Mar 27 2009
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Islamic Development Bank chief urges G-20 to assess Islamic finance
Ali was echoing calls by the Islamic finance industry experts that the faith-based alternative investment model has something to offer to the global financial system, which has been teetering on the brink of meltdown following the impact of a credit crunch as a result of risky investments in junk derivatives such as subprime CDOs (collateralized debt obligations) in the US.
The IDB president told an Islamic Financial Architecture Colloquium hosted yesterday by Lord Mayor of the City of London Ian Luder at his official headquarters that it is time that the wider world should consider mainstreaming Islamic financial services. And the best way to do this is to accord the relevant Islamic finance stakeholders "observer status" within the framework of the G-20 and the expanded Financial Stability Forum of the International Monetary Fund (IMF).
G-20 states, which include three IDB -member countries in Saudi Arabia, Indonesia and Turkey, meet in London on April 2 to discuss further measures to mitigate the impact of the global financial crisis and the resultant economic slowdown and to put measures in place to pre-empt such crisis in the future. This follows a string of economic and financial stimulus packages; fiscal packages and even quantitative easing.
Last year the IDB set up its own Islamic finance and global financial stability task force to report on the impact of the global financial crisis on the Islamic financial services industry.
According to Ali, these documents would be presented to the G-20 leaders and to the Financial Stability Forum for consideration and in support of getting the Islamic finance stakeholders a representation at the top table.
Zeti is a member of the United Nations Secretary-General's Global Financial Stability Committee, and she has pledged to articulate this potential role of Islamic finance in the global system and its intrinsic strengths. The IDB president stressed that stability is a major concern to the global financial community. The root cause of instability as we are witnessing currently is a "defective governance framework" that affects behavior.
"The major selling proposition of Islamic finance is its strong ethical foundation. Financial stability also requires to go back to basics under a new leadership, a special moral fiber and a character-and-integrity-based governance," he said.
However, it also entails recourse to "people values" and to "principles-oriented governance" and a strong linkage between financial services and real economic activities and transactions. It also requires a sense of responsibility and accountability. Islamic finance of course has an extra tier of compliance in the form of Shariah governance.
Ali added that the global financial crisis also reinforced the need for international cooperation and the reform of financial markets and institutions. The IDB itself has been unaffected by the crisis, but its member countries have inevitably in a globalize world been affected by the contagion effect of the credit crunch and the ensuing economic slowdown.
As such since the demand for Islamic financial services is primarily related to the real sector, any slowdown in the real economy could have a relatively significant adverse impact on the demand for these services.
Although Islamic financial institutions, he concluded, have shown relative resilience to the current financial crisis, "its soundness in the future and its contribution to global financial stability is an important ongoing concern."
By Mushtak Parker
© Arab News 2009
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