Landmark IMF decision to recognise Islamic Banking

|By Saifur Rahman, Executive Editor|

The International Monetary Fund (IMF) finally recognised the Islamic banking principles by endorsing a proposal on the use of the Core Principles for Islamic Finance Regulation (CPIFR), according to a statement. This effectively means that the IMF now accepts Islamic financial principles to become a globally accepted system in parallel to the conventional interest-based economy.

“The CPIFR will complement the international architecture for financial stability, while providing incentives for improving the prudential framework for Islamic banking industry across jurisdictions,” IMF said in a statement on Thursday. “The CPIFR and their associated methodology will be applied in financial sector assessments undertaken in fully Islamic banking systems and, as a supplement to the Basel Core Principles for Effective Banking Supervision (BCP) in dual banking systems where Islamic banking is systemically significant.”

Global Islamic financial assets have reached about US$2 trillion, with the banking sector accounting for about 85 percent of the total assets, an IMF report says. Islamic banking exists in more than 60 countries and the industry has become systemically important in 13 jurisdictions, while the domestic market share of Islamic banks (IB) increased in 18 countries in 2016.

The rapid growth of Islamic finance reflects both supply-push and demand-pull factors, including strong economic growth in core markets, competitive pressures, regulatory advancements and facilitative environment provided by governments. Several countries are recognising the segment’s potential, with authorities encouraging Islamic finance to improve financial inclusion.

“This is a belated realisation by the IMF which has seen the Islamic finance as an ethical and sustainable economic model that we have long been practicing and demonstrating its positive impact,” said a Dubai-based Islamic banker, requesting anonymity. “However belated than never – it is one of the best news coming out for the Islamic banking sector. I am glad that IMF has chosen to release in the holy month of Ramadan.”

The industry’s potential contribution to the United Nation’s sustainable development financing goals (SDGs) is also likely to help the industry to progress in coming years. Reflecting the importance of Islamic finance for many of its members, the IMF has had a long-standing interest in its implications for macroeconomic and financial stability.

“The Executive Board of the International Monetary Fund (IMF) today endorsed a proposal on the use of the Core Principles for Islamic Finance Regulation (CPIFR), which were developed by the Islamic Financial Services Board (IFSB) with the participation of the Secretariat of the Basel Committee on Banking Supervision. The CPIFR are intended to provide a set of core principles for the regulation and supervision of the Islamic banking industry and are designed to take into consideration the specificities of Islamic banks,” the statement said.

IMF has also released a working paper, The Core Principles for Islamic Finance Regulations and Assessment Methodology, in support of its decision.

IMF Executive Directors “welcomed the opportunity to consider the staff’s proposals to strengthen the Fund’s engagement on promoting financial stability in countries with Islamic banking,” the statement said.

“The Islamic finance sector continues to grow and evolve in size and complexity, with Islamic banking offered in more than 60 countries. The growth of Islamic finance presents important opportunities to strengthen financial inclusion, deepen financial markets, and mobilize funding for development by offering new modes of finance and attracting “unbanked” populations that have not participated in the financial system.”

IMF noted that Islamic banks (IB) undertake distinct operations with risk profiles and balance sheet structures that differ in important respects from conventional banks, with associated financial stability implications. In this regard, the IMF called for stronger efforts to strengthen the regulatory and supervisory frameworks to take into consideration the specificities of IB to promote financial stability and sound development, particularly in countries where IB have become systemically important. The approach to regulating and supervising IB should reflect the nature of risks to which IB are exposed and the financial infrastructure needed for effective regulation and supervision, which requires additional or different regulation and supervisory practices to address risks inherent in the Islamic banking operations.

IMF Directors broadly endorsed the use of the “Core Principles for Islamic Finance Regulation” (Banking Sector) (CPIFR) and their assessment methodology for the purposes of undertaking financial sector assessments and preparing Reports on the Observance of Standards and Codes (ROSCs) initiated after January 1, 2019 regarding the effectiveness of regulation and supervision of IB. The CPIFR, which was developed by the Islamic Financial Services Board (IFSB) with the participation of the Secretariat of the Basel Committee on Banking and Supervision (BCBS) for assessments of the banking regulatory and supervisory regimes for countries where Islamic banking is systemically significant, will complement the international architecture for financial stability, while simultaneously providing incentives for improving the prudential framework for the Islamic banking industry across jurisdictions.

IMF said, it saw merit in maintaining close cooperation between the IFSB and the BCBS to ensure their respective standards remain consistent. It welcomed staff’s proposal for countries where the IB system is below the 15 percent threshold.

“IMF directors considered that adoption of the CPIFR could be supported through technical assistance to help nascent IB financial systems develop in a safe and sustainable way. For these countries, Islamic finance plays a complex developmental role including in meeting the United Nations’ sustainable development financing goals in terms of providing access to investment and equity finance and inclusion for large parts of their unbanked populations where conventional finance may have less acceptance,” the statement said.

“IMF directors encouraged the Fund to continue developing alternative criteria to determine the significance of the IB sector in a country, beyond the simple market share in the financial market. A number of Directors saw merit in future work on developing comprehensive standards for Islamic financial services.

IMF emphasized the importance of close cooperation between the Fund and relevant key institutions on IB issues. In order to avoid duplication of efforts, they saw merit in a clear division of labour between standard-setters and international organizations.