Ms. Ritu Basu, Mr. Ananthakrishnan Prasad, and Mr. Sergio L. Rodriguez
The assessment provides evidence of market segmentation across Islamic and conventional banks in the Gulf Cooperation Council (GCC), leading to excess liquidity, and an uneven playing field for Islamic banks that might affect their growth. Liquidiy management has been a long-standing concern in the global Islamic finance industry as there is a general lack of Shari’ah compliant instruments than can serve as high-quality short-term liquid assets. The degree of segmentation and bank behavior varies across countries depending on Shari’ah permissibility and the availability of Shari’ah-compliant instruments. A partial response would be to support efforts to build Islamic liquid interbank and money markets, which are crucial for monetary policy transmission through the Islamic financial system.This can be achieved, to a large extent, by deepening Islamic government securities and developing Shari’ah-compliant money market instruments.
Mr. Mumtaz Hussain, Asghar Shahmoradi, and Rima Turk
Islamic finance has started to grow in international finance across the globe, with some
concentration in few countries. Nearly 20 percent annual growth of Islamic finance in recent
years seems to point to its resilience and broad appeal, partly owing to principles that govern
Islamic financial activities, including equity, participation, and ownership. In theory, Islamic
finance is resilient to shocks because of its emphasis on risk sharing, limits on excessive risk
taking, and strong link to real activities. Empirical evidence on the stability of Islamic banks,
however, is so far mixed. While these banks face similar risks as conventional banks do, they
are also exposed to idiosyncratic risks, necessitating a tailoring of current risk management
practices. The macroeconomic policy implications of the rapid expansion of Islamic finance
are far reaching and need careful considerations.
This paper outlines the recent progress in developing Islamic financial instruments for the management of monetary policy and public borrowing requirements and provides details on new instruments currently being developed in the Islamic Republic of Iran and Sudan. The paper also touches on the institutional arrangements for interbank market operations and the design of effective central bank credit facilities that are needed under Islamic banking to support the development and operation of these new instruments.