Unlocking the Promise of Islamic Finance, Speech by Christine Lagarde, Managing Director, International Monetary Fund at the Islamic Finance Conference, Kuwait City, Kuwait; November 11, 2015
IMF News, November 11, 2015
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- Authors: Christine Lagarde
- Published: November 11, 2015
Introduction
- Speaker: Christine Lagarde, Managing Director, International Monetary Fund.
- Event: Islamic Finance Conference, Kuwait City.
- Date: November 11, 2015.
- Purpose: Discuss how to develop Islamic finance in a sound and sustainable way by managing risks appropriately and ensuring financial stability.
The Promise that Islamic Finance Holds
- Total Islamic finance assets are estimated at around $2 trillion, practically a ten-fold increase from a decade ago.
- Current share of global financial assets: less than 1 percent.
- Financial inclusion:
- Only one-quarter of adults in the primary Muslim market have access to bank accounts.
- Islamic finance's risk-sharing features and asset-backed financing make it well-suited for SME and startup financing and infrastructure investment.
- Stability features:
- Risk-sharing reduces leverage; financing is asset-backed and fully collateralized.
- Islamic banks offer profit-sharing and loss-bearing accounts that can increase total loss-absorbing capital.
- Geographic concentration: Islamic finance remains very much concentrated in a few markets, with potential to appeal to a wider group.
Unlocking the Potential of Islamic Finance
- Key priorities identified:
- (a) Creating an Enabling Environment
- Adapt financial regulations to account for Islamic finance’s defining features and avoid disadvantaging Islamic banks.
- Example: Capital requirements should be adapted to account for Islamic finance’s risk-and-profit sharing model, which allows for some loss-bearing by investors and reduces risk weights applied to equity-like financing.
- Harmonize tax treatment of Islamic finance products with similar conventional contracts to remove debt bias that disadvantages Islamic finance.
- Improve consistency in application of regulation and supervision across jurisdictions; IMF surveillance suggests current standards are not being applied consistently.
- Recognize work by Islamic standard setters, including the Islamic Financial Services Board and the Accounting and Auditing Organization for Islamic Financial Institutions, and their cooperation with conventional standard setters.
- (b) Developing the industry and markets
- Strengthen information on SME creditworthiness and collateral availability.
- Increase training for well-qualified staff to meet demand for Islamic finance products.
- Bolster Islamic banks' risk management capacity for SME lending.
- Roles:
- Industry-led initiatives.
- Regulators to ensure adequate credit risk systems.
- Development banks to partner with Islamic banks for SME financing and capacity building.
- Governments to foster financial education and literacy.
- Sukuk market:
- Total outstanding Sukuk assets have increased ten-fold over the past decade to about $300 billion.
- Concentration: Gulf States and Malaysia; growing issuance in Luxembourg, Hong Kong, South Africa, and the United Kingdom.
- Policy needs: more regular sovereign issuance at different maturities to establish benchmarks, embed sovereign Sukuk in debt management strategies, and support markets with strong legal and regulatory frameworks to address uncertainty over investors' rights.
- Liquidity and interbank markets:
- Need for money and interbank markets for Shari’ah-compliant instruments to help Islamic banks manage liquidity and to enable central banks to conduct monetary policy in countries with large Islamic banking systems.
- Commendation of the International Islamic Liquidity Management Corporation for creating short-term Shari’ah-compliant instruments for cross-border liquidity management.
- (c) Ensuring financial stability
- Strengthen regulation and supervision with international consistency to manage risks and prevent regulatory arbitrage.
- Avoid under-regulation or over-regulation; adapt standards to features of Islamic products.
- Implement adapted Basel capital and liquidity requirements; transition may be challenging, particularly regarding liquidity, but represents an opportunity to develop new instruments and markets.
- Islamic finance is considered systemically important in 10 countries, where it accounts for more than 15 percent of total financial assets.
- Financial safety nets—deposit insurance and lender-of-last-resort facilities—need to evolve to reflect Islamic finance features to respond to shocks and prevent spillovers.
- IMF engagement:
- Increased analytical work on Islamic finance’s implications for financial stability and economic growth over the past year.
- Commitment to incorporate best practices for Islamic banking and finance into IMF surveillance and policy advice.
Conclusion
- Leadership and cooperation are required to unlock Islamic finance’s potential; quote from Ibn Khaldun: “He who finds a new path is a pathfinder, even if the trail has to be found again by others; and he who walks far ahead of his contemporaries is a leader, even though centuries pass before he is recognized as such.”
- Ongoing IMF activities:
- Worked with key standard-setters to develop international norms and assisted establishment of the Islamic Financial Services Board.
- Bilateral technical assistance in Islamic bank regulation and supervision, Sukuk market development, and monetary policy implementation in countries with large Islamic finance presence.
- Plans to cover Islamic finance more systematically in bilateral surveillance where it is important.
- Formation of an External Advisory Group drawing on major Islamic finance standard-setters and multilateral institutions.
- Expanded partnership with the Islamic Development Bank to support capacity development in Islamic Finance.
- Final objectives: promote financial inclusion and stability, meet needs of financially underserved populations, lift potential growth, and create better opportunities for all people.
Unlocking the Promise of Islamic Finance, Speech by Christine Lagarde, Managing Director, International Monetary Fund at the Islamic Finance Conference, Kuwait City, Kuwait; November 11, 2015.