World Economy

Islamic Finance Facing Challenges

Islamic Finance Facing ChallengesIslamic Finance Facing Challenges

The Islamic finance system faces several key challenges if it is to unlock its huge potential and develop safely, the International Monetary Fund (IMF) said.

Islamic finance – the provision of financial services in accordance with Sharia law – has so far been governed mostly by frameworks developed for conventional finance, it said, TradeArabia reported.

Cross-border operations of Islamic financial institutions have expanded considerably without regulatory harmonization, the IMF said.

“These developments indicate a need for increased regulatory clarity and harmonization, closer cooperation between Islamic and conventional financial standard-setters, and further enhancement of tools for effective supervision,” it said.

The industry is still largely nascent, lacking economies of scale and operating in an environment where legal and tax rules, financial infrastructure and access to financial safety nets and central bank liquidity are either absent or do not take its special characteristics into account, the IMF said.

The industry is also based on shared profit and loss, which minimizes risk for banks and avoids dealing in debt and derivatives such as foreign exchange forwards and futures, the IMF said.

The sector has doubled in size over the past four years and is now worth more than $2 trillion as demand for its products rises rapidly.

Around 40 million of the world’s 1.6 billion Muslims are clients of the Islamic finance industry.