IMF report: Islamic banking can spur growth in Muslim world

September 01, 2010, Wednesday/ 16:42:00
A recent International Monetary Fund (IMF) report has argued that the rapidly growing Islamic banking sector may accelerate economic development of the Muslim world.

In their working paper “Islamic Banking: How Has it Diffused?” IMF researchers Patrick Imam and Kangni Kpodar note that Islamic banking with its finance potential can solve the problem of slow growth in the world’s Muslim nations. “We showed that Islamic banking has, in a few decades, moved from a niche market into the mainstream. Because Muslim populations are underbanked, and given the tremendous need for infrastructure projects like roads and housing across the Muslim world, [the] development of Islamic banking can spur growth in these regions and can be part of the solution to the slow development process,” they wrote in the report.

Islamic banking came as a market response to the financial needs of devout Muslims who have been looking to invest their savings in a way that does not conflict with Islam, which proscribes engaging in interest-bearing transactions, a mainstay of conventional banks. “It is an increasingly visible alternative to conventional banks in Islamic countries and in countries with large Muslim populations, such as the UK. Globally, the assets of these institutions have grown at double-digit rates for a decade, and some conventional banks have opened Islamic windows, with Shariah-compliant financial assets reaching an estimated $509 billion at end-2007,” the IMF report said, reiterating the International Organization of Securities Commissions (IOSCO) prediction that “as much as half of the savings of the world’s estimated 1.2-1.6 billion Muslims will be in Islamic financial institutions by 2015.”

According to the IMF paper, the diffusion of Islamic banking has happened in relation to increasing oil prices but also has links to economic integration with the Middle Eastern countries and proximity to Islamic financial centers Malaysia and Bahrain. “Rising interest rates hinder the diffusion of Islamic banking because they raise the opportunity cost for less devout individuals or non-Muslims to put their money with an Islamic bank,” the researchers also stated. With these findings, the report, however, refuted the wide belief that Islamic banks owe their expansion to the deadly terrorist attacks on the World Trade Center in New York on Sept. 11, 2001. “Contrary to what many observers say, our results suggest that the attacks of 9/11 were not crucial to the diffusion of Islamic banking.

Instead, the attacks coincided with rising oil prices, which appear to overshadow the significance of 9/11,” the IMF researchers noted.

In addition to that, the international organization’s report also opposed the marginal view that Islam negatively affects growth. “Much of the evidence does not support this argument. First, the Golden Age of Islam between the 9th and 15th centuries, when advances were made in science, literature, navigation, law, and philosophy, illustrates that Islamic societies are capable of progress and innovation when the right environment is in place. In fact, not only does Islam not negatively impact growth, but Islamic banking could complement conventional banks and thereby help diversify systemic risk,” the report concluded.

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