ISLAMIC DEVELOPMENT BANK

SHAPING THE POST-CRISIS WORLD: REGIONAL IMPLICATIONS AND COORDINATED RESPONSES BY MEMBER COUNTRIES

Proceedings of the 20th IDB Annual Symposium 9 Jumada Thani 1430H (2 June 2009) Ashgabat, Turkmenistan

© Coordinated by: Dr. Nosratollah Nafar Economic Research and Policy Department Islamic Development Bank P.O. Box. 5925, Jeddah 21432 Kingdom of Saudi Arabia Telephone: + 9662 646 6531 Facsimile : + 9662 646 7478 E-mail : nnafar@isdb.org.sa Home Page: http://www.isdb.org ISSN 1658-449X The views expressed in this document are those of the authors/speakers and do not necessarily reflect the position, views and policies of the Islamic Development Bank or its member countries.

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CORPORATE PROFILE OF THE ISLAMIC DEVELOPMENT BANK Establishment The Islamic Development Bank (IDB) is an international financial institution established in pursuance of the Declaration of Intent issued by the Conference of Finance Ministers of Muslim Countries held in Jeddah in Dhul Qadah, 1393H ( December 1973). The Inaugural Meeting of the Board of Governors took place in Rajab, 1395H (July 1975), and the IDB formally commenced operations on 15 Shawwal, 1395H (20 October 1975). Purpose The purpose of the IDB is to foster the economic development and social progress of member countries and Muslim communities in non-member countries individually as well as jointly in accordance with the principles of the Shariah ( Islamic Law). Functions The main function of the IDB is to provide various forms of development assistance for poverty alleviation, human development, forging economic cooperation, promoting trade and investment and enhancing the role of Islamic finance in the social and economic development of member countries. It also establishes special funds for specific purposes, including a fund for assistance to Muslim communities in non-member countries. IDB mobilizes financial resources using Shariah-compliant modes and provides technical assistance to member countries, including provisions of training facilities for personnel engaged in development activities in member countries. Membership The present membership of the IDB stands at 56 countries spreading across different continents and regions. The basic condition for its membership is that the prospective country should be a member of the Organization of the Islamic Conference (OIC), pays the first installment of its minimum subscription to the Capital Stock of IDB and accepts any terms and conditions that may be decided upon by the Board of Governors. Capital Pursuant to the decision of the Board of Governors in their 31st Annual Meeting held in Kuwait in Jumada Awwal 1427H (May 2006), the Authorized Capital of IDB was doubled from ID15 billion to ID30 billion and the Issued Capital was also increased from ID8.1 to ID15 billion. The Issued Capital was further increased to ID16 billion by the Board of Governors in their 33rd Annual Meeting held in Jeddah, Kingdom of Saudi Arabia, on 29-30 Jumada Awwal 1429H (3-4 June 2008); of which ID15.1 billion was subscribed with ID3.3 billion paid-up as of end 1429H.

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Head Office and Regional Offices Headquartered in Jeddah, Kingdom of Saudi Arabia, the IDB has four regional offices in Rabat, Morocco, Kuala Lumpur, Malaysia, Almaty, Kazakhstan and Dakar, Senegal. Financial Year The IDB’s financial year is the lunar Hijrah Year (H). Accounting Unit The Accounting Unit of IDB is the Islamic Dinar (ID) which is equivalent to one SDRSpecial Drawing Rights of the International Monetary Fund. Language The official language of the IDB is Arabic, but English and French are additionally used as working languages.

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Kingdom of Saudi Arabia ..... Implementation Issues of G-20 Reform Agenda in the Area of New Global Financial System and Implications for MENA Region H.............................. Welcome Address H....................... Mr...... Implementation Issues Arising From the G-20 Reform Agenda and the Role of the IMF and the Financial Stability Board in the New Global Financial System H................................................ General Discussion .................... Minister of Finance............ Rifaat Ahmed Abdel Karim...........................................................E.. Ibrahim Bin Abdel Aziz Al-Assaf. Dr..... Undersecretary of Treasury...........................................TABLE OF CONTENTS Preface ........................................................................................................................... President of the Islamic Development Bank Group .............. Ahmad Mohamed Ali............ Republic of Turkey ... Major Conclusions and Recommendations .................. Secretary General of the Islamic Financial Services Board (IFSB) and Member of Task Force on Islamic Finance and Global Financial Stability ....... Ibrahim Halil Canakci.................... Key Proposals Made by the Task Force on Islamic Finance and Global Financial Stability Prof.......................... Dr... Issues Paper .................. vi 1 3 6 10 16 20 22 v .................E............................................E....................

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learn how to cope with a dramatically altered international financial landscape in moving to the post-crisis world. International Monetary Fund.E. Ibrahim Halil Canakci. and (iii) G-20 reform agenda concerning international financial architecture. Rahimberdi J. H. and the MDBs.E. and (iii) coordinated responses to the needs of member countries emerging from global economic crisis. must be also ensured. The purpose of the symposia has been to generate and disseminate ideas to orientate and encourage best practices as a way of enhancing the bank’s catalytic role in fostering economic and social development in member countries. President IDB Group delivered a welcome address. including IDB member countries. Minister of Finance of the Kingdom of Saudi Arabia and IDB Governor. Ibrahim bin Abdel Aziz Al-Assaf. Sami Zeidan. Undersecretary of Treasury of Republic of Turkey and IDB Governor. need to ensure rapid delivery of short-term and long-term development assistance. In line with this tradition. A three-member panelist – comprising of H. The Symposium also highlighted the significant role of Islamic finance in providing safeguards against leveraging and excessive risk-taking and in promoting resilience and stability of financial institutions against shocks. (ii) its implications for member countries from regional perspectives. The topic of the Symposium was “Shaping the Post-Crisis World: Regional Implications and Coordinated Responses by Member Countries”. all multilateral development banks. Rifaat Ahmed Abdel Karim. Ahmad Mohamed Ali.Preface The Islamic Development Bank (IDB) has been organizing annual symposia on various themes of interest to member countries as well as its own mission in conjunction with the Annual Meetings of the Board of Governors since 1409H. in cooperation with the Government of Turkmenistan.E. In this context. Senior Anchor in Al-Jazeera English Television Channel very ably moderated the event. organized its 20th Annual Symposium on the occasion of the 34th Annual Meeting of the IDB Board of Governors in Ashgabat on 2 June 2009. The panelists in the Symposium stressed that member countries need to reconsider their growth strategies. (ii) post-crisis world: key implications at the regional level. and Prof. The Symposium was chaired by H. The Symposium mainly focused on (i) key structural factors influencing post-crisis world at the global level. The program of the Symposium was particularly designed to serve as a forum for member countries to share experiences and learn lessons in managing crisis and engendering economic recovery.E. The Symposium underlined the need for IDB member countries to enhance regional and global cooperation in dealing with the emerging challenges in the new millennium. Mr. However. Nineteen such symposia have already been organized. The main objective of the Symposium was to address (i) the major reform agenda in shaping the postcrisis world. Secretary-General of the IFSB and Member of the Task Force on Islamic Finance and Global Financial Stability – covered G-20 reform agenda and its implementation issues as well as concerns arising from the effects of global economic recession on Islamic financial institutions. cognizance of maintaining long-term debt sustainability of developing countries. and follow through the implications of potentially new global patterns of trade and investment. Dr. Dr. Jepbarov. the IDB. including IDB. Mr. vii . Chairman of the Board of Governors. Mr. H.

Ifzal Ali Chief Economist viii . By publishing the Proceedings of the Symposium. the process of reforming the global financial system and economic recovery is well underway. I acknowledge the efforts of Dr. As expected. in organizing the Symposium as well as Dr. Evidently. Mohammad Ahmed Zubair for preparing the ‘Issues Paper’ that laid out emerging issues and concerns in Shaping the Post-Crisis World. it is my fervent hope that a wider audience will benefit from the insights in addressing a variety of structural challenges and designing regional solutions towards robust and sustainable economic growth. which is attached as an Annex.Finally. former Director of the Economic Policy and Statistics Department. Lamine Doghri. the Symposium generated useful discussion on pertinent issues and produced a number of useful ideas in devising a clear vision of the post-crisis world and a coordination mechanism at the OIC level.

Jepbarov. On behalf of the Islamic Development Bank (IDB).3 percent in 2009. In addition. As you are aware. It has been estimated that the fall in global demand brought on by the biggest economic downturn in decades will drive exports down by about 13. the Most Merciful Praise be to Allah. IDB member countries face sizeable declines in their foreign capital inflows both from public and private sources. Executive Directors and leading experts from international organization are participating in this Symposium to address the major reform agenda in shaping the post-crisis world and its implications for member countries from regional perspectives.E. Governors and Alternate Governors.E. Dear Brothers and Sisters. Assalamu Alaikum Wa Rahmatullahi Wa Barakatuh Excellencies. learn how to cope with a dramatically altered international financial landscape. the Most Gracious. (iii) stock market turbulence and outflow of 1 . Ladies and Gentlemen. because of the crisis and the resultant recession. Rahimberdi J. I would like to very warmly welcome you all to the 20th IDB Annual Symposium on “Shaping the Post-Crisis World: Regional Implications and Coordinated Responses by Member Countries”. Cherisher and Sustainer of the World and Peace and Blessings be upon the Last of the Prophets and Messenger and upon His Family and All His Companions H. (ii) reduced access to international capital markets. Mr.5 percent during 2009. This global financial crisis impacted on macroeconomic stability and growth of our member countries through various channels. Ahmad Mohamed Ali President. economic prospects of our member countries appear uncertain as their growth is projected to drop from 6. I am sure all of you agree that IDB member countries need to reconsider their growth strategies. and follow through the implications of potentially new global patterns of trade and investment. Acting Chairman of the Board of the State Bank for Foreign Economic Affairs of Turkmenistan and Chairman of the IDB Board of Governors.Welcome Address H. Islamic Development Bank Group In the Name of Allah. These are: (i) declining ODA flows. It is indeed a privilege for IDB that its Governors and member of their delegations. Dr. Distinguished Guests.1 percent in 2007 to 1.

According to IMF. Ibrahim Halil Canakci. I once again welcome you all to the Symposium and wish you every success in your deliberations. Dr. I am confident that this Symposium will provide a platform for sharing of experiences and lessons learnt in managing crisis and engendering economic recovery. as well as in enhancing regional and global cooperation in dealing with the challenges of our economy in the new millennium.portfolio investments. financial strains remain acute. IDB Governor of Saudi Arabia. we will hear about G-20 reform agenda and its implication issues from the honourable IDB Governor of Saudi Arabia and Turkey. Kazakhstan. (iv) decline in global demand for country exports. and Nigeria about the implication issues arising from the G-20 reform agenda from regional perspectives. pulling down the real economy.3 percent in 2009. IDB Governor of Turkey. and Professor Rifaat Ahmed Abdel Karim. Dear Brothers and Sisters. H. At the global level. which is global recession for the first time since World War II. by so doing. With these words. Ibrahim bin Abdel Aziz Al-Assaf. In line with the global efforts. We will also hear from Honourable IDB Governors of Indonesia. Policymakers around the world have announced many programs and plans to confront the current financial and economic crisis. and (iv) implementing economic stimulus packages to revive the demand. Today. world economic growth is estimated to decline by -1. they will share their wide and rich experiences with us. Four steps which have been already taken to restore confidence to the financial markets and stimulate the economic growth are : (i) buying risky assets in troubled banks. and for their various presentations which will address the major reform agenda in shaping the postcrisis world and its implications for IDB member countries. the leaders of G-20 countries. Secretary-General of the Islamic Financial Services Board (IFSB) for having so kindly agreed to participate in the proceedings. (ii) injecting liquidity into the global financial system to keep the world’s financial infrastructure intact by.E. agreed that a wide range of actions is needed to help the global economy and the financial system regain their footing. and (vi) decline in remittance. (iii) a cut in interest rates to prevent the economy recession. I wish to express my sincere gratitude to H. (v) postponement of large investment projects due to withdrawal by banks and investors. we need well-focused and specific measures to reflect on new challenges and forge common positions on regional and global challenges in a post-crisis world as well as assist the IDB Group to better align its development assistance to the new and emerging needs of member countries. On behalf of IDB. Despite these wide-ranging policy actions. Clearly.E. Mr. Wassalamu Alaikum Wa Rahmatullahi Wa Barakatuhu 2 . held a Summit meeting in London on 2nd April.

revival of global trade and ensuring smooth functioning of domestic banking systems. Over the longer term. with advanced economies undergoing deep recessions. Indonesia. The Kingdom of Saudi Arabia has swift and effective actions in all these areas. The outlook remains clouded as investor confidence has faltered across the globe. Emerging and developing economies also suffering due to the impact of shrinking global trade. the G-20 will address a broad agenda that will include reform of financial market regulations and international architecture. I would like to thank the Islamic Development Bank for organizing this symposium and inviting me to address this distinguished audience. which looked into issues relating to the multilateral development banks. Ladies and Gentlemen. This fiscal stimulus comprises both oil-related and infrastructure investments to boost the productive capacity of the economy and shield it from impact of the ongoing global crisis. the G-20 Leaders have held two Summits since November last year. and ISDB that led to taking into account the Bank views in the final report of the group. of which Saudi Arabia is a member besides two of the IsDB member countries. The synchronized downturn is reflected in the projected decline this year of output per capita in countries that represent three quarters of the global economy. As you know. However. Indonesia and Turkey. I am most encouraged that the G-20.Implementation Issues of G-20 Reform Agenda in the Area of New Global Financial System and Implications for MENA Region H. Saudi Arabia has been taking an active part in the G-20 technical work and discussions. Indeed. has led the way in this regard. and consumers have cut back on expenditures despite some positive signs in some countries. It spans all regions of the world. Ibrahim Bin Abdel Aziz Al-Assaf Minister of Finance. strengthening financial regulation to rebuild trust. Dr. enhancing resources of the international financial institutions. Assalamu Alaikum Wa Rahmatullahi Wa Barakatuhu.E. I appreciate the good coordination between Saudi Arabia. the most critical countercyclical actions that the G-20 countries have agreed to concern provision of fiscal stimulus. Kingdom of Saudi Arabia Excellencies. a major decline in private financial flows. and reversing declines in global trade and investment. we are currently implementing the largest budget in our history—$130 billion to be precise—in order to spur domestic demand and sustain a strong GDP growth over the medium term. repairing the global financial system to revitalize markets and revive lending. 3 . They have agreed on a number of measures with a view to restoring growth and jobs. and a sharp fall in commodity prices. The unprecedented nature of this crisis and the risks it posed to the global economy underscored the importance of a coordinated and timely international response. I am very pleased that the Islamic Development Bank too was able to contribute to the technical work of the Working Group 4. We are meeting today at a time when the global economy is in the midst of the deepest recession since the Great Depression. It plans a 400 billion dollar investment program for the next five years.

Saudi Arabia remains committed to open trade. but also because of rising protectionist pressures and drying up of trade finance. and enhance capital inflows. I am confident that other countries will also work toward ensuring a strong regulatory system. but would also have positive spillover effects on other economies. The return of global growth would increase exports from our region. has shown that self-regulation is insufficient and counterproductive. All in all. especially from expatriate workers. The expansionary policies will also help the continued flow of remittances to a large number of countries. The G-20 Leaders have acknowledged that major failures in the financial sector and in financial regulation and supervision were fundamental causes of the crisis. and markets. I can say that Saudi Arabia has played. including our region. Saudi banks have completed the implementation of Basel II. which will result in a more resilient global financial system. The G-20 actions. Encouraging countercyclical policies such as building up capital buffers during upswings and allowing these buffers to be drawn in a downturn is also an important measure agreed in the Summit. Thus the policies agreed by the G-20 Leaders are good not only for the health of the G-20 economies. instruments. I need not emphasize that financial remittances. Going forward. including oil. So the restoration of global trade growth would require 4 . which has triggered the global economic crisis. that the G-20 Leaders have agreed to extend prudential regulation and oversight to all systemically important financial institutions. and will continue to play. In the area of trade. On the regulatory side. The focus on discouraging excessive leverage and emphasis on short-term results is also a welcome development. an active role in international cooperation to resolve this crisis. Indeed. and the Saudi contribution to them. Moreover. We have also strongly supported the goal of reaching a successful conclusion to the Doha Round. This would also help our region in terms of higher foreign direct investment. will help boost global growth in the period ahead. The financial crisis. In Saudi Arabia. Another important area that attracted the attention of the G-20 Leaders related to resisting protectionism and promoting global trade and investment. we are committed to remain vigilant and will monitor the evolving risks closely. we have worked very diligently over the past few years to strengthen the capacity of the Saudi banking system to withstand adverse macroeconomic shocks. which has served the economy well at this difficult juncture. as well as other countries actions. which will open up new growth opportunities for all countries. exposure to real estate markets has been limited. the estimated 14 million expatriate workers in the GCC countries send home about 40 billion dollars a year. The capitalization and provisioning policies of our banks have enhanced their buffers. which is important for further promoting private-sector led growth.In the monetary and banking area. the Saudi Arabian Monetary Agency has maintained close supervision of our banks to ensure they have adequate liquidity and depositors are protected. It is fitting. do play a vital part in the economies of a number of Islamic Development Bank member countries as well as other countries from many regions. The crisis has caused a collapse of global trade not only due to global recession. therefore. The World Bank in a recent paper has identified the Kingdom as one of only three G-20 countries that have implemented the “standstill commitment” of the G-20 Washington Summit. including systemically important hedge funds.

maintaining open trade regimes. I. and taking measures to encourage trade-related finance. The Islamic Development Bank has played a vital role in the evolution and spread of the Shariah-based financing modalities and instruments. the G-20 Leaders have agreed to work toward increasing the IMF’s resources substantially and to review the capital adequacy of all multilateral development banks. It is also an opportunity for the Islamic Development Bank to assume a leading role in reviving the real economy in its member countries by scaling up trade financing operations. I want to recognize another unique achievement of the Islamic Development Bank. were key factors behind the global financial and economic crisis. coupled with a lack of regulation. The current crisis has underscored the critical importance of trade finance in global recovery. which will help establish its legitimacy and effectiveness. we should be proud that the Islamic Development Bank is the only major MDB that is exclusively owned by developing countries. The Leaders have agreed to expand the membership of the FSB—formerly known as the Financial Stability Forum—to all G-20 members. To help mitigate the impact of the sharp fall in capital flows to emerging market and developing countries and the difficulty in access to financing. in monitoring financial markets and contributing to the stability of the global financial system. it is a pioneer and a long time provider of trade finance facilities to its members. I want to conclude by sharing some thoughts on how our great institution—the Islamic Development Bank —can contribute to a sound and stable financial system. I also sense a keenness on the part of major global financial institutions to learn more about Islamic finance. Here we have an institution where voice is a non-issue. Among the MDBs. which as I stated earlier would benefit growth in our region.stimulating demand. We also know that the Shariah-based financing has built-in safeguards against such behavior. Accordingly. Last but not least. there is scope for doing more. believe that the Islamic Development Bank and the Islamic financial institutions across its membership can take this opportunity to fully harness and exploit the potential of Islamic finance. First and foremost. and increase coordination between them. The rapid growth of the Sukuk market globally is an indication that the upside is virtually unlimited. it is clear that excessive leverage and risk-taking behavior in major financial markets. 5 . the return to health of these economies is essential for restoring worldwide growth and prosperity. In my view. therefore. the practitioners of traditional and Islamic financing systems can learn a lot from each other. The IMF is already providing substantial financial support to a number of affected countries while the World Bank is well on way to triple its lending this fiscal year. The World Bank and other MDBs are frequently criticized for lack of voice and participation of developing countries. These are welcome developments as emerging market and developing countries have been the engine of recent global growth. Another important outcome of the G-20 deliberations is the recognition of the need to enhance the roles of the IMF and the Financial Stability Board (FSB). Secondly. Nevertheless. The regional development banks are also expanding financing substantially.

I would like to elaborate on the decisions taken towards achieving the second goal which I think more relevant for today’s discussion. Undersecretary of Treasury. the G20 has decided: • • to improve the regulation and supervision of the global financial system and enhance international coordination. Looking back. which cross-border firms and financial flows play an important role. have been the key milestones in this process where political will were turned into concrete outcomes that might make a difference for the world economy both in the short and medium run. and to improve the governance structure of the IFIs. Towards this goal our leaders decided: • • • to provide an unprecedented fiscal stimulus. and to promote global trade and investment and to avoid protectionism. The first G-20 Leaders Summit held in November 2008 in Washington. Let me remind you some of the key decisions of the G-20. I believe the broad representation at the G-20 was a key factor that enhanced the effectiveness and relevancy of the decisions. Second goal is to establish a stronger financial architecture to prevent future crises. First goal is to minimize the impact of the crisis and to achieve quick recovery. To support this goal.Implementation Issues Arising From the G-20 Reform Agenda and the Role of the IMF and the Financial Stability Board in the New Global Financial System H. and the April 2009 London Summit. Second.E. Now. 6 . I can tell that our undertaking within the G-20 has contributed significantly in restoring confidence and containing the downturn in global financial markets. is the need for global institutions that could oversee and govern today’s international financial system. Mr. the system has several supervisory and regulatory loopholes which left excessive risks in the system unaddressed. we have agreed on a number of actions aimed at broadly two goals. As G-20 countries. Republic of Turkey When in October 2008 the global financial turmoil has turned into a full fledged crisis. First. Ibrahim Halil Canakci. the G-20 took the leadership in designing a global response which would restore market confidence and minimize the negative impact on growth and employment. to support an increase in lending to emerging market countries by the International Financial Institutions. Improving the Regulation and Supervision of the Financial System The current crisis has highlighted two shortcomings in the current financial system.

the G-20 has agreed: • • to reemphasize the IMF’s global surveillance mandate. A dry run of the exercise was presented to the IMFC during the IMF/World Bank Spring Meetings. in Washington. the FSB needs to be open to the representation by developing countries that is influenced by changes in the global financial system. a high level of collaboration between the IMF and the FSB will be needed for a more effective global supervision.To address these gaps. The Role of the Financial Stability Board In the new financial architecture. Finally. The formal early warning exercise will be launched during the 2009 IMF/World Bank Annual Meetings in Istanbul. the IMF was given the task: • • • to analyze macro-financial issues and systemic vulnerabilities. and to restructure the Financial Stability Forum as the Financial Stability Board with a broadened mandate and membership. accounting standards and prudential regulations. To list few. the FSB needs to improve its institutional capacity and its accountability. In this respect the G-20 made an important decision by opening the membership of the FSB to all G-20 countries including Turkey. the performance of the FSB will be critical for creating a more resilient global financial system. However. Particularly more transparency regarding the selection of its Chairman will be a positive step. Especially. However. In the post-crisis period. including the steering committee. there are some preconditions for the FSB to be successful: First. to monitor implementation of financial sector policies and adherence to international standards by the national authorities. the early warning exercise that will be done by both institutions will be important to early identify major risks in the system. and to observe the G-20 commitment to refrain from taking policy actions that might be harmful for each other. The FSB will also advise and monitor best practices in regulatory standards and will set new guidelines. the same spirit should be preserved when it comes to deciding who will be represented on the committees. given the importance assigned to it. To oversee the process. 7 . the G-20 has put in place an action plan that includes several measures to improve the regulatory framework in areas such as hedge funds. The IMF’ Role in the New Global Financial System The G-20 has also envisaged a broadened role for the IMF in the new international financial architecture and assigned it with several tasks. the FSB was given an important role to act as an international monitoring and coordinating body among national financial authorities and international standard setting bodies. Second.

I believe several IDB member countries which play an important role in the global economy deserve a better representation in the IFIs. the crisis has now provided an opportunity for reviving these consultations to prevent rebuilding of excessive risks in the global financial system. if we do not want to be left outside. To this end. I see that international standards in the financial system will be tighter. In this regard. Another necessary ingredient for ensuring that IMF’s advice is taken seriously by both advanced and developing countries is to improve its legitimacy. Secondly and related to the first item. the Fund’s enforcement capacity and legitimacy needs to be further improved.Fulfilling these tasks requires a more effective IMF surveillance. Overall Assessment So when looking at the recent efforts to redesign the international global financial system I see two main implications for developing countries like us: First. having three of our fellow members being also represented in the G-20 and FSB is an invaluable opportunity for the IDB. I believe. to achieve this. As developing countries. should provide a significant improvement in the quota shares of emerging market economies. the IMF’s next general quota review which is now scheduled to be completed by January 2011. Turkey is willing to collaborate more with fellow IDB member countries and is keeping its communication channels open to reflect the perspective of IDB members to the work of these bodies. Second one is the Multilateral Consultations which was initiated by the Fund in 2006 to bring together the relevant counterparties in order to address the global imbalances. This generated a boost to our economy through increased confidence and efficiency. had been very open-minded on this front and introduced best practices and rules to its financial system. However. These consultations were useful but had only a limited practical impact. as acknowledged by the FSAP review 8 . we should prepare our financial systems for tighter international financial regulation and be open to peer reviews and international scrutiny. as we all recognize. following the 2001 banking crisis. This need was particularly evident during two occasions in the pre-crisis period: First one was the unwillingness of some systemically important financial centers to undergo FSAP reviews and to be open to listening to the Fund advice. This cooperation will be realized through international forums and bodies such as the G-20. and enforced more strictly going forward. there is a move towards further enhancing the cooperation among countries that are part of the global financial system. In particular. Turkey. As developing countries we should contribute to the work of these bodies and try to make our voice heard as much as possible. the IMF and the FSB and the decisions of these international bodies will be more influential and will affect our lives more deeply in the coming period. the G-20 recognized that IMF’s governance structure should be improved by giving more representation to the emerging market and developing countries and by the selection of senior managers of the IFIs on a merit basis.

countries with adequate fiscal space should continue to stimulate their domestic demand.that we have gone through in 2007. However. measures should be reversible to ensure medium term sustainability and be focused on high-quality infrastructure investments. could be prepared for the post crisis regulatory regime. In this regard. This will support the diversification of the economy in these countries and will provide positive externalities to the global economy. We are looking forward to the quick realization of these commitments. By fully utilizing their capital base. Following my speech we will distribute a paper that summarizes the financial sector restructuring experience of Turkey over the last few years. This vision was reflected in the G-20 commitment to increase MDBs lending by $100 billion. particularly in advanced countries. the MDBs should boost their development assistance both to low income countries and to middle income countries where around 70% of the world’s poor lives. It would be critically important to ensure that credit flows to emerging and developing countries are not hampered by these tighter regulations. We should also prepare our financial sectors for the challenges that might arise by the introduction of tighter regulations. The Role of the MDBs and the IDB Member Countries My final words will be regarding the role of the Multilateral Development Banks and IDB members in supporting global economic recovery. including the IDB should boost their efforts to minimize the damage to the poor to prevent the fading away of hard won gains on achieving the Millennium Development Goals. • MDBs. In response to the crisis. including the Islamic financial systems. we suggest that IDB initiate a comprehensive assessment on how the financial systems in IDB countries. The strength of our financial system is now also providing a buffer against the negative impact of the current crisis on Turkey. • 9 .

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resilience and financial inclusion. Secretary-General of the Islamic Financial Services Board. The Islamic Development Bank (IDB) Group–Islamic Financial Services Board (IFSB) Task Force on Global Financial Stability and Islamic Finance was established through the initiative of H. although she highly appreciates the importance of this Symposium to the IDB and its member countries. Zeti as chairperson and myself representing the IFSB. it has become clearer to us that fundamental changes must be introduced 11 .Key Proposals Made by the Task Force on Islamic Finance and Global Financial Stability Prof. IDB Excellencies and Distinguished Guests. In addition to H. which is chaired by H. It gives me great pleasure to participate in this 20th IDB Symposium in conjunction with the 34th Annual Meeting of the IDB Board of Governors in Ashgabat. Rifaat Ahmed Abdel Karim. and (iii) to examine the building blocks in the development of the Islamic financial architecture to further strengthen the resilience of the IFSI. Excellencies. Tan Sri Dr.E. (ii) to take stock of progress in the development of the Islamic financial services industry (IFSI) in the current challenging global financial environment. to share with you some updates on the work of the Task Force. Rahimberdi J. Jepbarov. Turkmenistan. on behalf of the IDB-IFSB Task Force on Global Financial Stability and Islamic Finance Your Excellency Mr. I would like to thank the IDB for inviting the Task Force on Global Financial Stability and Islamic Finance. Good afternoon to all of you. IDB Your Excellency Dr. President of the IDB Group Your Excellencies Board of Executive Directors. Islamic Development Bank (IDB) Your Excellencies Members of the Board of Governors. I would like to convey Governor Zeti’s sincerest apologies for not being able to be here today due to her busy schedule. the Task Force includes eminent international scholars and experts in Islamic finance. are addressing the global financial crisis.E. Ahmad Mohamed Ali. The Task Force was given the following terms of reference: (i) to examine the key elements in Islamic finance that contribute to its viability. Governor of Bank Negara Malaysia. Dr. following the recommendations of the Forum on the Global Financial Crisis and its Impact on the Islamic Financial Services Industry. Ladies and Gentlemen As we have heard. As the crisis continues to unfold and expand to become an economic crisis. including the UN and the G-20. the President of the IDB Group. Chairman of the Board of Governors. Zeti Akhtar Aziz. several international initiatives.E.

Islamic finance emphasizes transparency. which effectively restricts speculative short-selling transactions. Further. and that Islamic finance can be beneficial in addressing these challenges. thus preventing the creation of toxic assets. excessive uncertainty and risk – Islamic finance puts strong emphasis on controlling risk-taking. while signs of a recent slowdown are actually related to an overall downturn in the real economic sectors. through the Shari`ah prohibition of selling something that you do not own. The prohibition of Riba – that is. and restricts speculation. Hence. if embraced in its entirety. In a nutshell. Although institutions that offer Islamic financial services (IIFS) have debt receivables on their balance sheets arising from credit sale financing transactions. Shari`ah scholars further inhibit any high-gearing and aggressive expansion strategies. One can easily appreciate how Islamic finance. and it does not endorse engaging in over-leveraging or other excessive speculative activities. by prohibiting gharar – that is. The Task Force is aware that several independent reports have indicated the relative resilience of the IFSI compared with its conventional counterpart throughout 2008. Similarly. 12 . the adherence to Islamic finance principles pre-empts expansion of credit that is not backed by real assets. so that they become an integral part of the risk management culture and prudential framework in the reform initiatives for the global financial system. Indeed. they cannot securitize and offload these debt receivables. disclosure and clear documentation of contracts. The Task Force further notices how Islamic finance fundamentally discourages excessive leveraging. Islamic finance has benefited immensely from these pillars of strength and steadfastness that have contributed to its stability amidst rampaging turbulence. In this respect. Similarly. contributes to a system that preserves soundness and stability. lending and borrowing on the basis of interest – minimizes the likelihood of creating inverted pyramids of debts that make crashes inevitable. inter alia. while several Shari`ah-compliant stock indices have recorded lower losses compared with the main indices during recent stock market crashes. it is inclusive by extending financial services to various segments of the population. thus minimizing informational asymmetries and the chances of deception and malpractice. The IFSI has proven relative resilience compared to its conventional counterpart during the early waves of the financial tsunami.to the existing financial system. it is ethically and socially responsible. has the following characteristics: (i) (ii) (iii) (iv) it involves real economic activity that generates income and wealth. This condition eliminates the ability of IIFS to purchase instruments that carry credit risks that are highly dispersed beyond identification. by capping the interest-based debt-to-equity ratio at not more than a third as part of the portfolio screening process of shares. we should further harness these elements of Islamic finance in the national financial sector development policies. the Task Force observes that the Islamic finance model of financial intermediation. by upholding and promoting certain values grounded in Shari`ah rules and principles.

out of immense competitive and economic pressures. As the current crisis has proven. repackaging and trading of debt a repugnant concept. The Task Force notes that these and other considerations have confirmed the need for robust and consistently applied global standards of prudent risk management and other supporting infrastructure for enhancing financial stability and promoting financial development and inclusion. not the least of which are the “toxic” assets that. address the needs of the more vulnerable segments of society.Notwithstanding this. some IIFS. which address the diverse needs and heterogeneous components of society. helps to ensure that they invest only in stocks that are permissible within the parameters set out by their Shari`ah boards. securities firms. Ladies and Gentlemen. Since pure lending is ruled to be a strictly benevolent transaction and transfer of debt can only be done at par value. This helps to mitigate economic decline and prevent it 13 . adverse developments in that sector would adversely affect the business activities and performance of IIFS. perhaps due to naivety and enthusiasm for pursuing aggressive expansions. Second. Both these goals are catered for through different types of profit-based institutions and social institutions. particularly during economic “booms”. the portfolio screening process that is required to be adopted. rather than transferring risk. financing activities by IIFS are required to be conducted on an asset-backed or production basis. Similarly. rather than being merely lending and borrowing. rather than on a lender–borrower basis. The social institutions of Zakat and Awqaf provide social safety nets that strongly promote philanthropy. may have neglected fundamental and sound risk management standards. for the following main reasons: First. The prohibition of gharar further rules out highly risky assets. profit-based institutions – including banks. Finally. the Task Force acknowledges that the IFSI is not immune to risks and. should expect challenging and uncertain prospects in the near future. and complement other government-initiated safety nets. especially by Islamic securities firms and investment companies. as Islamic finance is closely linked to the real sector. hence. the prohibition of gharar forces Islamic insurance/takaful operators to adopt a model of sharing risk among the takaful participants. As we know. insurance/takaful operators and investment companies – are governed by several fundamental requirements that require them to adopt a different business model than their conventional counterparts. IIFS may. in Islamic finance. such as Zakat and Awqaf. thus further making the packaging. thereby resulting in financial losses and triggering a crisis of confidence and systemic risks in the Islamic financial system. Let me now share with you the Task Force’s analysis of how Islamic finance attempts to achieve financial stability. The IIFS mobilizes funds on a profit-sharing or agency basis. be tempted to tamper with their fiduciary responsibilities towards investment account holders in their business operations and conduct. Excellencies. aggressive lending and inadequate risk management can have negative consequences. Third. by their design. imply a very high degree of risk.

including those for the IFSI. poverty eradication and financial inclusion. The Task Force is pleased to note that various ground-breaking initiatives have been undertaken by the international community to pursue financial stability. Hong Kong and Singapore. should enhance the soundness and stability of the financial system in which the IIFS operate. Ladies and Gentlemen. World Bank. The third building block relates to the strengthening of the financial safety net mechanisms – namely. Bank for International Settlements. The current 185 members of the IFSB comprise 43 regulatory and supervisory authorities. In this respect. the Philippines. the IFSB. which takes into account the specificities of the IIFS that. if properly implemented. Islamic finance principles also highlight “forbearance to debtors under distress” as a mechanism to consider in managing imminent defaulters. Excellencies. which can only bring further catastrophes upon the economy. payment and settlement systems. On the financial sector development front. On the financial stability front. the Islamic Corporation for the Development of the Private Sector.from escalating into a crisis. which is based in Malaysia and was granted by its government the immunities and privileges that are accorded to diplomatic missions and international organizations. thus avoiding massive foreclosures and fire-sale liquidations. the IDB has been active for the past 34 years in fostering the economic development and social progress of its member countries. and the microstructure of the money. emergency financing arrangements. the IFSB has been issuing international standards designed not only to address the specificities of Islamic financial services. exchange and securities markets. International Monetary Fund. The second building block is the development of a robust systemic liquidity infrastructure that encompasses monetary policy and exchange operations. inter alia. and Muslim communities in non-member countries. The first building block relates to the effective implementation and enforcement of a set of robust and consistently applied prudential standards for risk management and supervision. its risks and Shari`ah compliance. as well as 136 financial and professional institutions operating in 35 jurisdictions. the Task Force acknowledges that six key building blocks will crucially form the basis of an Islamic financial architecture that is imperative in order to support orderly financial development and sustained financial stability in the IFSI. As you may know. namely the IDB. The need for the IDB and the IFSB to further strengthen their partnership in pursuing both financial stability and financial development cannot be overemphasized. but also to take a cross-sectoral approach to the regulation and supervision of IIFS that encompasses both the banking and the investment and securities market sectors. including the central banks of Japan. Korea. China. In addition. liquidity risk management of IIFS. These strategic objectives are described in more detail in the IDB Vision 1440H. the IDB–IFSB 10-Year Framework for the development of the IFSI highlights the need for the development of the Islamic financial sector. six international intergovernmental organizations. in response to the need to pursue financial stability for the IFSI. was established in 2002 by eight central banks and the IDB. by addressing. deposit 14 . Asian Development Bank and the IDB’s sister company.

which includes (in addition to financial safety nets). The Financial Stability Forum (now known as the Financial Stability Board). the ministries in charge of finance and economic development.protection and insurance. asset recovery and bank restructuring. in both national and different jurisdictions. Hence. The Task Force also notes that the IDB has taken the initiative to establish the Islamic Financial Sector Development Forum (IFSDF) as a broad-based and constructive dialogue platform for stakeholders with a vested interest in Islamic financial development through financial inclusions. bank insolvency laws and arrangements for dealing with non-performing assets. both in form and economic substance. the Task Force is of the view that some of these initiatives require the collaboration of the stakeholders of both institutions who are concerned with financial development–namely. the Task Force is entertaining the idea of recommending the establishment of an Islamic financial stability forum for the IFSI. Zakat and Awqaf – as well as those who are directly concerned with financial stability. the Task Force believes there is an urgent need for a conducive and synergistic dialogue platform that assembles together the IDB Board of Governors and members of the IFSB Council. entrepreneurship. inter alia. and capacity building and empowerment of the vulnerable segments of society. This calls for the development of an adequate range of tools and instruments for liquidity and risk management that are consistent with the core objectives and principles of Shari`ah. The traditional micro-prudential supervision approach cannot effectively address system-wide stress that might develop due to the common exposure of financial institutions and markets to macroeconomic risk factors. poverty eradication. provides a model for the IFSI to replicate. In this respect. Upon analysing the challenges posed in developing the building blocks. While the IDB and IFSB have been exerting efforts within their own respective mandates to develop and put in place these building blocks. as well as the lender of last resort facility. 15 . the IFSB would be pleased to host the Secretariat of the proposed forum. in enhancing the resilience and stability of the IFSI. such as central banks and financial supervisory authorities. which is an integral part of the strategy to help strengthen the resilience of the Islamic financial system and to limit the risks of financial fragility. which was set up following the onset of the Asian financial crisis and gathers together the various stakeholders with a vested interest in international financial stability. just such a broad-based and constructive dialogue platform where the IDB Board of Governors and the IFSB Council members can address the emerging challenges and policy issues of financial stability and development. The fourth building block involves the development of a reliable crisis management and resolution framework. The fifth building block refers to the requirement for close cooperation among policy-makers and financial supervisors with different mandates. often leading to prudential policies that aggravate the impact of economic shocks. which will become. The sixth building block refers to macro-prudential surveillance and financial stability.

this Forum needs to be further strengthened to enhance the sound development of the industry. 16 . The Task Force hopes that the views and recommendations of the Report will provide useful insights into the value propositions of Islamic finance for the global financial community in the current reform process of the international financial system. On that note.Given the impact of the current financial crisis. I thank you for your attention.

by bilateral means between countries and IMF. IDB Governor. The Ministerial Committee of the IMF.20th IDB Annual Symposium: General Discussion Floor Participant 1: To what extent the panelists believe that the IMF has the required resources to help developing countries cope with the consequences of the global financial and economic crisis? Thank you. we are likely to experience a shortage of foreign exchange in the short-run and that’s why a number of African countries now believe that funding the emerging imbalances in the balance of payments will become a critical issue. On the expansion of IMF mandate. which is called the IMFC. there are no immediate or urgent needs for the mobilization of these resources. which should continue because I do not believe that we have seen the last of the financial crises. The present crisis has shown that perhaps the IMF and other international organizations should have been much more involved in highlighting the systemic risks in developed countries. I also want to say that most of the Third World countries are being adversely impacted by the global financial crisis. our central banks have exercised due diligence over the banking system. In Africa. there are plans to augment resources by US$ 500 billion. Saudi Arabia: Well. what many of us in the developing countries are saying is that the IMF should focus more on surveillance activities in the developed economies. Looking ahead. In this regard. both the financial markets and the developing countries will be reassured that widespread crisis can be mitigated. Furthermore. has been calling developed countries to have more supervision and more intensive monitoring of volatile prices in international commodity markets. I think this is where IMF needs to be more flexible and responsive so as to be able to help us to protect the development gains achieved in African countries. which in our view was caused by speculative bubbles. both official and FDI types of inflows. the IMF already has the resources estimated at US$250 billion. augmenting IMF resources will be achieved through various mechanisms such as new agreements to borrow. and also by issuing IMF bonds. especially price developments in the oil market during 2007 and 2008. 17 . in addition. we have been concentrating our efforts in achieving social development and ensuring social safety for the poorest in pursuit of Millennium Development Goals. especially through the trade and financial flows channels. Uganda: I want to say that this global financial crisis is disturbing for all of us because it is very difficult to understand why the world best economies are unable to put the best facilities for surveillance and receive early warning signals of an imminent crisis. IDB Governor. I think there is likely to be a widening of a gap in external capital inflows. But as yet. The idea is that by augmenting IMF resources. We have been spared from the direct or the first-round impact on our banking system primarily due to the fact that our banks are not exposed to the CDS and such instruments.

If our development partners can encourage their companies in Africa to produce and export value-added products to their countries. we need to focus on certain priorities. official interventions or responses to correct the market failure were almost immediate and they save the world from the meltdown of the international financial institutions. Can we think of supportive policies for Islamic finance in terms similar to the role played by pro-FDI policies in years in the developing world? Looking at the figures on the relative market share of Islamic finance in IDB member countries. bulk of Islamic finance will be intermediated through financial centers in Hong Kong in the east and London in the west? Perhaps the Honorable Governors can think of other questions along these lines. Dr. I want them to support the private sector in African countries. On the question of how to cope with the recent food crisis. including the IDB. 18 . who are all from developing countries. But when the crisis broke out. Uganda: I would like to see the IDB to play a more catalytic role in attracting investors to Africa. We need this because most of our communities are agro-based and we cannot do our agriculture effectively and profitably without regional infrastructure. like to communicate to your colleagues in the G-20 and the MDBs. to support African countries organize itself as the food basket of the world because we have all the advantages to produce food to the poor. in terms of development priorities in the context of the post-crisis world? IDB Governor. it could be a lot cheaper rather than exporting raw materials and processing in their countries. particularly in the value-added export sector. In Africa. in a period of global recession. I think this is an opportunity for Africa and for all the development partners. again on our side. we now want to export finished products. Furthermore. Is it possible that. we need to invest in infrastructure projects in preparation for the revival of the global economy because many African countries still don’t have regional networks of roads and electricity. we are changing our attitudes . The Moderator: What would Honorable Governors in this room. The Moderator: From the floor. I would like to remind this august gathering that the global financial crisis originated in the developed countries whose economic philosophy is against government interventions in the market mechanisms. if I may have questions on the role of Islamic finance in terms of shaping the post-crisis world. For the development partners.instead of exporting raw materials. going forward.And. Floor Participant 2: Before I partially answer questions raised by the Moderator. We need more public and private funds for the long term development of the agriculture sector. suggests to me that there is still a huge untapped potential. we need to identify new investment opportunities in African countries. Rifaat can confirm whether or not the rating agencies also bear the primary responsibility for the outbreak of the crisis. Even the due diligence of financial institutions and financial papers by private sector entities such as the rating agencies failed in their fiduciary role.

This is also in line with the practice of the Basel Committee for Banking Supervision. I think that’s the core of your question as well. I would encourage IDB to exert maximum efforts to put into practice the Islamic economic theories. for example. we stressed that when they give a rating to an institution. all these issues became no more untouchable and the workings of all these areas. Is there a mechanism for coordination between the member countries on how to communicate our views to the G20 Leaders? And. In order to mitigate the impact of the global financial crisis. I would like to digress from the question and instead focus on how we engage with these rating agencies with respect to Islamic finance. Morocco: I would like to thank all the Honorable Governors and Excellencies for clarifying the precise implication of the global financial crisis on our countries. I think the Islamic Development Bank. At the beginning. were reviewed. including the rating agencies. The reality is that IDB is a manifestation of a doctrine and visualization of Islamic economics. Rifaat Ahmed Abdel Karim I understand that the rating agencies have played a role in spreading the current crisis perhaps by not rating certain products in terms of the probability of default of those instruments. the hedge funds. the investors (holders) whose funds are mobilized on the basis of the mudarabah where the profits are shared proportionately except in the case negligence or failure in carrying out fiduciary responsibilities. etc. Thank you. that rating could be best represented as the sum of the probability of defaults on individual contracts. As indication of its huge potential. since last October. but I do think that Islamic banks have smaller market share in many countries. the accounting standards. a holder of an investment account is an investor rather than a depositor and then one can calculate the probability of default. I am referring to. countries around the world have instituted fiscal measures to support economic recovery 19 .For the Islamic banking sector. I would like to take this opportunity to ask a question about the coordination amongst the Government representatives of the IDB member countries. there were denials and resistance to touching those areas and only to focus on the financial institutions. Thank you. We did have a very constructive dialogue with the major international rating agencies in order to try to give them a better understanding of the business model of Islamic finance. we know the industry is growing with an annual increase of 20% to 25%. IDB Governor. I do not have correct statistics. the Islamic Financial Services Board has communicated a technical note that helps the supervisors and regulators of Islamic banks when they designate a rating agency with regards to the risk weighting of the assets of those institutions. At the last G20 Summit. In addition to this. I would like to raise a policy concern regarding the huge debt overhang arising from the current economic recovery programs. Prof Dr. whether in the financial or economics areas. In this respect. However. which today gave us this opportunity. in extensive discussions on the role of the rating agencies. Saudi Arabia: We have been involved. IDB Governor. I believe that almost all the international rating agencies now publish their reports on Islamic finance based on modified rating methodologies that takes on board the specificities of Islamic finance. In fact. could help in setting up a coordination mechanism.

My concern then is if there is a clear vision of how to address these problems once the economic recovery phase is completed. member countries also need to deepen participation in IDB resources mobilization programs. These debts will have a significant impact on the management of financial markets and interest rates and other indicators. increases in public investments and public consumption within the government budgets typically results in a large deficit in the balance of payments. perhaps IDB must support countries through fasttracking disbursements of infrastructure projects. The Moderator: I want to wrap up the Symposium by highlighting some of the key points and messages that seem to come up in today’s discussion. 20 . expertise and experience in Islamic finance to help member countries to mainstream it in their financial systems.these are pre-requisites for survival in the next phase of the post-crisis world. multilateral institutions have also promised to scale-up their assistance to developing countries. inclusiveness to flourish domestically and to move towards the world of empowerment of the underprivileged . There is a recognition that we are at the end of one era and at the beginning of the other. I believe that the Honorable Governors are supportive of an enhanced role of the IDB in the area of transferring knowledge. There is clear consensus that the new global financial system should give greater space and voice to the developing world. We need to bring about greater competitiveness to survive globally. rapid response by multilateral institutions to help and mitigate countries facing balance of payments’ problems. At the same time. In recent past. Honorable Governors. this created considerable problems for debt servicing by the developing countries.and have also totally eased their monetary policies. I take from the floor discussion that the Honorable Governors are interested in supporting the establishment of a coordination mechanism as a way for communicating concerns and policy issues to the G20 forum. and distinguished ladies and gentlemen. The basic point is that economic recovery is being planned by further raising growth in public investments and public consumption? Higher and. more investments in infrastructure and development projects. on behalf of the Islamic Development Bank I thank you for participating in this 20th Annual Symposium and wish you all a pleasant day. demand a more equitable distribution of the benefits of wealth creation for an inclusive economic recovery and emerging stable world order. As many of the Excellencies have pointed out. and a better mechanism for cooperation amongst the IDB member countries. thus we need to prepare for a new emerging world order. In the short run. Furthermore. it means that much greater investments in human development need to be programmed. unsustainable. Excellencies.

the membership of G-20 developing countries in the Steering Committee of the Financial Stability Board needs to be ensured. 21 . Among the G-20 countries. Ahmad Mohamed Ali. Rahimberdi J. In order to achieve greater acceptance of Financial Stability Board (FSB) work. Dr. Member countries need to prepare for an era of intrusive and tougher financial sector regulations.E. The role and contributions of the three IDB member countries viz. Due to the synchronized nature of the on-going global financial and economic crisis. The major point of departure of the Symposium was that it was a Governor’s Seminar with the active participation of many Governors. In this regard. A three-member panel – comprising H. The major conclusions of the Symposium were the following: 1. and Prof. President IDB Group delivered a welcome address. Mr. Adequate national countercyclical initiatives for rapid recovery in member countries will also have beneficial regional spillover effects. While IMF has sufficient resources to provide ‘emergency’ support for balance of payments crisis. 3. The G-20 reform agenda provides a ‘global response to the global crisis’. which was held in conjunction with the 34th Annual Meeting of the IDB Board of Governors on 2nd June 2009 in Ashgabat. this Board needs to be made more inclusive through broadening its membership of developing countries. Turkmenistan. Self-regulation by key financial institutions has been proved to be insufficient and counterproductive.Major Conclusions and Recommendations of the 20th Annual Symposium IDB organized its 20th Annual Symposium on “Shaping the Post-Crisis World: Regional Implications and Coordinated Responses by Member Countries”. Undersecretary of Treasury of Republic of Turkey and IDB Governor. 7. Chairman of the Board of Governors. it needs to introduce greater flexibility and policy space in its lending instruments. Ibrahim Halil Canakci. 4. The Symposium was chaired by H. Rifaat Ahmed Abdel Karim.E. Ibrahim bin Abdel Aziz Al-Assaf. multilateral consultations to address global imbalances and IMF surveillance of macro-financial policies need to be greatly strengthened and made more effective. Indonesia. Secretary-General of the IFSB and Member of the Task Force on Islamic Finance and Global Financial Stability – discussed the G-20 reform agenda and its implementation issues as well as issues arising from the effects of global economic recession on Islamic financial institutions. which originated in developed countries. including through remittances channel to other member countries. In this regard. 6. Due to the negative spillover effects of financial and economic policies in developed countries. 5. H. Dr. 2. require partnership and collaboration with international bodies and institutions. Minister of Finance of the Kingdom of Saudi Arabia and IDB Governor. Saudi Arabia and Turkey were greatly appreciated in shaping the G-20 reform agenda. Saudi Arabia announced the highest fiscal stimulus package.E. readiness was expressed to coordinate with other member countries to bring up their key concerns and voices in the G-20 forum. economic recovery is likely to be protracted across all regions. H. Jepbarov.E. Mr. The challenges of addressing the on-going global economic crisis.

As a pioneer. 6. including IDB. which provides in-built safeguards against leveraging and excessive risk-taking. has key lessons to offer in promoting resilience and stability of financial institutions against shocks. However. 4.8. Islamic finance. MDBs and the private sector need to be strengthened to increase the impact of IDB’s development assistance. including IDB member countries. 3. including PPP projects in LDMCs. IDB Group needs to consider further scaling-up its development assistance to support implementation of high-quality infrastructure projects. 10. Rising trade protectionism must be resisted under all circumstances. must also be ensured. cognizance of maintaining long-term debt sustainability of developing countries. A strong commitment to revive and rapidly conclude the Doha development round is urgently needed. Partnerships with other donors. IDB Group needs to consider taking further steps through which the potential of Islamic finance in the global financial system can be fully exploited. In order to help the LDMCs cope with the consequences of the global economic crisis. All multilateral development banks. IDB Group needs to identify opportunities for intra-OIC FDI in the agriculture sector and exports of value-added goods. The work of the “Task Force on Islamic Finance and Global Financial Stability” can be better harnessed through conversion to a permanent dialogue forum which can also be an interlocutor with the Financial Stability Board. Efforts need to be made to devise a clear vision of the post-crisis world and a coordination mechanism at the OIC level. 22 . The major recommendations of the Symposium are as follows: 1. the IDB Group needs to scale-up its trade financing in order to help member countries in their economic recovery. 9. need to ensure the rapid delivery of short-term and long-term development assistance. 2. 5.

ANNEX ISSUES PAPER Shaping the Post-Crisis World: Regional Implications and Coordinated Responses by Member Countries .

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social protection.3 percent in 2009 with a potential recovery projected at 1. Economic Policy and Statistics Department as a background document to assist participation of the Honorable Governors in the Symposium. The volume of world trade is projected to decline by 11 percent in 2009. regional. Mohammad Ahmed Zubair. It is expected that the Symposium will generate useful discussions by the Honorable Governors and. Looking ahead. Policymakers around the world have announced various programs and plans to address the adverse consequences of the current financial and economic crisis. The basic objective of the Symposium is to facilitate an exchange of views among member countries on a theme of current relevance to their economic development and social progress. The discussion and suggestions by Honorable Governors on regional responses will also assist the IDB Group to devise new programs and to better align its development assistance to the new and emerging needs of member countries. IDB has prepared an ‘Issues Paper’ which lays out key concerns that are likely to be relevant in Shaping the Post-Crisis World.2 percent in 2007 to -1. is taken note of during the Closing Session of the Annual Meeting. and forging new trade and investment linkages by Honorable Governors will provide an opportunity to explore ways for forging common positions on global and regional issues. in turn. 2 IMF (2009): World Economic Outlook (April). national and IDB level. Actions Taken to Shaping the Post-Crisis World The on-going phase of the financial and economic crisis is the most serious after the Great Depression of the 1930s. A regionally focused policy approach in the area of trade and investment is more likely to help member countries to strategically position themselves in order to benefit the most from emerging opportunities when recovery occurs. reducing economic growth across all regions.ISSUES PAPER1 Shaping the Post-Crisis World: Regional Implications and Coordinated Responses by Member Countries Introduction IDB organizes an Annual Symposium in conjunction with the Annual Meeting of the IDB Board of Governors. financial strains remain acute. a discussion on critical issues connected to economic recovery. help the Honorable Governors to reflect and articulate their views on emerging global and regional scenarios. namely. Division Chief. The topic of this year’s Symposium . The purpose of this Paper is to highlight major emerging issues that may. 1 25 . world economic growth is estimated to fall from 5. key recommendations at various levels. The scale of financial meltdown and wealth destruction in the on-going crisis is unprecedented. Despite wide-ranging policy actions. Implementation of key recommendations is followed through knowledge dissemination as well as through policy reviews and operational initiatives at the IDB Group-level. Three key steps which have been already taken to restore confidence in the financial markets and stimulate economic growth are: The Issues Paper has been prepared by Dr.9 percent in 2010. According to the IMF2.Shaping the Post-Crisis World: Regional Implications and Coordinated Responses by Member Countries – has been chosen because of its relevance.

initiatives for injecting liquidity in the financial markets and unfreezing of credit markets have been adopted. strengthening capital adequacy of multilateral development banks for lending (total: $300 billion. Besides helping to maintain growth momentum. economic and fiscal stimulus packages in the G-20 countries have been announced. Major global and regional level trends and issues. and expanding officially supported trade financing through export credit agencies and the World Bank Group ($250 billion). Emerging Issues From the standpoint of policymakers. learn how to cope with a dramatically transformed international financial landscape. enhanced prudential regulations for all segments of financial sector. including additional measures: $100 billion). reviving consumer confidence and to lay the foundations from turning recession to economic recovery phase in the short-run3. regulating credit rating agencies and mainstreaming non-cooperative tax jurisdictions. Implementing a comprehensive G-20 reform agenda for the global financial system in key areas such as macro-prudential regulatory framework. It is critical that steps to repair international financial institutions and G-20 reform agenda are rapidly implemented in order to re-establish a climate of stability and confidence in the global financial system as well as to prevent potential future recurrences of such crisis. For many developing countries. the highest fiscal stimulus packages estimated at 2. and follow through the implications of potentially new global patterns of trade and investment. injecting liquidity through allocation of new SDRs ($250 billion). 3. improving and harmonizing accounting standards. iii. In addition.3 percent in 2009. totaling $5 trillion. that aim to stem the falloff of aggregate demand. ii.i. assessing vulnerabilities of financial systems through expanded and strengthened Financial Stability Board. including IDB member countries. critical issues in mainstreaming Islamic financial intermediation. among the G-20 countries. Some of the emerging issues raised in parts 1 to 6 are listed below for the consideration of the Honorable Governors.5 percent in 2010. More specifically. and 3. key concerns remain with regard to ‘pricing’ and ‘volume’ of external official and private inflows which are important to sustain their programs of poverty alleviation and infrastructure development as access to international capital markets become more difficult in terms of higher rates and shorter maturities. in the post-crisis world. member countries need to reconsider their growth strategies. such sustained fiscal stimulus over the three years will also have beneficial regional spill over effects through remittances channel. it is critical to look ahead to assess how existing geoeconomic linkages are likely to be altered and to anticipate new patterns that are likely to present both challenges and opportunities. key implications of G-20 reform agenda. It is noteworthy to point out that Saudi Arabia has announced. Supporting developing countries to face the consequences of global economic recession through expanding resources of IMF ($500 billion).8 percent of GDP in 2008. At the national-level. and expanded mandate of the multilateral development banks (MDBs) to support developing countries as they face the consequences of global economic crisis are presented in parts 1 to 6 annexed to this paper. 3 26 .

Within the context of rebalancing growth. is the banking sector sufficiently resilient to withstand shocks and potential loan delinquencies? 4. U. to what extent is rebalancing the economic growth model from a reliance on external demand to stimulating domestic demand desirable and feasible for Asian countries? 2.A. Asian or African countries? 7. Is the OIC intra-trade target of 20% to be achieved by 2015. Japan and Eurozone) a pre-requisite for recovery in developing countries? 4.. under the Ten-Year OIC Plan of Action. Is it correct to say that this crisis has “forced” adjustment of global imbalances? 3.e. What does revival of global economic growth mean? Does it mean a ‘new normal’ characterized by lower credit intermediation at the global level and reduced capacity for sustained. Given the global economic recession and slower growth in SSA region. is there a case to re-examine the desirability of maintaining full capital account convertibility? 6. In the medium-term. is there need to put together contingency plans to counteract a potential liquidity crisis triggering a solvency crisis for the private sector in IDB member countries? 6.I: Growth. will countries face a liquidity crisis? What is the risk that ‘spreads’ may resume their northern journey? 5.S. Will there be a strategic rebalancing of portfolio by GCC-based investment funds away from investment in financial assets towards longer term investments in developmental projects at home. non-inflationary growth? 2. Given the balance of ‘external funding’ risks. Given the rollover size of external debt combined with likelihood of reduced crossborder flows. In view of developments in the financial sector of GCC countries during the crisisperiod. Is a recovery in the G3 (i. will it be appropriate to defer the target year of MDGs from 2015 to (say) 2020? 27 . Trade and Financial Flows in the Post-Crisis World 1. Is long term investment in developing the regional trade potential in hydrocarbons and hydropower sector the way forward for Central Asia region? 5. still feasible? II: Regional Implications for Member Countries 1. Will a strategy to rebalance economic growth also imply structural adjustment issues? To what extent structural adjustment in the industrial sector is likely to lead to dislocations in labor market? 3.

how can fundamental insights of Islamic finance become part of the international discourse? 2. will member countries prefer joint programming engagement with all MDBs? 2. how can IDB address policy concerns related to upgrading productivity and competitiveness. In repairing institutions and reforming global financial system. can stability and resilience of the financial system be achieved by managing a consistent linkage between growth in financial intermediation and real GDP growth? 3. How can non-G20 member countries better liaise with G-20 countries in terms of communicating their views on the work of standard-setting bodies? IV: Expanded Mandate for MDBs: What are the Key Strategic Implications for IDB Group? 1. Going forward. Given the scale of destruction of global financial assets. In the context of structural adjustment issues. Compared to other MDBs. is it an opportune moment to mainstream Islamic finance in the national financial system? 4. will it be appropriate to double the planned growth in IDB’s Operations Plan? 28 . To what extent IDB-sponsored projects will be protected from potential cutbacks in counterpart funds? 4.III: Key G-20 Reform Agenda for Global Financial System: Regional Impact and Islamic Financial Industry (IFIs) 1. is there a clear case for coordinating the development of a common regulatory framework for banks plus nonbanks plus Islamic financial institutions at the regional level? 5. In deference to insights from Islamic finance. In the context of expanded mandate of MDBs. including re-training and skills development of the workforce? 3.

Dramatic drop in prices of financial assets in the private sector and near-zero policy interest rates on treasury papers in developed countries will represent. United States alone absorbed 43% of net global capital exports followed by U. and IMF (2009): Global Financial Stability Report. for net capital exporters.6% in 2008.e. This underpinned creation of riskier assets (such as CDS. 29 .K.Part 1: Global Imbalances: The Dark Heart of Global Financial Instability1 Analysis • Global imbalances continued to widen right up to 2006.1% of the world’s total in 2008. plus Eurozone countries at 23. at least valuation losses on financial assets and low yields on treasury papers. a potential correction in global imbalances could imply sharper exchange rate adjustments (with possibility of exploiting newer trade opportunities) which can be offset by an eventual stiff competition for capital (i. hedge funds. Policyinduced rigidity prevented exchange rates to correct sustained build-up. 1 Graphs are from Martin Wolf. particularly developing countries. US subprime mortgages) and ‘speculative bubbles’ in commodities and energy markets. For the rest of the world. deregulation of financial institutions and weak risk management practices fostered leverage and search for yields. This share roughly corresponds to Japan. a rise in cost of capital). Net Exporters of Capital (2008) Net Importers of Capital (2008) • • • • Combined share of five IDB member countries as net exporters of capital was 18. • Global imbalances accompanied by low interest rate policy. Financial Times (2008): Crisis and Aftermath.

US current account deficit has started to contract.4% age points in GDP growth during 2001 to 2006. This was due to relatively slower growth in US and lagged effects of US dollar depreciation. Can households in emerging economies build-up liabilities to compensate for loss of US consumers? Part 1: Global Imbalances in the Post-Crisis World2 Analysis • With the onset of US subprime crisis. • • 2 Graphs are from IMF (2009): World Economic Outlook (p. • Issues for Honorable Governors 1.3 trillion. As percent of global GDP. Why is that sustained global imbalances could not be resolved? 3. After Jan. US dollar depreciated by 8½ percent from June 2007 to July 2008. what is the risk of a disorderly movement in exchange rates? 4. As the financial crisis intensified. Without correcting global imbalances. mainly due to capital flight to safety reasons. Why is it that the G-20 Summit in London did not make an attempt on how to resolve global imbalances? 2. Contributions of net exports to growth rose steadily to about 2% points by end-2008. US dollar has steadily appreciated. 35 and 38).• • Domestic demand has contributed in the range of 2. Beginning from 2006. US household consumption is estimated at 15% which is more than twice the size of the Japanese economy. Has the world run out of large and willing creditworthy borrowers? 5. With domestic demand collapsing in US. 30 . US household consumption is 71% of its total GDP of about $14. 2009. spare capacity is being turned for exports. flight to safety concerns became dominant resulting in reversal of private capital inflows back to the US.

Is it correct to say that this crisis has “forced” adjustment of global imbalances? 2. current account surpluses will again appear. Beyond 2009.R. albeit at much reduced levels. Global imbalances are projected to sharply decline from 5¾% in 2007 to 4% in 2009. noninflationary growth? 3. IMF is projecting adjustments in global imbalances from three channels: increase in US private savings. contraction of global imbalances accompanied by a fall in cross-border gross capital flows. US deficit is expected to improve from a peak of 6% in 2006 to 3¼% in 2009. Looking ahead. with projected global recovery beyond 2010. key issues are home bias. • • • • • Issues for Honorable Governors 1. of China proposal to use SDR as an international reserve currency gaining popularity? 5. Has rebalancing growth model by moving away from export-led growth to reliance on domestic and regional growth become imperative? 4. to what extent it is feasible to invest current account surpluses at home in infrastructure projects rather in financial assets overseas? 31 . Oil-exporting countries and Japan are likely to experience disappearance of current account surpluses in 2009. What are the prospects for P. Does revival of global economic growth means a “new normal” characterized by lower credit intermediation at the global level and reduced capacity for sustained.e. lower global credit intermediation and terms of trade improvements (or deterioration) for oil for commodity importing (or exporting) countries. i.• Surge in demand for US treasury securities was mainly led by private sector (in particular. However. financial institutions) while overseas official sources liquidated their investment.

Corporate savings in East Asian countries.9% in 2009 followed by 4. • • • • • • • 32 . For developing countries.Part 2: Rebalancing Growth in the Post-Crisis World: Trade Channels Analysis • • Economic growth in OECD countries. In the pre-crisis period.4% in 2009 followed by 20. while growth in household savings in India dominates the national savings rate.5% in 2009 followed by 0.2% in 2010. Oil prices are projected to decline by -46. including China. Rising prosperity in developing countries was mainly predicated on export-led growth whose final buyers were consumers in developed countries.5% in 2010. developing countries registered per capita growth at 9% while it grew in IDB member countries by 4%. IMF projections for exports growth by OECD countries is -13. Share of total exports of IDB-MCs in global exports increased from 8. exports growth is projected to decline by -6.4% in 2009 followed by recovery of 1.1%. Nonfuel commodities are expected to decline by -27. Decline in exports of IDB-MCs to developed countries increased by over 3% age points to developing countries and intra-trade ratio. import by emerging Asian countries was about 3% of global GDP while by IDB member countries (IDB-MCs) was 3. In emerging Asian countries. in turn. national savings are in excess of 30% with China at over 50% in 2007. who.4% in 2010.2% recovery in 2010. albeit at a lower rate compared to 2007. During 2002-07. financed their purchases by building up net liabilities.1% in 2003 to 9. developing countries and IDB member countries are all projected to recover in 2010 and 2011.9% in 2007.

Since the onset of crisis. spread on sukuks has been relatively higher than bond index. Asian economies can significantly contribute in creating a virtuous cycle of growth and intra-regional trade? 3. Is the intra-OIC target of 20% to be achieved by 2015. during the crisis-period. 33 . Prior to the crisis-period. What policy measures can assist in fostering “look East” trade policy? Part 2: Rebalancing Growth in the Post-Crisis World: Financial Flows Channel Analysis • IMF-WEO (2009) states that there is broadbased withdrawal of foreign investors and banks from developing countries: issuance of new securities has come to a virtual halt. some emerging economies (such as Indonesia) and MDBs (such as World Bank) have returned to international capital markets. Beginning from 2nd quarter 2009.Issues for Honorable Governors 1. Source: HSBC-DIFX Index. this has drastically reduced new bond issuance by emerging economies in the international capital markets. still feasible? 4. pricing of bonds for both sovereigns and corporate in the Middle-East region are still elevated: about 200 bps compared to peak during 2008 and about 400 bps compared to average during 2007. spread on sukuks was generally below the spread on bond index. under the Ten-Year OIC Plan of Action. p. Sukuk US$ Index Spread JP Morgan EMBI stripped spreads3 • Middle-East US$ Bond Index Spread4 • • • 3 4 Source: Asian Development Outlook (2009. For most of the crisis-period. a sharp rise in the premium on US dollar bond index for sovereigns and corporate in both Asia and Middle-East regions is reflective of a broadbased repricing of risks. published by Asian Development Bank. However. which probably reflects risk-quality of sukuk issuers in the Middle-East region. can trade ever recover and grow to pre-crisis rates? 2. bank flows are reduced and bond spreads have spiked. Is it likely that. downloaded on 11 May 2009.33). Beginning from 2nd quarter 2009. in the near term. With final demand collapsing in developed countries.

34 . a potential decline in crossborder gross capital flows)? 3. With global imbalances narrowing. what is the risk that ‘spreads’ may resume their northern journey? 4.and long-term debt.8% by 2011. • • Issues for Honorable Governors: 1. Given the rollover size of external financing combined with significantly reduced crossborder flows. • Beyond 2009. • Strong foreign exchange reserves position combined with partial capital account convertibility have limited significant recourse to external financing.8 trillion in 2009. External private debt financing by both sovereigns and corporates in 40 IDB member countries is estimated at about $102 billion in 2008.5 billion in 2008.• IMF-WEO (2009) estimates that rollover needs5 of emerging economies are $1. Given the balance of ‘external funding’ risks. • Over two-thirds of external financing is based on loan syndications. is there need to put together contingency plans to counteract a potential liquidity crisis triggering a solvency crisis for the private sector in IDB member countries? Part 3: Shaping the Post-Crisis World: Regional Implications for Member Countries in Asian Region Analysis • Member countries in Asia region are expected to grow close to 2% in 2009 and then gradually recover to about 4. • Economic recovery is expected to be below an average of 6% growth recorded during 2006 to 2008. Deleveraging process of financial institutions in developed countries is likely to be protracted. 5 Rollover needs are defined as short-term debt plus amortization of medium. Weight of new regulations can also add to dampening of gross crossborder private flows. Can there ever be a longer term increase in home bias? (i. is it likely that era of rapid growth of global finance is over for the foreseeable future? 2.e. remittance inflows are projected to remain steady after a slight drop from $24.

Indonesia and Pakistan each annually receive remittance inflows of about $6 billion. External financing flows to CIS region mainly reflect loan syndications by Kazakhstan. • Economic recovery is expected to be below an average of about 9% growth recorded during 2006 to 2008. banking sector by 2008 is well positioned in terms of declining share of nonperforming loans. A key vulnerability is that banks’ regulatory capital to risk-weighted assets has declined from (weighted average) 16% in 2003 to 14% in 2008. • 35 . is targeted stability in real effective exchange rate the best policy option? Part 3: Shaping the Post-Crisis World: Regional Implications for Member Countries in Central Asia Region Analysis • Member countries in CIS region are expected to grow close to 2% in 2009 and then gradually recover to about 6% by 2011. In a complicated external environment.• • • Bangladesh. Within the context of rebalancing growth. Is it likely that rollover needs combined with ‘prohibitive’ cost of access to external finance can be potentially threatening to external sector viability? 4. is the banking sector sufficiently resilient to withstand shocks and potential loan delinquencies? 2. After a period of reforms. In the medium-term. Issues for Honorable Governors 1. to what extent rebalancing economic growth model from reliance on external demand to stimulating domestic demand is both desirable and feasible policy choice? 2.

• For 2009. Economic recovery is expected to be below an average of about 5. Another source of vulnerability is that banks’ regulatory capital to risk-weighted assets has declined from (weighted average) 19% in 2003 to 15% in 2008. what strategic choices are available to underpin long term economic development? 2. Is long term investment in developing regional trade potential in hydrocarbons and hydropower sector the way forward for CIS region? 3. Is the banking sector sufficiently resilient to withstand shocks and potential loan delinquencies? Part 3: Shaping the Post-Crisis World: Regional Implications for Member Countries in MENA Region Analysis • Member countries in MENA region are expected to grow close to 1% in 2009 and then gradually recover to about 4% by 2011. With major downturn in the Russian economy. The overall volume of remittance inflows to CIS member countries is still modest about $5billion each in 2007 and 2008. are critical to underpinning external sector viability. remittance inflows are projected to sharply decline. Kazakhstan appears to have covered its financing needs during 2009 through large loan syndications during the 3rd quarter of 2008. after ODAs. • • • • Issues for Honorable Governors 1. Banking sector in CIS region appears to be vulnerable with share of nonperforming loans sharply rising during 2008.3% growth recorded during 2006 to 2008. Remittance inflows. Given the prospects of depressed prices of major commodities exported by CIS member countries. Bond issuance and loan syndications in MENA region dropped from $33 billion and • • 36 .

$75 billion in 2007 to $15 billion and $58 billion in 2008.7 billion. is the robustness of banking sector in MENA region under threat from loan delinquencies? 37 . what will be the key drivers of long term economic growth in MENA region? 2. respectively. Will there be a strategic rebalancing of portfolio by national investment funds and central bank reserves away from investment in financial assets towards longer term investments in developmental projects ? at home.5 billion. MENA countries are projected to receive a steady flow of about $33 billion annually during 2009 to 2011. Banks’ regulatory capital to risk-weighted assets declined from (weighted average) 18. In 2008. these volumes include both official and private sector borrowings. With projected narrowing of global imbalances and near-zero current account surpluses of GCC countries. Asian or African countries? 4.4% in 2006 to 14% in 2008. are pricing pressures likely to build-up through reduced gross capital flows for sovereign and corporate borrowers? 3. both at home and abroad. In the post-crisis world. is the recent rebound in international oil prices ‘speculative’ or reflecting ‘’green shoots’ of global economic recovery phenomenon? 5. Lebanon -$6 billion and Morocco -$6. Given the unprecedented scale of losses on financial assets. major recipient of remittance inflows in MENA region were: Egypt -$9. • • • • Issues for Honorable Governors 1. these volumes mainly reflect private sector borrowings. For oil-exporting countries. In other part of MENA. • In the GCC region. Banking sector in MENA region appears to be well positioned in terms of declining share of nonperforming loans. After a sharp drop in growth of remittance inflows in 2009.

The G-20 Summit has requested the World Bank and the IMF to review the Debt Sustainability Framework (DSF). Net ODA disbursements received by 22 member countries in SSA region have dramatically dropped from $18. banking sector in SSA region by 2008 is well positioned in terms of declining share of nonperforming loans. an exception is Senegal. Remittances inflows to 22 member countries in SSA region have become an important source of external inflows: it more than doubled from $7 billion in 2005 to estimated $15. Remittance inflows are projected at about $14 billion annually during 2009 to 2011. However. where loan delinquencies appear to have risen. After a period of sustained reforms.Part 3: Shaping the Post-Crisis World: Regional Implications for Member Countries in SSA Region Analysis • Member countries in SSA region are expected to grow close to 3% in 2009 and then gradually recover to about 5% by 2011. • • • • • • • • 38 .5 billion in 2008.7 billion in 2006 to estimated $11. mainly reflecting loan syndications by Nigeria.8 billion in 2007 to $3. A key strength is that banks’ regulatory capital to risk-weighted assets in SSA region has improved from (weighted average) 16% in 2004 to 21% in 2008.3 billion in 2008. Economic recovery is expected to be below an average of about 6% growth recorded during 2006 to 2008.7 billion. External financing flows to SSA region are relatively modest: it dropped from $5.

What major issues should be considered in the review of DSF? On what basis. member countries in SSA region can argue that DSF is a binding constraint for sustainable economic growth? 39 . In the post-crisis world. Given the global economic recession and slower growth in SSA region. are projects and programs being re-prioritized? To what extent. Given the further expected shortfall in ODA disbursements. what will be the key drivers of long-term economic growth in SSA region? 2. will it be appropriate to advance the target year of MDGs from 2015 to (say) 2020? 3. authorities will remain committed to providing counterpart funds for re-prioritized projects? What will be key principles in the reprioritization exercise? 4.Issues for Honorable Governors 1.

is there a clear case for streamlining regulatory and supervisory framework for banks and nonbanks as well as Islamic financial institutions? • To what extent. It involves answering three questions: what is the covariance between aggregate banking portfolio and each banks’ portfolio?. it will be important to consider harmonization of regulatory regime at the regional-level? • At the global level. in the GCC region. transport and public utilities. Regulate all segments of financial markets Analysis of National/ Regional Issues • At the national level. In a business downturn.Part 4: Key G-20 Reform Agenda for Global Financial System: Regional Impact and Islamic Financial Industry (IFIs) G-20 Reform Agenda I. financial services. is there a strong case to postpone or even consider reversal of partial liberalization of capital account? • In deference to Islamic finance. IFIs in some countries may constitute ‘ systematically important’. and conditional on a systemic crisis. 2. In some countries. can stability and resilience of the financial system be achieved by managing a consistent linkage between growth in financial intermediation and real GDP growth? Macro-prudential regulatory framework • Definition of an Islamic financial institution is the key issue. 1. IFIs are treated as nonbank institutions and regulated by Capital Market or Securities authorities. conditional on a bank failing. Analysis of IFIs Issues Issues for Honorable Governors • Going forward. • The above raises potential difficulties in uniform application of regulatory framework in a cross-border context. Identify systematically important financial institutions -------------------------Identify and assess risks and vulnerabilities across financial system • These two issues are inter-related. during the global financial crisis. covariance between aggregate banking and IFIs portfolio could create systemic crisis. 40 . the experience of GCC financial sector. IFIs are treated as banking entities and hence come under regulatory ambit of central banks. These will require a careful review of capital account convertibility issues. a key issue is multiplicity of regulators: whether bank and nonbank financial institutions need to be under a single regulatory ambit of central banks or an independent super regulator. what is the probability of a bank failure? • Another key consideration is how to control for transmission of externally generated contagion to the domestic financial sector. • In terms of sectoral exposure. cost of regulating bank and nonbank international financial institutions and relationship with regulators in country of origin are important considerations. • In terms of market shares. is there a case for imposing nominal tax on bank and nonbank institutions to cover cost of regulatory financial markets? • Can stock market ‘bubbles’ pose systemic threats to financial institutions? • In view of recent experience. what is the probability of a systemic crisis?. • For regional financial centers in member countries. In this regard. IFIs in any single country are unlikely to be characterized as ‘systemically important’. In other countries. 3. is quite instructive. For instance. bulk of IFIs loan exposure is towards real estate (commercial and residential).

Analysis of IFIs Issues Issues for Honorable Governors • Is it desirable to initiate a critical review of regulatory arbitrage by ‘large’ financial institutions? • Is there a need to strike balance between ‘sophisticated’ and ‘simple’ set of prudential regulations? • In the absence of capital account convertibility. • Is it correct to believe that member countries in general do not experience overall business cycles similar to the developed countries? • To what extent it will be appropriate to limit sector-level exposure of a single financial institution? 41 . can countries adopt different capital adequacy parameters for their banking institutions? • IFSB has introduced uniform treatment of profit sharing investment accounts (PSIAs) of IFIs-known as Alpha factor in their CASacross jurisdictions.5 times. it appears that global banks engaged in regulatory arbitrage on a massive scale. developing (including IDB member countries) do not experience overall business cycles. • There could be a case for organizing capacity building courses for IFIs regulators in order to help in implementation of IFSB and AAOIFI standards. 4. 5. Indonesia and Pakistan. real estate in GCC region. which is equivalent to allowing a bank to be leveraged a conservative 12. • Twenty years later. agriculture and textile sector financing in Bangladesh. Prudential regulations Harmonization of the definition of capital and risk-based capital and requirements for financial institutions Analysis of National/ Regional Issues • This issue was first tackled in 1988 with the adoption of Basel Capital Accord. • Basel II handed over risk measurement to either rating agencies or financial institutions themselves. which set out a measurement system banks’ capital and minimum ratio of capital to assets – for global banks – at 8 percent. • There could be a need to review consistency of definitions and adequacy of capital of IFIs under IFSB standards along with emerging BCBS standards.G-20 Reform Agenda II. Lessons learnt from weaknesses of regulatory standards related to capital adequacy will be key to any reform in this area. financial institutions in member countries have typically \large\ exposures. • Like developed economies. both on capital measurement side and by converting risky assets into triple –A securities. such as oil & petrochemicals. Establish countercyclical capital and liquidity buffers for ‘systemically’ important financial institutions • Same set of issues are applicable for IFIs. exports (based on outsourcing production) in Turkey and North African countries etc. However.

Establish and participate in supervisory colleges for ‘systemically important’ international financial institutions. • Measurement of capital and liquidity buffers for ‘systemically’ important financial institutions in developing as well member countries needs to follow a differentiated as well as variable approach. Financial Stability Board (broader mandate) Assess vulnerabilities of the financial system. identify and oversee correction • It appears that. • It does not appear that there are ‘systemically important’ international financial institutions with country of origin in member countries. • none 8. Undertake review of the policy development work of standard-setting bodies. • However. at this stage. FSB will mainly focus attention on assessment of vulnerabilities mainly in developed countries. there are some banks which have ‘large’ market shares at the regional level. at the GCC level. it is unlikely that FSB will have enough resources to undertake even a regional assessment. • none 42 . • In the near-term. Analysis of IFIs Issues Issues for Honorable Governors III 6. • none • is it likely that work of FSB will mainly concentrate on financial sector issues in developed countries while IMF will focus on related issues in developing countries? 7. • There are no IFIs which can be considered as ‘systemically’ important international financial institution. a partnership between standard-setting bodies of Islamic finance (such as AAOIFI and IFSB) and FSB will be desirable. • There is need to establish a strong network between international and national/ regional standard-setting bodies. • In order to address niche IFIs needs.G-20 Reform Agenda Analysis of National/ Regional Issues • In addition to normal commercial banks. countries have also set-up specialized banks serving the financing needs of a particular sector.

including Indonesia. • none • How can be non-G-20 countries with ‘significant’ presence of international banks better liaise with FSB? 43 . Saudi Arabia and Turkey. • So far. Analysis of IFIs Issues • IDB along with IFSB is collaborating with World Bank / IMF on a gap study for developing an Islamic finance template plate in FSAP. Issues for Honorable Governors • Will member countries of IDB support inclusion of Islamic finance template in FSAP in the Boards of World Bank and IMF? 10. there are seventeen member countries that have had at least one FSAP report. • Member countries could consider establishing ‘colleges’ on specific areas with other G-20 countries to promote exchange of information on FSB activities. Analysis of National/ Regional Issues • FSAP is an important tool for assessing risk and vulnerabilities as well as formulating reform agenda for the entire spectrum of domestic financial sector.G-20 Reform Agenda 9. Collaborate with IMF/WB Financial Sector Assessment Program (FSAP) reports. Membership of FSB has been expanded to include all G-20 countries.

8 & 10). 11 Courtesy of Thomson Reuters. 12. 8 Courtesy of Thomson Reuters. 9 Gulf One Investment Bank: Islamic Finance: Opportunities and Challenges. 1. Islamic Equity Index7 Performance of Islamic Equity Fund Index10 Islamic Equity in Emerging Markets8 Performance of Islamic Money Market Fund Index vs. December 2008 (p. No. Courtesy of Thomson Reuters. 10 Courtesy of Thomson Reuters. The Mckinsey Quarterly 2007 (p. 2001-056 Growth of Islamic Mutual Funds9 World Equity vs. Research Bulletin Vol.Part 5: Performance of Islamic Finance During Global Crisis A Small But Increasing Share. 44 . 107). LIBOR USD 3 Months11 6 7 Rethinking Regulation for Islamic Banking.

In many IDB member countries. there appears to be no ‘decoupling’ between performance of aggregate measures of Shariah-compliant financial assets and their conventional counterparts. it has been estimated that size of Shariah-compliant assets is close to $1 trillion. As a result of Shariah-prohibition to trade in debt instruments. following critical issues have emerged: (i) need to minimize the severity and frequency of crises. No.12. and (ii) heighten the resilience Islamic Financial Intermediation in IDB Member Countries in 2007: Which Way to Grow?14 • • • • 12 13 Gulf One Investment Bank: Islamic Finance: Opportunities and Challenges. Currently. 8). Research Bulletin Vol. which is still less than 1 percent of global financial assets. the share of Islamic financial intermediation is small but with a rapidly growing market share. Courtesy of Thomson Reuters. however. A striking feature is. various estimates put the growth of Islamic financial intermediation in the range of 10 to 20 percent per annum. Islamic financial institutions worldwide have escaped unscathed the first-order impact of the global financial crisis. Supplement. December 2008 (p.Quarterly Global Sukuk Issuance. In the on-going financial and economic crises. during the crisis-period. October 2008. 2006-200812 Performance of CIMB Sukuk Index13 Part 5: Prospects for Islamic Financial Intermediation in the Post-Crisis World Analysis • Islamic financial institutions number over 300 in more than 75 countries worldwide. 45 . This is probably due to mimicking of conventional financial assets as Shariah-compliant assets as well as due to arbitrage by investors in different financial assets. 14 Based on data from The Banker Magazine: Top 500 Islamic Financial Institutions. In recent years. that. 1.

In repairing institutions and reforming global financial system. To what extent the rapid growth of Islamic finance was partly due to build-up of current account surpluses in some GCC countries and IDB member countries in the ASEAN bloc? 2. and (ii) to engender market-based discipline by promoting financial engineering in which intermediaries obtain returns and share in risk-taking with their borrowers. is it an opportune moment to mainstream Islamic finance in the national financial system? At the regional level? 4. Given the scale of destruction of global financial assets. Islamic finance has following insights to offer: (i) to forge explicit and consistent linkage between growth in international finance and in the real sector. In this context.of global financial system to shocks. Issues for Honorable Governors 1. Given the distinct possibility of reduced cross-border capital flows. Member countries at the top end of this corner can potentially improve the resilience of their financial system (a movement in the north-eastern direction) by supporting an enabling environment for Islamic finance. how can fundamental insights of Islamic finance become part of the international discourse? 3. will be next growth frontier of Islamic finance arise from developing and serving the pro-poor niche or segment? 46 . • Within overall financial intermediation. For the rest. sequencing of financial sector reforms will be a critical issue which will depend on country-specific conditions. share of Islamic banks in selected IDB member countries appears to be concentrated in the south-western corner (refer to graph on this page).

ICIEC trade credit guarantees and ITFC import financing. Should IDB Group develop instruments to support countercyclical financing? As a result of slowdown in economic activities. Infrastructure IDB-OCR. typically more Can ITFC financing be ‘concessional’ than commercial considered as BoP support and counterparts. but support capacity building for catalytic role of Zakah and Awqafs. Bank recapitalization Existing instruments in IDB Group Issues for Honorable Governors None. Balance of payments support ITFC. countries are prepared to accept Ordinary financing for supporting projects in awqaf sector? Is it desirable that Zakah institution is integrated with poverty reduction programs? vi. volume or pricing of trade financing? iii.Part 6: Expanded Mandate for MDBs: What are the Key Strategic Implications for IDB Group? Expanded mandate of the MDBs: to support economic growth and development by prioritizing legitimate needs from financing: i. repayments are rescheduled. repayments due to IDB Group need to be considered as eligible for debt rollover? To what extent. Debt rollover vii. Under what circumstances. Equity investments in Islamic banks. 47 . ICIEC and ICD financing and investment guarantees both in public and private sectors. Countercyclical spending ii. accorded preferred creditor status? For stressed countries. are there any anticipated ‘stressed’ Islamic banks? Is there a likelihood of ‘widespread’ cut-backs in counterpart financing for longer term infrastructure projects? Is falling growth in exports due to drop in final demand. Safety nets and social support None. Trade finance v. could develop Shariahcompliant fiscal support instruments. iv.

1 bn. Doubling to 30% for the same period will yield $11. Operations Plan of IDB-OCR is planned for annual 15% during 2009-11. Both AfDB and AsDB are projecting total lending (i. IDB appears to be closer to AfDB than other MDBs. will ‘pricing’ of attracting external private debt flows remain a key concern? Issues for Honorable Governors Compared to other MDBs. In case of AfDB: lending volumes are projected to increase from $10. ‘Disbursed & Outstanding Loans’ of AfDB are higher by about 13 percent. relative to IDB. Compared to IDB.5 bn by 2011.2 times and 2. AfDB pre-crisis and crisis-related lending volume is 1. AsDB has almost twice the ‘Equity Capital’ and six times bigger in terms of ‘Development Assets’. yielding $8.e. will it be appropriate to double planned growth in IDB’s Operations Plan? Will member countries prefer a To what extent MDBs-sponsored joint programming engagement projects will be protected from with all MDBs? potential cutbacks in counterpart funds? 48 .8 bn in 2009 to $20. is IDB well positioned to scaleup development assistance in response to crisis-related needs of member countries? Compared to other MDBs.e. In the medium-term.7 bn.1 bn by 2011 and in case of AsDB: lending volumes are projected to increase from $21 bn in 2009 to $43.8 times relative to the IDB.3 times. With assumed 15% growth of IDB-OCR. IDB is the least leveraged institution. Compared to IDB. i. 2008): Relative Position of IDB vis-à-vis Other MDBs Post-Crisis Period (20092011): Relative Position of IDB vis-à-vis Other MDBs Post-Crisis Period: Relative Position of IDB vis-à-vis African and Asian Development Banks Analysis In terms of major financial indicators. almost 100 percent increase due to crisis-related lending. Among the MDBs. respectively. pre-crisis + crisis-related) to double during 2009 to 2011.Pre-Crisis Period (end Dec. then overall AfDB lending volume is 1. If 30% annual growth of IDBOCR is assumed.

A.Regional and Economic Groupings of IDB Member Countries Least Developed Member Countries (LDMC-28) Non-Least Developed Member Countries (Non-LDMC-28) Sub-Saharan Africa Member Countries (SSA-22) Middle East and North Africa Member Countries (MENA-19) Asian Member Countries (ASIA-8) Central Asian Member Countries (CA-6)1 Afghanistan Albania Azerbaijan Bangladesh Benin Burkina Faso Chad Comoros Djibouti Gambia Guinea Guinea Bissau Kyrgyz Rep. 49 .A.E. Yemen Afghanistan Azerbaijan Bangladesh Brunei Indonesia Malaysia Maldives Pakistan Suriname Kazakhstan Kyrgyz Tajikistan Turkmenistan Uzbekistan Note: in IDB Classification.E. Maldives Mali Mauritania Mozambique Niger Palestine Senegal Sierra Leone Somalia Sudan Tajikistan Togo Uganda Uzbekistan Yemen Rep. 1 Algeria Bahrain Brunei Cameroon Cote d’Ivoire Egypt Gabon Indonesia Iran Iraq Jordan Kazakhstan Kuwait Lebanon Libya Malaysia Morocco Nigeria Oman Pakistan Qatar Saudi Arabia Suriname Syria Tunisia Turkey Turkmenistan U. Countries-in-Transition (CIT) includes Albania plus the six Central Asian member countries. Benin Burkina Faso Cameroon Chad Comoros Cote d’Ivoire Djibouti Gabon Gambia Guinea Guinea Bissau Mali Mauritania Mozambique Niger Nigeria Senegal Sierra Leone Somalia Sudan Togo Uganda Algeria Bahrain Egypt Iran Iraq Jordan Kuwait Lebanon Libya Morocco Oman Palestine Qatar Saudi Arabia Syria Tunisia Turkey U.