ISFIRE

REVIEW

INTERNATIONAL
FINANCIAL INSTITUTIONS
INCREASING ACCEPTANCE
FOR ISLAMIC FINANCE
Ahmed Ali Siddiqui
Group Head, Shariah Compliance, Meezan Bank
Samia Tahir Jawad
Research Associate, IBA Centre for Excellence in Islamic Finance

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During the last 40 years, Islamic finance has emerged as an
effective alternative for conventional financing around the
world. The sector is growing rapidly into areas like trade, real
estate, manufacturing, banking and infrastructure. Muslim as
well as non-Muslim countries are adopting Islamic Finance
and its products for financing and catering the needs of those
customers who want Shari’a compliant and ethical financial
products. Islamic financial products are directly linked with real
assets and real economy, and mostly involve trade, rental or
profit and loss sharing contracts while interest in any form is
prohibited.
The emergence of Islamic finance across global markets has
gained attention of several international financial institutions
like World Bank, International Monetary Fund (IMF) and Asian
Development Bank (ADB) and they now acknowledge Islamic
finance for its sustainable and ethically responsible nature.
These organisations have realised that Islamic finance has
potential to help in issues like poverty elimination and boosting
prosperity in developing countries.
THE GLOBAL ISLAMIC
FINANCE INDUSTRY SHOWED
RESILIENCE DURING
PANDEMIC. ACCORDING TO
INTER-COOPERATE DEPOSIT
ICD REFINITIVE ISLAMIC
FINANCE DEVELOPMENT
REPORT 2022, THE TOTAL
ISLAMIC FINANCE ASSETS
BOOSTED TO US$4 TRILLION
WITH A 17% ANNUAL
GROWTH RATE.
The global Islamic finance industry showed resilience during
pandemic. According to inter-Cooperate Deposit ICD Refinitive
Islamic finance development report 2022, the total Islamic
finance assets boosted to US$4 trillion with a 17% annual
growth rate. The global Islamic banking sector grew by 17% to
US$2.8 trillion. Sukuk, the second largest sector by assets, grew
by 14% in 2021 to US$713 billion in sukuk outstanding. New
issuance rose by nine percent to a record US$202.1 billion. The
issuance of Environmental, Social, and Governance (ESG) sukuk
in 2021 reached a new high of US$5.3 billion. Islamic funds, the
third biggest sector, saw standout growth of 34% to US$238
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billion worth of assets under management in 2021. The takaful
industry grew by US$73 Billion during 2021 with a growth of
17% during the year.
World Bank is directly involved with Islamic finance since early
2005 and is continuously supporting the sector. The World
Bank had established its Global Islamic Finance Development
Center by 2013 in partnership with government of Turkey to
serve as a knowledge hub for development of Islamic finance
globally. The main role is to conduct research and training and
to provide technical assistance and advisory services to the
World Bank Group client countries interested in developing
Islamic financial institutions and markets.
Every year, the World Bank and AAOIFI (Accounting and
Auditing Organisation of Islamic Finance Institute), Bahrain
jointly organise an international conference in Bahrain in which
representatives from World Banks’ Islamic Finance department
participate and present their views and efforts on Islamic
finance. In 13th annual conference, Mr Ahmed Rostom, Senior
Financial Sector Specialist, World Bank presented the efforts
made in Islamic finance by World Bank and assure that World
Bank will increase its participation in Islamic finance and help
those countries who want Shari’a compliant solutions for their
financial needs.
The World Bank has also signed Memorandum of Understanding
(MoU) with The General Council for Islamic Banks and Financial
Institutions (CIBAFI), in July 2015. This MoU served as
foundation for cooperation between the World Bank and Islamic
Financial institutions in the areas of knowledge generation and
dissemination; sharing of experience; encouraging research
and promoting awareness; and enhancing capacity in the
Islamic financial services industry. Since then, World Bank is
also using Shari’a compliant products to help eliminate poverty
and fostering shared prosperity. The World Bank Group has
financed and supported several projects through Islamic
financing during last two decades which includes US$250
million, a line of credit to TSKB (Turkiye Sinai Kalkinma Bankas) ,
a private Development and Investment bank in Turkey, financing
for Jordan’s SMEs sector, murabaha financing facility of US$450
million to Natrindo Telepon Selular (NTS) in Indonesia and a
political risk insurance for a project in Djibouti was provided by
Multilateral Investment Guarantee Agency (MIGA) was funded
through an Islamic financing structure.
The World Bank Group had also entered the Islamic capital
market as an issuer of sukuk with two issues of sukuk in 2005
by the World Bank Treasury and the International Finance
Cooperation (IFC) respectively in Malaysia. IFC has also
issued its first US$100 million sukuk in Dubai and Bahrain. In
2014, the World Bank serves as treasury manager for IFFIm
(the International Finance Facility for Immunization) to issue
US$500 million sukuk. These sukuks proved to be socially
responsible and ethical alternatives for interest bearing bonds
and tapped a large number of investor base among Muslim as
well as non-Muslim countries.
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International Monetary Fund (IMF) also acknowledged the rapid growing demand for Islamic financing by its member
countries. The former Managing Director Christine Lagarde, addressed in the Islamic Finance Conference, Kuwait City,
Kuwait; November 11, 2015 on potential of Islamic finance, she stated; “We at the IMF are keen to participate, to listen,
to collaborate, innovate, and develop the promise of Islamic finance in a sound and sustainable way, by managing risks
appropriately and ensuring financial stability”.

“WE AT THE IMF ARE KEEN TO PARTICIPATE, TO LISTEN, TO

COLLABORATE, INNOVATE, AND DEVELOP THE PROMISE
OF ISLAMIC FINANCE IN A SOUND AND SUSTAINABLE WAY,
BY MANAGING RISKS APPROPRIATELY AND ENSURING
FINANCIAL STABILITY”. (BY CHRISTINE LAGARDE,
FORMER MANAGING DIRECTOR IMF)

In February 2017, the International Monetary Fund’s (IMF) executive board held its first formal discussion on Islamic
finance and adopted a set of proposals on the role that the IMF should play in this area. IMF played a vital role in the
establishment of Islamic Finance Service Board (IFSB) to provide regulatory guidelines for central banks on Islamic finance.
IMF Executive Board has also endorsed a proposal on the use of the core principles for Islamic Finance Regulation (CPIFR)
in 2018, which were developed by the Islamic Financial Services Board (IFSB) with the participation of the Secretariat
of the Basel Committee on Banking Supervision. An Interdepartmental Working Group was formed by IMF with an
objective of building institutional view on Islamic finance industry and train people to build in house expertise in Islamic
Finance and make policies to better coordinate with the stakeholders in the industry. This working group is focusing on
analytical work in the key areas of Islamic finance including Islamic banking regulations and supervision, macro-prudential
policy, financial inclusion, consumer protection, monetary policy, sukuk markets, public financial management, and tax
policy.

IMF has also established an External Advisory Group, comprised of standard-setters for Islamic finance and leading
international experts, to assist in identifying policy issues and to enhance coordination with different stakeholders
interested in Islamic finance.

IMF is now actively engaged in regulation activities in countries where Islamic finance is now deemed to be systemically
important and is focusing to enhance the consistency in applying Shari’a rules across all Shari’a-compliant products to
ensure smoother growth and financial stability.

Asian Development Bank as a policy supported Islamic Finance to ensure sustainable development and reduce poverty
across its member countries. ADB has 14 member countries having majority Muslim population including five countries
with biggest Muslim population globally. After realising the Asia’s vast investment needs, ADB not only recognised
the potential of Islamic finance to promote sustainable development in the region but also offer funds & financing for
infrastructure and green and ethical investment in the member countries.

ADB also offers support to member countries by assisting through Technical Assistance (TA) for assessment and
development of regulatory and supervisory frameworks. ADB also built a cooperation with standard setting organisation
like Islamic Financial Services board IFSB to assist its member countries about use of best international standards in
Islamic finance. In July 2021, ADB Trade and Supply Chain Finance Program (TSCFP) has signed an agreement with Dubai
Islamic Bank Pakistan Limited (DIBPL) to support trade in Pakistan. Most importantly, ADB is working with developing
countries for financial innovation, financial inclusion and help them to strengthen their Islamic financial sector and
address the challenges related to this particular sector.

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THE WORLD BANK, IMF AND ADB’S INVOLVEMENT IN

ISLAMIC FINANCE DURING THE LAST 17 YEARS HAS
INCREASED DUE TO ITS UNIQUE PROFIT & RISK SHARING
NATURE AND ETHICAL FEATURES AND THESE INSTITUTIONS
NOW APPRECIATE THE ROLE OF ISLAMIC FINANCE GLOBALLY
FOR SUSTAINABLE GROWTH.

It is evident that IMF, World Bank and ADB has not only
accepted Islamic finance as viable financial system but also
promote it as a tool for shared prosperity. This also presents
an opportunity for Pakistan to explore options with IMF,
World Bank & ADB to provide financing on Shari’a compliant
modes that can help Pakistan in conversion of country’s
external debt Islamic financing modes.

The World bank, IMF and ADB’s involvement in Islamic

finance during the last 17 years has increased due to its
unique profit & risk sharing nature and ethical features and
these institutions now appreciate the role of Islamic finance
globally for sustainable growth. The growing demand for
Shari’a compliant products will boost the share of Islamic
assets globally. The growth of Islamic finance also presents
an opportunity to expand financial markets, strengthen
financial inclusion and creation of new funding sources.

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