On March 20, the International Monetary Fund (IMF) legislators issued a report on the impact of central bank digital currency (CBDC) on Islamic banks. The IMF official examined the CBDC and monetary policy’s relationship to understand its impact on Islamic banking.
The regulators observed that changes in monetary policy affect bank reserves, the flow of capital, money supply and currency exchanges. In addition, the regulators observed that the adoption of CBDC will affect the operation of Islamic banking.
Impact of CBDC on Islamic Banking
A report from the global banking sector revealed that the Islamic banking system holds a market share of 2% of the finance industry. The report stated that 34 countries across the globe depend on the Islamic banking system. Iran and Sudan rank among the top Shariah-compliant countries.
Per the report, the Iranian government is considering the adoption of CBDC. However, the financial providers argued that CBDC requirements contravene Islamic laws subjecting the Muslim states to be reluctant to implement the new central bank currency.
A statement from the head of Islamic banks revealed that the CBDC liquidity management features, including primary and secondary market financial tools, have interest-bearing features that violate Islamic laws. The report stated that CBDC fails to meet the banking standard of 15 jurisdictions, denying it the opportunity to be used in foreign transactions.
The report revealed that the existing banking regulations had limited the implementation of Islamic liquidity management tools. Also, members of Islamic banks lament that their liquidity management has failed to actualize due to complex Sharia laws and weak capital markets in developing countries.
Challenges Facing Islamic Banking
Unlike other traditional banks, the Islamic banking sector has surplus assets due to the limited number of Shariah-compliant financial providers. Most developing and developed countries fail to invest in deploying Islamic banking tools undermining the growth of Sharia finance.
Based on the Islamic bank findings, the attempt to comply with the Sharia law might trigger a high risk of bank disintermediation due to the imposed interest.
Besides the Islamic banking speculations, other Sharia-based countries in the Middle East and North Africa (MENA) have witnessed mass cryptocurrency adoption. The rise of the crypto-savvy population in Islam countries has created mixed feelings among economists and scholars.
A recent study from the Securities Commission Shariah Advisory committee in Malaysia observed that some crypto assets uphold the conformity of Islamic laws.
Elsewhere, the leading scholarly agency in Indonesia, Ulema Council, considered Bitcoin (BTC) and other crypto forbidden.