Priorities for Aman Union Members in an Age of Heightened Market and Operational Risks

Oussama KAISSI, The Secretary-General of Aman Union and CEO of ICIEC, the global consensus is unequivocal. Responding to and coping with the current compound challenges and uncertainties of the global economy requires decisive policy action laced with a heavy dose of pragmatism to find common ground and cooperation.

Whether GDP growth is the appropriate and defining metric of measurement for the outlook for the world economy - instead of rising inequality, sovereign indebtedness, imbalances in terms of trade, political instability, conflict, and gender bias, the bane of many middle-and-low income developing countries - may be lost in the scramble for national self-interest especially among the industrialised and fast-emerging economies.

The stark reality is that global growth in the near and medium term is projected to remain weak by historical standards and could weaken further if financial stress continues and leads to a sharp tightening of financial conditions. At best economic recovery is fragile. The latest WTO Trade Monitoring Report shows that trade protectionism is increasing during economic uncertainty. WTO members are introducing restrictions at an increased pace, particularly on food, feed, and fertilizers. The stockpile of import restrictions in force also continues to grow.

The IMF’s World Economic Outlook (WEO) Spring 2023 projects global growth will bottom out at 2.8% this year before rising modestly to 3.0% in 2024. MENA region economies are projected to grow at a slower pace, with GDP in 2023 at 3.0% and 3.1% in 2024, much lower than the growth rate of 5.8% in 2022. The MENA average growth rate masks stark differences across countries. On average, the GDP growth of the 57 IsDB member states decelerated marginally from 5.4% in 2021 to 5.1% in 2022 and is projected to decelerate further to 4% in 2023. While this appears generally optimistic compared to the global outlook, it masks the projected sharp deceleration in IsDB fuel-exporting member states of 3.4 percent in 2023 from 4.6 percent in 2022.

?It is in this context that the 13th Annual General Meeting of the Aman Union in Dubai from 29th to 31st May 2023 assumes much greater importance and urgency, especially in the three priority areas of food security, digitalization, and its impact on supporting trade and investment, and the consequences of climate change leading up to COP28 in the UAE in November 2023.

Enhancing Market Awareness, Education and Resilience

The common thread for us is the role credit and investment insurance and reinsurance play in risk absorption and mitigation, thus making more significant FDI and trade flow possible and projects more bankable, especially to private capital, enhancing market awareness and education about export credit and political risk insurance (PRI), and convincing policymakers in our member states about the urgency and efficacy of adopting or adapting requisite legal and regulatory frameworks to facilitate the above.

In this respect, ICIEC organized and hosted the 1st Capacity Building Program for the users of the OIC Business Intelligence Center (OBIC) in March 2023, stressing the Role of Credit Information Sharing, Business Intelligence, and Digital Transformation in supporting trade and investment decisions and how the OBIC platform can be used as an improved Credit Risk Management tool that will facilitate access to finance for trade and investment, as well as the mitigation of risks related to those activities.

?Another sign of the increasing awareness of credit and investment insurance and guarantees in the MENAT (Middle East, North Africa, and Türkiye) region is the signing of an MoU in April 2023 between Emirates Development Bank and Emirates Islamic to collaborate on a joint credit guarantee scheme supporting financial inclusion of SMEs in the UAE. The aim is also to support SMEs in their efforts to develop their export potential to regional and international markets, especially in non-hydrocarbon products, as part of the government’s diversification away from the oil strategy and the contribution of the non-oil sector to GDP.?

The Organisation of Islamic Cooperation (OIC) member states who participate in and are ‘beneficiaries’ of the Paris-based OECD’s Arrangement on Officially Supported Export Credits also stand to benefit further following the endorsement by the EU to modernise export credit rules and payment terms aimed at supporting exporters in member states, especially in transitioning to green and climate-friendly transactions.

?The deal to update the Arrangement on Officially Supported Export Credits says the OECD “will provide streamlined terms and conditions so that government-backed export finance can better meet the needs of exporters in an increasingly competitive landscape while avoiding market distortions. At the same time, the outcome widens the scope of green and climate-friendly transactions benefitting from extra incentives in the form of more flexible financial terms and conditions.”

?Overvalued Risk Perception

The flip side of market perceptions is the “issue of perception” by rating agencies of overvalued risk in many OIC countries, including those members of the Aman Union. This risk perception pushes up the cost of finance of transactions and projects. Understandably, these countries perennially lobby with insurers, including ICIEC, to reduce insurance premiums, which would help reduce project costs and make the market more accessible to the private sector, including in member states. We need to explore ways how to reset such perceptions in general.

?The benefits are potentially game-changing – increased intra-OIC trade and investment, better socio-economic outcomes, greater capacity building, and resilience in meeting climate and other challenges – ensuring that no one, whether businesses, SMEs, or individuals, is left behind.

What we have achieved as individual organisations or collectively has undoubtedly delivered in impact investment and engagement.

?Nevertheless, by any measurement and the sheer scale of existing and emerging uncertainties and risks given the shifting sands of evolving events – ongoing Ukraine war, the rocky global economic recovery, sticky inflation, rising sovereign indebtedness, and conflicts as in Sudan – our efforts though highly commendable remain a work in progress.

We need a much greater level of collaboration and partnerships to close the gaps in resources, capital - which would allow us to underwrite much greater volumes of business and investment insured, reinsurance treaties and guarantees, capacity building, risk management, and reliable credit history and data collection, which is underdeveloped even in the advanced economies. We need to be honest and pragmatic about the challenges that lie ahead. The debate is still dominated by the rhetoric of aspiration as opposed to the reality of delivery and outcomes.

?A Trio of Priorities

The three areas the Aman Union is prioritizing - food security, climate action, and digitalization – are, in fact, intrinsically interlinked. Food insecurity is often a consequence of climate change. An important aspect of Climate Adaptation is mitigating the disruptions caused by catastrophic climate and environmental events such as floods, droughts, pests, and geopolitical events such as conflict and their impacts on the agricultural, agri-business, and food sectors.

The consequences of inaction and delayed policy implementation could be devastating – with huge social and human costs. According to the World Bank, on the social front, more than 216 million people could be pushed to migrate within their own countries by 2050, and millions of others to migrate internationally because of delayed climate action or inaction.

Through its Agriculture for Poverty Reduction and Food Security through Green Finance strategies, the IsDB Group is leading from the front in collaboration with peer partners. The flagship Food Security Response Programme (FSRP) is a landmark collaboration with the Arab Coordination Group, earmarking US$10.54 billion for the FSRP and US$24 billion for climate finance initiatives to support the ongoing food crisis and Future Food Resilience Against Climate Impact in the IsDB’s 57 Member States. Total IsDB Group’s financing support for agriculture and food security currently stands at US$20.6 billion.

?As a signatory to the Principles for Responsible Insurance and the fact that it is the only Shariah-compliant multilateral insurer, sustainable investment is firmly embedded in ICIEC’s due diligence process by linking all new business and other queries with SDGs and climate action indicators.

Aman Union members have an important role in contributing to the international climate finance ecosystem by committing to further boosting our green and sustainable finance operations. New initiatives are potentially on the cards, including the establishment of a Climate Action Finance Trust Fund with institutional partners, peer multilaterals, and ECAs in Member States and beyond, which would offer a discount on the insurance premiums needed for the financing of Climate Action projects in Member States that are not investment grade.

ICIEC’s green finance credentials are implicit, especially in promoting a clean and just energy transition in the Member States through supporting renewable energy projects, waste management, desalination, and clean water provision, often involving private sector investment and bank financing. We actively target real impact and change in all its financing, insurance policies it underwrites, and projects it supports, and act as a catalyst for private sector capital mobilization towards achieving the SDGs.

The danger is that in a global context, the failure to harmonize Climate Action regimes and green taxonomies may lead to competition between jurisdictions and some investors migrating to regions such as the US, Asia, and the MENA region, where opportunities for scaled-up investment may deem to be more significant.

Digitalisation Divide

Technology is a potentially empowering enabler of trade and investment, despite the tendency towards protectionism in times of uncertainty, as the WTO has shown.

A defining moment will come when the UK’s Electronic Trade Documents Bill 2023 gets imminent Royal Assent and is enacted into law. Under the Bill, digital trade documents will be put on the same legal footing as their paper-based equivalents to give UK businesses more choice and flexibility in how they trade. But the transformation to digital trade documents has taken a mind-boggling 131 years since adopting the Bills of Exchange Act of 1882.

The UK government projects a significant boost for the country’s international trade, already worth more than ￡1.4 trillion, and will reduce the estimated 28.5 billion paper trade documents printed and flown around the world daily. Business-to-business documents such as bills of lading - a contract between parties involved in shipping goods - and bills of exchange - used to help importers and exporters complete transactions - currently have to be paper-based due to longstanding laws.

Could the Electronic Trade Documents Bill 2023 evolve into a global governing model akin to the pre-eminent role English Law plays as the governing law for the documentation in the global bond and Sukuk market? Perhaps, the Aman Union member states could explore this to see whether a similar model can be developed. According to the International Chamber of Commerce, digitalizing trade documents could generate ￡25 billion in new economic growth in the UK by 2024, and free up ￡224 billion in efficiency savings.

?In the UAE, Abu Dhabi Islamic Bank (ADIB), in April 2023, became the first Islamic bank to go live on the UAE KYC (Know Your Customer) Blockchain Platform, a national ecosystem for the exchange of verified KYC data between licensing authorities and financial institutions including insurers. This platform will expedite opening of bank accounts for newly registered companies and pave the way for a less cumbersome and costly process of managing KYC data for companies already registered with the system. It will also facilitate a faster, more secure onboarding and exchange of digital customer data and documents through advanced blockchain-powered distributed technologies.

Dubai’s Department of Economy and Tourism (DET) launched the initiative in 2020 in partnership with a consortium of banks and entities. Introducing the KYC Blockchain Platform is also part of the UAE government’s strategy towards attracting global investors to this market through leveraging blockchain technology to improve business efficiency and transparency.

These latest initiatives complement the existing digital footprint of multilateral, national, and private insurers, which, at best, is fragmented in Aman Union member states. Credit and investment insurance are essential for developing the holy grail of increased trade, and FDI flows. The opportunities are enormous, especially in our member states, because the insurance premium market penetration and starting base are very low.

According to the WTO, trade finance has a US$1.7 trillion gap. In Africa, this amounts to a US$450 billion trade finance opportunity, of which the current gap is around US$80 billion. Private sector engagement requires credit enhancement, which insurers such as ICIEC are uniquely positioned to do through their sustainability policies and access to member states’ national and subnational bodies, which engage with relevant climate action and food security projects and transactions.

Embedding commercial opportunities and helping corporates and banks make a material difference to support positive climate and food security outcomes is something that risks mitigation tools can facilitate!?