W’Bank Report Outlines Actions to Leverage Islamic Finance
The World Bank Group and the Islamic Development Bank have published a first Global Report on Islamic Finance, which detailed the prospects for the global Islamic finance industry and its potential to help reduce worldwide income inequality, enhance sharing prosperity, and achieve the Sustainable Development Goals.
Subtitled “A Catalyst for Shared Prosperity?”, the report provides an overview of trends in Islamic finance, identifies major challenges hindering the industry’s growth, and recommends policy interventions to leverage Islamic finance for promoting shared prosperity.
Islamic finance advocates for just fair and equitable distribution of income and wealth. With a strong link to the real economy as well as risk-sharing financing, Islamic finance can help improve the stability of the financial sector. It can also bring into the formal financial system people who are currently excluded from it due to cultural or religious reasons. Unlike conventional finance, Islamic finance is based on risk-sharing and asset-based financing. By making people direct holders of real assets in the real sector of the economy, it reduces their aversion to risk.
The report outlined a theoretical framework to analyse Islamic economics and finance based on four fundamental pillars: institutional framework and public policy; prudent governance and accountable leadership; promotion of an economy based on risk sharing and entrepreneurship; and financial and social inclusion
The report noted, however, areas where policy interventions are needed to develop Islamic finance’s effectiveness and fulfill its potential in helping to reduce inequality. These interventions include: enhance harmonisation, implementation and enforcement of regulations; create institutions that provide credit and other information to support equitybased finance, particularly for micro, small and medium-sized enterprises (MSMEs); and develop capital markets and sukuk products to help finance large infrastructure projects.
“The Islamic finance industry needs to expand beyond banking, which is currently a dominant component of Islamic finance, accounting for more than three-quarters of the industry’s assets. However, for the banking sector, the report recommends creating an enabling regulatory and supervisory environment that addresses systemic risk across jurisdictions; introducing innovative risk-sharing products and services, rather than replicating conventional risk-transfer products; unifying cross-country shar ‘ah rulings on Islamic finance; enhancing access to Islamic finance; and bolstering Islamic finance human capital and literacy.
“Another area of development is Islamic capital markets. While still relatively young, they can provide opportunities to build assets but through equity- and asset-based finance. Particularly, the sukuk markets (Islamic bond) are suitable for financing infrastructure and encouraging entrepreneurship. The use of sovereign sukuk to mobilize financing is essential to develop the market, as well as to promote transparency and efficiency of the asset pricing,” according to the report.