IMF study notes CBDC design may impact the Islamic banking system

A study by the IMF agency noted that a fully Islamic banking system may not find CBDC as a friendly financial system. 

In the present time, more than 100 Central Banks are working on the Central Bank Digital Currency (CBDCs), to bring advancement in their existing traditional digital payment systems. Different Central banks are designing different model based CBDCs. 

Recently the International Monetary Fund (IMF) published a study on CBDC to address the issues associated with the CBDC design for the Islamic banking system.

The study noted that 34 islamic countries are systemically important in 15 jurisdictions that account for 2% of global finance. Iran and Sudan, have fully Islamic banking systems. But only 10 countries with an Islamic financial presence are currently considering the development of CBDCs.

In the Islamic financial system, there are some complicated laws and those laws are not friendly with the alternative digital payment & financial system. In short, CBDC may not support the Islamic financial system.

IMF study noted that CBDC design may impact liquidity management in the Islamic financial system.

“Conventional mechanisms of liquidity management — interbank market, secondary market financial instruments, central bank discount window and Lender of Last Resort (LOLR) — that are based on interest are not permissible for Islamic banks,” an IMF study read.

The study also found that CBDC cannot be used in foreign exchange derivatives transactions in the Islamic liquidity management instruments. 

The report noted that the financial & banking infrastructure of the Islamic financial system is not fully digitally developed and also holds the majority of the money in the form of cash, so entry of CBDC in the Islamic financial system may bring a threat to the dominance of banks. 

Since late 2021, many Islamic countries have shown significant Inclination toward the crypto sector. In particular, The Middle East and North Africa region brought crypto-friendly proposals & welcomed many crypto companies to boost digital innovations.

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