Islamic Finance, Consumer Protection, and Financial Stability
IMF Working Papers, May 18, 2015
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- Islamic Finance, Consumer Protection, and Financial Stability
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Bibliographic details
- Authors: Inutu Lukonga
- Published: May 18, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513515106.001
Overview and central findings
- Consumer protection and financial literacy are essential pillars of a well functioning and stable financial system.
- Inadequate attention to consumer protection and financial literacy can lead to financial instability, as demonstrated by the global financial crisis.
- Shari’ah principles provide a strong foundation for consumer protection, but:
- the principles alone cannot provide adequate protection because not all providers are guided by ethical precepts and the practices have deviated from the principles.
- To safeguard the stability of the Islamic finance industry, consumer protection frameworks that cater to the specifics of Islamic financial products should be an integral part of regulatory frameworks.
Specific issues identified
- Deviations from Shari’ah principles in practice reduce the effectiveness of ethical precepts as a consumer protection mechanism.
- Gaps in consumer awareness and financial literacy contribute to consumer vulnerability.
- The absence of tailored consumer protection measures can undermine investor confidence and financial stability in Islamic finance markets.
Policy recommendations and regulatory implications
- Integrate consumer protection frameworks that address the specificities of Islamic financial products into broader regulatory frameworks.
- Strengthen financial literacy and consumer awareness programs targeted at users of Islamic financial services.
- Enhance investor protection mechanisms for Islamic finance instruments, including Sukuk, to protect Sukuk holders and safeguard investor confidence.
- Consider the role of deposit insurance, central banks, and legal support mechanisms (including liquidation process considerations) in a consumer-protection-oriented regulatory architecture.
Subjects and keywords (as provided)
- Subjects: Banking, Deposit insurance, Financial crises, Financial services, Islamic banking, Islamic finance, Legal support in revenue administration, Revenue administration
- Keywords: asset-backed Sukuk, banking sector, central bank, consumer awareness, Consumer Protection, consumer vulnerability, Deposit insurance, Financial Stability, Global, investor confidence, investor protection, investor right, Islamic banking, Islamic Finance, Legal support in revenue administration, liquidation process Sukuk, protection of Sukuk investor, Shar'iah principle, Shari'ah-complaint Sukuk, Sukuk holder, WP