Finance & Banking

REPURPOSING TRADE FINANCE PRIORITIES IN A POST-COVID ERA

ADVANCING TRADE TO
IMPROVE THE LIVELIHOODS
OF MEMBER COUNTRIES

ENG. HANI SALEM SONBOL
CHIEF EXECUTIVE OFFICER
INTERNATIONAL ISLAMIC TRADE FINANCE CORPORATION

Globally, the year 2019 was a year of trade tensions, sluggish growth, and volatile commodity prices. It was a
challenging year for many economies around the world. For the International Islamic Trade Finance Corporation
(ITFC), 2019 was a year of record operational and fiscal support extended to member countries, with trade financing
approvals reaching USD5.8 billion of which, USD2.1 billion was extended to the least developed countries (LDCs).
Crucially, USD3.9 billion was extended to support intra-OIC trade.

The year 2020 brought a sudden unprecedented change on a global scale. The advent of the COVID-19 global crisis created major challenges, leaving even the world’s economic leaders grappling to phantom its impact. For the developing world, however, the economic fallout could be felt even greater and for far longer as the world slides into recession. Multilateral development institutions such as ITFC have had to swiftly recalibrate operational plans and reprioritise what matters to mitigate the multifarious impacts of the pandemic in vulnerable member countries.

Without doubt, food security and medical
preparedness have emerged as the areas
where critical intervention is needed in LDCs.
Amongst the immediate challenges resulting
from the pandemic is the lack of availability
of medical testing and personal protective
equipment for front line doctors and nurses. In
parallel, the collapse of international, regional
and (especially) local supply chains during the
spread of coronavirus has laid bare the extent
of the lack of food security that many of these
countries face. Without intervention, imports of
basic raw commodities such as wheat and sugar
could become inordinately expensive as supply
falls. Many SMEs are in danger of being wiped
out altogether.

To mitigate the socio-economic impact of the
pandemic in member countries, the Islamic
Development Bank (IsDB) pledged USD2.3
billion for the Group’s Strategic Preparedness and
Response Programme for COVID-19 pandemic.
The Programme adopted a 3-R approach, with
each component focusing on Respond, Restore
and Restart.

ITFC was appointed by IsDB to execute the
trade finance operations for the prevention,
containment, and mitigation of the impacts of
the pandemic on member countries. In line with
the Group’s strategy, ITFC has adopted a twophase response to the COVID-19 crisis. The
first phase, the Rapid Response Initiative (RRI),
intends to sustain supply chains and enable the
revival of trade. For this purpose, a USD300
million package has been allocated to member
countries for the purchase of emergency medical
equipment and supplies, as well as for strategic
commodities, such as staple food.

The second phase, the Recovery Response
Programme (RRP), earmarks another USD550
million for deployment over the next two years.
The RRP is aimed at fixing the socio-economic
damage, which is expected to last longer than
the immediate impact of the virus.

PRIORITISING SAFETY AND
FOOD SECURITY THROUGH
TARGETED COUNTRY-SPECIFIC
INTERVENTIONS

Since April 2020, ITFC continued to provide trade
finance and trade development interventions
to support emergency food and healthcarerelated needs in the most vulnerable of member
countries. In Egypt, ITFC approved a USD100
million financing package for the Government
in favour of the General Authority for Supply
Commodities (GASC) for essential strategic
commodity needs. This package will directly fund
up to 240,000 thousand tonnes of wheat, and
100,000 tonnes of sugar.

In Kyrgyzstan, an emergency food package relief
programme has been provided in partnership with
the Micro Credit Company M Bulak to support
around 2,000 families who are most affected by
the health and economic consequences of the
pandemic.

ITFC also approved USD15 million for the
Maldives’ State Trading Organization (STO), to
facilitate the procurement of staple foods and
medicines. In addition, ITFC is extending a grant
to the Government for immediate emergency
medical equipment including crucial personal
protective equipment for use by medical
professionals such as anti-fog face shields, safety
goggles and protective uniform suits.

ITFC is actively engaging international, regional
and local partners as a strategic means of scaling
these interim financing measures to contribute
to the critical needs of the member countries
and where necessary, on the mobilisation of
trade development support services during the
pandemic. This includes helping OIC member
countries with strategies for the control and
production of healthcare facilities.

ENSURING MEDICAL
PREPAREDNESS THROUGH
SKILLS TRANSFER, RESEARCH,
AND DEVELOPMENT

Whilst emergency financing is crucial in the
short-term, it is not sustainable unless countries
can stand on their own in the fight against the
pandemic. Many member countries need to
enhance medical capacity and know-how to
effectively withstand the impact of COVID-19.

In April 2020, IsDB and ITFC, in coordination
with the Moroccan Society of Anesthesia,
Analgesia and Resuscitation (SMAAR), launched
an online platform to facilitate learning and
knowledge sharing between medical teams
from African member countries. The e-learning
platform, which comes under the Reverse
Linkage Mechanism and the Arab Africa Trade
Bridges (AATB) Programme, was rolled out via
the first of three webinars focusing on pandemic preparedness and response, whilst leveraging on international expertise in this field. The AATB programme, launched in 2017, aims to foster greater economic ties between the Arab African regions.

The e-platform aims to build the capacities of medical staff in African countries on their COVID-19 response protocols and approaches, whilst facilitating engagement between decisionmakers and practitioners in participating countries, thus paving the way for increased global collaboration. The webinars are designed to encourage dialogue and scenario mapping to identify key challenges facing participating countries and to outline best practice approaches for successfully integrating response strategies in their respective countries.

The platform has seen the participation of more than 130 doctors, reanimators, emergency physicians and members of national committees from 17 African countries including Algeria, Benin, Burkina Faso, Cameroon, Comoros, Djibouti, Gabon, Guinea, Cote d’Ivoire, Mali, Mauritania, Morocco, Niger, Senegal, Chad, Togo, and Tunisia.

SAFEGUARDING SMEs IS CRUCIAL TO ITFC’S COVID-19 STRATEGY

COVID-19 has already crippled countless SMEs across the world, forcing them into liquidity stress and closure in some cases. In the developing world especially, SMEs are a fundamental driver of job creation and economic development – a lynchpin for sustainable development and a crucial requirement on the road towards realising the United Nation’s Sustainable Development Goals (SDGs). SMEs deliver progress in key SDG targets, especially No Poverty, Zero Hunger,
Good Health and Well-being, Decent Work and Economic Growth, Industry, Innovation and Infrastructure.

For these SDGs to be realised, it is imperative that SMEs survive the economic challenges of COVID-19. All relevant parties must come together to ensure that SMEs in OIC member countries continue to operate, employ, and trade amongst each other. In 2019, ITFC’s overall private sector approvals reached USD821 million with USD367.9 million disbursed to enhance SMEs’ access to trade finance. With the COVID-19 crisis, ITFC is actively repurposing trade financing and development efforts towards supporting SMEs where they are needed most – food and healthcare.

In the pre-COVID economy, the AATB programme had successfully implemented a series of business matching events for buyers and sellers in the agri-foods and pharmaceutical sectors in the African and Arab regions. These efforts led to USD150 million pharmaceutical and USD30 million agri-food trade transactions. With the crisis, these platforms will play an even more important role in terms of continuing to engage B2B companies in the two regions to become part of the crisis solution in member countries.

Just recently, ITFC approved a EUR8 million financing facility for the Senegalese bank, Banque Islamique du Sénégal (BIS), to support private sector development. With around 300,000 SMEs and micro-enterprises accounting for 90%
of businesses in Senegal, the financing is aimed at supporting the country’s efforts to drive economic inclusion and ensure the continuity of intra-OIC trade. Furthermore, the facility is expected to support around 1,000 jobs within
the private sector, including companies in food and distribution.

ISLAMIC TRADE FINANCE AND
THE WAY FORWARD IN A POSTCOVID ECONO

In 2019, ITFC’s strategy of impact investment as a means to advancing trade and improving living standards saw a total of USD3.7 billion for the import of energy products, USD755 million for food and agriculture and USD290 million worth of income redistributed to groundnuts and cotton farmers in OIC member countries. Around 500,000 farmers were uplifted through financing and capacity development training, and 13 million people were provided with access to
energy.

In the same year, ITFC extended USD3.9 billion of financing to support Intra-OIC trade. Amongst the key initiatives was a USD500 million agreement with Afreximbank to create the Arab Africa Trade Finance and Promotion Programme
(AATFPP) under the umbrella of AATB. This milestone was further complemented by ITFC’s MoU with the African Union (AU) in February 2020, to partner on joint activities to boost interregional trade between African and Arab OIC member countries and help enterprises tap into large-scale opportunities across the two regions.

These transformative developments have laid powerful structural and fiscal foundations for growth and, whilst COVID-19 was unexpected, the platforms that have been established can help OIC member countries to withstand the inevitable economic shocks that the pandemic brings.

Moving forward, and building on these robust foundations, a nuanced, targeted focus on providing what is needed, where it is needed right now and in the near term will take precedence. For ITFC so far, this will mean continuing to drive funds and operational support to those parts of the OIC regions that are most in need.

Emphasis will be placed on the OIC member countries’ continued engagement in the global agri-food value chains. In the best of times, it is challenging for LDCs to end hunger (SDG 2) because of a multitude of factors ranging from soaring population growth to climate change, inadequate natural resources, poor soil quality, low mechanisation and inadequate storage and processing facilities. Such factors disproportionately affect the many millions who live in rural, remote areas the subsistence farmers.

Efforts will continue to focus on improving access to agricultural inputs that contribute to better quality agri-food output, transport, and storage. Prioritising better market access for smallholder farmers is important for the quality
of local food production (and consumption), job security and to reduce the burden of imported input costs. ITFC will act to repurpose its activities towards training farmers on improved agricultural techniques, raising the standards of
their production and enhancing their access to markets in other OIC member states.

ITFC’s priorities will continue to include an ongoing assessment of OIC member states’ emergency commodity needs and the provision of capital to financial institutions that SMEs rely upon. ITFC will also double down on programmes
that provide practical and operational support, including the West Africa SME Programme, a flagship programme designed to improve SME access to trade finance.

There will also be a continued focus on the training of partner banks and other financial institutions to promote and spread Islamic finance across OIC member countries – this will further enable the ITFC to reach deeper into business ecosystems and encourage intra-OIC trade. It is equally important over the coming period for ITFC to align its strategy and give its time to expanding the international ecosystem of impact investment – this is crucial because impact investment delivers sustainable socioeconomic outputs and helps nations to make good progress on SDGs.

These developments mean that during the aftermath of COVID-19, ITFC can drill down to focus on what makes the best impact on the near-term and long-term livelihoods and quality of life for the hundreds of millions of people most affected by the pandemic.

Global Islamic Finance Report (GIFR) 2020

All GIFR editions revolve around a specific theme. The theme for the 2020 edition is “Islamic Social Finance”. While social finance is emerging as a global phenomenon, Islamic Social Finance lends a fresh perspective to the trend. Community or Social welfare is at the core of Islamic Shari’a and this issue of GIFR explores how the trend is unfolding in real-time.

GIFR 2020 will shed light on social finance topics such as microfinance, philanthropy, grants, social enterprises, and sustainable businesses among others.

Aiming to continue as an industry building initiative and enhancing the quality and authenticity of information and analysis provided, GIFR 2020 is expected to scale new heights in terms of audience, reach, and content.

Pause for Thought ISLAMIC FINANCE [TO BE] RE-DEFINED

PROFESSOR HUMAYON DAR
DIRECTOR-GENERAL
CAMBRIDGE INSTITUTE OF ISLAMIC FINANCE

There is a need to remould the edifice of Islamic banking and finance by relaying its foundations. This may very well involve a change in the very nomenclature that differentiates it from interest-based banking and finance.

The fundamental principle on which the whole foundation of Islamic banking and finance – or whatever name we may give to it – should be erected is the prohibition of unjustifiable enrichment1.
There are four important pillars of this prohibition:

• Prohibition of money lending for a gain;
• Coercive contracts;
• Unhealthy speculation; and
• Deception, fraud and outright stealing

Another important guiding principle of Islamic banking and finance is the promotion of equitable distribution of wealth.

The ongoing pandemic must allow us to re-evaluate the value proposition of Islamic banking and finance to develop
products that do not allow the stronger party to a financial transaction to maximise rent-seeking at the expense
of the weaker party. Also, the use of Islamic social finance must allow Islamic banks and other financial institutions to
contribute to shared prosperity rather than accentuating income and wealth inequalities.

For this to be achieved, a new animal must be born rather than taming the beast that has already got acclimatised
to the vast wild jungle of financial markets. If this is too radical a suggestion then the beast must be captured and
kept in a zoo or a rehabilitation centre for quite some time to undo what it has fast learnt from its conventional
counterparts. This is only possible if all the stakeholders in Islamic banking and finance have developed a consensus in this respect. One must not be blamed if they do not deem it a plausibility.

A new model of Islamic banking and finance must be:

• Free from the profit motive;
• Based on interest-free loans;
• Fee-oriented rather than interested in earning income from a return similar to interest;
• People-centric and not based on conventional wisdom behind the market economy; and above all
• A system based on charity, philanthropy and donations, away from the deposit-centric banking system.

If the above is not possible now in the wake of COVID-19, one should not hope for this to happen any time in the future!

Related Articles

Leave a Reply

Your email address will not be published.

Back to top button