The IFIs and Islamic finance
Riaz K Tayob
The IFIs and Islamic finance
Inside the inst|Bretton Woods Project|1 February 2008|update 59|url
There are more than 300 Islamic financial institutions operating in 51
countries. Their combined assets exceed $250 billion, with an annual
growth rate between 10 and 15 per cent. The activities of these
institutions affect more than 20 per cent of the world's population, and
in certain countries, they handle more than 20 per cent of financial
flows. This provides financial services access to certain groups that
would otherwise be excluded.
Besides the prohibition of riba (interest), gharar (contractual
uncertainty), maisir (gambling), and haram industries (such as those
related to alcohol), financial institutions must observe other often
complex principles to comply with Islamic jurisprudence, known as shariah.
The World Bank Group's support for Islamic finance cuts across its
institutions. The Bank does not have a specialised unit but individuals
across the Bank work in partnership with Islamic financial institutions
on specific deals and issues as they arise. To build staff capacity on
the issue, there have been a series of lectures on the topic held in the
Bank's Washington headquarters over the last three years. In December,
the Bank published the first book on risk management for Islamic
financial institutions.
The International Finance Corporation (IFC), the Bank's private sector
arm, offers equity and debt financing to institutions interested in
Islamic finance. In 2007, the IFC provided its first partial credit
guarantee that complies with Islamic finance rules. In April 2007,
Yemen's Saba Islamic Bank was the first Islamic bank to join the IFC’s
global trade finance programme as an issuing bank.
The Multilateral Investment Guarantee Agency (MIGA), the arm of the Bank
that issues investment guarantees against political risk, co-organised
in 2007 a conference with the Islamic Corporation for the Insurance of
Investments and Export Credit, a member of the Islamic Development Bank
Group. The groundwork was laid to enable the agency to begin
guaranteeing projects backed by an Islamic financing structure. In
January, MIGA announced its first-ever guarantee for shariah-compliant
project financing. The $427 million guarantee will support investments
into a new container terminal in Djibouti.
In terms of its own financing, the World Bank Group has dabbled in
shariah-compliant bond issues known as 'sukuk'. Both IFC and IBRD have
issued 'sukuks' but so far the Bank has not been able to issue in the
'sukuk' market at a rate which is competitive with the major banks.
While IMF staff have conducted research in the area of Islamic finance
as far back as the mid-1980s, the institution did not commence much work
in this area until about ten years ago. The start of this work, both
technical assistance and surveillance, coincided with the Fund's
recognition that it needed to be more aware of what was happening in the
financial sector in light of crises that were hitting many emerging
markets. Fund staff have not yet consulted the board for endorsement of
a particular strategy or policy. Instead work on Islamic finance is
guided by the same policy that guides all financial sector oversight.
Like the Bank, the Fund does not have a separate division that handles
Islamic finance, but instead incorporates work in this field into
existing functional activities. Within the monetary and capital markets
(MCM) department, about 25 people are familiar with the topic and
experienced in applying standard analysis to Islamic institutions.
Naturally much of this is concentrated in MCM's Middle East and Central
Asia division.
In terms of country level engagement, the IMF is involved in assisting
governments to set up appropriate regulatory frameworks for handling
Islamic banks. Standard oversight mechanisms, such as required capital
adequacy ratios, are hard to apply directly to shariah-compliant banks.
The IMF indicates that its work in this area is fast expanding as more
countries are interested in improving their surveillance of these banks
as they grow in prevalence and size. There are at least eight IMF
technical assistance projects in this field at the current time In
mid-2007, it issued a working paper called Introducing Islamic banks
into conventional banking systems.
The Fund has also worked at the global level to facilitate the
development of standards. In 2002 it helped establish the Malaysia-based
Islamic Financial Standards Board (IFSB), which issues global prudential
standards and guiding principles for the Islamic financial industry. The
IFSB standards are designed to complement the standards issued by the
Basel Committee of the Bank for International Settlements which is also
an IFSB member. The World Bank has developed tools to assess country
compliance with the standards. The IMF also works with the Accounting
and Auditing Organisation for Islamic Financial Institutions.
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Published: Friday 1st February 2008