Islamic Financial Instruments;An Alternative Model for International Transactions

Public Relation  6/27/2010


The Speech by:
H.E .Dr. Seyed Shamseddin Hosseini
Minister of Economic Affairs and Finance
IDB Governor for the Islamic Republic of Iran

Title: Islamic Financial Instruments;
An Alternative Model for International Transactions

35th Annual Meeting of Islamic Development Bank
Baku-Republic of Azerbaijan
 23-24, June 2010

In the Name of God, the Compassionate, the Merciful

Honorable Members of the IDB Board of Governors,
H.E. Chairman of the Board of Governors,
H.E. President of the Islamic Development Bank,
Distinguished Delegates,

Assalamu Alaikum Warahmatullahi Wabarakatuhu

 At the outset, I avail the opportunity to express my appreciation to the Government and people of Azerbaijan for their generous hospitality extended to us and also for convening this annual meeting with excellent arrangements.
   In addition, while congratulating the reappointment of my dear brother, H.E. Dr. Ahmed Mohamed Ali, I would like to express my sincere gratitude to him and also IDB Chief Executive Officers and staff for their relentless efforts to assist the member countries in their socio-economic development process. I hope the results of negotiations and achievements of the meeting will result in strengthening the cooperation among Islamic countries.

Mr. Chairman,
 The 35th Board of Governors' meeting is held in a condition within which the global financial and economic crisis which has been started since late 2007 has not yet been faded away and we are still witnessing the impacts and aftermath of this crisis in the world. Although, we have recently observed some weak signs of returning the economy in some parts of the world to the stable and balanced situation, the debt crisis in some countries specifically in European Union has caused new concerns which in an optimistic condition, will lead to the slow recovery to the period of economic growth and in pessimistic conditions, will warn the formation of a new wave of crisis. This is the fact which should be considered in the policymaking and management of Islamic Development Bank as an international financial institute.
Esteemed Participants,
 Although the crisis began in the financial sector, it quickly spread to an economic crisis through the insolvency of economic enterprises and the growth in unemployment and poverty which eventually led to social tensions and humanitarian problems. This issue has caused due to the fact that globalization of trade (in both goods and services, such as tourism), finance (in both the availability and cost of credit), and labor (in terms of the direct and indirect demand for labor and the flow of remittances) had tied countries together to a much greater extent than they had been for about a century, since early 1900s. As a consequence, in today's world any crisis that affects a major country or group of countries in the global economy or financial system will have some adverse effects on other countries.
The economic growth decline in developed countries has led to the negative average of economic growth in the world to -0.6 percent in 2009 which has been occurred due to the economic deflation and negative growth of 3.2 percent in developed countries.
The level of the trade transaction has been declined to 12.3 percent. The world is not facing just a global financial and economic crisis; it is also facing a global social job crisis. Global unemployment rate which has been increased from 5.7 percent in 2007 to 6.1 percent in 2009 resulted in 20 million increase of the unemployed by the end of 2009.
It is essential to make the assessment of the impacts of the crisis on IDB member countries, since, as an average the growth of IDB member countries has been declined from 4.6 percent in 2008 to 1.2 percent in 2009.

Mr. Chairman,
 The pathology of the crisis has indicated that the usury character, excessive de-regulation in the international financial system, issuing bonds without the support of real assets, and lack of transparency in financial supervision system have been the main reasons for the said crisis. Thus, today, the need for redefining the financial Methods and Models as well as international transactions, deems more crucial than before.

Mr. Chairman,
Ladies and Gentlemen,
 Some proposals to redesign the system and regulations for reducing the negative impacts of the crisis shall be considered as follows;
1) To pay greater attention to Islamic economies and finance models, where emphasis is put on the balance between financial versus the real sector of the economy. Since the Islamic financial institutions follow the sharia'a principals, they avoid the usury based activities and prevent the expansion of paper assets and derivatives, which have been helpful in coping with the crisis. In this context, Islamic Development Bank has been demonstrated to be a resilient model, but it has allocated a small portion of Islamic countries' market which comprises 22 percent of the world's population, 9 percent of the world's GDP and contributing to 10 percent of the global exportation. Considering this fact and regarding the capabilities, the existing principals and successful experiences of Islamic countries, we should take this opportunity to introduce Islamic Economic and Islamic Banking as a universal substitute model. This issue could be considered in the strategic plans of Islamic Development Bank’s Group.
2) IDB member countries have noticed that IDB has an important, continuing role in providing potential financing to member countries in pre-crisis, incipient-crisis, and actual-crisis situations. Meanwhile, IDB should have adequate resources to assist its members when crises occur. In this regard, enrichment of the Bank’s financial resources by means, such as encouraging member countries’ financial institutions to increase deposits in the Bank needs to be followed up.
3) Co-operation of the stock exchanges of the Islamic countries, adopting each other's experience, facilitation of capital flow, and cooperation of banking system of the Islamic countries based on Islamic agreements can increase the financial contribution of the member countries.
4) The mutual support of Islamic countries and also the Islamic Development Bank in developing the application of Islamic monetary mechanisms is also emphasized. I would like to bring into your kind notice that after two decades of successful experiences of Islamic Republic of Iran in issuing 24 billion dollar participation bonds (Sukuk) in the local currency, our country has commenced issuing foreign exchange participation bonds (Sukuk) since last year. Euro 500 million of these bonds has already been launched and sold and we have been authorized to issue Euro 13 billion bonds which can be brought to the attention of Banks, Islamic Development Bank and member countries’ financial institutions.
5) Regarding the importance of foreign trades in international economic cooperation, removing commercial obstacles and barriers and reducing tariffs among member countries, would facilitate and promote foreign trade of Islamic countries. In this respect, International Islamic Trade Finance Corporation (ITFC) acts as the facilitator and an effective agent for financing the trade of member countries. 
6) Designing mechanisms for implementation of arrangements such as “Joint Investment Funds”, exchanging and utilizing local currencies in economic interactions among Islamic countries, are some issues that could be implemented as a result of efforts and comprehensive research activities, in order to reduce the negative impacts of the developments of the global economy on Islamic countries.
7) Today, it is obvious that the function of international financial institutions such as the International Monetary Fund (IMF) in monitoring and leading the global economic monetary and financial system is weak. In order to supervise and guide the monetary system among Islamic countries and to improve their ties and also the stability of the foreign exchange market among IDB member countries, it is recommended to review and follow up the establishment of an "Islamic International Monetary Fund" with the active contribution of IDB member countries. This issue can be considered as a research priority with the support of Islamic Development Bank.

Ladies and Gentlemen,
 Before concluding my speech, I would like to avail myself of this opportunity to remind you of the resistance of Muslim brothers and sisters of Palestine and strongly condemn the three-year siege of Gaza Strip by the Zionist regime and its mortal attack to humanitarian aid flotilla. This siege has caused the economic, social sufferings for 1.5 million people in Gaza which indicates the clear violation of human rights, international laws and conventions by the Zionist regime. Lack of medical and hospital equipment, electricity, portable water as well as poverty and unemployment are only some of the sufferings of the oppressed people of Gaza. In this regard, the role of Islamic Development Bank, as an international development institution is more fundamental than before, and it could seriously play its ethical, institutional and humanitarian duties for rendering financial support.
The breach of the international law in the global arena, such as the incidence in the zone of Persian Gulf, indicated that aggression, violence and clear violation of international regimes will lead to instability and uncertainty in the world.

 At the end I re-express my gratitude to the organizers of this event and wish for effective and evolving activities of IDB while reiterating on the necessity for the Islamic countries to play their deserved active and effective role in reorganizing and designing new financial and economic guidelines. There is no doubt that IDB as a development institution, and also the supplier of technical and theoretical inputs is able to play its fundamental role and pave the grounds for the coalition and convergence of views and approaches.

Thank you very much for your attention.


H.E.Ilyas Jaoa, Vice President, Bolivarian Republic of Venezuela,
Esteemed Members of Ministerial Council,
Ladies and Gentlemen,

At the outset I express my gratitude to the Government of Venezuela, Honorable Minister of Planning and Finance of Venezuela and His Excellency’s colleagues who hosted the 31st Annual Session of Opec Fund for International Development (OFID) Ministerial Council and made excellent arrangement for organizing the meeting. I was honored by having the opportunity to attend the meeting and highlighting my observations on various important issues addressed in the agenda, which will with no doubt affect the future performance of the Fund in the financing operations and development activities at global level.

Esteemed Participants,
Ladies and Gentlemen, 

The global economic perspective is not expected to be promising in the short run. The global financial and economic crisis which started in the late 2007, has not yet faded away despite forecasts of returning of the world to a stable and balanced economic situation in late 2009. The negative economic growth rate of minus 3.2 percent in the developed economies, has caused the world average economic growth rate be set at minus 0.6 percent in 2009. As forecasted by the financial international organizations the average world economic growth rate stand at 4.2 percent in 2010 mostly due to economic growth in the Asian countries and emerging economies, which seems to be doubtful since witnessing the recent economic developments in developed economies especially in EU States. 
Given the volatility in the world returning to a stable economic situation, the unemployment and low economic growth rate in the developed countries and at the same time the difficult access of the developing countries to international financial resources and foreign investment are some of future challenges. The poor and least developed countries are facing problems in managing the crisis and its aftermath impacts. These countries and most of developed countries play key role in the demand stimulation process and accelerating the global economic recovery which itself requires providing sustainable financial resources. The role of international financial organizations, multilateral Banks and development Funds and institutions is crucial in filling this gap and addressing the needs and observations of least developed, developing as well as developed countries in this process. In addition to paying attention to this key mission, combating poverty, providing food security, moving toward the achieving the other eighth Millennium Development Goals, attending to the global warming issue and focusing on financing the green projects and producing non fossil energies are still on the top of these organizations and institutions priority list.

Esteemed Colleagues,
OFID as a multinational development institution, actively and effectively contributing to assisting the countries development and their financing needs for more than 30 years, is experiencing a critical and unique situation while the expectations from these institutions increases. Playing the deserved role by the Fund is only possible if the sustainability of the available resources, the Fund financial structure and its programs and strategies are designed to face these challenges and the Fund is prepared to encounter the new era and address the numerous and various available needs while maintaining its capacity and efficiency after the crisis. Although the Fund immunity and not being affected by the crisis was not expected, but we have to ensure that the required lessons have been learned and experience gained for designing an operational vision and  appropriate strategic planning, while supervising and monitoring the implementation of programs and strategies in order to achieve the sustainable financial resources and its efficient utilization.
Thus, measures should be taken for enabling us to face the new challenges. Taking actions for receiving a credit rating assessment for the Fund and utilizing new models and approaches for mobilizing funds from international market based on the OFID rating along with introducing more effective internal supervision policies, Fund asset management, maintaining and protecting the capital resources, attending to capital adequacy proportionate to the volume of lending operation, more monitoring and supervision on financing operations and portfolio risk management, reducing the non operational costs and strengthening and increasing the specialized and professional staffs could be considered as internal measures and organizational policies which results in sustainable operation of the Fund.
Assessment and identification of investment opportunities for investment of the Fund resources and capital investment operations with the priority given to the available opportunities in the member countries, could assist and contribute to  the sustainability of the Fund resources and financial capacity as well as promoting the opportunities and strengthening the markets in the member states. 
Since OFID three year strategic plan based on the Fund 18th lending program is   being reviewed in the context of the agenda of the 31st Ministerial Council meeting, attending and considering the afore mentioned issues are of great importance.

Esteemed Colleagues,
Ladies and Gentlemen,
I strongly believe that though designing the appropriate framework for the visions, objectives, programs and approaches of the Fund are undeniably important, the models, mechanisms and operational policies which are introduced to fulfill and achieve them are of the same importance. The implementation of the Energy for the Poor Incentive ,which is also included in the agenda, based on the OFID capital resources and the member countries capital contribution, may be the most accessible and at hand option, but is not the only and most appropriate option given the impacts of the recent financial and economic crisis on the member states and the budget deficit problems encountered by them. In these circumstances, the Fund management should assess different ways and means such as mobilizing funds from international financial market, and evaluate and analyze the results at the level of the OFID Governing Board, in order to enable the member countries make the optimum and most appropriate decision which could be implemented by all members.
Ladies and Gentlemen,
Given the current circumstances and considering the increasing and numerous demand in the world and while there is an ongoing dispute over the need for redefining and reengineering the global financial and economic management structure and system, the international financial organizations and development institutions are of no exception and should ,along with providing the conventional packages and traditional modes of financing, design and offer variety of products, instruments and services meeting the requirements and needs of their clients and borrowing countries.  
The implementation of short term modes of financing as we approved in Jeddah in 2006, is and effective tool to meet the needs of borrowing countries and provides more sustainability in the Fund resources and we should benefit from this window to promote the south-south trade cooperation and developing countries intra trade. In Portshach- Austria in 2007, the council also approved that OFID take necessary measures to mobilize funds from international market which with no doubt ,if materialized, is the prerequisite for enabling the Fund to address the increasing demands of borrowing countries and effectively implement the lending programs. These objectives and approaches were reiterated in Isfahan-Iran in 2008.
In addition, introducing the various medium and long term modes of project financing, focusing on strengthening the eligible and reputable member countries’ contractors and suppliers and offering flexible and attractive financing packages with appropriate terms and conditions should be considered by the OFID,   in order to ensure the sustainability and stable performance of the Fund. In this course the necessity of promoting the capacity and capability of the private sector as the enforcing engine and the key player in the developing countries development process and ensuring the direct or indirect input of the OFID lending programs in this promotion should not be ignored.          
Today, the governments and governmental executing agencies encourage the foreign investors and transnational companies as well as the local private sector to participate in implementing the infrastructure projects through designing and employing various methods and modes of public private partnership in their infrastructure and development projects. Currently and by the vast changes that have taken effect in the rules of the game, the effective and efficient presence and contribution is provided for the institutions and organizations which are able to adapt and synergize their products and services with the new principles, and play their deserved role when the flow of investment to the infrastructure projects resumes after the crisis. These projects not only provide a good platform for mobilizing local and international funds and thus coalition and leverage of local and foreign resources, but also respond to one of requirements and objectives of the Millennium development Goals which is the development of infrastructures in developing and least developed countries.
Although there is a huge gap between the needed and actual investments required for infrastructure development in the developing countries, we are witnessing an increasing engagement of large transnational companies and foreign investors in these types of projects starting from early 90’s. This contribution has resulted in stock of investments amounting to US$ 200 billion in infrastructure projects in water, electricity, gas, transportation and communication by the end of 2006.
Employing the structured financing operations, defining methods and mechanisms to identify and prioritize projects which are in line with the Fund macro and strategic programs and fall into these categories, introducing external fund mobilization programs for these projects, collaboration and concluding cooperation protocols with reputable international financial organizations for syndicate and joint financing tailored for these projects are only few of the products and models which could be offered in this area of activity and should be considered by the OFID.
Designing and preparing investment insurance coverage packages to be offered to the foreign investors independently by the Fund or jointly with the cooperation of international or regional investment insurance companies and also collaboration with the these institutions and organizations in the area of export credit could also introduce a new window and appropriate capacity for efficiency and attractiveness of the Fund long and short term operations and packages. 

Esteemed Colleagues,
Before concluding my speech, I avail the opportunity to strongly condemn the Zionist regime for their actions to continue the three year siege of Gaza and attacking the humanitarian aid cargo and peace ships. This siege has resulted in suffering and living, economic and social difficulties for 1.5 million Palestinians in the region and has explicitly violated international human right law and international conventions by the Zionist regime. Lack of medical and hospital equipments, long time blackouts, lack of clean drinkable water, poverty and unemployment are just part of hardships and difficulties of the innocent people of Gaza. The estimates show that the siege has caused for US$ 30 million loss in agriculture activity in the region, losing 40,000 job opportunities, stoppage in the operation of 98 percent of factories and industrial activities in the region and dependency of 80 percent of the people of Gaza on the humanitarian aids of international organizations. The double standards and the approaches of some countries and international bodies in respect to the siege of Gaza and Zionist regime violation of international conventions in attacking to the humanitarian aid cargoes, has resulted in discredit of this regime in the world public opinion. In this course the role of OFID as international financial development institutions is even greater than before and the Fund should comply with its institutional, moral and humanitarian obligation for extending grants and financial assistance in the context of the special grant account for emergency relief operations and special grant account for Palestine. 
H.E.Ilyas Jaoa, Vice President, Bolivarian Republic of Venezuela,
Esteemed Members of Ministerial Council,
Ladies and Gentlemen,
 I once again express my appreciation to the revolutionary authorities of the government of Venezuela, and especially to H.E. Minister of Planning and Finance of Venezuela and His Excellency’s colleagues for the excellent arrangements extended for organizing this Meeting, and avail the opportunity to wish for health and pray for immediate recovery of Mr. Gorge Glordani, Minister of Planning and Finance of Venezuela.
At the conclusion I wish to extend my regards to the chairman of the board of governors and his colleagues in the board for their relentless efforts for achieving the objectives and goals of the OFID. I also express my appreciation to the secretary general, assistants secretary general and hard working staff of the Fund for their efforts and endeavors for maintaining the financial stability, sustainability of resources and efficiency and directorship of this international institution and wish all success for the Meeting and hope that the 31st  Ministerial Council could achieve all its objectives.         

Wa salam-o-Alaikum wa Rahmatulah wa barakatu 
 Jun 21, 2010 08:53

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