IMF nod to Islamic finance

The International Monetary Fund plans to formally include Islamic finance into its surveillance framework, a nod to the fast-growing sector but noting risks posed by complex hybrid products that replicate conventional ones.

The IMF’s executive board said recently that it had adopted a set of proposals on the role it should play in Islamic finance, including providing policy advice as requests for technical assistance from national regulators grows.

Islamic finance, which bans interest payments and pure monetary speculation, is estimated to have over USD2 trillion of assets globally with around USD1.3 trillion held by Islamic commercial banks.
The IMF said there has been significant progress in developing prudential standards for the sector, but gaps remain in areas such as deposit insurance and liquidity management.

A lack of high quality liquid assets, in particular sovereign Islamic bonds, have undermined Islamic banks’ capacity to manage liquidity, interact with central banks, and develop money markets, the IMF said.

A main concern rests with hybrid instruments like murabaha, a widely used cost-plus-profit arrangement, because these often mimic conventional loans which then expose Islamic banks to liquidity, market and even interest rate risks.