IMF Backs Islamic Banking Industry with Caution

Published Date : Apr 07, 2015

Islamic Banking was endorsed by the International Monetary Fund (IMF) in one of its latest weekly reports. The global lender’s interest in Islamic finance principles was reflected in its independent discussions with an advisory group of Islamic finance experts, last year. The IMF’s report mentioned that the lesser risk attached to Islamic banking compared to that of the conventional banking would help in promoting financial stability. 

Islamic banking does not allow pure monetary speculation and focuses on deals based on real economic activity. This would discourage credit booms and would lead to better risk management by the financial institutions. The IMF’s backing would help in the expansion of Islamic banking industry. However, the international lender stressed on following Islamic banking rules stringently by the regulators of the industry, without which the industry might not reach its aim. 

The deputy director at the IMF’s monetary and capital markets department, Christopher Towe, mentioned that there were differences in the way of following Islamic banking standards by the industry regulators. Inconsistent application of these standards might act as an obstacle to the growth of Islamic banking industry. The principle of risk-sharing and asset-based financing needs to be applied in practice. 

Because the Islamic finance industry is relatively young, issues such as the restricted scope of sharia-compliant financial safety nets for banks needs to be addressed. There is a shortage of financial tools to manage the short-term funds of Islamic banks. The investor rights in Islamic banking industry need to be clarified legally. Currently, some of these issues are being handled by regulatory bodies such as the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), Bahrain and the Islamic Financial Services Board (IFSB), Malaysia.