The Islamic finance system faces several key challenges if it is to unlock its huge potential and develop safely, the International Monetary Fund said on Monday. The ethical-based fast-growing sector, which bans speculation, still lacks regulatory and supervisory frameworks catering to its unique risks, the IMF said in a report.
Islamic finance - the provision of financial services in accordance with sharia law - has so far been governed mostly by frameworks developed for conventional finance, it said.
Cross-border operations of Islamic financial institutions have expanded considerably without regulatory harmonisation, the IMF said. "These developments indicate a need for increased regulatory clarity and harmonisation, closer co-operation between Islamic and conventional financial standard-setters, and further enhancement of tools for effective supervision," it said.
The industry is still largely nascent, lacking economies of scale and operating in an environment where legal and tax rules, financial infrastructure and access to financial safety nets and central bank liquidity are either absent or do not take its special characteristics into account, the IMF said.
Islamic finance bans interest, products with excessive uncertainty, gambling, short sales and financing prohibited activities considered harmful to society. The industry is also based on shared profit and loss, which minimises risk for banks and avoids dealing in debt and derivatives such as foreign exchange forwards and futures, the IMF said.
The sector has doubled in size over the past four years and is now worth more than $2 trillion (1.76 trillion euros) as demand for its products rises rapidly.
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