ANNUAL DEVELOPMENT EFFECTIVENESS REPORT 2019

WITH A SPECIAL FOCUS ON ICD’S INNOVATION IN SUPPORTING SMES IN FRAGILE SETTINGS

ceo

MESSAGE from THE CEO

“IN THE NAME OF ALLAH, THE BENEFICENT, THE MERCIFUL”

ICD is pleased to present the 2018 Annual Development Effectiveness Report (ADER) of the Islamic Corporation for the Development of the Private Sector (ICD). Innovative ways of supporting small-and medium-size enterprises (SMEs) particularly in fragile and conflict affected states(FCS) is a primary focus of this 5th edition of ADER.

Highlights

HIGHLIGHTS OF ICD’S PORTFOLIO IN FRAGILE CONTEXTS

In the last four years (2015- 2018), ICD continued investing in its Member Countries (MCs) in fragile and conflict-affected contexts.

Overall, ICD approvals increased from 2015 to 2017 before a slowdown in 2018.

In Fragile and Conflict-affected Situations (FCS), ICD approvals decreased from 2015 to 2017 before increasing in 2018.

In 2018, ICD approvals in FCS exceeded those in non-FCS (68% vs. 32%).

On average, in the last 4 years, 36% of ICD approvals went to MCs in FCS.

Line of Finance (LoF) was the most attractive investment product in FSC in 2018 (80%).

On average, in the last 4 years, 36% of ICD disbursements went to MCs in FCS.

Since 2016, disbursements in FSC mainly done through LoF and Term Finance.

HIGHLIGHTS OF 2018 ICD'S DEVELOPMENT EFFECTIVENESS SURVEY

The oldest ICD local partners are in Yemen (13 years) and sub-Saharan Africa (10 years).

54%

Twenty nine (29) ICD MCs are classified as being in fragile situation in 2018 (54% of the total).

50%

ICD has an active portfolio in 50% of these countries.

83%

The survey response rate is 83% (20 out 24 targeted projects from 13 MCs).

TYPES OF FINANCIAL INSTITUTIONS IN THE SAMPLE

The total number of individual clients of the surveyed financial institutions is 8 million. The total number of SME clients is estimated to be 377,159, without one outlier from Nigeria: Sterling Bank (with 1 million clients). The share of SME financing in total banking portfolio in 2018 was 36%. In 90% of institutions, SME financing targets are reflected in their Key Performance Indicators (KPIs) and performance management.

35%

Islamic banks

30%

Conventional banks with an Islamic window

20%

Conventional banks

15%

Ijara companies

The total number of individual clients of the surveyed financial institutions is

8 Million.
70%

of institutions have an SME policy.

The share of SME financing in total banking portfolio in 2018 was 36%. In 90% of institutions, SME financing targets are reflected in their Key Performance Indicators (KPIs) and performance management.

65%

of institutions have a dedicated SME department.

The total number of SME clients is estimated to be

377,159

without one outlier from Nigeria: Sterling Bank (with 1 million clients).

70%

of institutions have received support for SME financing.

MAIN SECTORS TARGETED IN SME FINANCING BY THE SURVEYED INSTITUTIONS:

  • 65%

    Agribusiness

  • 65%

    Manufacturing

  • 65%

    Energy

  • 65%

    Services

  • 55%

    Transportation

TOP THREE FINANCING STRATEGIES IN PARTNER INSTITUTIONS:

60%

Management decision to be ahead of market

50%

New market demand

40%

Strong competitive pressure/ standard approach exhausted

BANKS ARE WILLING TO PROVIDE FINANCE FOR:

Only 25% of banks want to provide finance for start-ups.The share of SME financing in total banking portfolio in 2018 was 36%. In 2018, banks could finance only 23% of all financing requests (4,929 financing facilities provided in 2018). Conventional banks rated their partnership with ICD highest (4 out of 5), but Islamic banks – lowest (2.9 out of 5). 80% of financial institutions reported having at least some benefit from the partnership with ICD.

90%

Asset Acquisition

80%

Expansion

60%

Working Capital

55%

Value Chain

ICD's SDGs Dashboard

SDG Investments (contribution) per Department

Investments Portfolio and Projects per SDG

Jobs Generated by Department

Community Development per Department

Goods and Services Purchased locally per Department

SDG Operational Results

ICD Investments

SDG's Operational Results

ICD's Impact (2017)

EXECUTIVE

SUMMARy

This is the fifth Annual Development Effectiveness Report (ADER) of the Islamic Corporation for the Private Sector Development (ICD). It describes the global strategic context with its economic challenges to the ICD Member Countries (MCs) that ICD is committed to address; the advancement of development effectiveness framework, including new ICD’s approaches to measuring impact and additionality framework; ICD’s role in fragile settings; and the way forward.

GLOBAL CONTEXT

Numerous economic indicators point towards a downturn in the global economy, largely due to heightened risk and diminishing activity. The impact of this downturn will not be evenly felt or evenly distributed across regions and nations. Some states are projected to experience increased economic difficulties. Specifically, many Islamic Development Bank’s (IsDB) MCs run the risk of failing to achieve Sustainable Development Goal 1 (SDG1), addressing extreme poverty, defined as living on less than USD 1.90 per day. This potential development is especially worrisome as extreme poverty is projected to decrease worldwide yet increase in MCs. Currently, thirty-six countries will not meet SDG1, seventeen, over a half of which are MCs. In fact, four MCs are regressing in terms of achieving SDG1, getting further away from the desired goal. Fortunately, the President’s Five-Year Program (P5P, 2016-2021) is well positioned to help address this issue. Part of the goal of the program is to transition the IsDB from a funding provider to a development enabler, market creator and investment facilitator. In other words, from a purely funding role to a development and capacity building role. The program contains four main components, focusing on: (i) the global value chain, (ii) science, technology and innovation, (iii) innovative Islamic finance and (iv) partnerships and resource mobilization. Achieving improvements in these areas means improving operations. As such, the private sector arm of IsDB, the Islamic Corporation for the Development of the Private Sector (ICD), has created four strategic priorities for improving its operational efficiency and effectiveness. These priorities include: (i) revisiting the operating model, (ii) introducing innovative products, (iii) improving ICD internal process and (iv) ensuring robust financial performances. These components and priorities comprise the overarching attempts to improve and realign the IsDB and ICD operations.

DEVELOPMENT EFFECTIVENESS FRAMEWORK

In order to track the progress of its initiatives, ICD has continued to improve its Development Effectiveness Agenda (DEA) on both the global and local level. At the global level, this improvement involves taking a more focused approach to measuring development impact and identifying attribution achieved through using new methods and utilizing an SDG dashboard which accurately tracks progress. A great example of this is the Business Resilience Assistance for Value-adding Enterprises (BRAVE) Project in Yemen, which employed a pre-test/post-test design to isolate and measure the impact of the matching grant component of the program using a Difference-InDifferences identification strategy. At the local level, this improvement involves supporting local financial institutions as they build and develop their own monitoring and evaluation systems. Al-Akhdar Bank of Morocco demonstrates what this approach can provide, as it was one of the first local banks to receive Technical Assistance support in development effectiveness system. As part of the partnership, it created a clear roadmap for implementing a monitoring and evaluation system and a dashboard to track its progress. In order to maximize its impact, ICD will begin using its new grading system, Development Impact Scoring System (DISS), which was developed using benchmarks and metrics from numerous Development Finance Institutions. This new scoring system allows ICD to maximize its impact by supporting institutions which (i) align with ICD’s mandate, (ii) take into account the fragility context of the country, (iii) use the Harmonized Indicators for Private Sector Operations (HIPSO) that allow ICD to target specific SDGs, (iv) provide specific financial and economic performance results and (v) allows for Additionality – providing financial and non-financial support beyond what is currently available.

ICD’S ROLE IN FRAGILE SETTINGS

All this progress, however, must take into account local and national circumstances where fragility acts as a major obstacle to the realization of the SDGs. Many MCs are classified as fragile states, including many of those with high populations of extreme poverty. As of 2018, 54% of MCs are considered at risk (29 out of 54 countries). Based on a definition provided by the OECD, fragility involves a state’s exposure to risk and its ability to cope or mitigate those risks across economic, environmental, political, societal and security dimensions. The fragility context is important for ICD for several reasons. First, as established by the OECD and Overseas Development Institute (ODI), it has significant impact on poverty and economic growth, affecting the most vulnerable segments of the population. Second, it acts as a roadblock for MCs in their attempts to achieve the SDGs. One potential way of continuing to work towards the SDGs in fragile states is by focusing on Small and Medium-sized Enterprises (SMEs). SMEs play a disproportionately large role in economic, social and political growth in developing countries. The International Finance Corporation (IFC) noted that 70-95% of newly created jobs in these countries can be attributed to SMEs. These jobs provide not only economic benefits, but also many additional benefits which the national governments cannot produce. ICD has the potential to play an important role in supporting SMEs in fragile MCs by creating partnerships with local banks and private sector actors and helping them meet SME needs. The BRAVE project in Yemen offers a worthwhile case study for how ICD can support SMEs in fragile states. The ongoing conflict in Yemen has produced a humanitarian and economic crisis. Over a quarter of all enterprises have closed, with women owned enterprises accounting for nearly half (42%). These closures, the result of the destruction of infrastructure and inability to access financing and numerous other factors, have severely impacted the entire Yemeni economy. The aim of the BRAVE project was to address this crisis by offering training and matching grants to SMEs in the health care, fishery, food, clothing and agri-business sectors in Sana’a, Aden and Hadramout. In total, over 500 enterprises received training that helped them develop risk management and business continuity plans. Of these enterprises, roughly 300 were randomly selected to receive grants with 50% matching contribution from their own funds. Local banks played an important role as partners facilitating the transfer of funds to the SMEs. The success of BRAVE can be demonstrated with the survey results. 97% of surveyed entrepreneurs confirmed that the intervention was right and occurred at the right time. Many felt that the grants helped owners keep their businesses open, and sometimes expand operations despite the ongoing conflict. Furthermore, the intervention provided benefits to the community by creating new jobs and improving access to services, especially in the health care sector. According to the BRAVE dashboard, over 800 new jobs were created as a direct result of the intervention. Individual cases, such as Al Ameer in the textile sector, demonstrate the success of the project. At one point, the owner had considered closing the business, but, as a result of support from BRAVE, the owner developed a business continuity plan which helped him mitigate risks. As a result, Al Ameer added 10 new production lines, including the high-quality Al Shemage line which is now exported abroad. The enterprise has also opened 8 new retail stores and hired over 500 seasonal workers during busy periods. Clearly, BRAVE has provided a tangible benefit to Al Ameer, its employees and the community.

WAy FORWARD

Moving forward, ICD will take into consideration the concerns and expectations of its partner financial institutions as they are striving to improve the services to their client SMEs in fragile settings. In the ICD 2018 Development Effectiveness Survey, financial institutions shared their observations of reasons that prevent SMEs from getting financing, for example, high cost of borrowing, high business risk, poor business accounting systems and weak cash flow. Institutions also expected ICD to help them with increasing their knowledge and skills of financing mechanisms, especially Islamic banking practices; proving technical assistance; building capacity and accessing financial markets among other things. To strengthen its services, ICD intends to make use of the technological solutions enabled by the advance of digital economy. One such technology is an Ethereum-based blockchain with its smart contracts. It requires trust among all participants using it and has a potential to simplify and accelerate financial transactions.