Fitch affirms Islamic Development Bank at 'AAA'/'F1+'

The ratings are based on the strong support the bank derives from its shareholders, its very limited recourse to leverage and its established track record in terms of asset quality.

IDB benefits from the strong support of its 56 member countries, all members of the Organisation of the Islamic Conference (OIC). Support takes the form of uncalled subscribed capital -or "callable capital"- that the bank would be authorised to call in case of need. Shareholders' ongoing subscription to the capital increase initiated in May 2006 also clearly illustrates their adherence to the bank's mandate. To date, the IDB has received acceptance from shareholders accounting for 84% of its capital and once completed the capital increase will translate into an approximate 50% rise in paid-in capital.

Support also benefits from the much improved credit quality of some large shareholders. In particular, Fitch upgraded Saudi Arabia's (IDB's largest shareholder) Long-term IDR, to 'AA-' ('AA minus') from 'A+' in July 2008, thereby reflecting the bank's much improved credit environment.

These developments will inevitably reinforce IDB's comfortable capitalisation, which already benefits from a large equity base. Since inception, IDB has indeed been funded quasi-exclusively by equity and while the bank has begun to resort to market funding in 2003, it exhibits extremely low leverage ratios. Debt accounted for 10.8% of shareholders' equity at end-1428H (09 January 2008), the lowest given ratio for any multilateral development bank (MDB) Fitch rates. The capital increase will enable the bank to maintain leverage below 50% of shareholder's equity, despite a 15% projected annual growth rate in financing for the five-year 1429H -1433H period.

IDB's ratings also reflect its established track record in terms of asset quality. While most of its financing is directed to speculative-grade countries (72.5% of the bank's portfolio at end-1428H), the IDB has traditionally recorded a very low level of non-performing assets, with impaired financed operations standing at only 0.6% of the bank's portfolio (excluding equity stakes) at end-1428H.

The performance of IDB's portfolio is all the more noteworthy since concessional financing has been historically funded through the bank's ordinary capital, while other MDBs generally rely on a separate financial arm. Hence, credit risk exposure will be further diluted by the recent establishment of a concessional fund, the Islamic Solidarity Development Fund, which has been fully operational since January 2008.

As the bank progressively transfers some of its riskiest assets to this fund, the average credit quality of its portfolio should improve, thereby strengthening the resilience of its credit profile to the projected growth in operating assets.

IDB is an MDB based in Jeddah, Saudi Arabia. Created in 1975 with the aim to foster economic development and social progress, it provides project and trade finance as well as technical assistance to its member countries. The bank operates in accordance with the principles of Islamic Law, and its financing instruments are mainly asset-backed. It employed 990 staff members at end-1428H.