EVEN governments are not immune to defaulting on their obligations under cross-border investment agreements, says Dr Abdel-Rahman Taha, general manager of the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), a member of the Islamic Development Bank Group.
Dr Taha was speaking at the two-day Broader MENA Investment summit that ended in Dubai yesterday (Wednesday, Feb 21), jointly sponsored by ICIEC and the World Bank Group’s Multilateral Investment Guarantee Agency (MIGA), in association with Dubai International Financial Centre.
He explained how cross-border investment can be a hazardous gamble unless the political risks are expertly covered, highlighting four main areas of vulnerability – confiscation, nationalisation, foreign exchange transfer, and breach of contract.
Some governments have been known to block transfer of profits by imposing foreign exchange restrictions, or failing to honour arbitration agreements reached to settle disputes, he said.
“Creeping nationalisation” is also a threat, when governments subtly change laws or take steps that eventually contribute to dispossessing investors.
But for a premium as low a one to three per cent of the sum insured, investors can guard against political risks to their assets and returns.
And the mere fact of having ICIEC or MIGA backing is in itself a deterrent to unscrupulous governments that might otherwise be prepared to exploit foreign investors.
With governments being shareholders in the World Bank Group, they are less likely to consider defaulting on contractual obligations and end up in confrontation with the bank.
So much so that ICIEC has had no claims arising from its regional coverage and MIGA is currently dealing with only three claims worldwide.
Dr Taha also pointed out that political risk insurance also made raising finance easier – and at cheaper rates, and ICIEC’s success in protecting against such risks has contributed to its growth.
The corporation will open a Dubai office within the next few months. “The UAE is one of the Middle East’s biggest users of export credit insurance and many banks are based there, suggesting it would be helpful for ICIEC to have a presence.”
Ms Yukiko Omura, executive vice-president of the MIGA/World Bank Group, told delegates to the Broader MENA Investment Summit that investors and lenders are looking for higher returns, but that higher yields always carried proportionately higher risk.
The role of MIGA was to find attractive solutions to this challenge, stimulating finance for foreign investment while mitigating the risks involved.
“MIGA is strengthening its efforts in the region, directly or through partners, to support investors and focus on private investment and public-private partnerships,” she said.
“Improvements in the investment climate in some MENA countries are creating new opportunities and MIGA is working with companies and governments to increase and diversify investment levels.”
About 250 delegates comprising top-level business executives and financiers from the Middle East, North Africa, Turkey, Sudan, and Pakistan attended the two-day summit that was planned and managed by the Al Iktissad Wal Aamal Group.
About the Islamic Development Bank Group (ICIEC)
The Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) is a member of the Islamic Development Bank Group (IDB), a AAA rated multilateral development institution based in Jeddah, Saudi Arabia.
ICIEC was established in 1994 with the objective to increase the scope of trade transactions from, and to facilitate foreign direct investment into its 36 Member Countries in the Middle East, North Africa, Asia and sub-Saharan Africa. ICIEC fulfils these objectives by providing Islamic Sharia’ah compatible credit and country risk insurance and re-insurance instruments. These products cover a variety of risks including non-payment of export receivables, expropriation, civil wars/disturbances, and breaches of contract.
ICIEC also manages the Investment Promotion Technical Assistance Program of the IDB - a grant assistance program aimed at improving the investment climate of the IDB member countries.
For more details, please visit www.iciec.com
About MIGA
The World Bank Group’s MIGA provides guarantees (insurance) against political risks for cross-border investments into developing countries and emerging markets. With 169 member countries and over $16 billion in insurance issued, MIGA is the largest multilateral agency of this type.
MIGA’s guarantees protect investors against the political risks of expropriation; inconvertibility/transfer; war/civil disturbance/terrorism; and breach of contract. Equity investors and lenders benefit from improved risk/return profiles for projects, and MIGA guarantees are often required before banks will lend to projects in certain markets. MIGA has a special focus on supporting investors and lenders from Broader MENA who are venturing into frontier markets, and has assisted companies from Saudi Arabia, Egypt, Turkey, Lebanon, and Tunisia for projects in the Middle East, Asia, and Africa.
See www.miga.org for more details.
