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Letter from the Executive Board

Greetings delegates,

We feel proud and privileged to presiding the meeting of Board of Governors of the Islamic

Development Bank at the Ryan Model United Nations 2014. We welcome you to the same

and hope that you have an enriching experience. The Board of Governors of the Islamic

Development Bank, therefore, shall be discussing the agenda: Developing an efficient

financial system in post-conflict and conflict ridden areas with an aim to

achieve self-sustaining economic recovery, based on the principles of Islamic

Finance

The Islamic Development Bank Group comprises five entities, namely:

1. Islamic Development Bank (IDB),

2. Islamic Research and Training Institute (IRTI),

3. Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC),

4. Islamic Corporation for the Development of the Private Sector (ICD), and

5. International Islamic Trade Finance Corporation (ITFC).

We shall be having The Islamic Development Bank (IDB) in Particular.

This background guide intends to give you detailed understanding of the IDB and the

Board of Governors of the IDB. However, we still encourage you to research further about

the Bank and its operation. This background will be of prime importance to you before and

during the committee, and we request you to read it thoroughly.

We also request you to read the Articles of Agreement of the Islamic Development Bank

and the 38th Annual Report for 1433H.

At all times, please bear in mind that Islamic Development Bank works, not on the

conventional principles of banking and finance, but on the ethics and morals discussed in

Sharia. The Islamic Development Bank works strictly on the principles outlaid by Sharia.

We, as your Executive Board members, shall be delighted to clarify any doubts you may

have before and during the committee, and we request you to feel free to contact us in case

you have any queries or need any clarifications.

Regards,

Aditya Sachdeva Aman Kapur Anusuiya Radhika

President Vice President Rapporteur

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About Islamic Development Bank

Establishment

The Islamic Development Bank is an international financial institution established in

pursuance of the Declaration of Intent issued by the Conference of Finance Ministers of

Muslim Countries held in Jeddah in Dhul Q'adah 1393H, corresponding to December 1973.

The Inaugural Meeting of the Board of Governors took place in Rajab 1395H, corresponding

to July 1975, and the Bank was formally opened on 15 Shawwal 1395H corresponding to 20

October 1975.1

Purpose

The purpose of the Bank is to foster the economic development and social progress of member

countries and Muslim communities individually as well as jointly in accordance with the

principles of Shari'ah i.e., Islamic Law2.

Functions

The functions of the Bank are to participate in equity capital and grant loans for productive

projects and enterprises besides providing financial assistance to member countries in other

forms for economic and social development. The Bank is also required to establish and

operate special funds for specific purposes including a fund for assistance to Muslim

communities in non-member countries, in addition to setting up trust funds. The Bank is

authorized to accept deposits and to mobilize financial resources through Shari'ah compatible

modes. It is also charged with the responsibility of assisting in the promotion of foreign trade

especially in capital goods, among member countries; providing technical assistance to

member countries; and extending training facilities for personnel engaged in development

activities in Muslim countries to conform to the Shari'ah.

Membership

The present membership of the Bank consists of 56 countries. The basic condition for

membership is that the prospective member country should be a member of the Organization

of Islamic Cooperation (OIC), pay its contribution to the capital of the Bank and be willing to

accept such terms and conditions as may be decided upon by the IDB Board of Governors.

Capital

Up to the end of 1412H (June 1992), the authorized capital of the Bank was two billion Islamic

Dinars (ID) {A unit of account of IDB which is equivalent to one Special Drawing Right (SDR)

of the International Monetary Fund (IMF)}. Since Muharram 1413H (July 1992), in

accordance with a Resolution of the Board of Governors, it became six billion Islamic Dinars,

divided into 600,000 shares having a par value of 10,000 Islamic Dinars (ID) each. Its

subscribed capital also became four billion Islamic Dinars payable according to specific

schedules and in freely convertible currency acceptable to the Bank. In 1422H, the board of

governors at its annual meeting held in Algeria decided to increase the authorized capital of

the Bank form ID 6 billion to ID 15 billion and the subscribed capital from ID 4.1 billion to ID

1http://www.isdb.org/irj/portal/anonymous?NavigationTarget=navurl://24de0d5f10da906da85e96ac356b7af0 2 Article 2: Articles of Agreement of Islamic Development Bank

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8.1 billion. According to the Directive of the Third Extra-Ordinary Session of the OIC Islamic

Summit Conference held in Makkah Al-Mukarramah on 7- 8 December 2005, calling for a

substantial increase in the capital stock of IDB in order to enable it to strengthen its role in

providing financial support and technical assistance to its member countries, the Board of

Governors of the IDB in its 31st Annual Meeting in Kuwait decided to increase the authorized

capital stock of IDB by 15 billion Islamic Dinars to become 30 billion Islamic Dinars and the

subscribed capital by 6.9 billion Islamic Dinars to become 15 billion Islamic Dinars.

Financial Year

The Bank's financial year is the lunar Hijra Year.

Structure

The Bank shall have a board of Governors, board of Executive Directors, a President, one or

more Vice-President(s), and such other officers and staff as maybe considered necessary.

The organization structure can be found here:

http://www.isdb.org/irj/go/km/docs/documents/IDBDevelopments/Internet/English/IDB/

CM/About%20IDB/Organization/IDB_Organization_Structure.pdf

Principles of Operations

1. The Islamic Development Bank operates according to the Islamic Shari'ah principles.

Shari'ah is the set of rules derived from the Holy Quran, the authentic traditions

(Sunnah) of the Prophet (peace be upon him) and the scholarly opinions (Ijtehad)

which are based on the Holy Quran and the Sunnah. The principles of Shariah that

govern Islamic banking are the following:-

Prohibition of interest (riba) in all financial transactions, such as: riba in debts, riba in

sales, including forward currency deals and futures exchanges.

Participation in profit and loss sharing, since return is not guaranteed in an Islamic

transaction.

2. The IDB does not borrow from the market and its operations are sustained by share-

holders capital, retained earnings and funds generated internally through its foreign

trade and project financing operations. The IDB has no non-regional members. The

IDB is an institution established by the Ummah (Islamic Nations), for the Ummah and

operated and managed by the Ummah. The IDB finances trade and development

projects both for the public and private sectors, finances large and medium sized

projects and small enterprises in the member countries.

In non-member countries the IDB supports Islamic communities by providing scholarships

and training facilities. Through the Islamic Research Training Institute (IRTI), the IDB

conducts research on Islamic topics having modern day relevance. The IDB also mobilizes

technical capabilities within member countries in order to promote exchange of expertise and

experience. Science and Technology development are in the forefront of the strategic agenda

of the IDB which forms an integral part of project financing. Additionally, the IDB provides

merit scholarships for high technology to scholars for pursuing doctorate programme and

post-doctoral research in centers of excellence in the world.

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IDB Group Strategic Framework

In 1424H, the Bank adopted a new strategy entitled IDB Group Strategic Framework. The

Strategic Framework identified major elements of the IDB Group (ICD, ICIEC, IRTI and IDB

as a flagship) to improve efficiency and services delivery to member countries.

Under the new strategy, the IDB envisions greater cooperation and coordination among the

group members to ensure complementarity and optimum collective impact in the member

countries.

To this end, the IDB has formulated its vision, mission statement and core values, and

redefined its medium term strategic objectives and priority areas as briefly described below.

Vision

To be the leader in fostering socio-economic development in member countries and Muslim

communities in non-member countries in conformity with Shariah.

Mission

The IDB Group is committed to alleviating poverty; promoting human development; science

and technology; Islamic economics; banking and finance; and enhancing cooperation amongst

member countries, in collaboration with our development partners.

The core values, referred to with the acronym PRIDE, are as follows:

Performance excellence in all activities and in dealing with its clients and partners.

Responsiveness (responding to clients' needs with focused and forward-looking

approach based on review of performance, reflection on improvement and resolve to

offer the best)

Integrity (demonstrating a high level of sincerity, honesty and fairness)

Dedication in serving clients with dignity and determination supported by creativity

and initiative.

Empowerment of staff and concerned entities with responsibility, authority and

teamwork.

Objectives

In this regard, the following three major strategic objectives have been identified to drive

forward the Group actions.

Promotion of Islamic financial industry and institutions

Poverty alleviation

Promotion of cooperation among member countries

Priority Areas

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To realize these objectives, the IDB Group will focus on the following six priority areas:

Human development

Agricultural development and food security

Infrastructure development

Intra-trade among member countries

Private sector development

Research and development (R & D) in Islamic economics, banking and finance

Mobilization of financial resources and quality manpower have been considered as two critical

prerequisites for successful implementation of the Strategic Framework. While the Group will

continue to strive to increase its resource base, it will also enhance the development impact of

these resources.

Projects Financing Strategy

IDB project financing is carried out with reference to the strategic framework of the IDB

Group. The fight against poverty which is the overriding objective of the IDB Group requires a

multi-pronged approach. As a general rule of thumb, high and sustained economic growth is a

pre-requisite to reducing poverty, assuming that such growth (The level of economic growth

required to reduce poverty by a half by the year 2015 (as per the MDGs) is estimated at a

robust 7.4% for IDB member countries in Africa for the period 2000-2015.) is matched with a

'fair' re-distribution of wealth and deliberate moves by governments to target the poor

segments in society. This 'targeting' may include labor-intensive growth strategies, investment

in human capital (for the poor) and safety nets for the vulnerable groups. Studies in the

Middle East and North Africa have revealed that for every 1 percent growth in real GDP, the

number of poor people declines by 4-5 percent (Dr. Vivi Alatas, "Poverty Reduction, a Main

Challenge in Islamic World" (The International Conference of Islamic Scholars, Jakarta,

Indonesia 23-25, 2004).

Against this backdrop, a project or program is deemed pro-poor if it aims to create a critical

mass of beneficiaries-cum-consumers that will, in the long run, support and sustain the local

economy (hence the direct link between economic growth and poverty reduction). It also

implies that any intervention by IDB and the international donor community at large must

occur in areas or sectors that benefits or uplifts a greater majority of people. These 'broad-

based growth approaches' are the very basis of the Complex's sector and thematic priorities.

Considering that poverty in the majority of member countries is a rural phenomenon,

investment in the agricultural sector, in which the bulk of the population depends for its

livelihood, is an obvious target for any poverty reduction program. It's imperative that the

Bank's assistance in agriculture is targeted in high-value addition sub-sectors such as agro-

processing, irrigation and crop development, marketing and storage facilities, micro-credit

schemes etc. Agro-processing is one area that has a high value-addition especially in Africa,

and therefore, higher impact on improving the living conditions of the most vulnerable groups

in society.

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In addition to agriculture, other broad-based growth sectors are health and education (or

collectively referred to as human development). Human development is a major contributor to

economic growth and well-being, as experience everywhere has shown. Taking into account

the specific needs and priorities of individual member countries, the Operations Complex will

broadly concentrate on the basic education and health care in the low-income countries, and

on research and technology in the middle and high-income countries (see Box below).

Water supply, sanitation, transport and power supply fall under the thematic group of

infrastructure. It is common knowledge that infrastructure plays a multi-purpose role in any

economy as it has a direct bearing on the well-being of the population, hence its positive

contribution to poverty alleviation. Transport facilitates the movements of goods and services

within and between production and market centers, and is of great economic significance to

rural communities. Power supply offers a variety of economic and income-generating

opportunities, hence an impact on the living standards. Equally crucial is water, which has

many uses. The availability of clean and safe water for instance, improves the health status of

the population, as many diseases afflicting the poor countries are related to unsafe, dirty and

contaminated water supplies. Recently, telecommunications has been playing a vital role in

energizing several economic sectors and benefiting various social groups in the member

countries.

Both the Ordinary capital resources OCR and those mobilized from the market will be utilized

to finance infrastructure. A large share of the OCR will finance infrastructure projects in low-

income countries and regional groupings. Resources generated from the market will be

invested mainly in the middle-income and high-income countries. Given the dynamism and

competitiveness of the operating environment in the middle-income and high-income

countries, the Operations Complex will continuously assess the market conditions in these

countries with the view to enhance its niche and strategic position.

Human Development 'Strategies' in Low, Middle and High-Income Countries

For Low-Income

Countries:

- Primary and secondary education

- Primary health care

- Vocational and technical training

Objective:

To contribute in meeting basic needs in health

and education, and to address skill-gaps in the

labor force. The three priority areas will also

contribute to achieving MDGs

For Middle and

High-Income

Countries:

- Science and technology

- Research and development (R&D)

- Higher education

Objective:

To increase the technological and research

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capability, with the view to improve the

competitive edge of these countries in the global

market.

With the introduction of the market raised resources, private sector financing, including big-

ticket leasing and large infrastructure projects, has assumed great significance in the daily

workload of the Operations Complex.

In addition, small and medium scale enterprises (SMEs), which are the traditional domain of

the private sector, will continue to be supported by the Operations Complex (mainly though

lines of financing), in view of its high income and employment generation potential,

particularly in urban areas. Unlike rural poverty which is more sensitive to broad-based

economic growth and the provision of social services, urban poverty is more responsive to 're-

distribution' factors, of which wage employment is perhaps the most important.

The Operations Complex is carrying out the above strategy while keeping in mind the

following concerns:

i. To be country/client focused and service oriented.

ii. To achieve high development impact/ effectiveness.

iii. To contribute to the income and financial soundness of the Bank.

iv. To harness a strategic partnerships, co-financing and other forms of cooperation.

v. To build capacity and enhance professionalism in the Operations Complex.

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Board of Governors of the Islamic Development Bank

Composition of the Board of Governors

Each member shall be represented on the board of Governors and shall appoint one governor

and one alternative. Each governor and each alternative shall serve at the pleasure of the

appointing member. No alternate may vote, except in absence of his principal.

Powers of the Board of Governors

All the power of the bank shall be vested in the Board of Governors.

The Board of Governors may delegate the Board of Executive Directors any or all its powers,

except the power to:

1. Admit new members or determine their condition of admission;

2. Increase or decrease authorized stock capital of the bank;

3. Suspend a member;

4. Decide appeals from interpretations and applications of the Articles of agreement

given by the Board of Executive Directors;

5. Authorize the conclusion on general agreements for corporation with other

international agencies;

6. Elect President of the Bank;

7. Elect Executive Directors of the Bank;

8. Determine remuneration for the Executive Directors and the salary and other terms of

contract of service of the President;

9. Approve, after reviewing the auditor’s report, the general balance sheet and statement

of profit and loss of the Bank;

10. Determine the reserve and the distribution of the net income and surplus of the Bank;

11. Amend the Articles of Agreement;

12. Decide to terminate operations of the Bank and to distribute its assets; and

13. Exercise other special powers as are expressly assigned to the Board of Director by the

Articles of Agreement.

The Board of Governors retain full power to exercise authority over any matter delegated to

the Board of Executive Directors.

The Board of Governors hold an annual meeting and such other meetings as it may be

provided by the board or called by the Board of Executive Directors.

A majority of the Governors shall constitute a quorum for any meeting of the Board of

Governors, provided that such majority represents not less than two-third of the total voting

power of the members.

The Board of Governors, and the Board of Executive Directors to the extent authorized, may

establish such subsidiary bodies as may be necessary or appropriate to the conduct of the

business of the Bank.

The Board of Governors shall determine annually what part of the net income or surplus of the

Bank from ordinary capital operations shall be allocated to reserves, depositors, Special Funds

and members: provided that no part of the net income or the surplus of the bank shall be

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distributed to members by way of profit until General Reserves of the Bank shall have attained

the level of 25% of the subscribed capital.

Voting

In the Board of Governors, each member shall be entitled to cast the votes of the member he

represents. Except as otherwise expressly provided in the Articles of Agreement, all the

matters before the Board of Governors shall be decided by a majority of the voting power

represented at the meeting.

The President (or Vice-Presidents) not vote in the meetings of Board of Governors.

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Agenda: Developing an efficient financial system in post-conflict and conflict

ridden areas with an aim to achieve self-sustaining economic recovery,based on

the principles of Islamic Finance

Islamic Finance and economy

Islamic Economy

The central features of an Islamic economy are summarized as the following:

1. "Behavioral norms and moral foundations" derived from the Quran and Sunnah;

2. Zakat tax as the basis of Islamic fiscal policy, and

3. Prohibition of interest.

To reduce the gap between the rich and the poor, Islam encourages trade, discourages the

hoarding of wealth and outlaws usury (the term is Riba in Arabic). Therefore wealth is taxed

through zakat, but trade is not taxed. Profit sharing and venture capital where the lender is

also exposed to risk are acceptable. Hoarding of food for speculation is also discouraged.

Grabbing other people's land is also prohibited.

The Qur'an states that God is the sole owner of all matter in the heavens and the earth. Man,

however, is God's vice-regent on earth and holds God's possessions in trust (Amanat). Islamic

jurists divide properties into public, state, private categories.

Public Property

Public property in Islam refers to natural resources (forests, pastures, uncultivated land,

water, mines, oceanic resources etc.) to which all humans have equal right. Such resources are

considered the common property of the community. Such property is placed under the

guardianship and control of the Islamic state, and can be used by any citizen, as long as that

use does not undermine the rights of other citizens.

Some types of public property cannot be privatized under Islamic law. Muhammad's saying

that "people are partners in three things: water, fire and pastures", led some scholars to

believe that the privatization of water and energy is not permissible. Muhammad allowed

other types of public property, such as gold mines, to be privatized, in return for tax payments

to the Islamic state. The owner of the previously public property that was privatized pays zakat

and, according to Shi'ite scholars, khums as well.

In general, the privatization and nationalization of public property is subject to debate

amongst Islamic scholars. Public property thus, eventually, becomes state or private property.

State Property

State property includes certain natural resources, as well as other property that can't

immediately be privatized. Islamic state property can be movable, or immovable, and can be

acquired through conquest or peaceful means. Unclaimed, unoccupied and heir-less

properties, including uncultivated land (Mawat), can be considered state property.

During the life of Muhammad, one fifth of military equipment captured from the enemy in the

battlefield was considered state property. During his reign, Umar (on the recommendation of

Ali) considered conquered land to be state rather than private property (as was usual

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practice). The purported reason for this was that privatizing this property would concentrate

resources in the hands of a few, and prevent it from being used for the general good. The

property remained under the occupation of the cultivators, but the taxes collected on it went

to the state treasury.

Muhammad said "Old and fallow lands are for God and His Messenger (i.e. state property),

then they are for you". Jurists draw from this the conclusion that, ultimately, private

ownership takes over state property.

Private Property

There is consensus amongst Islamic jurists and social scientists that Islam recognizes and

upholds the individual's right to private ownership. The Qur'an extensively discusses taxation,

inheritance, prohibition against stealing, legality of ownership, recommendation to give

charity and other topics related to private property. Islam also guarantees the protection of

private property by imposing stringent punishments on thieves. Muhammad said that he who

dies defending his property was like a martyr.

Islamic economists classify the acquisition of private property into involuntary, contractual

and non-contractual categories. Involuntary means are inheritances, bequests, and gifts. Non-

contractual acquisition involves the collection and exploitation of natural resources that have

not previously been claimed as private property. Contractual acquisition includes activities

such as trading, buying, renting, hiring labor etc.

A tradition attributed to Muhammad, with which both Sunni and Shi'a jurists agree, in cases

where the right to private ownership causes harm to others, then Islam favors curtailing the

right in those cases. Maliki and Hanbali jurists argue that if private ownership endangers

public interest, then the state can limit the amount an individual is allowed to own. This view,

however, is debated by others.

When Muhammad migrated to Madinah many of the Muslims owned agricultural land.

Muhammad confirmed this ownership and allocated land to individuals. The land allotted

would be used for housing, farming or gardening. For example Bilal b. Harith was given land

with mineral deposits at 'Aqiq Valley Hassan b. Thabit was afforded the garden of Bayruha

and Zubayr received oasis land at Khaybar and Banu Nadir. During the reign of caliph Umar, a

vast expanse of Persian royal family terrain had been acquired, this lead his successor Caliph

Uthman to accelerate the allotment of land to individuals in return for a portion of the crop

yield.

Markets

Islam accepts markets as the basic coordinating mechanism of the economic system. Islamic

teaching holds that the market, given perfect competition, allows consumers to obtain desired

goods and producers to sell their goods at a mutually acceptable price.

Three necessary conditions for an operational market are said to be upheld in Islamic primary

sources:

Freedom of exchange: the Qur'an calls on believers to engage in trade, and rejects the

contention that trade is forbidden.

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Private ownership

Security of contract: the Qur'an calls for the fulfillment and observation of contracts.

The longest verse of the Qur'an deals with commercial contracts involving immediate

and future payments.

Interference

Islam promotes a market free from interferences such as price fixing, hoarding and bribery.

Government intervention, however, is tolerated under specific circumstances.

Islam prohibits price fixing by a dominating handful of buyers or sellers. During the days of

Muhammad, a small group of merchants met agricultural producers outside the city and

bought the entire crop, thereby gaining a monopoly over the market. The produce was later

sold at a higher price within the city. Muhammad condemned this practice since it caused

injury both to the producers (who in the absence of numerous customers were forced to sell

goods at a lower price) and the inhabitants.

The above mentioned reports are also used to justify the argument that the Islamic market is

characterized by free information. Producers and consumers should not be denied

information on demand and supply conditions. Producers are expected to inform consumers

of the quality and quantity of goods they claim to sell. Some scholars hold that if an

inexperienced buyer is swayed by the seller, the consumer may nullify the transaction upon

realizing the seller's unfair treatment. The Qur'an also forbids discriminatory transactions.

Bribery is also forbidden in Islam and can therefore not be used to secure a deal or gain favor

in a transaction, it was narrated that Muhammad cursed the one who offers the bribe, the one

who receives it, and the one who arranges it.

Government interference in the market is justified in exceptional circumstances, such as the

protection of public interest. Under normal circumstances, governmental non-interference

should be upheld. When Muhammad was asked to set the price of goods in a market he

responded, "I will not set such a precedent, let the people carry on with their activities and

benefit mutually."

Monetary and fiscal policy

Islamic monetary and fiscal policy can guide a state in transition to an Islamic model as well

as when it reaches equilibrium.

Equilibrium

Monetary policy emphasizes keeping inflation towards a theoretical zero rate. The currency is

maintained according to a basket of goods and services that is reflective of the economy as

well as the value of a basket of currencies that would be represented by the level of trade with

the Islamic state. The proportion of the two are weighted to the proportion of foreign trade to

domestic consumption. This parallels classical and neo-classical ideals.

Money supply expansion is indexed directly to the population rather than through banking, to

avoid an unfair benefit to banking at the cost of the populace. Regulatory creep, conflict of

interest and political interference is avoided by a proposed independence of banking and the

statistical authority.

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Transition

Gradual transition is preferred over drastic change, calling for a transitional state similar to

Communism's transitional state of Socialism. Impairment of banking, staggered increases in

reserve ratios and a gradual approach in the general regulatory framework is considered

preferable.

A Keynesian fiscal policy is called for to counteract the fall in the money supply caused by the

transitional policies. Timing and proportion is critical to the success of such a transition.

Islamic Banking

Interest

The Quran (3: 130) clearly condemns riba (usually translated as "interest"): "O, you who

believe! Devour not riba, doubled and redoubled, and be careful of Allah; but fear Allah that

you may be successful."

Public finance (Bayt-al-Mal)

The concept of a collective or shared bank played a historic role in the Islamic economy. The

idea of state collected wealth being made available to the needy general public was relatively

new. The resources in the Bayt-al-Mal were considered God's resources and a trust, money

paid into the shared bank was common property of all the Muslims and the ruler was just the

trustee.

The shared bank was treated as a financial institution and therefore subjected to the same

prohibitions regarding interest. Caliph Umar spoke on the shared bank saying: "I did not find

the betterment of this wealth except in three ways: (i) it is received by right, (ii) it is given by

right, and (iii) it is stopped from wrong. As regards my own position vis-a-vis this wealth of

yours; it is like that of a guardian of an orphan. If I am well-off, I shall leave it, but if I am

hard-pressed I shall take from it as is genuinely permissible."

Debt arrangements

Most Islamic economic institutions advise participatory arrangements between capital and

labor. The latter rule reflects the Islamic norm that the borrower must not bear all the cost of a

failure, as "it is God who determines that failure, and intends that it fall on all those involved."

Conventional debt arrangements are thus usually unacceptable—but conventional venture

investment structures are applied even on very small scales. However, not every debt

arrangement can be seen in terms of venture investment structures. For example, when a

family buys a home it is not investing in a business venture—a person's shelter is not a

business venture. Similarly, purchasing other commodities for personal use, such as cars,

furniture, and so on, cannot realistically be considered as a venture investment in which the

Islamic bank shares risks and profits for the profits of the venture.

Savings and investment

An alternative Islamic savings-investment model can be built around venture capital;

investment banks; restructured corporations; and restructured stock market. This model

looks at removing the interest-based banking and in replacing market inefficiencies such as

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subsidization of loans over profit-sharing investments due to double taxation and restrictions

on investment in private equity.

Money changers

Due to religious sanctions against odious debt, Tamil Muslims have historically been money

changers (not money lenders) throughout South and South East Asia.

Hybrids

Islamic banks have grown recently in the Muslim world but are a very small share of the global

economy compared to the Western debt banking paradigm. Hybrid approaches, which applies

classical Islamic values but uses conventional lending practices, are much lauded by some

proponents of modern human development theory.

The IDB 1440H Vision

Given the strategic challenges confronting the Muslim world and IDB as well as the concept of

development in Islam, the Commission proposes that IDB adopt the following Vision:

“By the year 1440 Hijrah IDB shall have become a world-class development bank, inspired

by Islamic principles that has helped significantly transform the landscape of comprehensive

human development in the Muslim world and helped restore its dignity.”

Given the Vision of IDB and the most urgent challenges confronting the Muslim world, the

Commission recommends that the

Mission of IDB be stated thus:

“The Mission of IDB is to promote comprehensive human development, with afocus on the

priority areas of alleviating poverty, improving health, promoting education, improving

governance and prospering the people.”

The optimal realization of IDB’s Vision within the time-frame of 1440 Hijrah requires that

IDB focus its comprehensive development agenda and resources on some critical and carefully

selected areas that are consistent with its new Mission. The Commission accordingly

recommends that IDB adopt a 1440 Hijrah Vision implementation agenda that is driven by

the following nine Key Strategic Thrusts:

Key Strategic Thrust One: Reform IDB

Key Strategic Thrust Two: Alleviate poverty

Key Strategic Thrust Three: Promote health

Key Strategic Thrust Four: Universalize education

Key Strategic Thrust Five: Prosper the people

Key Strategic Thrust Six: Empower the Sisters of Islam without breaching the tenets of Islam

Key Strategic Thrust Seven: Expand the Islamic financial industry

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Key Strategic Thrust Eight: Facilitate integration of IDB Member Country economies among

themselves and with the world

Key Strategic Thrust Nine: Improve the image of the Muslim world

To read more about IDB 1440H Vision, please log on to:

http://www.isdb.org/irj/go/km/docs/documents/IDBDevelopments/Internet/English/IDB/

CM/About%20IDB/IDB%201440H%20Vision/IDB_1440H_Vision-full_version.pdf

Important terms in Islamic finance and banking

Bai' al 'inah (sale and buy-back agreement)

Bai' al inah is a financing facility with the underlying buy and sell transactions between the

financier and the customer. The financier buys an asset from the customer on spot basis. The

price paid by the financier constitutes the disbursement under the facility. Subsequently the

asset is sold to the customer on a deferred-payment basis and the price is payable in

installments. The second sale serves to create the obligation on the part of the customer under

the facility. There are differences of opinion amongst the scholars on the permissibility of Bai'

al 'inah, however this is practised in Malaysia and the like jurisdictions.

Bai' bithaman ajil (deferred payment sale)

This concept refers to the sale of goods on a deferred payment basis at a price, which includes

a profit margin agreed to by both parties. Like Bai' al 'inah, this concept is also used under an

Islamic financing facility. Interest payment can be avoided as the customer is paying the sale

price which is not the same as interest charged on a loan. The problem here is that this

includes linking two transactions in one which is forbidden in Islam. The common perception

is that this is simply straightforward charging of interest disguised as a sale.

Bai' muajjal (credit sale)

Literally bai' muajjal means a credit sale. Technically, it is a financing technique adopted by

Islamic banks that takes the form of murabahah muajjal. It is a contract in which the bank

earns a profit margin on the purchase price and allows the buyer to pay the price of the

commodity at a future date in a lump sum or in installments. It has to expressly mention cost

of the commodity and the margin of profit is mutually agreed. The price fixed for the

commodity in such a transaction can be the same as the spot price or higher or lower than the

spot price. Bai' muajjal is also called a deferred-payment sale. However, one of the essential

descriptions of riba is an unjustified delay in payment or either increasing or decreasing the

price if the payment is immediate or delayed.

Mudaraba

"Mudarabah" is a special kind of partnership where one partner gives money to another for

investing it in a commercial enterprise. The capital investment should normally come from

both partners. Both should have some skin in the game.

The Mudarabah (Profit Sharing) is a contract, with one party providing 100 percent of the

capital and the other party providing its specialized knowledge to invest the capital and

manage the investment project. Profits generated are shared between the parties according to

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a pre-agreed ratio. If there is a loss, the first partner "rabb-ul-mal" will lose his capital, and the

other party "mudarib" will lose the time and effort invested in the project.

Murâbaḥah

This concept refers to the sale of goods at a price. This includes a profit margin agreed to by

both parties. The purchase and selling price, other costs, and the profit margin must be clearly

stated at the time of the sale agreement. The bank is compensated for the time value of its

money in the form of the profit margin. This is a fixed-income loan for the purchase of a real

asset (such as real estate or a vehicle), with a fixed rate of profit determined by the profit

margin. The bank is not compensated for the time value of money outside of the contracted

term (i.e., the bank cannot charge additional profit on late payments); however, the asset

remains as a mortgage with the bank until the default is settled.

This type of transaction is similar to rent-to-own arrangements for furniture or appliances

that are common in North American stores.

Musawamah

Musawamah is the negotiation of a selling price between two parties without reference by the

seller to either costs or asking price. While the seller may or may not have full knowledge of

the cost of the item being negotiated, they are under no obligation to reveal these costs as part

of the negotiation process. This difference in obligation by the seller is the key distinction

between Murabahah and Musawamah with all other rules as described in Murabahah

remaining the same. Musawamah is the most common type of trading negotiation seen in

Islamic commerce.

Bai Salam

Bai salam means a contract in which advance payment is made for goods to be delivered later

on. The seller undertakes to supply some specific goods to the buyer at a future date in

exchange of an advance price fully paid at the time of contract. It is necessary that the quality

of the commodity intended to be purchased is fully specified leaving no ambiguity leading to

dispute. The objects of this sale are goods and cannot be gold, silver, or currencies based on

these metals. Barring this, Bai Salam covers almost everything that is capable of being

definitely described as to quantity, quality, and workmanship.

Basic features and conditions of Salam

The transaction is considered Salam if the buyer has paid the purchase price to the seller in

full at the time of sale. This is necessary so that the buyer can show that they are not entering

into debt with a second party in order to eliminate the debt with the first party, an act

prohibited under Sharia. The idea of Salam is normally different from the other either in its

quality or in its size or weight and their exact specification is not generally possible.

Salam cannot be effected on a particular commodity or on a product of a particular field or

farm. For example, if the seller undertakes to supply the wheat of a particular field, or the fruit

of a particular tree, the salam will not be valid, because there is a possibility that the crop of

that particular field or the fruit of that tree is destroyed before delivery, and, given such

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possibility, the delivery remains uncertain. The same rule is applicable to every commodity the

supply of which is not certain.

It is necessary that the quality of the commodity (intended to be purchased through salam) is

fully specified leaving no ambiguity which may lead to a dispute. All the possible details in this

respect must be expressly mentioned.

It is also necessary that the quantity of the commodity is agreed upon in unequivocal terms. If

the commodity is quantified in weights according to the usage of its traders, its weight must be

determined, and if it is quantified through measures, its exact measure should be known.

What is normally weighed cannot be quantified in measures and vice versa.

The exact date and place of delivery must be specified in the contract.

Salam cannot be effected in respect of things which must be delivered at spot. For example, if

gold is purchased in exchange of silver, it is necessary, according to Shari'ah, that the delivery

of both be simultaneous. Here, salam cannot work. Similarly, if wheat is bartered for barley,

the simultaneous delivery of both is necessary for the validity of sale. Therefore the contract of

salam in this case is not allowed.

This is the most preferred financing structure and carries higher order Shariah compliance.

Hibah (gift)

This is a token given voluntarily by a debtor in return for a loan. Hibah usually arises in

practice when Islamic banks voluntarily pay their customers a 'gift' on savings account

balances, representing a portion of the profit made by using those savings account balances in

other activities.

It is important to note that while it appears similar to interest, and may, in effect, have the

same outcome, Hibah is a voluntary payment made (or not made) at the bank's discretion, and

cannot be 'guaranteed'(akin to Dividends earned by Shares, however it is not time bound but

is at the bank's discretion). However, the opportunity of receiving high Hibah will draw in

customers' savings, providing the bank with capital necessary to create its profits; if the

ventures are profitable, then some of those profits may be gifted back to its customers as

Hibah. It is important to note once again that although the preceding descriptions of Hibah do

sound like interest payments, there is a fundamental difference beneath: Hibah is voluntary,

and at the sole discretion of the giver, whereas payment of interest is contractual obligation

that is made in advance between the parties.

Istisna

Istisna (Manufacturing Finance) is a process where payments are made in stages to facilitate

step wise progress in the Manufacturing / processing / construction works. Istisna enables

any construction company get finance to construct slabs / sections of a building by availing

finances in installments for each slab. Istisna also helps manufacturers to avail finance for

manufacturing / processing cost for any large order for goods supposed to supply in stages.

Istisna helps use of limited funds to develop higher value goods/assets in different stages /

contracts.

Ijarah

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Ijarah means lease, rent or wage. Generally, the Ijarah concept refers to selling the benefit of

use or service for a fixed price or wage. Under this concept, the Bank makes available to the

customer the use of service of assets / equipment such as plant, office automation, motor

vehicle for a fixed period and price.

Ijarah thumma al bai' (hire purchase)

Parties enter into contracts that come into effect serially, to form a complete lease/ buyback

transaction. The first contract is an Ijarah that outlines the terms for leasing or renting over a

fixed period, and the second contract is a Bai that triggers a sale or purchase once the term of

the Ijarah is complete. For example, in a car financing facility, a customer enters into the first

contract and leases the car from the owner (bank) at an agreed amount over a specific period.

When the lease period expires, the second contract comes into effect, which enables the

customer to purchase the car at an agreed price. The bank generates a profit by determining in

advance the cost of the item, its residual value at the end of the term and the time value or

profit margin for the money being invested in purchasing the product to be leased for the

intended term. The combining of these three figures becomes the basis for the contract

between the Bank and the client for the initial lease contract. This type of transaction is

similar to the contractum trinius, a legal maneuver used by European bankers and merchants

during the Middle Ages to sidestep the Church's prohibition on interest bearing loans. In a

contractum, two parties would enter into three concurrent and interrelated legal contracts, the

net effect being the paying of a fee for the use of money for the term of the loan. The use of

concurrent interrelated contracts is also prohibited under Shariah Law.

Ijarah-wal-iqtina

A contract under which an Islamic bank provides equipment, building, or other assets to the

client against an agreed rental together with a unilateral undertaking by the bank or the client

that at the end of the lease period, the ownership in the asset would be transferred to the

lessee. The undertaking or the ome an integral part of the lease contract to make it

conditional. The rentals as well as the purchase price are fixed in such manner that the bank

gets back its principal sum along with profit over the period of lease.

Musharakah (joint venture)

Musharakah is a relationship between two parties or more that contribute capital to a business

and divide the net profit and loss pro rata. This is often used in investment projects, letters of

credit, and the purchase or real estate or property. In the case of real estate or property, the

bank assess an imputed rent and will share it as agreed in advance. All providers of capital are

entitled to participate in management, but not necessarily required to do so. The profit is

distributed among the partners in pre-agreed ratios, while the loss is borne by each partner

strictly in proportion to respective capital contributions. This concept is distinct from fixed-

income investing (i.e. issuance of loans).

Qard hassan/ Qardul hassan (good loan/benevolent loan)

Qard hassan is a loan extended on a goodwill basis, with the debtor only required to repay the

amount borrowed. However, the debtor may, at his or her discretion, pay an extra amount

beyond the principal amount of the loan (without promising it) as a token of appreciation to

Page | 19

the creditor. In the case that the debtor does not pay an extra amount to the creditor, this

transaction is a true interest-free loan. Some Muslims consider this to be the only type of loan

that does not violate the prohibition on 'riba, for it alone is a loan that truly does not

compensate the creditor for the time value of money.

Sukuk (Islamic bonds)

Sukuk, plural of Sakk, is the Arabic name for financial certificates that are the Islamic

equivalent of bonds. However, fixed-income, interest-bearing bonds are not permissible in

Islam. Hence, Sukuk are securities that comply with the Islamic law (Shariah) and its

investment principles, which prohibit the charging or paying of interest. Financial assets that

comply with the Islamic law can be classified in accordance with their tradability and non-

tradability in the secondary markets.

Takaful (Islamic insurance)

Takaful is an alternative form of cover that a Muslim can avail himself against the risk of loss

due to misfortunes. Takaful is based on the idea that what is uncertain with respect to an

individual may cease to be uncertain with respect to a very large number of similar

individuals. Insurance by combining the risks of many people enables each individual to enjoy

the advantage provided by the law of large numbers.

Wadiah (safekeeping)

In Wadiah, a bank is deemed as a keeper and trustee of funds. A person deposits funds in the

bank and the bank guarantees refund of the entire amount of the deposit, or any part of the

outstanding amount, when the depositor demands it. The depositor, at the bank's discretion,

may be rewarded with Hibah as a form of appreciation for the use of funds by the bank.

Wakalah (power of attorney)

This occurs when a person appoints a representative to undertake transactions on his/her

behalf, similar to a power of attorney.

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Annexures

Annex 1: Projects and Programs Loans (Adapted from the IDB Articles of Agreement)

Article 18: Project Loans

In making loans for specific infrastructure and other specific projects, the Bank shall take into

account each project’s potential return and importance in the scheme of priorities of the

recipient country.

Article 19: Program Loans

In making program loans to member countries, including institutions and agencies thereof,

the Bank shall satisfy itself that the purpose of loan is to promote the well-being of the people

through economic and social development.

Article 20: Terms and Conditions of Project and Program Loans

1. The Bank shall determine the schedule of repayment of loans extended under article 18

and 19 bearing in mind relevant considerations especially overall resource position and

the balance of payments prospectus of the member country concerned.

2. If a member represents that it suffers from acute foreign exchange stringency and the

service of any loan contracted or guaranteed by that member or any other of its

agencies cannot be provided in the stipulated manner, the Bank may at its discretion

modify the terms of amortization or extend the life of the loan or both provided that it

is satisfied that such relaxation is justified in the interest of particular recipient and the

operations of the Bank.

3. The Bank shall levy a service fee to cover its administrative expenses. The amount of

the fee and the manner of levying it shall be determined by the Bank.

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Annex 2: Sample Loan Proposal

Total amount: __________ Dinars

1. Purpose

Summarize your loan proposal, including your plan, reasoning, and expected outcome.

Explain how your loan will act towards achieving the aims, purposes and missions of

the IDB.

2. Background

Give a summary of the history of the issue your loan addresses and why your loan is

indeed needed. Furthermore, what economic factors ensure that the nation will be

capable of paying back its loan once the project/program proposal has been completed?

Support your position. How does it address past attempts at solving problems in this

issue, if this applies to your loan?

3. Rationale and Body

This will be the main body of your proposal. Outline and give descriptions of your loan

indetail. Be sure to explain every step of your plan here: give organizations involved,

diagrams orcharts showing processes involved, quantities, etc. Additionally, be sure to

include a timeframe ofhow your project/program will operate overits lifetime. Be as

clear and specific as possible.

4. Co-Financing

General Example:

Islamic Development Bank - 5,000,000.00 Dinars

Government of Saudi Arabia - 2,000,000.00 Dinars

Trusts/NGOs/IGOs - 1,000,000.00 Dinars

5. Allocation

Outline where the money will go, accompanied by the amount. Be as specific as

possible. It may be helpful to refer to your rationale to make sure each part of your loan

is covered. It may also be helpful to calculate money amounts by using stated quantities

in your rationale.

A general example (in unit of Dinars):

2.5 million - Administrative Oversight

25 million – Labor

15 million - Project Engineers

10 million – Production

7.5 million - Shipping and Logistics

55 million – Materials

25 million – Contingency

Total: 140 million Dinars

6. Pay back details

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Maturity Period:

15 years

Grace period:

5 years

Details for Hibah and/or Mudaraba (or other financing methods mentioned below)

Keep in mind the following guidelines:

-The more expensive the loan, the longer the maturity age.

-The higher a nation’s economic instability, the higher the grace period.

-The above is only a hypothetical example and may not meet the technicalities and

requirements.

7. Other relevant information

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Annex 3: Procedure for introducing a loan proposal

Delegates will sign up for speakers' list to present loans

o 10 minutes will be allowed for presentation and questions

o After presentation of each proposal, committee may motion to:

Table the loan

This means moving onto the next loan without discussion; must havea legitimate

reason for doing so

Speaker for and against motion

Amend the loan

Amendments to loan are equivalent to resolutions in a regularcommitteeFormal

caucus required to present amendments, which are passed invoting block

Pass the loan as is

Speaker for and against motion

If loan is passed, chair will go through delegate list for donations

If insufficient amount received, loan is tabled

Floating a loan - funding the loan in its entirety, given that thedelegate has

enough shares.

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Annex 4: Voting Powers and Consolidated Position of Subscribed Capital

Annex 5 (Part 2) Islamic Development Bank - Ordinary Capital

Resources Statement of Subscriptions to Capital Stock and Voting Power as at 29/12/1433H (November. 14, 2012)

Authorized Capital: ID 30 Billion (Amount in ID million) No. Member Country Consolidated Position of Subscribed Share Capital

No. of Shares Called-up Callable Total % of Total 1 Afghanistan 993 5.000 4.930 9.930 0.06% 2 Albania 923 2.500 6.730 9.230 0.05% 3 Algeria 45,922 124.260 334.960 459.220 2.55% 4 Azerbaijan 1,819 4.920 13.270 18.190 0.10% 5 Bahrain 2,588 7.000 18.880 25.880 0.14% 6 Bangladesh 18,216 49.290 132.870 182.160 1.01% 7 Benin 2,080 6.040 14.760 20.800 0.12% 8 Brunei 4,585 12.410 33.440 45.850 0.25% 9 Burkina Faso 2,463 12.410 12.220 24.630 0.14%

10 Cameroon 4,585 12.410 33.440 45.850 0.25% 11 Chad 977 4.920 4.850 9.770 0.05% 12 Comoros 465 2.500 2.150 4.650 0.03% 13 Côte d’Ivoire 465 2.500 2.150 4.650 0.03% 14 Djibouti 496 2.500 2.460 4.960 0.03% 15 Egypt 127,867 346.000 932.670 1278.670 7.10% 16 Gabon 5,458 14.770 39.810 54.580 0.30% 17 Gambia 923 2.500 6.730 9.230 0.05% 18 Guinea 4,585 12.410 33.440 45.850 0.25% 19 Guinea Bissau 496 2.500 2.460 4.960 0.03% 20 Indonesia 40,648 124.260 282.220 406.480 2.26% 21 Iran 149,120 432.900 1058.300 1491.200 8.28% 22 Iraq 4,824 13.050 35.190 48.240 0.27% 23 Jordan 7,850 22.790 55.710 78.500 0.44% 24 Kazakhstan 1,929 5.290 14.000 19.290 0.11% 25 Kuwait 98,588 496.640 489.240 985.880 5.48% 26 Kyrgyz 923 2.500 6.730 9.230 0.05% 27 Lebanon 977 4.920 4.850 9.770 0.05% 28 Libya 170,446 494.810 1209.650 1704.460 9.47% 29 Malaysia 29,401 79.560 214.450 294.010 1.63% 30 Maldives 923 2.500 6.730 9.230 0.05% 31 Mali 1,819 4.920 13.270 18.190 0.10% 32 Mauritania 977 4.920 4.850 9.770 0.05% 33 Morocco 9,169 24.810 66.880 91.690 0.51% 34 Mozambique 923 2.500 6.730 9.230 0.05% 35 Niger 2,463 12.410 12.220 24.630 0.14% 36 Nigeria 138,400 401.770 982.230 1384.000 7.69% 37 Oman 5,092 13.780 37.140 50.920 0.28% 38 Pakistan 45,922 124.260 334.960 459.220 2.55% 39 Palestine 1,955 9.850 9.700 19.550 0.11% 40 Qatar 129,750 354.610 942.890 1297.500 7.21% 41 Saudi Arabia 424,960 1233.660 3015.940 4249.600 23.61% 42 Senegal 5,280 15.330 37.470 52.800 0.29% 43 Sierra Leone 496 2.500 2.460 4.960 0.03% 44 Somalia 496 2.500 2.460 4.960 0.03% 45 Sudan 8,321 24.160 59.050 83.210 0.46% 46 Suriname 923 2.500 6.730 9.230 0.05% 47 Syria 1,849 5.000 13.490 18.490 0.10% 48 Tajikistan 496 2.500 2.460 4.960 0.03% 49 Togo 496 2.500 2.460 4.960 0.03% 50 Tunisia 1,955 9.850 9.700 19.550 0.11%

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51 Turkey 116,586 315.470 850.390 1165.860 6.48% 52 Turkmenistan 496 2.500 2.460 4.960 0.03% 53 U.A.E. 135,720 393.990 963.210 1357.200 7.54% 54 Uganda 2,463 12.410 12.220 24.630 0.14% 55 Uzbekistan 480 2.650 2.150 4.800 0.03% 56 Yemen 9,238 24.810 67.570 92.380 0.51%

Shortfall / (Overpayment) * * * * * Sub-Total 1,778,260.000 5,312.220 12,470.380 17,782.600 98.79% Uncommitted 21,740.000 28.500 188.900 217.400 1.21% Grand Total 1,800,000.000 5,340.720 12,659.280 18,000.000 100.00%

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Annex 5: Financing Instruments

The Islamic Development Bank (IDB) utilizes various Sharia-compliant financing instruments

to support development projects in its member countries. Through these instruments, the IDB

finances a variety of projects in the agricultural, industrial, agro-industrial and infrastructural

sectors. The Bank also finances small and medium-scale enterprises (SMEs), micro-finance

schemes etc. These instruments fall under folowing categories:

1. Loan Financing

Loans are extended mostly to governments or to public institutions having the

government guarantee and provide long-term financing for development projects in

basic infrastructure and agriculture.

Loans are limited to a maximum of ID 7 million per project. They are given interest free

and bear a service fee to cover related administrative expenses incurred by IDB (this fee

will not exceed 2.5% p.a.). Repayment is made over a period of 15 to 25 years, including

a grace period of 3 to 7 years, depending on the classification of the beneficiary country.

Loan financing with even softer conditions may be provided for certain types of

projects in the least developed member countries. The repayment would then go up to

30 years including 10 years of grace, with the administrative fee ceiling set at 0.75% p.a.

2. Technical Assistance

The purpose of this assistance is to finance the acquisition of technical expertise to

prepare or implement a particular project, or for the purpose of formulating policies, or

for providing institutional support or human resources development and training.

Technical Assistance is generally of two types. The first type is extended directly to the

project to help prepare the required technical and economic feasibility studies, detailed

technical designs and tender/bid documents or to provide the necessary services for

technical supervision of project implementation. The second type is provided to help

determining sectoral policies, preparing sectoral plans, construction program and

institutional support for capacity building. Taking into consideration the nature and

type of the project, technical assistance is provided either as a grant up to a maximum

amount of ID 300,000 or in the form of an interest-free loan for 16 years, including a

grace period of 4 years. Such financing is subject to a lump sum service fee that would

cover part of the actual administrative costs incurred by the Bank, at a maximum rate

of 1.5% per annum if calculated on an annual basis. The technical assistance may

combine a grant element and an interest-free loan.

3. Leasing

IDB procures the assets that constitute similar and independent items, such as

machinery and equipment needed for lines of production in case of factory financing,

power generation plants, or ships, etc. Then it leases them to the beneficiary for a

specific period of time.

According to this mode, IDB procures the assets that constitute similar and

independent items, such as machinery and equipment needed for lines of production in

Page | 27

case of factory financing, power generation plants, or ships, etc. Then it leases them to

the beneficiary for a specific period of time. The assets procured remain the property of

the Bank throughout the lease financing period, which may extend for up to 20 years,

including a gestation period of up to 5 years. This mode is basically used in financing

projects in medium- and high-income member countries. The Bank earns a profit

margin or a mark-up on such leasing operations, currently at the rate of 5.1% annually

(the beneficiary may also opt for a floating rate). The profit margin rate is reviewed

periodically in the light of changes in the cost of alternative borrowing opportunities

and other economic and financial factors. The beneficiary is required to provide a

government guarantee, or a first class bank guarantee or any other guarantee

acceptable to the Bank. The ceiling of IDB financing for a leasing operation is set at ID

80 million.

Among the advantages of Leasing, for the beneficiary is that the goods involved are tax-

exempt according to the Articles of Agreement establishing the Islamic Development

Bank, who is owner of the commodity. From an accounting point of view, Lease

installments are taken as part of the operating costs and are not considered a debt.

4. Instalment Sale

IDB purchases the machinery/equipment needed for a certain project then re-sells

them to the beneficiary adding a mark-up which is mutually agreed upon between the

Bank and the beneficiary.

According to this mode of financing, IDB purchases the machinery/equipment needed

for a certain project then re-sells them to the beneficiary adding a mark-up which is

mutually agreed upon between the Bank and the beneficiary. The beneficiary then

repays this higher price in semi-annual equal instalments over a period extending up to

20 years, including gestation period of up to 5 years. According to this mode of

financing, ownership of the asset is transferred to the beneficiary upon delivery (this

allows the beneficiary to give the asset in security to secure financing for operation

purposes, for example). The return to the Bank in the form of a mark-up is currently

calculated at the rate of 5.1% per annum. The mark-up is reviewed and subject to

change from time to time. The beneficiary, under this mode of financing, is required to

furnish a government, first class bank or any other guarantee acceptable to the Bank.

The ceiling of IDB financing for an Installment Sale operation is set at ID 80 million.

5. Istisna'a

This mode is applied in the financing of manufacturing of goods and equipment, as well

as in the financing of construction works

This mode is applied in the financing of manufacturing of goods and equipment, as well

as in the financing of construction works. From the Shari'ah point of view, it is defined

as a contract in which one of the parties, the seller (the IDB, as financier, in this case) is

obliged to manufacture/construct or produce a specific thing, which is possible to be

made from materials available to him, according to certain agreed upon specifications,

and have it delivered to the buyer at a determined price. In IDB operations, the buyer

pays the price over an agreed upon period. The conditions governing the financing by

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way of Istisna' are the same as those governing Instalment Sale as far as the terms, rate

of return, guarantees and ceiling are concerned.

6. Lines of Financing.

IDB extends lines of financing to the National Development Financing Institutions

(NDFIs) or Islamic Banks (IBs) to promote the growth of small and medium scale

enterprises, particularly in the industrial sector.

IDB extends lines of financing to the National Development Financing Institutions

(NDFIs) or Islamic Banks (IBs) to promote the growth of small and medium scale

enterprises, particularly in the industrial sector.

The line is used by the NDFI/IB to finance sub-projects (SMEs) through leasing,

Installment sale, or istisna’a modes (equity may be applicable in certain cases), on pre-

agreed terms and conditions.

Request by an entrepreneur to have a project financed by the line is made to the

NDFI/IB concerned. The latter is authorized to approve projects up to a certain level,

depending on how it is categorized by IDB. Beyond that level, the NDFI/IB submits its

appraisal report to IDB for decision.

The NDFI/IB are remunerated for their role as agents of IDB according to a pre-agreed

formula.

7. Equity Participation

IDB participates in the capital share of productive industrial and agro-industrial

projects that are economically and financially viables.

IDB participates in the capital share of productive industrial and agro-industrial

projects that are economically and financially viable. The Bank's maximum

participation in the capital share of a company/enterprise is limited to one-third of the

equity capital, and is undertaken to encourage other financiers to participate in the

financing of such companies/enterprises. A condition of the Bank participation is that

the company/enterprise should not deal in interest in its financing operations.

8. Murabaha

This mode of financing is used in the financing of foreign trade, both 'imports' and

'exports'. The Bank purchases the commodity requested and re-sells it to the

beneficiary. In case of import financing, the period of financing is up to 30 months,

while, in case of export financing, it may extend up to 120 months.

This mode of financing is used in the financing of foreign trade, both 'imports' and

'exports'. The Bank purchases the commodity requested and re-sells it to the

beneficiary. In case of import financing, the period of financing is up to 30 months,

while, in case of export financing, it may extend up to 120 months. Preference is given

to financing of commodities imported from member countries of the Bank, where they

are subject to a lower mark-up rate. The financing is based on LIBOR rate as follows:

The LIBOR taken for the mark-up calculation will be the 12 month LIBOR quoted on

the LIBOR OI page of Reuters as appropriate for the US Dollar or other currency

Page | 29

offered, on the value date of each disbursement, plus a "gross spread" according to the

risk, tenor, commodity being financed and market conditions. In all circumstances,

mark-up rates will be competitive to those prevailing in the market.

In case of the beneficiary repaying on or before due date, he is given a rebate equivalent

to 30% of the 'gross spread'.

The beneficiary's risk has to be accepted by IDB to qualify for this financing. The

security provided could be in the form of an unconditional and irrevocable guarantee

from the central bank in his country, any first class commercial bank acceptable to IDB,

or any other security acceptable to IDB.

9. Profit Sharing

Profit Sharing is a form of partnership which involves the pooling of funds between the

IDB and another party for the financing of a project, each partner obtaining a

percentage of the net profit accruing from the venture. The profit accruing to (or loss

incurred by) each partner is proportional to its share in the venture. This mode might

be suitable for projects expected to have a high financial rate of return.

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Annex 6: Project Life Cycle

Each project financed by IDB passes through a cycle that, with some variations, is common to

all projects. The Bank's project cycle which is to a large extent similar to that in other

development financing institutions, covers the life of a typical project from identification of

needs and priorities until the final completion of work and evaluation of results and the Bank's

role in each of them. The cycle is constituted by:

1. Project Identification

This is the first phase of the project cycle. Identification proceeds against the

background of the country development plan and the Bank priorities. Identification of a

project can come from several sources, including the Government, IDB missions and

from contacts with other development finance institutions, UN agencies, or private

sponsors.

In all cases, in order to be considered for financing by IDB, a project should have

official Government endorsement and must also meet a prima facie test of feasibility

that technical and institutional solutions are likely to be found at costs commensurate

with expected benefits.

Once identified, a project might be incorporated into a rolling three-year work program

for the country concerned. The programme forms the basis for the Bank's future

operations in that country and is used for budgeting the Bank's operations and for

assuring that the resources are available to support each successive phase of the project

cycle. The Three-Year Work Program is basically prepared through a Country

Assistance Strategy Study (CASS) undertaken every three years. The program is

subsequently updated in the light of requests that are received thereafter.

Some Governments have however agreed that such endorsement is not necessary for

projects submitted by the Private Sector of their countries.

2. Preparation

An extensive preparation period of close collaboration between the Bank and the

beneficiary/executing agency begins, the purpose of which is to transform the project

idea into a detailed proposal that covers the full range of technical, economic, financial,

social, institutional and environmental aspects.

A major aspect in the preparation process is the project feasibility study which aims at

defining the best method to achieve the project's objectives, by comparing alternatives

on the basis of their relative costs and benefits.

Formal responsibility for project preparation rests with the beneficiary. The Bank plays

an active role in making sure that the beneficiary has the capacity and resources to

prepare the project, ensuring the beneficiary understands the Bank's requirements and

standards, updating and filling gaps in projects that are inadequately prepared, etc.

The Bank can extend financial and technical assistance for project preparation in a

number of ways. In particular, it can provide financing for preparation of feasibility

study, detailed design or preparation of tender documents. In providing this help, the

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Bank ensures that the applicant is fully committed to the project and deeply involved in

its preparation.

3. Appraisal/Negotiation

After the completion of the project preparation stage, the Bank reviews the proposal

and undertakes a full-scale project appraisal. Appraisal covers comprehensive review of

the technical, economic, social, financial and institutional aspects as well as the

environmental aspects of the project proposal and lays the foundation for

implementing the project and evaluating it when completed.

An appraisal mission examines such matters as the financing plan, components to be

financed by IDB, terms and conditions of IDB financing, project procurement action

plans, project implementation plans, and disbursement profiles. It also reviews the

legal aspects of the project including the draft project financing agreement and

conditions of effectiveness and concludes an understanding on these issues with the

executing agency (and the government, if applicable). The appraisal mission and the

beneficiary endeavor to agree on the measures necessary to assure the success of the

project.

The draft project financing agreement is negotiated and, at the end of the appraisal

mission work, a Memorandum of Understanding (MOU)/Minutes of Meeting reflecting

the discussions and understanding reached by the appraisal mission and the

beneficiary is signed.

Appraisal of a project is the Bank's responsibility but is conducted in full co-ordination

with the Beneficiary. It is carried out by the Bank staff, supplemented by outside

consultants if necessary. Appraisal activities cover the review and assessment of the

following major aspects of a project:

Technical: The Bank has to ensure that projects are soundly designed, appropriately

engineered, and follow accepted industry/sector standards. The appraisal mission

looks into technical alternatives provided, solutions proposed and the results expected.

The technical appraisal is concerned with questions of physical scale, layout, and

location of facilities. It looks into the technology to be used, including types of

equipment or processes and their appropriateness to local conditions; the approach to

be followed for the provision of services; how realistic the implementation schedules

are; and the likelihood of achieving expected levels of output.

Institutional: The Bank mission verifies whether the Executing Agency is properly

organized and its management and staff are adequate to handle the project, whether it

needs capacity building support, setting up of a Project Management Unit (PMU), etc.

This is essential in order to avoid problems that often arise during project

implementation and operation. The executing agency is provided adequate financial

and human resources both by the beneficiary and IDB to implement the project

successfully and also to maintain and operate the project after it is completed. For

implementation purposes, the establishment of a PMU is deemed essential. Both IDB

appraisal team and the beneficiary discuss this matter along the following terms:

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Suitable type of PMU

Selection of an adequate project manager, with a professional profile suitable for the

assignment

PMU set up

Project Monitoring System and Project Performance Indicators

Logistical support

Functions of the PMU

Reporting system

Auditing

Completion report

Economic: The project is studied thoroughly in its various sector settings. The

investment program for the sector, the strengths and weaknesses of public and private

sector institutions, and key government policies are all examined.

The project is subjected to a detailed cost-benefit analysis of alternative project designs,

the result of which is usually expressed as an economic rate of return and the one that

contributes most to the development objectives of the country may be selected.

"Shadow" prices are used routinely when true economic values of costs are not reflected

in market prices as a result of various distortions, such as trade restrictions, taxes, or

subsidies. The distribution of the benefits of a project and its fiscal impact are

considered carefully. Since the estimates of future costs and benefits are subject to

substantial margins of error, a sensitivity analysis is always made of the return on the

project to variations in some of the key assumptions. Macro- economic benefits such as

value added, effect on employment, generation of foreign exchange, etc., are also

considered.

Financial: Financial appraisal has several purposes. One is to ensure that there are

sufficient funds to cover the costs of implementing the project. Normally, the Bank

does not finance the total project costs: the beneficiary or the government are expected

to meet some or all of the local costs. In addition, other financiers may join to co-

finance a project. Thus, project appraisal ensures IDB to a financing plan that will make

funds available to implement the project on schedule. The appraisal mission should

also discuss whether retroactive financing would be required, i.e. financing

expenditures incurred and paid for by the beneficiary between the date of appraisal and

the date of effectiveness of the project financing agreement. Such facility is to be used

only in exceptional circumstances with appropriate justification. Some typical reasons

are early project start-up, avoidance of gap between sequential projects, as in the case

of repeater projects for financing intermediary on-lending operations, maintenance of

momentum achieved during project preparation, and prevention of delays.

The retroactive financing covers items such as pre-investment work (e.g. engineering

and architectural work), preliminary physical work (e.g. as access roads); office

equipment for the PMU, etc.

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The maximum permissible under retroactive financing is ten (10) percent of IDB total

financing.

The financial appraisal is also concerned with financial viability. This includes an

assessment of the enterprises ability to meet all its financial obligations, including

repayments to the Bank; capability to generate enough funds from internal resources to

earn a reasonable internal rate of return (FIRR) on its assets and make a satisfactory

contribution to its future capital requirements, etc. The finances of the enterprise are

closely reviewed through projections of the balance sheet, income statement, and cash

flow. Additional safeguards of financial integrity may include establishing suitable

debt-to-equity ratios or placing a limit on additional long-term financing. Other

financial indicators such as break-even-point, liquidity and acid-test ratios, etc., may be

calculated depending on the project type.

The financial review often highlights the need to adjust the level and structure of prices

charged by the enterprise. It is also concerned with recovering investment and

operating costs from project beneficiaries.

Social: Social assessment provides a benchmark on potential beneficiaries and the

extent to which project benefits and costs will be distributed among them. Adverse

effects are to be quantified and appropriate remedial actions put in place to alleviate

them.

Another aspect of social appraisal is to have a better understanding of the local

organizational arrangements (socio-cultural issues) so that these are incorporated in

the design of the project for its successful implementation.

Environmental Impact: Environmental impact assessment has become an important

tool in project design and selection due to the inseparable relationship between socio-

economic development and environment. The decision to carry out such an assessment

depends upon the nature and scale of the project and is done at the early stages of

project preparation so that the final design incorporates the key environmental aspects.

4. Approval and Signing

The appraisal mission prepares a Staff Appraisal Report (SAR) and Report and

Recommendation of the President (RRP) that set forth its findings and recommends

the level and terms and conditions of IDB financing. These reports are carefully

prepared to reflect the agreements reached during appraisal. They are reviewed, and

cleared according to IDB?s internal processes and procedures.

Upon obtaining the formal concurrence of the beneficiary on the proposed terms and

conditions of IDB financing, the project is presented to the Board of Executive

Directors for final approval. On approval by the Board, the decision is intimated to the

beneficiary. Subsequently, the project agreement is finalised and signed. This marks

the end of the processing phase of the project cycle and the beginning of the

implementation. The staff appraisal report is provided to the beneficiary and the

project executing agency. Some projects may be approved directly by the President.

5. Implementation and Follow-up

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The main stage in the life of a project is its actual implementation over the period of

construction and subsequent operation. Implementation of the project is the

responsibility of the beneficiary. The Bank's role is to follow-up the implementation

and procurement processes. Follow-up is primarily concerned with that period in the

project’s life when physical components are being constructed, equipment purchased

and installed, services rendered and new institutions, programs, and policies put in

place.

The main purpose of follow-up is to help ensure that a project achieves its development

objectives and, in particular, to work with the beneficiary in identifying and dealing

with problems that arise during implementation. Follow-up, therefore, is primarily an

exercise in collective problem solving.

Follow-up takes place in a variety of ways. During appraisal, agreement will have been

reached on a schedule of progress reports to be submitted by the beneficiary. Based on

this, the beneficiary provides progress reports periodically covering the physical

execution of the project.

The progress reports are reviewed at the Bank. Problems that surface are dealt with

through correspondence or in the course of project follow-up missions undertaken by

the Bank staff. The frequency of these missions is tailored to suit the complexity of the

project, the status of its implementation, and the number and nature of problems

encountered. Missions are also mounted on selective basis to undertake portfolio

review exercise in member countries where all approved projects are closely scrutinized

and followed up.

Supervision: Supervision by the Bank, as a financing institution, is a continuous set of

project activities that start after the Board approval and ends up with the preparation of

Project Completion Report. The supervision is carried out both within the

Headquarters and with the beneficiary during the Bank's field visits.

In the Headquarters, supervision encompasses such activities as: ensuring timely

declaration of effectiveness of the financing agreement, review of Progress Reports

received from the executing agency, handling procurement and disbursement,

monitoring implementation problems faced by project and taking appropriate action,

and preparing Project Completion Report.

The Bank mounts field missions periodically to assess project progress, identify issues

and bottlenecks and take corrective action, monitor actual compliance to the Bank's

policies and procedures, etc.

Procurement: An important element of project follow-up concerns with procurement of

goods and services financed under the project agreement. Procurement is carried out in

accordance with IDB guidelines, incorporated in the project agreement that are

designed to ensure that the requisite goods and services are procured in the most

efficient and economical manner.

Completion: Upon physical completion of the project, the beneficiary submits a Project

Completion Report (PCR) to the Bank. Subsequently, the concerned Country

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Operations Department prepares the Bank’s Project Completion Report. If a part of

IDB approved financing remains unutilized at project completion, it is normally

cancelled; its utilization will be considered only on exceptional basis, and in any case,

strictly for improving the efficiency of the project.

6. Post-Evaluation After Completion

Upon completion, Bank-assisted projects are subjected to post-evaluation. To ensure

its independence and objectivity, this review is carried out by the Operations

Evaluation Office (OEO), which is entirely separate from the Bank's operations

departments and reports directly to the President.

OEO prepares an independent evaluation report on each project within 2-5 years of its

completion. This report assesses the impact of the project and compares actual results

with what had been expected at the time of project appraisal. Valuable lessons are

learned over time from the successes and failures. Results and recommendations

drawn from these reports are fed back into the design and implementation of future

policies and financing operations.

The Bank's role in the project cycle is performed largely by its Country Operations

Departments with the involvement of the Legal Department, the Finance Department, the

Operations Planning and Services Department, the Operations Evaluation Office and, in

certain cases, the Regional Offices and the Field Representatives.