During the last 40 years, Islamic finance has emerged as an effective alternative to conventional financing around the world. Islamic Financial products are directly linked with real assets and the real economy and mostly involve trade, rental or profit and loss sharing contracts while interest in any form is prohibited.

The emergence of Islamic finance across global markets has gained the attention of several international financial institutions like the World Bank, International Monetary Fund (IMF) and Asian Development Bank (ADB). They now acknowledge Islamic finance for its sustainable and ethically responsible nature. These organisations have realised that Islamic finance has the potential to help in issues like poverty elimination and boosting prosperity in developing countries.

The global Islamic finance industry showed resilience during the pandemic. According to the Islamic Corporation for the Development of Private Sector (ICD) of the Islamic Development Bank Group Refinitive Islamic finance development report 2022, the total Islamic finance assets boosted to $4 trillion with a 17 per cent annual growth rate. The global Islamic banking sector grew by 17pc to $$2.8tr.

Sukuk, the second largest sector by assets, grew by 14pc in 2021 to $713 billion in Sukuk outstanding. New issuance rose by 9pc to a record $202.1bn. The issuance of environmental, social and governance (ESG) Sukuk in 2021 reached a new high of $5.3bn. Islamic funds, the third biggest sector, saw standout growth of 34pc to $238bn worth of assets under management in 2021. The takaful industry grew by $73bn in 2021, with growth of 17pc during the year.

Pakistan has the opportunity to explore options that can help convert the country’s external debt to Shariah-compliant products

World bank has been directly involved with Islamic finance since early 2005 and continuously supports the sector. The World Bank established its Global Islamic Finance Deve­lopment centre in 2013 in partnership with the government of Turkiye to serve as a knowledge hub for the development of Islamic finance globally.

Its main role is to conduct research and training and to provide technical assistance and advisory services to World Bank Group client countries interested in developing Islamic financial institutions and markets.

Every year the World Bank and the Accounting and Auditing Organisation for Islamic Financial Institutions, Bahrain, jointly organise an International conference in Bahrain in which representatives from the World Bank’s Islamic Finance department participate and present their views and efforts on Islamic Finance.

The World Bank also signed a Memorandum of Understanding (MoU) with The General Council for Islamic Banks and Financial Institutions in July 2015. Since then, World Bank has been using Shariah-compliant products to help eliminate poverty and foster shared prosperity.

The World Bank Group has financed and supported several projects through Islamic financing during the last two decades, which includes $250 million, a line of credit to TSKB, a private Development and Investment bank in Turkiye and the financing for Jordan’s small and medium enterprises sector.

The World Bank Group had also entered the Islamic capital market as an issuer of Sukuk with two issues of Sukuk in 2005 by the World Bank Treasury and the International Finance Corporation (IFC), respectively, in Malaysia. IFC has also issued its first $100m Sukuk in Dubai and Bahrain.

In 2017, the IMF’s executive board held its first formal discussion on Islamic finance and adopted a set of proposals for its role in this area. IMF played a vital role in establishing the Islamic Finance Service Board (IFSB) to provide regulatory guidelines for central banks on Islamic finance.

The IMF executive board has also endorsed a proposal on the use of the core principles for Islamic Finance Regulation in 2018, which were developed by the Islamic Financial Services Board (IFSB) with the participation of the Secretariat of the Basel Committee on Banking Supervision.

IMF formed an Interdepartmental Working Group to build an institutional view of the industry and train people to build in-house expertise in Islamic Finance and make policies to better coordinate with the stakeholders in the industry. This working group focuses on analytical work in the key areas of Islamic finance, including Islamic banking regulations and supervision, macro-prudential policy, financial inclusion, consumer protection, monetary policy, Sukuk markets, public financial management, and tax policy.

IMF has also established an External Advisory Group, comprised of standard-setters for Islamic finance and leading international experts, to assist in identifying policy issues and enhance coordination with stakeholders interested in Islamic finance.

IMF is now actively engaged in regulation activities in countries where Islamic finance is now deemed systemically important and focuses on enhancing the consistency in applying shariah rules across all shariah-compliant products to ensure smoother growth and financial stability.

The ADB, as a policy, supports Islamic finance to ensure sustainable development and reduce poverty across its member countries. ADB has 14 member countries with Muslim-majority populations, including five countries with the biggest Muslim population globally.

After realising Asia’s vast investment needs, ADB recognised the potential of Islamic finance to promote sustainable development in the region and offer funds and financing for infrastructure and green and ethical investment in the member countries.

Most importantly, ADB is working with developing countries for financial innovation and inclusion and helping them to strengthen their Islamic Financial sector and address the challenges related to this particular sector.

The World Bank, IMF and ADB’s involvement in Islamic finance during the last 17 years has increased due to its unique profit and risk-sharing nature and ethical features. These institutions now appreciate the role of Islamic finance globally for sustainable growth.

The growing demand for Shariah-compliant products will boost the share of Islamic assets globally. The growth of Islamic finance also presents an opportunity to expand financial markets, strengthen financial inclusion and create new funding sources.

It is evident that IMF, World Bank and ADB have accepted Islamic finance as a viable financial system and promote it as a tool for shared prosperity. This also presents an opportunity for Pakistan to explore options with the IMF, World Bank and ADB to provide financing on Shariah-compliant modes that can help Pakistan convert the country’s external debt to Islamic financing modes.

Ahmed Ali Siddiqui is the director, and Samia Tahir Jawad is a research associate at the Institute of Business Administration’s Centre for Excellence in Islamic Finance

Published in Dawn, The Business and Finance Weekly, March 6th, 2023