Highly rated Reinsurance companies back these treaty programmes. Products included in the treaty programmes are – amongst others – STP, BMP, and FIIP. These treaty reinsurance programmes have provided ICIEC with automatic facilities and additional capacity, reducing the rising transaction costs of setting up facultative reinsurance.
In what cases does ICIEC use facultative reinsurance?
Rahmatnor: While ICIEC typically works with reinsurers on a treaty basis, we remain open to the reinsurance market on a facultative basis. The facultative market helps us stay in touch with the market to understand the current status of risk appetite and pricing. Facultative reinsurance is often used for transactions that do not meet treaty terms and conditions and typically reserved for large-scale transactions with profound development impact. Thanks to ICIEC’s outward facultative partnerships, investors, traders, and banks receive much-needed insurance cover, enabling the execution of trade transaction and inflow of investment to our member countries.
Can you speak more on ICIEC’s role in providing inward reinsurance?
Rahmatnor: Certainly. ICIEC serves as an essential reinsurance partner for the national ECAs of Member Countries in terms of inward reinsurance. These ECAs are often relatively small and are in need not only of financial capacity but also require technical support. These ECAs reach out to ICIEC for reinsurance to support their countries’ export activities and project financing. For these ECAs, ICIEC provides inward reinsurance agreements through facultative and treaty arrangements covering development impact-oriented projects that might not materialize otherwise.
2020 has been a challenging year for everyone. Besides the widespread hardships COVID-19 created in various capacities, how did the pandemic impact the reinsurance market and ICIEC?
Rahmatnor: 2020 was a challenging year in general for the reinsurance market, with significant concerns and outcomes of non-payment. With such uncertainty in the market for political and commercial risk, underwriters mainly focused on their existing portfolios. They did not have an appetite for underwriting new business. In 2020, ICIEC insured USD 9.9 billion worth of business and secured a reinsurance capacity totalling USD 6.081 billion through our treaties, the facultative reinsurance market and other insurance partners. In terms of inward reinsurance, ICIEC participated as a reinsurer for the Inward Quota Share Treaty programs with Turk Eximbank (Turkey), CAGEX (Algeria), COTUNACE (Tunisia), NAIFE (Sudan), Indonesia Eximbank (Indonesia), EGE (Egypt), JLGC (Jordan) and ASEI (Indonesia). In December 2020, ICIEC notably renewed its outward Quota Share Treaties based on expiring terms and conditions despite the world’s challenging pandemic period. ICIEC is particularly proud of this achievement, as we believe it shows how valued ICIEC is as an insurance partner.
Putting 2020 into the rear-view mirror, what is your outlook on the market for reinsurance entering 2021?
Rahmatnor: In 2021, the political risk landscape is particularly tumultuous. The COVID-19 pandemic continues to wreak havoc across the globe, killing and infecting millions, stressing healthcare systems, straining supply chains, troubling economies, and exposing deficiencies in all levels of government worldwide. Various geopolitical conflicts are causing significant risks, while the deterioration of US-Sino relations is providing concerning risk implications for global security and trade. Meanwhile, domestic forms of political strife are exceptionally high, with large protests and unrest occurring in various states worldwide. Despite the conditions in 2021 being somewhat unpredictable, we expect more reinsurance capacity to be released as vaccines reach those in need and governments slowly open their countries from extended lockdowns. These actions will help boost business going forward and encourage investment and trade in the post-COVID-19 world.
Lastly, what should ICIEC’s stakeholders expect from the Corporation’s reinsurance team in the future?
Rahmatnor: As we continue to deal with the ramifications of the pandemic, the reinsurance team at ICIEC is working diligently to strengthen our existing reinsurance partnerships and seek new opportunities to enhance ICIEC’s capacity in support of our Member Countries achieving their development vision and programmes. Despite the current difficulties, we are excited and prepared to help enable an insurance market that can assume more risk, further enhance trade and investment, and support life-altering projects for those most in need. We will continue strengthening ICIEC’s reinsurance capacity as we come out of this challenging period, and I am excited for the potential I see in the world post-COVID. Thank you.
Introduction
Collaboration and partnerships are potent enablers of economic development. One inherent and highly influential collaboration for ICIEC stems from being a member of the Islamic Development Bank Group (IsDB Group). All the IsDB Group member institutions work together towards the same goal – delivering economic prosperity across the OIC by supporting sustainable development through Shari’ah-compliant solutions. Enhancing synergies between ICIEC and the IsDB Group is a strategic priority for the Corporation. It allows ICIEC and its group entities to deliver on both their shared and individual goals more effectively. Partners in the IsDB Group are integral to ensuring ICIEC’s success as the Corporation works to deliver on its mandate to support trade and development throughout the OIC.
The Islamic Development Bank (IsDB) and the IsDB Group:
The Islamic Development Bank (IsDB) established in December 1973 as a Multilateral Development Bank (MDB) under the auspices of the Organisation of Islamic Cooperation (OIC). The Bank commenced business activities in October 1975 with the key objective of facilitating the economic development and social progress of its Member Countries and Muslim communities across the world more broadly. The Bank currently serves 56 Member Countries and is continuously looking to grow its membership.
Since IsDB’s inception, several entities have been launched by the Bank, including ICIEC, the International Islamic Trade Finance Corporation (ITFC), the Islamic Research and Training Institute (IRTI), the Islamic Corporation for the Development of the Private Sector (ICD) and the World WAQF Foundation (WWF). Together with the Bank, these sister institutions make up the IsDB Group and work together to serve OIC member states.
The Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC):
The Islamic Development Bank Group established ICIEC in 1994 as the trade credit and investment insurance arm of the IsDB Group. ICIEC is mandated to expand the scope of trade transactions and increase investment flows among OIC Member Countries by providing takaful solutions for cross-border transactions. Specifically, ICIEC provide exporters, investors, and financial institutions with the following services: i) export credit insurance to cover the risk of non-payment in relation to cross border trade and trade finance transactions, ii) investment insurance to cover country risk in relation to foreign investments among Member Countries, iii) reinsurance of operations covered by export credit agencies (ECAs) in Member Countries, and iv) promotion of Islamic Finance and Takaful.
These services enable exporters, importers, investors, financial institutions and ECAs to transact and conduct business with ICIEC Member Countries by limiting their potential loss. ICIEC’s takaful solutions limit the potential losses that policyholders can incur by mitigating against certain risks, including the risk of expropriation, non-payment, and many others.
The Islamic Research and Training Institute (IRTI):
IRTI was established in 1981 to ensure that the IsDB could perform its intended functions in conducting research and providing training. IRTI’s core objective is to undertake research and provide training and information services in Member Countries and Muslim communities in non-Member Countries around the topic of Shari’ah-compliant finance. The intention behind this research and the training is to help bring these target communities’ economic, financial and banking activities into conformity with Shari’ah and further accelerate economic development and enhance cooperation amongst them. IRTI’s current activities include producing publications, conducting research projects relevant to Islamic Finance, providing capacity development services, and online training courses.
The Islamic Corporation for the Development of the Private Sector (ICD):
ICD established in 1999 to complement the IsDB through the development and promotion of the private sector as a vehicle for economic growth and development in Member Countries. The ICD delivers on this mission by providing finance for private sector projects, promoting competition and entrepreneurship, providing advisory services to governments and private companies and encouraging cross border investments.
The ICD’s primary aims are: i) to identify and support investment opportunities in the private sector in Member Countries, ii) to provide a broad range of Shari’ah-compliant financial products and services and iii) to improve the access that private companies have to Islamic capital markets.
The ICD’s activities are wide-ranging, including the provision of lines of finance to financial institutions in member states to promote the provision of Shari’ah-compliant finance, investment into the equity of Islamic Banks, advisory services to financial institutions, asset management services and investing in projects and corporates.
The Islamic Trade Finance Corporation (ITFC):
The International Islamic Trade Finance Corporation (ITFC) established in 2005 with the mandate to promote trade of the Member Countries of the Islamic Development Bank through providing trade finance and engaging in activities that facilitate intra-trade and international trade. ITFC’s trade finance division provides Shari’ah-compliant trade financing for OIC Member Countries, emphasizing financing intra-OIC trade. ITFC considers providing all Shari’ah-compliant modes of trade financing. The three main financing methods under which it currently provides trade financing include: i) Murabaha, ii) Installment Sale, and iii) Istisna’a. In addition to providing trade financing, the ITFC also provides trade promotion and trade facilitation services. Its trade promotion activities include enabling businesses to attend trade fairs, identifying new markets and business opportunities, and establishing trade partnerships with new contacts and financial institutions. Its trade facilitation services include working with international partners to eliminate regulatory and procedural barriers to trade and facilitate knowledge sharing between Member Countries in trade and transport facilitation. Overall, apart from its trade financing activities, the ITFC aims to provide capacity-building tools to Member Countries and their corporates so that they can effectively trade beyond their domestic borders.
World Waqf Fund (WWF):
Considering the need for a global Waqf entity that can collaborate with and connect governments, organizations, NGOs, philanthropists and corporates alike, the WWF was established by IsDB 2001. The WWF has a host of objectives, including i) the promotion of Awqaf for sustainable development, ii) supporting organizations, programs and projects in the areas of education, health, culture and social life, iii) providing support for research conducted in the area of Waqf, and iv) assisting countries and organizations in drafting legislation regarding Waqf.
ICIEC and the IsDB Group
ICIEC’s relationship with the IsDB Group is vital, as ICIEC and the various members of the Group work together to achieve more significant trade and investment volumes into and between OIC countries. As part of the IsDB Group, ICIEC’s mission, vision, and core values were all created to align amongst members. Enhancing synergies between ICIEC and its partners in the IsDB Group is a crucial priority for the Corporation. Synergies cut across the three strategic objectives of ICIEC’s 10-Year Strategy – enhancing impact, efficiency, and resilience.
ICIEC is working with its sister institutions to support initiatives they are pursuing and is exploring cross-marketing, staff rotation, and undertaking upstream and downstream programs.
Collaboration between ICIEC and IsDB
ICIEC works in the closest collaboration with the IsDB. The Bank and ICIEC have a long history of working together to support strategic transactions and undertake joint initiatives that support Member Countries both in good times and in times of crisis.
An example of this partnership in times of crisis includes the response to the adverse effects of the COVID-19 pandemic. ICIEC is collaborating with the IsDB in several ways. First, ICIEC provided USD 450 million as part of IsDB’s ‘Strategic Preparedness and Response Facility’ to ensure the continuous flow of strategic imports, protect investments, and minimize economic volatility. Later, the two entities established a collaborative USD 2 billion credit guarantee facility known as the COVID-19 Guarantee Facility (CGF). ICIEC serves as the administrator of this facility by deploying its standard credit and political risk insurance solutions through the fund to sustain the import of strategic commodities and protect investments in its Member Countries.
ICIEC has worked particularly closely with the Islamic Solidarity Fund for Development (ISFD) during the crisis. The ISFD sits within the IsDB and works to reduce poverty, build productive capacities of Member Countries, reduce illiteracy, and eradicate diseases and epidemics. ICIEC has formed a bespoke partnership with ISFD known as the ICIEC-ISFD COVID-19 Emergency Response Initiative (ICERI) throughout the pandemic. ISFD has allocated a funding grant of USD 400 million to ICIEC, used to subsidize the premium charged on the insurance cover ICIEC provides to facilitate the procurement of medicine, medical equipment and other essential commodities to eligible countries. In addition to its collaboration through ICERI, ICIEC is exploring the option of using its insurance/guarantee mechanisms as a tool to mobilize resources for financing ISFD’s One Wash Program to address cholera and sanitation issues in OIC MCs.
Building on the success of the ICERI, further collaborations between ICIEC and ISFD are underway. Through such partnerships, the institutions can catalyze support to LDMCs in strategic sectors, including education, health systems, youth empowerment, and economic recovery initiatives of fragile and conflict-affected. This approach is aligned with ISFD’s mission and will enable ICIEC to boost trade and investment flow in LDMCs of OIC Member States.
During the COVID-19 crisis, ICIEC also hosted and participated in knowledge-sharing events with the IsDB and sister entities. As an example of this, ICIEC participated in the « IsDB Group Private Sector Action Response to COVID-19 Webinar, Launching New Online Initiatives ». The webinar hosted many participants from various industries and discussed challenges facing both the private sector and the global economy more broadly during the COVID-19 outbreak. All IsDB Group members participated and used the platform to discuss investment and trade opportunities in IsDB member countries and outlined various pursued initiatives to withstand the economic effects of the pandemic better.
Beyond the crisis, the ICIEC and IsDB entities have collaborated for the mobilize-to-channel line of financing designed to mobilize private capital and deliver much-needed funding to SMEs in ICIEC’s Low Income Member Countries (LIC). The mobilization of this funding is to be done with minimal utilization of ordinary capital resources through partnerships with regional DFIs.
ICIEC and the IsDB are also exploring further partnership in several vital areas, including increased access to finance for women-owned enterprises and infrastructure project risk mitigation. IsDB and ICIEC are currently considering a partnership on Affirmative Finance Action for Women in Africa (AFAWA), a women enterprises and women-friendly SMEs support program designed by AfDB and funded partly by the G-7 States. Additionally, there is a proposal by ICIEC to launch the Infrastructure Investment Fund Pool (IIFP) alongside the IsDB. This proposal by ICIEC aims to increase non-funded project support mechanisms such as credit and political risk insurance instruments.
ICIEC is also working towards integrating the IsDB’s policy framework into its mainstream activities. The integrated policies include the IsDB’s sector policies and other policies related to compliance, anti-corruption, integrity and ethics. By doing so, ICIEC will foster greater alignment with the IsDB.
Collaboration between ICIEC and IRTI
ICIEC regularly works with – and benefits from the services of – IRTI. ICIEC has taken part in seminars and events organized by IRTI to improve the understanding of its personnel related to various topics within the sphere of Islamic Finance. ICIEC also uses IRTI’s courses to build the capacity of its people, as ICIEC offers staff the option to participate in the many Islamic Finance courses offered by IRTI. Additionally, ICIEC personnel often uses IRTI’s research and publications to inform its decision-making related to its products, transactions and other components of its operations.
ICIEC has also contributed to IRTI as well. Specifically, senior personnel from ICIEC have acted as trainers for courses offered by IRTI in the past. As such, the relationship between ICIEC and IRTI is one characterized by knowledge-sharing and collaboration.
There is room to expand the relationship, primarily in jointly producing learning material on investment and trade credit takaful, often not well understood across the OIC.
Collaboration between ICIEC and ICD
ICIEC’s relationship with ICD is robust as the institutions share the objective of supporting the private sector in Member Countries by strengthening companies and facilitating infrastructure projects across the OIC through Islamic financing. ICIEC has participated in multiple Sukuk deals led by ICD.
Additionally, ICIEC has participated with ICD in the financing of various projects. For example, ICD and ICIEC supported a power plant project in Mali called the « Albatros Energy Mali (AEM) ». ICD financed part of the project, while ICIEC issued a Foreign Investment Insurance Policy (FIIP) to one of the equity participants in the transaction. With their participation and other DFIs, the project was made financially viable and was able to attract the capital needed for construction.
Increasing collaboration with the ICD is an ICIEC aim. Working more closely concerning ICD’s syndication mandates, its Line of Financing business, and enhancing ICD’s guarantee program for SMEs would prove beneficial for both entities.
Collaboration between ICIEC and ITFC
The visions and missions of ICIEC and ITFC both aim to boost intra-OIC trade through Shari’ah-compliant financial instruments. The institutions have worked together on many initiatives and transactions in the past. Currently, ICIEC is supporting over USD 484 million of ITFC’s finance operations for Member Countries.
The most salient recent initiative that the institutions have worked on is the Arab-Africa Foreign Trade Bridge (AATB) program. The AATB is a regional trade promotion program aimed at addressing some of the challenges of promoting trade between the two regions. The AATB program is essential for ICIEC’s mission and values. It allows the Corporation to more effectively encourage intra-OIC trade and Arab and African inter-regional collaboration more specifically. Thus far, the program has seen a high degree of participation by governmental bodies, trade support organizations and private sector organizations alike. ICIEC has seen the significant potential of the AATB program, as the Corporation has closed upwards of USD 5.6 billion worth of transactions through the program over the last ten years. ICIEC aims to work closely with its partner ITFC to contribute to and consistently grow the program.
ICIEC aims to improve synergies with ITFC by collaborating more closely on the AATB Program, LC Products, syndication enhancements, cross-selling, and incentivized business-level agreements for project referrals. With enhanced collaboration across these elements, the business volumes for both entities would expand.
Collaboration between ICIEC and WWF
ICIEC’s relationship with the fund remains limited. However, the Corporation foresees potential opportunities to explore in the future where the WWF may be able to utilize ICIEC services to support development in strategic sectors.
Conclusion: Coming Together for Growth and Resilience
ICIEC’s partners are critical to the Corporation’s ability to facilitate sustainable economic growth for Member Countries. With this in mind, ICIEC has worked hard to foster strong relationships with its IsDB partners and will continue to strengthen IsDB Group synergy going forward. While ICIEC has a longstanding history with most of its IsDB Group peers, the Corporation is still in the process of exploring deeper collaborative options with others. ICIEC acknowledges the importance of all of its partners in the IsDB Group. The difficulties that have come with the COVID-19 pandemic have shown the Corporation that the Group can only withstand and recover from crises if the members join forces and leverage each other’s strengths. Enhancing the partnership amongst the IsDB Group is a goal that ICIEC remains committed to ensuring that all members of the IsDB Group and our shareholders can achieve their development goals.
The interest rate benchmark LIBOR is being wound down at the end of 2021. End dates have been announced for all LIBOR term lengths and new alterative reference benchmarks have been developed. Firms, financial organizations, insurers and governments should be taking appropriate action to review their operations and transition contracts to the alternative rates to ensure the end of LIBOR does not lead to market disruptions, business challenges, or harm to consumers. ICIEC will be prepared for the transition, will you?
What is LIBOR?
LIBOR is the London Interbank Offered Rate. It was intended to provide the interest rate at which banks could borrow funds from other banks in the wholesale market and since became an important interest rate reference point for contracts and business transactions around the world. LIBOR has been produced in 7 tenors or term lengths (overnight/spot next, one week, one month, two months, three months, six months and 12 months) across 5 currencies – the US dollar, euro, UK pound, Japanese yen, and Swiss franc. LIBOR is managed through regular submissions provided by a panel of 20 banks to a U.S.-based regulatory authority, the ICE Benchmark Administration Limited. These submissions were intended to reflect the interest rate by term and currency at which banks could borrow money on unsecured terms in wholesale markets.
Why move away from LIBOR?
There are a number of reasons why LIBOR has become a problem. First, financial markets have changed, and LIBOR has not been able to keep up. After the 2008-09 financial crisis, banks turned away from accessing funds by using the interbank market, where LIBOR set the interest rate for transactions. Therefore, the international interbank market which underpins LIBOR has since dwindled substantially.
Second, the eurocurrency markets that helped to drive LIBOR no longer exist as a distinct entity. Over time, LIBOR instead has been used to price much of the interest rate derivatives market, even as that derivatives market expanded far beyond the euromarkets. Logically, a risk-free benchmark rate should have been used rather than LIBOR, but that evolution never took place.
Third, banks do not often lend to each other at present on an unsecured basis, and that market is not returning. As a result, LIBOR is no longer measuring anything that resembles real transactions; it has become the rate at which banks are not actually borrowing from one another. This reality raised serious questions about the future sustainability of the LIBOR benchmarks. Both the Bank of England and UK financial regulator (the FCA) noted in 2017 that it was increasingly apparent there was an absence of active underlying markets for actual LIBOR transactions, which undermined the use of LIBOR as a market-based metric.
And fourth, the system for quoting rates, and thus constructing LIBOR, was contained and even fragile, making it more vulnerable to misconduct and illegal activity — as has unfortunately occurred on occasion.
The coming transition
After much discussion among various global banks and national financial regulators, in March 2021 the ICE Benchmark Administration Limited (IBA), the administrator of LIBOR, confirmed that the panels for sterling, euro, Swiss franc and Japanese yen LIBOR will cease operating at end-2021, as well as the panels for 1-week and 2-month US dollar LIBOR. The remaining US dollar LIBOR panels will cease to operate at end-June 2023. The LIBOR panel banks will continue to submit to LIBOR until end-2021, and to end-June 2023 for US dollar LIBOR, to enable time for the market to transition away from LIBOR.
A new representative rate for each LIBOR currency
Working groups in the United States, the EU, United Kingdom, Japan, and Switzerland have been discussing the development of alternatives to LIBOR over a number of years. These alternatives have now been established and, while generally similar, they will have subtle differences among them. The key difference compared to LIBOR is that the new reference interest rates reflect actual transactions in repos, wholesale deposits and overnight call markets in the five currencies being used.
The new reference rates are:
U.S. dollar: Secured Overnight Financing Rate (SOFR): Secured rate that covers multiple overnight repo market segments.
Euro: Euro short-term rate (ESTR): Unsecured rate that captures overnight wholesale deposit transactions.
UK pound: Sterling Overnight Index Average (SONIA): Unsecured rate that covers overnight wholesale deposit transactions.
Swiss franc: Swiss Average Rate Overnight (SARON): Secured rate that reflects interest paid on interbank overnight repo rate.
Japanese yen: Tokyo Overnight Average Rate (TONAR): Unsecured rate that captures overnight call rate market.
Each reference rate will be administered by a national authority for their respective currency –the Federal Reserve Bank of New York, European Central Bank, Bank of England, SIX Exchange for the Swiss franc, and Bank of Japan.
The Federal Reserve Bank of New York was the first institution to begin publishing SOFR data, and SOFR futures made a fast start with about US$5 billion in daily volume of trading in the first year (2017). Interest in the SOFR futures market grew and quickly reached over 12 thousand contracts in the first year.
The first SARON transactions took place on a bilateral basis in April 2017, with clearing of SARON-referencing swaps being established in autumn 2017. While notional volumes were initially small, growth in transaction numbers has been encouraging and is a valuable pre-requisite for transition.
Foundational European financial institutions have taken steps to build the new market segments. The European Investment Bank (EIB) issued an initial £1 billion SONIA-linked bond, the first SONIA floating rate note issued. It was significantly oversubscribed. The European Central Bank’s Governing Council then began publication in 2019 of an overnight euro rate, called ESTR, based on wholesale unsecured overnight borrowing transaction data collected by the euro system.
Overall, significant progress has been made across all five currencies toward implementing the new reference interest rate system administered by a national authority for each currency. The transition away from LIBOR is well under way, and there will be no turning back.
Implications of the transition
At the end of 2021 (and June 2023 for most USD LIBOR tenors), the LIBOR benchmark will no longer be sustained through the current mechanism used by its regulators, and banks on the panels will not be obliged to stay part of the system. Ensuring an orderly transition by businesses, financial institutions and governments from LIBOR to the alternative interest rate benchmarks would minimize disruption and help contribute to financial stability.
At this stage, all market participants will need to take appropriate action to remove dependencies on LIBOR. This means taking reasonable steps to ensure the end of LIBOR does not lead to markets being disrupted, business affected or diminished, or harm to consumers. The smoothest and best pathway for this transition is to move away from LIBOR in all new contracts, instead selecting one or more of the five alternative reference rates.
In terms of legacy contracts (i.e. those still in force at end-2021 and referencing LIBOR), users of LIBOR should be making plans to either switch contracts from the current basis for LIBOR to the new benchmarks, or by ensuring that contracts have robust fallbacks in place that allow for a smooth transition when current LIBOR data points cease to be published. The most desirable approach to transition for legacy contracts would be to amend contracts to reference one or more alternative rates. All firms (even those that are not banks, insurers or asset managers) that currently make use of LIBOR in some manner should be taking action on these fronts.
Ideally, firms, financial institutions, and governments should conduct an end-to-end inventory of their LIBOR exposure. This inventory should cover the full range of processes and systems, including pricing, valuation, risk management and financial accounting. It should cover contracts with clients, counterparties, creditors, employees, suppliers and others. For critical inhouse and contracted financial systems, firms should seek confirmation from their service providers of timely software upgrades in order to be able to use alternative rates.
Where LIBOR transition issues are identified that require amendment or renegotiation, firms should communicate with affected clients or service providers in a timely manner. This communication should describe to the customer or service provider the risks associated with LIBOR ending, recognizing the risk that some customers may not fully appreciate the implications.
Implications for Islamic Finance
With the upcoming transition, there are a number of implications for Islamic banking facilities. First, they will need to consider if any fallback provisions that apply after the transition away from LIBOR are appropriate and satisfactory. Second, LIBOR is a forward-looking term rate, whereas the proposed replacement rates are backward-looking. Banks’ operational systems are generally set-up on the basis of forward-looking term rates and may therefore need to be adapted to function effectively. The timing and basis of calculating profit rates will also need to be amended where new rates are implemented. New forward-looking term rates may be developed for some currencies, but it is still uncertain if these will be available prior to the cessation of LIBOR and their use is likely to be restricted to specific markets and circumstances.
A third concern is in relation to value transfer and spread adjustment. The new rates will be based on the overnight deposit rate of the relevant central bank and do not include the term liquidity premium and bank credit risk that are inherent in LIBOR. Simply replacing the LIBOR with the new rate without any spread adjustment would reduce the overall financing cost and reduce the economic value of the financing arrangement to the bank. Where an existing facility will transition from LIBOR to the new rates, it will need to be determined how to build in term liquidity premium and bank credit risk to avoid value transfer as much as possible. This will generally mean that a spread adjustment will need to be added to the existing margin or profit rate to compensate the bank or financier for what is otherwise likely to be a lower overall rate.
A fourth area of concern is the implication of structural issues for Islamic banking facilities. Islamic banks will face specific challenges in adapting to the use of backward-looking rates due to the fact that they typically use cash flows to generate a mark-up, that must, under Shari’ah principles, be determined at the time the provision of services is agreed. One possible solution to this is to calculate the return on a backward-looking basis and add it to the following profit period. However, the general preferred solution is to agree on a fixed rate of return payable in advance for a set contract or calculation period. At the end of each period, the bank would then calculate the actual profit return using the new rates and grant the obligor a rebate of any difference between the fixed profit mark-up that was previously charged and the actual profit determined by the backward-looking rates.
Overall, Islamic banking facilities will need to consider what changes need to be made for their existing or legacy transactions which will continue after December 2021 and on what basis to facilitate new transactions going forward. There is opportunity for the transition away from LIBOR to result in the development of alternative standard benchmarks designed specifically for the Islamic finance market, but development in this regard remains to be seen. Flexibility to accommodate future market consensus will be key for Islamic banks.
Implications for the Insurance Industry
The transition away from LIBOR can have a significant impact on numerous aspects of an insurer’s business if not managed intentionally. As with Islamic banking facilities, insurers should consider if any fallback provisions that apply after the transition away from LIBOR are appropriate and satisfactory. In terms of balance sheet valuation being impacted by the transition, a small change in the discount rate could have impact on long-dated liabilities with a floating interest rate. Insurers should measure and analyze the impact of these changes on their overall capital position. If potential impact on cash flow and liquidity is determined, insurers should revisit their asset and liability matching. LIBOR is also the most used rate for interest rate swap transactions. The decommissioning of LIBOR could present issues for insurers hedging against risk. Additionally, the transition may affect insurers pricing for some of their long-duration products, such as any legacy contracts that are tied to LIBOR.
Regulators and rating agencies may examine insurers’ operational readiness for the transition process and their ability to adjust their products, provisions and contracts accordingly. To mitigate the possibility of negative implications for their ratings, insurers need to plan ahead. They can begin by identifying areas within their products, models, and systems that are affected by the transition and consider the impact. Insurers need to understand the approach needed to address the transition so that clear plan and governance framework for operational readiness can be developed. A plan will help prevent bottlenecks and avoidable delays during the implementation process. Insurers should also keep open communication with their board of directors and senior management throughout the transition. Additionally, speaking with clients and agents early will limit surprises and disruptions in the future.
ICIEC is currently in the process of preparing for the transition, keeping in close touch with clients and the board of directors along the way. An internal study is being conducted to determine the effect of the transition on ICIEC’s products, operations, and existing contracts. Once completed, ICIEC will prepare an action plan to manage and transition operations as necessary.
2020 has been defined by the COVID-19 pandemic, which created life-altering circumstances and presented great challenges for people around the world. However, 2020 was also a year defined by hope and promise, as people, companies, institutions, and governments worked together to tackle these challenges using innovative solutions and strong partnerships. ICIEC has worked to be at the forefront of these innovations and partnerships and is delighted to show the developments of the Corporation in 2020: ICIEC’s Year in Review.
2020 Press Highlights
2020 was a significant year for ICIEC in terms of the events the Corporation both hosted and attended, and awards received. Majority of the events in 2020 were held virtually in response to the COVID-19 pandemic, offering an opportunity for ICEIC to provide leadership, support, and solutions to mitigate the challenges posed by the crisis. Event attendance helped ICIEC to keep stakeholders up to date on its activities and raise awareness of the benefits of Islamic finance.
On July 6th, ICIEC participated in the “IsDB Group Private Sector Action Response to COVID-19 Webinar, Launching New Online Initiatives”. Hosting over 700 participants from various industries, the webinar discussed challenges facing both the private sector and the global economy during the COVID-19 outbreak and provided a platform to discuss investment and trade opportunities in IsDB member countries. Learn more here.
On July 13th, ICIEC and the Islamic Centre for Development of Trade (ICDT) jointly organized a Webinar on the “Impact of COVID-19 on the Insurance of Investment and Export Credit for Strengthening Intra-OIC Trade and Investment”. During this virtual forum, participants discussed the role and experiences of insurance and export credit agencies in OIC countries along with the insurance sector’s response to the pandemic. The webinar highlighted the importance of the investment and export credit insurance sector in covering risks for countries, local companies, and international trade partnerships, both during the pandemic and in the post-pandemic future. Read more about the event here.
On September 14th, ICIEC was awarded “The Global Islamic Export Credit and Political Risk Insurance Award for 2020” at the 10th annual Global Islamic Finance Awards (GIFA). This marks the fourth time ICIEC has received this accolade since its introduction in 2016 – previous awards occurring in 2016, 2017, and 2018, respectively. Learn more about the award here.
On October 19th, Moody’s Investor Services (Moody’s) affirmed ICIEC’s Aa3 Insurance Financial Strength Rating (IFSR) for the 13th consecutive year with stable outlook. The report highlighted the significant growth in business during H1-2020 with gross premiums increasing by 21% over H1-2019. Moody’s’ acknowledged ICIEC’s low accumulation of claims, despite negative impacts from the pandemic, as a strength when compared with other global credit insurers that experienced notable weakening in claims performance. Read about why ICIEC received this rating here.
To close out the year, ICIEC was awarded two major awards from the Islamic Finance News (IFN) 2020 Awards. For ICIEC’s EUR20 million cover for the enhancement of a scientific high school in Yamoussourkro, Cote D’Ivoire, the Corporation was awarded the IFN Africa Deal of the Year, showcasing the innovation and importance of development to Ivorian growth. Meanwhile, ICIEC’s EUR142 million cover for the construction and development of hospitals and related health facilities in Cote d’Ivoire was awarded the IFN Sovereign and Multilateral Deal of the Year, as the Corporation worked to support Cote d’Ivoire in its pandemic response efforts. Read more about these awards here.
Publications
2020 was a significant year for ICIEC in disseminating information about the Corporation’s activities. Frequent and informative publications are organizational goals for the Corporation, ensuring transparency for our valued partners and clients. Furthermore, as the only multilateral provider of shariah compliant export credit and political risk insurance, ICIEC believes the Corporation’s publications can help guide other organizations towards industry best practices and innovations.
On May 31st, ICIEC released its Annual Report and financial statements for 2019. Despite 2019 being marked by the intensification of trade tensions, political instability, and weak global growth, the Corporation raised its business insured by 20% to reach USD 10.86 billion – the highest in the past decade. The Corporation saw an increase of more than 28% over the previous year in total intra-OIC business, insuring a total of USD 5.4 billion, involving 36 member countries. Read more on ICIEC’s impressive 2019 results here.
In July, ICIEC launched the first edition of its revamped quarterly newsletter. The newsletters have been designed to feature updates and announcements, industry insights and success stories from ICIEC and our partners. Re-introducing newsletters reflects the Corporation’s genuine desire for greater engagement with its valued partners, clients, and stakeholders.
On August 19th, ICIEC released its Annual Development Effectiveness Report (ADER) for 2019. The ADER highlights the impact of ICIEC’s work on furthering human development within OIC member countries, including the Corporation’s impact on facilitating lasting development by providing insurance solutions for imports and exports of essential commodities, and the construction of critical infrastructure. Read more about the report here.
On September 14th, ICIEC released information regarding its performance over the first half of the fiscal year. The update highlighted that, while the pandemic has provided challenges for a positive financial performance, the Corporation was able to raise its total businesses insured by over 9%. Read more about these positive developments here.
On December 14th, ICIEC published a stock-take study for the G20 Saudi Presidency on “Best Practices of MDBs and Specialized Multilateral Insurers (SMIs) in Political Risk Insurance for Equity Investments, Medium and Long-Term (MLT) Debt Investments and other Insurance Solutions.” The study analyzes the current state of the political risk and credit insurance market for equity investments and MLT debt investments. It also identifies best practices and potential gaps in the market and provides recommendations on how identified gaps could be filled, particularly for low-income countries and fragile states. Learn more about our work on the G20 study here.
Partnerships
ICIEC understands the value of collaboration in expanding trade, strengthening coverage, and growing economies. This is why the Corporation has made efforts throughout 2020 to forge new relationships and strengthen existing partnerships throughout the pandemic. To do so, ICIEC has signed several new Memorandums of Understanding (MoU), cooperating with national Export Credit Agencies (ECA) to help stabilize OIC states and grow their economic prospects.
On June 30th, a MoU was signed between ICIEC and the Uzbekistan National Export-Import Insurance Company (Uzbekinvest). The partnership advances both parties’ respective operational mandates of providing insurance support for trade and investments. The new MoU will create opportunities for joint strategic projects between the two insurance entities in addition to other forms of cooperation such as technical assistance, training, and capacity building. Read about the ICIEC-Uzbekinvest partnership here.
On July 22nd, a MoU was signed between ICIEC and the Austrian ECA Oesterreichische Kontrollbank Aktiengesellschaft (OeKB). The MoU is an agreement for OeKB and ICIEC to work jointly at increasing projects and investments from Austrian businesses and investors into ICIEC member countries while providing other forms of cooperation such as technical assistance, training, and capacity building. The agreement allows for quick and flexible agreements for risk sharing in the form of reinsurance or co-insurance, encouraging higher risk appetite for trade transactions and investments. Read about the ICIEC-OeKB partnership here.
On August 17th, ICIEC signed a MoU with the United Kingdom’s ECA, which operates under the name UK Export Finance (UKEF). The MoU allows for both entities to enter co-insurance, reinsurance, or cooperation agreements to engage in strategic joint projects that support exports and investments from the United Kingdom into ICIEC’s member countries. The deal provides potential for UKEF to risk-share with ICIEC and leverage the Corporation’s preferred creditor status across key international markets such as UAE, Oman, and Bahrain – all ICIEC member countries. Read about the ICIEC-UKEF partnership here.
On September 7th, ICIEC signed a MoU with Compañía Española de Seguros de Crédito a la Exportación, S.A., Compañía de Seguros y Reaseguros, SME (CESCE). The partnership encourages cooperation in supporting trade and investment between Spain and ICIEC member countries through joint export credit insurance provisions, risk sharing, and co-insurance, in addition to promoting other forms of cooperation such as technical assistance and capacity building. Read about the ICIEC-CESCE partnership here.
On December 10th, ICIEC signed a MoU with the ECA Eximgarant of Belarus (Eximgarant). The signed MoU promotes collaborative efforts to support trade and investment between the Republic of Belarus and ICIEC member countries, encouraging joint export credit insurance provisions and other forms of cooperation such as technical assistance and capacity building. Read about the ICIEC-Eximgarant partnership here.
COVID-19 Response
ICIEC has been working since the beginning of the pandemic to forge partnerships and find solutions that help mitigate the challenge of COVID-19 in our member countries. ICIEC’s crisis response has brought close collaboration with IsDB and other members of the IsDB Group, ensuring the provided aid met the unique needs of our varying member countries and their citizens. The Corporation is continuing many of these support efforts into 2021.
On July 6th, ICIEC played a key role in launching IsDB’s Strategic Preparedness and Response Programme (SPRP), a COVID-19 focused innovation allocating USD 2.3 billion of aid to member countries and Muslim communities in non-member countries. This aid package has been crucial to helping member countries respond to the virus, restore normalcy, and restart their economies. The Programme is working to fulfill the IsDB COVID-19 Response “3 R’s”: Respond, Restore, Restart. Of the allocated aid, USD 150 million has been provided by ICIEC for extended insurance cover, facilitating continued trade and investment in member countries. Read about the launch of the SPRP here.
As of October 23rd, ICIEC continued in its partnership with IsDB by jointly launching the COVID-19 Guarantee Facility, an innovative program providing USD 2 billion to support the private sector. 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. Learn more about the partnership here.
ICIEC continued its efforts to support those affected by the COVID-19 pandemic by partnering with the Islamic Solidarity Fund for Development (ISFD), the poverty alleviation arm of the IsDB Group. Together, ICIEC and ISFD launched ICERI, or the ICIEC-ISFD COVID-19 Emergency Response Initiative. The Initiative was created to help IsDB member countries meet their import needs of medicine, medical equipment, food supplies and other essential commodities.
Several 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 Initiative has also helped ICIEC extend USD 5.5 million in coverage to the State Bank of India’s Singapore branch for the critical importation of wheat to address food security for the citizens of Bangladesh. Read more about ICERI here
Seminal Projects
Throughout 2020, ICIEC provided insurance support for numerous important development projects across its member countries, enabling the development of infrastructure in a wide variety of fields. These ongoing projects are helping to address the unique needs of our member countries, furthering ICIEC’s mission to facilitate long-term and impactful investment. The Corporation made significant contributions to healthcare and medical infrastructure throughout the pandemic, improving the ability for healthcare workers to provide quality care and support to underserved communities.
ICIEC provided a cover of EUR142 million for a project in Cote d’Ivoire, which was financed by Deutsche Bank, helping to build two new hospitals in the south-eastern towns of Adzope and Aboisso. The two hospitals will employ around 600 local people and foster the development of a micro-economy in the areas surrounding them. Additionally, the project will finance five new medical units in existing hospitals across the country. Greatly improving citizens access to essential healthcare infrastructure.
ICIEC has extended more than EUR 143 million in cover toward infrastructure developments in Diamniadio, Senegal. ICIEC’s cover contributes to the construction of a 50,000-seat capacity Olympic football stadium, two training grounds and a system to produce and store the solar energy that will power the stadium, in addition to creating nearly 400 jobs.
ICIEC has issued EUR 50 million in guarantee coverage for a transformational telecommunications project in Indonesia conducted between China’s largest telecommunications equipment manufacturer and Indonesia’s second largest telco operator. By investing approximately USD 2 billion to expand and strengthen its 4G network, the telco operator will ensure 90% of Indonesia’s 267 million people, particularly in rural areas, will have access to reliable voice and data coverage.
ICIEC has provided EUR20 million in Non-Honoring of Sovereign Financial Obligation cover against the non-payment of a loan facility provided to the Government of Côte d’Ivoire. ICIEC’s cover enables the government to move forward with the renovation of the Scientific High School of Yamoussoukro in addition to advancing the construction of 22 new classrooms.
ICIEC covered approximately USD 9.6 million to Boskalis, a leading Netherlands-based maritime infrastructure company, to develop a new contract for the expansion of the Alexandria Port in Egypt. The capacity of the container terminal is on-track to accommodate approximately 1,250 million containers – double the Port’s existing capacity. The project will contribute to the creation of 3000 temporary construction jobs, in addition to the almost 3000 direct and 2000 indirect jobs created for the long-term.
