Interview: Iran Integral to Islamic Development Bank Operations

Islamic Development Bank, the Jeddah-based multilateral development financing institution devoted to lending a hand to its 57 Muslim member states in fostering economic development and social progress, has 15 active projects in Iran worth billions of dollars.

"We value Iran's membership, as it is the third largest shareholder in the institution and an important member country," Mansur Muhtar, IDB vice president for operations, also told Financial Tribune in an exclusive interview in Tehran.

As to the lender's latest capital increase, Iran holds 8.25% of all IDB shares worth 4.174 billion Islamic dinars (ID) and ranks third after Saudi Arabia and Libya holding 23.5% and 9.43% of the shares worth 11.896 billion ID and 4.771 billion ID respectively. A little more than 1% of the bank's shares worth 517.07 million ID are still available for subscription.

Islamic dinar, a unit of account of IDB, is equal to one Special Drawing Right of the International Monetary Fund. The composition of currencies in the SDR basket denominating in ID are USD 41.9%, EUR 37.4%, GBP 11.3% and JPY 9.4%.

In terms of voting power, Iran holds 387,734 or 8.40% of the total votes.

What is more, Iran sits on IDB's Board of Executive Directors and is represented by its deputy economy minister for banking affairs.

According to Muhtar, a seasoned banker who has served as executive director on the board of the World Bank Group and as executive director of the African Development Bank, Iran currently has an overall portfolio of about $7.4 billion with IDB.

"We have project financing amounting to $3.2 billion, we have trade financing of about $2.4 billion and we also offer insurance coverage that provides support against investment and political risks in the form of guarantees and that support for Iran is about $1.4 billion," he said.

"The bulk of project financing funds are concentrated in infrastructure, water sanitation, urban services and energy sectors, but the development bank also caters to capital needs in agriculture, industrial and mining operations," adds Muhtar who also helmed the Nigerian Ministry of Finance from 2008 to 2010.

The Gharesso-Zaringol Irrigation and Drainage Network Project, for instance, is an Iranian project currently employing IDB funds. It approved €92.3 million in 2016 and provides infrastructure for flood prevention, irrigation and water supply while introducing state-of-the-art technology.

The project is aimed at increasing agricultural income, reducing poverty and increasing participatory water management.

Furthermore, the Islamic Corporation for the Development of Private Sector (ICD), a multilateral development financing institution that is part of the IDB Group, provides support for the Iranian private sector, but the amount of $3.78 million pales in comparison with the support they provide for government projects.

Leaving Politics at the Door

The Iranian economy was brought close to the brink by sanctions intensified against it in 2010, which mainly targeted its financial system.

The country was also practically barred from employing any foreign funds, but Muhtar says that "in terms of approvals, yes we had some projects" when the sanctions were still in place, without elaborating on the projects.

"Based on IDB rules and regulations, we only recognize UN, Arab League and African sanctions, not unilateral sanctions of the US or the EU," stresses Farshad Kalivash, IDB's field representative in Iran.

On the other hand, regional political tensions have been on the rise in the Middle East and among Muslim nations of other regions as well, in what is at best an uncertain period.

However, Muhtar pointed out that even as Iran and Saudi Arabia are increasingly emerging as polar opposites in a regional power game and close to a quarter of IDB shares are held by the latter, that does not exert an influence over how IDB decides to conduct business.

"IDB is a non-political organization, a multilateral development bank committed to supporting its 57 member countries across various regions. Iran is also one of our members like many other countries and we basically continue to see how we can support our member countries achieve their economic and social development goals," he added.

Islamic Banking 

Islamic banking system, based on the principles of Islamic law that upholds risk/profit sharing and combats usury, is becoming more of a hot-button topic by the day as it is spreading its reach.

Muhtar lauds Iran as a proponent of Islamic banking, which has put a lot of effort for promoting it and refers to it as one of the nations "leading the way among other Middle East countries".

"There is a growing recognition and awareness that Islamic banking and financing in general have a key role to play and compliance with Sharia principles comes first and foremost here," he said.

The IDB executive does not have a specific formula for Iran to boost its endeavors in Islamic banking, as he says he is not sufficiently familiar with the precise internal workings of the Iranian banking system, but he does have nuggets of wisdom to offer.

He stresses on complying with Islamic principles, balancing risk, encouraging the real sector of the economy and avoiding speculative lending, calling on Muslim countries to continuously strive to focus on removing hurdles by improving access, scope and coverage related to financial inclusion.

According to Muhtar, many countries have focused on individuals with high net worth and the corporate sector, while they need to redirect attention toward micro-financing and small businesses, and part of their challenge in this regard is to reduce the cost of transactions by employing more cutting-edge technology and electronic and mobile banking.

"The other issue, of course, relates to [putting in place] suitable regulatory and supervisory rules for Islamic banking that many countries have implemented," he said, underscoring the importance of standards set by the Kuala Lumpur-based Islamic Financial Services Board.

Human capital appears as the next vital piece of the Islamic banking puzzle owing to the fact that because of the uniqueness of Islamic banking and its unique features, countries must train a workforce that is well-versed in Islamic banking principles to achieve effective results.

Islamic banking and international banking are obviously differentiated in some aspects. A discrepancy in regulations and approaches in various countries means that the two will be at odds with each other at certain junctures.

"It is discriminatory; it does not favor Islamic banking," says Muhtar, while noting that the traditional banking system and the legal, regulatory and tax systems in many countries tend to be biased against Islamic banking principles.

Training, Sustainable Development

The IDB Group has an outfit called the Islamic Research and Training Institute that serves as its primary organizational unit for offering training, information, advisory and technical assistance on Islamic banking and finance.

"We do practical and face-to-face training, but we have also invested a lot on online courses that has made us the most recognized online banking training platform for Islamic banking and finance," the IDB executive said, stressing that the trainings are "open to everybody".

The in-person trainings are not limited to Saudi Arabia, as representatives of the institute travel around the world to offer in-country trainings and workshops tailored to the specific needs of their respective member states at their request.

"We also have partnerships with other institutions based on which we support training activities by providing resource persons to join other institutions involved in these things," he added.

IDB accentuates sustainable development and poverty alleviation in the Muslim world and that's one of the points focused on by Muhtar in the Islamic Economics and Banking Symposium held recently in Tehran by Iran's Mustafa Science and Technology Foundation.

As to financial challenges confronting Muslim countries, he believes that for many countries it boils down to mobilizing and effectively channeling financial resources to address critical development needs.

"Basically, that entails both mobilizing the resources from the private sector and enhancing the government revenue," he said, referring to the mobilization of more public resources through taxation and other areas for the state and encouraging private partnerships and raising investments, both internally and through foreign direct investments for the private sector.  

IDB and Member Countries

Since its inception more than four decades ago, the Islamic Development Bank has financed over 850 major projects –with the total exceeding 6,000–in member countries and spent over $127 billion in project financing, trade financing and technical assistance.

As per the board's decision in its latest annual meeting, its authorized capital was raised to 100 billion ID and its subscribed capital to 50 billion ID.

The multilateral development bank amasses information about a variety of social and economic indicators in member countries. The social indicators pertain to population, annual growth rate, birth, death, mortality and literacy rates, total labor force and Internet and computer uses, while it evaluates multiple industries and their share in each member country's GDP, exports, imports and trade balance, as well as reserves and debts.

Its data show that since its founding in 1976, IDB has approved more than 270 projects in Iran.

IDB's Member Country Partnership Strategies, which were launched in 2010, play an important role in formulating medium-term strategies and enhancing dialogue with key stakeholders in member countries and development partners, including Iran.

As of Dec. 2016, IDB had prepared 19 MCPS. In 2016, the IDB Group initiated eight new MCPS, six of which–including the one with Iran–are in various stages of cooperation.

Furthermore, in close consultation with the Iranian Economy Ministry, the IDB Group completed a Country Economic Work initiative for Iran while initiating one each for Turkey and Kyrgyzstan.

Muhtar announced that a book titled 'Diagnosing Iranian Economy' will be launched in the coming months, which consists of 10 background documents for Iran's MCPS.