Islamic Finance: Opportunities, Challenges, and Policy Options

This paper discusses policy issues and challenges in building an inclusive and safe Islamic finance industry with a focus on Islamic banking and Sukuk (bond) markets. It looks into why Islamic finance matters in current-day scenario and takes into account its recent and prospective growth. The report identifies potential contributions of the sector in terms of financial inclusion, support for small and medium enterprises, and investment in public infrastructure. It discusses a range of regulatory and other challenges that the Islamic finance industry faces and offers policy advice to address factors that hamper the development of the industry. Key findings of the study include:

• Regulatory and supervisory frameworks in many jurisdictions do not yet cater to the unique risks of the Islamic finance industry;
• Regulators do not always have the capacity or willingness to ensure Shari’ah compliance, which undermines consistency of approaches within and across borders;
• Sukuk are seen as well-suited for infrastructure financing because of their risk-sharing property and can also help fill financing gaps;
• Monetary policy formulation and implementation are challenging the presence of Islamic finance because of the scarcity of Shari’ah-compliant monetary policy instruments and a lack of understanding of the monetary transmission mechanism.