Tuesday 16, May 2017 by William Mullally

IDB/World Bank report details role of Islamic finance in ending poverty

The report, subtitled “Islamic Finance: A Catalyst for Shared Prosperity?”, was unveiled by IDB Group President, Dr Bandar Hajjar, during a news conference on the sides of the 42nd Annual Meeting of the IDB Group in Jeddah, Kingdom of Saudi Arabia.

A report jointly published by the Islamic Development Bank (IDB) Group and World Bank Group has outlined the potentials of Islamic finance in curbing income inequality and ending poverty worldwide.

The report, subtitled “Islamic Finance: A Catalyst for Shared Prosperity?”, was unveiled by IDB Group President, Dr Bandar Hajjar, during a news conference on the sides of the 42nd Annual Meeting of the IDB Group in Jeddah, Kingdom of Saudi Arabia.

It details the trends in Islamic finance, identifies the major challenges hindering the industry’s growth, and recommends policy interventions to leverage Islamic finance for fostering shared prosperity and ending poverty.

Prof. Mohamed Azmi Omar, Director General of the Islamic Research and Training Institute (IRTI) of the IDB Group, and Dr Zamir Iqbal, head of World Bank Global Islamic Finance Development Center in Istanbul, presented findings and recommendations of the report during separate sessions on the sides of the IDB Group Annual Meeting.

“The IDB Group and World Bank collaborated to produce this comprehensive report to serve as a useful guide to all stakeholders in the efforts to leverage Islamic finance for fostering shared prosperity, promoting development, reducing income inequalities, and, ultimately, ending poverty,” Prof. Azmi Omar said.

The report outlines a theoretical framework to analyze Islamic finance based on four fundamental pillars, namely institutional framework and public policy oriented to the objectives of sustainable development; prudent governance and accountable leadership; promotion of the economy and entrepreneurship based on risk sharing; and financial and social inclusion, promoting development, growth, and shared prosperity.

Key recommendations of the report include having adequate policy interventions and financial infrastructure; creating a level playing field for Islamic equity instruments; and creating institutions and governance systems for the Islamic social finance sector which comprises zakat, awqaf and Islamic microfinance.

The report notes that the Islamic banking sector needs innovative risk-sharing products and services; enhanced scale and access to Islamic finance; improved liquidity and stability; and bolstered human capital and literacy in Islamic finance.

The development of capital markets with wider access to the public under a strong legal and governance framework is desirable for the Islamic finance sector, especially given that sukuk bonds offer great potential for promoting financial inclusion and mobilizing funds for development, the report adds.

It further notes that Islamic non-bank financial institutions should provide Islamic financial services in countries where establishing Islamic banks is not possible due to legal and regulatory restrictions.

On the prospects of Islamic social finance, the report estimates that for most countries in South Asia, Southeast Asia and Sub-Saharan Africa, the resource needs to alleviate deprivation could be met if the potential of Islamic social finance were realized.

The report also provides an overview of recent policy initiatives taken by several IDB member countries in the enactment and implementation of policies to promote shared prosperity. These include integrating the Islamic financial sector development within the national development plans; improving the alignment of the national-level banking regulations with the principles issued by international Islamic financial infrastructure institutions; establishing diversified financial institutions; and promotion of financial inclusion through Islamic social finance.

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