The International Monetary Fund recently published a study that claimed a Central Bank Digital Currency (CBDC) could impact monetary policy in different ways.
The study indicated that it can bring a negative effect when it is not well designed. Although they pose many benefits, they might increase money velocity, currency substitution, and even alter capital flows even when they are not meant to do so. Such effects are relatively more visible when it comes to the Islamic banking system.
Issuing a non-income generating or unpaid CBCD does not alter the basic objective or operational framework of monetary policy. There are proposed designs for CBDCs that are said to reduce the disintermediation risks, but many scholars have opined that such updates made on the monetary policy are still insufficient.
Although the Islamic banking system is significant in 15 major jurisdictions and is currently encouraged across 34 countries in the world, it still only accounts for less than 2% of worldwide finance.
Currently, only two countries such as Sudan and Iran are promoting and following Islamic banking systems to their fullest. As per reports, countries like Iran, where people depend on Islamic financial products to engage further in businesses that promote Islamic Sharia (Islamic law), are currently open to CBDCs.
CBDC concept is usually applied in its simplified form, but it is rather complicated when they get merged with Islamic law on speculation and usury, two diversions that are strictly prohibited in Islam. These factors strongly impact liquidity management.
Here, the prohibition on speculation intends to imply that generally Central Bank Digital Currencies are neither used nor encouraged to use for foreign exchange derivatives transactions.
But these theories as well as other Islamic liquidity management instruments and principles like Sukuk (Islamic bond), Tawarruq, Murabaha (cost-plus financing), Musharaka (joint partnership), Mudaraba (partnership in profit, but in compliance with Islamic Sharia), continue to develop slowly.
As per the statement made by the authorities of the International Monetary Fund, these limitations are due to the “controlled standardization of Islamic banks”, and its “sharia-compliance complexities.”
The study further invited the public’s attention to the fact that until now, there have been many countries that possess “underdeveloped financial sectors’ ‘ but there are only a few countries that have adopted Islamic banks.
In addition to it, the IMF explained that “interest-based” conventional or traditional liquidity management mechanisms such as “secondary market financial instruments, the central bank discount window, Lender of Last Resort, and the interbank market are prohibited in Islamic banks.
Furthermore, the study found that the issue with many of the countries is that they lack a proper infrastructure for Islamic banking, which hinders any further development in this sector. According to the study, this can result in the hoarding of cash in Islamic banks.
This happens because Islamic banks function on a basic principle that denies any kind of engagement in business or transactions that contain Riba (interest).
Since Islamic banks promote an interest-free mode of payment, which is halal (in compliance with Islamic law), neither their deposits nor their CBDC would pay interest, which leads to an increased risk of ‘bank disintermediation.”
Not only in the CBDC design, but several scholars have also reacted to the role of cryptocurrency in the Islamic world. While a group of people, especially from the North African region and the Middle East have begun to accept cryptocurrency.
But others in the same region have displayed stagnation against crypto adoption, meaning the reaction to crypto has been not uniform within the Islamic world. In fact, Islamic scholars themselves have varied opinions.
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For instance, the Indonesian National Ulema Council, one of Indonesia’s top Islamic Scholar bodies, stands as a pillar between its people and the structural framework of crypto as they totally oppose the thought of adopting cryptocurrency in the Islamic world.
But in contradiction to the Indonesian Islamic body, the Malaysian Shariah Advisory Council encourages others to take advantage of halal-approved crypto products.
DeFi platforms have recently been showing much interest in crypto products that work in accordance with Islamic law. They have tracked down numerous users looking for halal-approved cryptocurrencies.
In the wake of halal crypto products, the Australian-based crypto platform MRHB, which was launched in 2020, made several headlines as it released a statement promoting halal-approved cryptocurrency products on its national platform. By the end of 2022, they also released a string of new products which go well with Islamic Sharia.
In addition to these countries, Iran has also shown interest in supporting the usage of crypto, particularly for foreign trade.
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