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Economy

Islamic Development Bank Secures $4.9B for Bangladesh’s Growth

by Press Xpress February 25, 2024
written by Press Xpress February 25, 2024
Islamic Development Bank Secures $4.9B for Bangladesh’s Growth
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Amidst Bangladesh’s ongoing pursuit of economic development and energy security, the Islamic Development Bank (IsDB) Group has stepped forward with a monumental offer of $4.9 billion in loans. Tailored to span a three-year period commencing in 2024, this generous financial package targets crucial sectors such as energy procurement, developmental projects, and private sector fortification, according to officials at the Economic Relations Division (ERD). Let’s delve into the intricacies of this transformative proposition.

Loan Allocation

Energy Procurement: A substantial portion of the loan, totaling $3.2 billion, is designated for the procurement of oil and gas, facilitated through the International Islamic Trade Finance Corporation (ITFC). This allocation aims to address Bangladesh’s persistent dollar crisis and challenges in settling import bills related to energy resources.

You can also read: ADB’s $500 Million Initiative to Strengthen Bangladesh’s Social Safety Resilience

Development Projects: Another $1.3 billion from the loan is allocated for various development projects within Bangladesh, with interest rates aligned with prevailing market rates.

Private Sector Support: Additionally, there is a proposal for a $400 million loan through the Islamic Corporation for the Development of the Private Sector (ICD), focusing on advancing the private sector in Bangladesh.

Insurance Facilities

The IsDB Group has also proposed insurance facilities worth $2.5 billion for Bangladesh through the Islamic Corporation for the Insurance of Investment and

Export Credit. This initiative aims to facilitate trade and investment between member countries through Shariah-compliant risk mitigation tools.

Expert Insights

Zahid Hussain, former lead economist at the World Bank’s Dhaka office, emphasized the importance of utilizing such loans for quickly implementable projects that yield commercial benefits. He also highlighted the significance of ITFC loans for ensuring Bangladesh’s energy security through oil and gas procurement.

Loan Terms

Maturity Period: The loan has a maturity period of 20 years, with a five-year grace period.

Interest Rate: The interest rate will be based on a five-year mid-swap rate plus 1.5% to 1.9%, with an additional service charge not exceeding 1.5% per year.

Future Considerations

Within the context of Bangladesh’s energy consumption patterns, experts predict that continued dependence on imports might result in doubling the energy bill by 2030. As the government considers implementing an automatic pricing mechanism for fuel oil, using high-interest loans to cover imported fuels could potentially raise costs for consumers and add to accumulating interest.

To illustrate, last year, (2023) the government sought a $1.4 billion loan from the ITFC to import fuel oil; however, payment delays have resulted from the dollar crisis. Since its inception in 2008, the ITFC has supported numerous trade assistance proposals for Bangladesh, benefiting both public and private sectors alike.

Insights into ITFC Financing for Bangladesh’s Energy Sector

The Energy and Mineral Resources Division reveals that the Bangladesh Petroleum Corporation (BPC) has relied significantly on loans from the International Islamic Trade Finance Corporation (ITFC) for importing petroleum products, particularly crude oil, since 1997.

Initially, in 1997, the loan amount was a modest $67 million. However, over the years, it has seen a substantial increase, reaching $1.4 billion in the previous fiscal year. The highest recorded loan amount was $2.6 billion in 2012. These loans from ITFC have been instrumental in financing the import of crude oil, thereby ensuring a seamless import process to meet Bangladesh’s energy needs.

From 1997 onwards, ITFC’s short-term loans for Bangladesh have totaled more than $24.58 billion under its Syndicated Murabaha Operation, up to the fiscal year 2024-25. As of fiscal year 2023, a significant portion of these oil purchase loans, totaling $20.805 billion, including principal and interest, has been successfully repaid.

Reasons for Choosing ITFC for Oil and Energy Imports

Opting for loans from the International Islamic Trade Finance Corporation (ITFC) for oil and energy imports offers several advantages, as highlighted by sources at the Energy Division and the Bangladesh Petroleum Corporation (BPC).

1. SWIFT Arrangement with Major Oil Companies:

The ITFC has established a SWIFT Arrangement/Relationship Management Application (RMA) with designated banks of prominent oil companies like Abu Dhabi National Oil Company and Saudi Aramco. This relationship streamlines the process of opening Letters of Credit (LCs) for ITFC loans, providing operational efficiency.

2. LC Flexibility and Expedited Process:

While Bangladesh can typically open LCs only with state banks, the ITFC’s arrangement allows for LCs to be opened efficiently through its connections with major oil companies. This eliminates the need for additional confirmation charges and expedites the LC process.

3. Cost Savings and Timely Payments:

Importing crude oil through ITFC loans avoids additional confirmation charges that would be incurred when using state-owned commercial banks. This results in cost savings, as well as guaranteed payment within 30 days from the bill of loading date, ensuring timely transactions.

4. Avoidance of Delays and Additional Charges:

Opening LCs with ITFC loans eliminates the need for add-confirmation from international or third banks, which can cause delays of 20-22 days and incur demurrage charges of $10,000 per day at loading ports. This streamlined process minimizes delays and associated costs.

5. Payment Guarantees and Dollar Availability:

With ITFC loans, payment of the LC amount is assured within a specified timeframe, reducing uncertainties in transactions. Repayment schedules are structured to align with dollar availability from Bangladesh Bank, ensuring smoother financial operations.

Conclusion

The IsDB Group’s $4.9 billion loan offer represents a significant milestone in Bangladesh’s quest for economic resilience and energy security. By leveraging this financial assistance strategically and in alignment with national priorities, Bangladesh can navigate current challenges, drive inclusive growth, and emerge as a beacon of progress in the region.

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