The design of central bank digital currencies (CBDCs) was investigated by the International Monetary Fund (IMF), which discovered certain dangers associated with Islamic banking as a result of their findings.
The analysis conducted by the IMF revealed (1), to everyone’s surprise, that the flexibility of CBDCs and foreign exchange would operate in a manner inconsistent with Islamic law.
Iran and Sudan are notable examples of the only countries in the world to have completely functional Islamic banking systems.
Nonetheless, the financial sector may be found in 34 nations and consistently plays a significant part in the legal systems of 15 jurisdictions.
Less than two percent of the world’s economy is handled through an Islamic financial system.
Along with the two nations that fully implement Islamic banking practices, eight more nations are now investigating the possibility of establishing CBDCs.
Despite the fact that several nations are still in the process of producing their own CBDCs, others have already begun testing them and distributing them to their citizens.
El Salvador became (2) the first country in the world to declare its digital money issued by its central bank to be a kind of legal cash. The CBDCs’ potential benefits, if implemented correctly, were highlighted in the IMF research.
On the other side, if they are not constructed well, the digital currencies issued by central banks might also have a negative impact on the macroeconomy.
The monetary policy implications of CBDC are the subject of fewer in-depth analyses, according to the statement made by the financial body. Instead, the focus has been on the body of literature associated with it.
The International Monetary Fund Examines the Effects of CBDCs on Islamic Banking
In the document, the IMF explains that the objectives of monetary policy as well as its operational framework, are not altered in any way by CBDCs. The following is a summary from the international financial institution:
“However, the impacts of CBDCs on monetary inflation, deposit account deregulation, volatility of bank reserves, cash replacement, and flows of capital can have bad spillovers on financial regulation.
Countries with banking systems that are dominated by tiny deposit accounts and demand deposits, low levels of mobile payments, and weak macroeconomic fundamentals are the most vulnerable.”
Per International Monetary Fund (IMF), the creation of CBDCs is made more difficult by the fact that Islamic law prohibits usury and speculation.
The committee emphasized that conventional systems of liquidity management based on interests, such as “interbank market, secondary market financial instruments, central bank discount winder and Lender of Last Resort (LOLR),” are not valid for Islamic banks.
In addition, the financial agency of the United Nations noted the fact that Islamic banks are able to gain access to interest-bearing liquidity facilities despite the limits imposed by sharia law. Traditional banking institutions are often okay with these similar kinds of amenities.
There have been rumors that CBDCs cannot be utilized for transactions involving foreign exchange futures; nonetheless, the International Monetary Fund has declared that:
“However, Islamic liquidity management instruments (ILMI) continue to expand slowly because of the limited number of Islamic banks as well as the undeveloped finance system in many of the nations.”