Friday, Jun 19, 2020
MARC has affirmed its financial institution (FI) ratings of AAA/MARC-1 on Islamic Development Bank (IsDB), as well as its rating of AAAIS on the Sukuk Wakalah programme of up to RM400 million issued by Tadamun Services Berhad, a trust established by IsDB. The outlook on the ratings is stable.
The affirmed FI ratings reflect IsDB’s preferred creditor status as a multilateral development bank (MDB) that was established by the Organisation of Islamic Cooperation (OIC) in 1975 to provide financial support for development projects of OIC member countries and Islamic communities in non-member countries. It also considers IsDB’s strong capitalisation, healthy liquidity position and low leverage ratio, which provides some buffer against the weakening global economy amid the COVID-19 pandemic.
IsDB’s healthy capitalisation and provisioning stand the MDB in good stead to weather the economic crisis, notwithstanding the likely increase in overdue instalments. As at end-2019, impairment provisions stood at ID306.4 million against ID121.4 million worth of overdue instalments, translating to overdues provisioning coverage of over 250%. At the same time, the bank’s members’ equity-to-assets ratio stood at 38.5%, higher than many of its peer MDBs.
The bank also has a sound liquidity position as reflected by its liquid assets-to-total borrowings ratio of 51.2%. Its liquid assets, which stood at ID7.1 billion as at end-2019, comprised deposits with banks, cash balances and sukuk investment. MARC notes that the bank has also sourced deposits of ID361.8 million from related parties in 2019, which provides some diversification to its funding base that has previously comprised solely of borrowings.
As with other MDBs, IsDB remains exposed to the credit risk of sovereigns with weak credit profiles. As at end-2019, 85.1% of the bank’s top 20 sovereign exposures were unrated and non-investment grade countries. While overdue instalments improved to 0.8% of total financing in 2019 (2018: 1.1%), the economic impact from the ongoing COVID-19 pandemic on some of IsDB’s debtor nations will be severe, which could lead to an increase in overdue instalments. Nevertheless, IsDB benefits from its preferred creditor status which places priority of debt payments to MDBs ahead of other creditors.
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