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28 February 2017 at 09:30 BST

IMF calls for more robust legal and regulatory framework for Islamic banking

The International Monetary Fund has criticised the current framework governing Islamic Banking (IB), saying it needs a more robust legal and regulatory framework.

Hossein Lohinejadian

Its paper, Ensuring Financial Stability in Countries with Islamic Banking, has highlighted many regulatory gaps that need closing through the development of a more comprehensive, enabling environment that ensures financial stability and sound development. 'Islamic banking continues to grow rapidly, in size and complexity, posing a challenge to supervisory authorities and central banks. While accounting for a small share of global financial assets, Islamic banking has established a presence in more than 60 countries and has become systemically important in 14 jurisdictions,' the IMF study said.

Legal clarity needed for confidence

The study also argued that legal clarity and certainty for Islamic banking were important to promote confidence in the industry, as well as to mitigate the potential risk of regulatory arbitrage and strengthen supervision.International governance standards apply to Islamic banks but need to be customised to take into account their distinct governance features, the study argues. These relate to decision-making structures, Sharia compliance, and the rights of investment account holders.

Limited progress

The report also said that international guidance was needed to address the ‘limited progress’ that has been achieved in developing resolution and financial safety net frameworks for Islamic banking.The IMF also observed that progress had been slow in developing Islamic banks’ liquidity management and money markets.


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