Islamic banking faces serious hurdles in trying to compete with western banks, says the International Monetary Fund (IMF). A new paper published by the global body argues that Islamic finance does not yet possess the infrastructure to compete effectively.
It says that there are currently more than 300 Islamic financial institutions spread across 51 countries, in addition to 250 mutual funds that comply with Islamic principles. Over the last decade, the industry has experienced growth rates of 10-15 per cent, a trend that is likely to continue.
Despite the rapid growth of Islamic finance in the last few years, many supervisory authorities and practitioners are unfamiliar with the process by which Islamic banks were introduced into a conventional system, it said.
Terming Islamic finance as uncharted territory for most policymakers and practitioners, the IMF paper said the current trend hinted that the sector would continue to increase its penetration and hence, policymakers and practitioners needed to become acquainted with the process and its implications for financial supervision.
As Islamic financing expands, the supervisory authorities would need to ensure that these new institutions become fully integrated with the rest of the financial system, it said.
“The integration process will not only allow Islamic institutions to operate, but also provide a comprehensive regulatory framework as well as develop a supportive financial infrastructure,” it says.
Islamic financing lacked hedging instruments, the IMF paper says, resulting in the concentration of risks in a smaller number of institutions.