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

Support strengthened in 2008 due to the rating upgrade of Saudi Arabia ('AA-'/'F1+'/Outlook stable) in 2008. Saudi Arabia is the IDB's largest shareholder (24.4% of capital at end-2008). (The bank's member countries are all members of the Organisation of the Islamic Conference (OIC)). The upgrade of Saudi Arabia resulted in an increase in the share of capital owned by countries rated 'AA-' or above to 45.7% at end-2008 from 13.3% in 2007. Though this ratio remains lower than the average of 'AAA'-rated multilateral development banks (MDBs), Fitch believes that support would be provided to the IDB if necessary.

The IDB's financing is predominantly extended to sovereign or sovereign guaranteed entities: private sector exposure and equity participations accounted for 21.5% of its portfolio at end-2008. Like other MDBs, the IDB's portfolio includes a large share of speculative-grade borrowers (68.2% at end-2008), but the share of investment grade exposure has been steadily growing. Exposure to credit risk is clearly mitigated by the IDB's preferred creditor status, which grants it priority over other creditors in the event of a sovereign default, and has proven robust to date. Impaired operations stood at only 1.0% of gross credit .exposure at end-2008. The bank's asset quality will benefit from the gradual transfer of concessional financing to a separate entity financed from donors' funds.

The IDB was not impacted by the global financial crisis in 2008. While the fair valuation of its participations had a negative impact on equity, it did not suffer losses on its financing and treasury portfolio. This is due to its conservative risk management policies, which do not allow investment in ABS and other structured finance securities. However, in response to the growing financing needs of several member countries, it has decided to increase financing by 30% per year in the next three years compared with 15% in its initial operations plan. New financing will be sourced through the issuance of Sukuks, an Islamic debt instrument, and the bank's capital.

The bank enjoys a substantial capital base, which was strengthened by the 2006 capital increase and the improvement in Saudi Arabia's sovereign rating. The ratio of usable capital to required capital increased to 5.03x in 2008 from 3.26x in 2007. Despite the growth in IDB's financing, liabilities will remain below 50% of equity for the next two years. However, a further capital increase may be necessary in the future.

The IDB is an MDB based in Jeddah, Saudi Arabia. It aims to foster economic development and social progress, and 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 1,014 staff members at end-2008.