ADB on reforms for Islamic finance

The Asian Development Bank identifies some key barriers to the growth of Islamic finance, barriers which are most evident in emerging markets (emphasis added).[1]

‘(a) Legal and regulatory constraints. Conventional legal frameworks and institutional arrangements put into place for financing are generally not suitable for Islamic finance operations. In order to properly implement an Islamic finance system, countries must develop a holistic institutional setup that will enable Islamic banks to operate side by side with conventional banks. A harmonious interface between Islamic finance principles and the existing legal and regulatory framework is feasible, and is necessary. A number of Islamic financial products require multiple transactions (more than their conventional counterparts) to achieve functional equivalence. These transactions are subject to additional tax burdens under most existing legal and taxation systems. Thus countries that wish to develop indigenous Islamic financial markets need to consider tax and regulatory changes.

(b) Talent development and capacity constraints will continue to be a significant issue in Islamic finance for some time to come. Outside of the traditional Islamic finance markets, there are insufficient numbers of qualified Islamic finance professionals who are proficient in both finance and Islamic financial principles. Employees and management of central banks, regulators and Islamic financial institutions in emerging markets need training in modern Islamic finance principles, liquidity management in Islamic financial institutions, and risk management.

(c) Apart from traditional Islamic finance markets and sophisticated institutional investors, there is still a lack of public understanding and appreciation of Islamic finance. Many investors see Islamic finance as a type of financing for Muslims alone. Sophisticated investors can benefit from knowledge about the risk diversification benefits of Islamic financing. The poorer segments of society who have shunned conventional banking for religious considerations need to be educated about the availability of Islamic finance and the various financial products available to improve their financial future and well-being. The public generally can benefit from understanding of Islamic finance as a viable and useful method of accessing financial services, and a source of financing across a wide range of products that does have a religious basis but can be accessed and benefit clients and the country regardless of the religious beliefs of the user.’

[1] Last updated 31 March 2016, in a proposed research project: ‘Regional: Islamic Finance for Inclusive Growth’

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