According to a study published by the International Monetary Fund, A central bank digital currency (CBDC) can affect monetary policy by increasing the velocity of money, disintermediation, bank reserve volatility, currency substitution, and disrupting capital flows, even when not designed for it. The unintended impact of a CBDC can be felt especially acutely in the Islamic banking system.
The Islamic financial system represents less than 2% of global finance, but is present in 34 countries and is systemically important in 15 jurisdictions. only two countries Iran and Sudan have fully Islamic banking systems. According to the document, ten countries with an Islamic financial presence, including Iran, are studying the possibility of creating CBDCs.
The design of CBDCs is complicated by Islamic law’s prohibitions on usury and speculation. This greatly affects liquidity management:
“Conventional liquidity management mechanisms (interbank market, secondary market financial instruments, central bank discount window, and lender of last resort (LOLR)) that are interest-based are not allowed for Islamic banks.”
The speculation ban also “implies that a CBDC cannot be used for currency derivative transactions.” Meanwhile:
“Islamic liquidity management instruments […] they continue to develop slowly due to unfavorable regulations, the complexities of sharia compliance, limited standardization, the small number of Islamic banks, and underdeveloped financial sectors in many of the countries.”
In many countries there is a lack of infrastructure for Islamic banking, leaving Islamic banks with excess cash. Since neither deposits in Islamic financing banks nor halal (in accordance with Islamic law) CBDCs would pay interest, the risk of bank disintermediation increases, according to the study.
The reaction to cryptocurrency in the Islamic world has not been uniform. The Middle East and North Africa region has seen rapid growth in cryptocurrency adoption in some countries and stagnation in others. Opinions vary even among Islamic scholars. For example, the Securities Commission of Malaysia’s Sharia Advisory Council considered cryptocurrency trading permissible, while the Indonesian National Council of Ulema came to the opposite conclusion. Iranian business interests have also supported the adoption of cryptocurrencies for foreign trade.
If you are interested in the subject. Este #IM F report just came out. Monetary Policy Implications of #CBDC
Perspectives on Jurisdictions with
Conventional and Islamic Banking Systems. #Blockchain #CrossBorderPaymentshttps://t.co/BNzrfSgkxv pic.twitter.com/Gtz741Kqs0— Michel_Crypto.XDC #iso20022 (@MichelCrypto1) March 19, 2023
If you are interested in the topic. This IMF report just came out. CBDC Monetary Policy Implications
Perspectives on Jurisdictions with
Conventional and Islamic banking systems.
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