Feb 22 The International Monetary Fund plans to
formally include Islamic finance into its surveillance
framework, a nod to the fast-growing sector but noting risks
posed by complex hybrid products that replicate conventional
The IMF's executive board said late on Tuesday it had
adopted a set of proposals on the role it should play in Islamic
finance, including providing policy advice as requests for
technical assistance from national regulators grows.
Islamic finance, which bans interest payments and pure
monetary speculation, is estimated to have over $2 trillion of
assets globally with around $1.3 trillion held by Islamic
The sector is now systemically important in 14 countries,
accounting for over 15 percent of total financial assets,
including Iran, Saudi Arabia, Kuwait, Qatar, Malaysia and the
United Arab Emirates.
The IMF said there has been significant progress in
developing prudential standards for the sector, but gaps remain
in areas such as deposit insurance and liquidity management.
A lack of high quality liquid assets, in particular
sovereign Islamic bonds, have undermined Islamic banks' capacity
to manage liquidity, interact with central banks, and develop
money markets, the IMF said.
"This situation has given rise to Islamic banking practices
that may achieve some liquidity management objectives but are
inefficient and present risks."
A main concern rests with hybrid instruments like murabaha,
a widely used cost-plus-profit arrangement, because these often
mimic conventional loans which then expose Islamic banks to
liquidity, market and even interest rate risks.
Such practices straddle the line between conventional and
Islamic banking regulations, creating potential complex new
risks and heightened financial stability concerns, the IMF said.
This stands at odds with the interest-free concept that
Islamic finance extols, partly due to inconsistent regulation
which has restricted the development of profit-and-loss sharing
The IMF wants to encourage more consistency among countries
in applying Islamic finance rules and plans to develop a
guidance note on Islamic banking.
It will also incorporate a standard on Islamic finance
regulation issued by the Malaysia-based Islamic Financial
Services Board during the 2018 financial year.
(Reporting by Bernardo Vizcaino; Editing by Eric Meijer)