World Bank explores role of Islamic finance in development

The Islamic finance assets grew at an annual rate of 17 per cent during 2009-2013 and are estimated to exceed $2 trillion. — AFP/file

Practical measures are required to enhance the contribution of the sector, it said.

The Islamic finance assets grew at an annual rate of 17 per cent during 2009-2013 and are estimated to exceed $2 trillion.

The Islamic finance, the potential source of development finance, is often overlooked, according to the study.

The Millennium Development Goals set the stage for global support of ambitious development goals behind which the world must rally. The sustainable development goals bring forward the unfinished business of millennium development goals (MDGs) and go even further.

Developing countries are expected to speed up reforms to spur growth and improve MDG-related service delivery, while donors would provide larger financial resources and international trade access.

The OECD’s Development Assistance Committee (DAC) countries are expected to reach their commitment of providing Official Development Assistance equal to 0.7pc of Gross National Income (GNI).

The estimated $15 trillion in losses from the global financial crisis highlight the vulnerability of the financial sector.

Islamic finance seeks to ensure that financial practices and their accompanying legal instruments comply with Shariah that provides a comprehensive approach to various aspects of life, including economic dealings.

In addition to legal rules, Shariah also provides moral principles relating to economic activities and transactions.

A more effective role for Islamic finance in the implementation of Sustainable Development Goals would require supply of an innovative mix of products, adequate governance of Islamic finance intermediaries, and a supportive legal and regulatory framework. Based on the experience with the MDGs, and given the requirements of Islamic finance instruments for better ex-ante and ex-post understanding and scrutiny of transactions, the need for high quality data cannot be overemphasized, the study felt.

The study identified five tracks through which Islamic finance could support efforts to achieve the Sustainable Development Goals, and they are: financial stability, financial inclusion reducing vulnerability, social and environmental factors, and infrastructure finance.

The role of the Islamic financial industry in supporting the Sustainable Development Goals will depend on the extent to which stakeholders can influence its direction.

There are important factors on the demand side that are likely to change the dynamics of Islamic finance and could link it more profoundly to the Sustainable Development Goals, especially if one of the most distinctive characteristics of Islamic finance — backing financial transactions by real economic activities — is fully operationalized, the study says.

Published in Dawn, May 17th, 2015

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