Islamic Finance and the Role of the IMF

February 2017

Islamic finance has grown rapidly, even though it is still a small share of the global financial market. The Islamic banking segment has increased its penetration in many International Monetary Fund (IMF) member countries. It has become systemically important in Asia and the Middle East, while the global issuance of Sukuk - the Islamic equivalent of bonds - is expanding with remarkable international reach of issuers and investors. This trend is expected to continue, driven, in particular, by strong economic growth in countries with large, and relatively unbanked, Muslim populations.

Reflecting the importance of Islamic finance for many of its members, the IMF has had a long-standing interest in its implications for macroeconomic and financial stability, and played a key role in the establishment of the Islamic Financial Services Board (IFSB). The IMF has also engaged its members on the implications of Islamic finance, in the context of its policy advice and capacity development efforts, notably in the areas of regulation and supervision of Islamic banks, and development of domestic Sukuk markets.

This recent growth of Islamic finance has led to increased demand on the IMF. To foster its preparedness, the IMF has formed an Interdepartmental Working Group with the objectives to develop an institutional view on the industry, build in-house expertise and better coordinate with different stakeholders. This working group has stepped up the analytical work on Islamic finance in key areas, including Islamic banking regulation and supervision, macro-prudential policy, safety nets, resolution, financial inclusion, consumer protection, monetary policy, Sukuk markets, public financial management, and tax policy. The IMF 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.