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Saturday, 2 February 2008

The IFIs and Islamic finance

There are more than 300 Islamic financial institutions operating in 51 countries. Their combined assets exceed $250 billion, with an annual growth rate between 10 and 15 per cent. The activities of these institutions affect more than 20 per cent of the world's population, and in certain countries, they handle more than 20 per cent of financial flows. This provides financial services access to certain groups that would otherwise be excluded.
Besides the prohibition of riba (interest), gharar (contractual uncertainty), maisir (gambling), and haram industries (such as those related to alcohol), financial institutions must observe other often complex principles to comply with Islamic jurisprudence, known as shariah.
The World Bank Group's support for Islamic finance cuts across its institutions. The Bank does not have a specialised unit but individuals across the Bank work in partnership with Islamic financial institutions on specific deals and issues as they arise. To build staff capacity on the issue, there have been a series of lectures on the topic held in the Bank's Washington headquarters over the last three years. In December, the Bank published the first book on risk management for Islamic financial institutions.
The International Finance Corporation (IFC), the Bank's private sector arm, offers equity and debt financing to institutions interested in Islamic finance. In 2007, the IFC provided its first partial credit guarantee that complies with Islamic finance rules. In April 2007, Yemen's Saba Islamic Bank was the first Islamic bank to join the IFC’s global trade finance programme as an issuing bank.
The Multilateral Investment Guarantee Agency (MIGA), the arm of the Bank that issues investment guarantees against political risk, co-organised in 2007 a conference with the Islamic Corporation for the Insurance of Investments and Export Credit, a member of the Islamic Development Bank Group. The groundwork was laid to enable the agency to begin guaranteeing projects backed by an Islamic financing structure. In January, MIGA announced its first-ever guarantee for shariah-compliant project financing. The $427 million guarantee will support investments into a new container terminal in Djibouti.
In terms of its own financing, the World Bank Group has dabbled in shariah-compliant bond issues known as 'sukuk'. Both IFC and IBRD have issued 'sukuks' but so far the Bank has not been able to issue in the 'sukuk' market at a rate which is competitive with the major banks.
While IMF staff have conducted research in the area of Islamic finance as far back as the mid-1980s, the institution did not commence much work in this area until about ten years ago. The start of this work, both technical assistance and surveillance, coincided with the Fund's recognition that it needed to be more aware of what was happening in the financial sector in light of crises that were hitting many emerging markets. Fund staff have not yet consulted the board for endorsement of a particular strategy or policy. Instead work on Islamic finance is guided by the same policy that guides all financial sector oversight.
Like the Bank, the Fund does not have a separate division that handles Islamic finance, but instead incorporates work in this field into existing functional activities. Within the monetary and capital markets (MCM) department, about 25 people are familiar with the topic and experienced in applying standard analysis to Islamic institutions. Naturally much of this is concentrated in MCM's Middle East and Central Asia division.
In terms of country level engagement, the IMF is involved in assisting governments to set up appropriate regulatory frameworks for handling Islamic banks. Standard oversight mechanisms, such as required capital adequacy ratios, are hard to apply directly to shariah-compliant banks. The IMF indicates that its work in this area is fast expanding as more countries are interested in improving their surveillance of these banks as they grow in prevalence and size. There are at least eight IMF technical assistance projects in this field at the current time In mid-2007, it issued a working paper called Introducing Islamic banks into conventional banking systems.
The Fund has also worked at the global level to facilitate the development of standards. In 2002 it helped establish the Malaysia-based Islamic Financial Standards Board (IFSB), which issues global prudential standards and guiding principles for the Islamic financial industry. The IFSB standards are designed to complement the standards issued by the Basel Committee of the Bank for International Settlements which is also an IFSB member. The World Bank has developed tools to assess country compliance with the standards. The IMF also works with the Accounting and Auditing Organisation for Islamic Financial Institutions. ---(Bretton Woods Project)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant/Speaker/Motivator : www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

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