Islamic Financial Institutions and Products in the Global Financial System: Key Issues in Risk Management and Challenges Ahead
IMF Working Papers, November 1, 2002
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Bibliographic details
- Published: November 1, 2002
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451859775.001
Executive summary
- The provision and use of financial services and products that conform to Islamic religious principles pose special challenges for the identification, measurement, monitoring, and control of underlying risks.
- Effective and efficient risk management in Islamic financial institutions has assumed particular importance as they endeavor to cope with the challenges of globalization.
- Addressing these challenges requires the development of a more suitable regulatory framework, new financial instruments, and institutional arrangements to provide an enabling operational environment for Islamic finance.
- The recent establishment of the Islamic Financial Services Board, facilitated by the IMF, addresses these needs.
Key findings and challenges
- Special risk-management challenges arise from Islamic religious principles governing permitted financial services and products.
- Identification, measurement, monitoring, and control of underlying risks are more complex in Islamic financial institutions compared with conventional counterparts.
- Globalization increases the importance and urgency of improved risk management in Islamic finance.
- Institutional and market infrastructure gaps constrain effective risk management and product development.
Policy implications and recommendations
- Develop a more suitable regulatory framework tailored to the specific features of Islamic financial institutions and products.
- Create new financial instruments compatible with Islamic principles to enable better risk-sharing and risk-transfer mechanisms.
- Establish and strengthen institutional arrangements that provide an enabling operational environment for Islamic finance.
- Support standard-setting and coordination efforts, exemplified by facilitation of the Islamic Financial Services Board.
Institutional response
- The establishment of the Islamic Financial Services Board, facilitated by the IMF, is identified as a response to needs for standard setting and coordination in Islamic finance.