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ISLAMIC DEVELOPMENT BANK
SHAPING THE POST-CRISIS WORLD:
REGIONAL IMPLICATIONS AND COORDINATED
RESPONSES BY MEMBER COUNTRIES
Proceedings of the 20th IDB Annual Symposium
9 Jumada Thani 1430H (2 June 2009)
Ashgabat, Turkmenistan
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Coordinated by:
Dr. Nosratollah Nafar
Economic Research and Policy Department
Islamic Development Bank
P.O. Box. 5925, Jeddah 21432Kingdom of Saudi Arabia
Telephone: + 9662 646 6531
Facsimile : + 9662 646 7478
E-mail : nnafar@isdb.org.sa
Home Page: http://www.isdb.org
ISSN 1658-449X
The views expressed in this document are those of the authors/speakers and do not necessarily reect the position,
views and policies of the Islamic Development Bank or its member countries.
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CORPORATE PROFILE OF THE ISLAMIC DEVELOPMENT BANK
Establishment
The Islamic Development Bank (IDB) is an international nancial institution established
in pursuance of the Declaration of Intent issued by the Conference of Finance Ministers of
Muslim Countries held in Jeddah in Dhul Qadah, 1393H ( December 1973). The Inaugural
Meeting of the Board of Governors took place in Rajab, 1395H (July 1975), and the IDB
formally commenced operations on 15 Shawwal, 1395H (20 October 1975).
Purpose
The purpose of the IDB is to foster the economic development and social progress of member
countries and Muslim communities in non-member countries individually as well as jointlyin accordance with the principles of the Shariah ( Islamic Law).
Functions
The main function of the IDB is to provide various forms of development assistance for
poverty alleviation, human development, forging economic cooperation, promoting trade and
investment and enhancing the role of Islamic nance in the social and economic development
of member countries. It also establishes special funds for specic purposes, including a fund
for assistance to Muslim communities in non-member countries.
IDB mobilizes nancial resources using Shariah-compliant modes and provides technical
assistance to member countries, including provisions of training facilities for personnel
engaged in development activities in member countries.
Membership
The present membership of the IDB stands at 56 countries spreading across different
continents and regions. The basic condition for its membership is that the prospective country
should be a member of the Organization of the Islamic Conference (OIC), pays the rst
installment of its minimum subscription to the Capital Stock of IDB and accepts any terms
and conditions that may be decided upon by the Board of Governors.
Capital
Pursuant to the decision of the Board of Governors in their 31st Annual Meeting held in
Kuwait in Jumada Awwal 1427H (May 2006), the Authorized Capital of IDB was doubled
from ID15 billion to ID30 billion and the Issued Capital was also increased from ID8.1
to ID15 billion. The Issued Capital was further increased to ID16 billion by the Board of
Governors in their 33rd Annual Meeting held in Jeddah, Kingdom of Saudi Arabia, on 29-30
Jumada Awwal 1429H (3-4 June 2008); of which ID15.1 billion was subscribed with ID3.3
billion paid-up as of end 1429H.
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Head Ofce and Regional Ofces
Headquartered in Jeddah, Kingdom of Saudi Arabia, the IDB has four regional ofces in
Rabat, Morocco, Kuala Lumpur, Malaysia, Almaty, Kazakhstan and Dakar, Senegal.
Financial Year
The IDBs nancial year is the lunar Hijrah Year (H).
Accounting Unit
The Accounting Unit of IDB is the Islamic Dinar (ID) which is equivalent to one SDR-
Special Drawing Rights of the International Monetary Fund.
Language
The ofcial language of the IDB is Arabic, but English and French are additionally used as
working languages.
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TABLE OF CONTENTS
Preface ......................................................................................................................... vi
Welcome Address
H.E. Dr. Ahmad Mohamed Ali,
President of the Islamic Development Bank Group ................................................... 1
Implementation Issues of G-20 Reform Agenda in the Area of New Global Financial
System and Implications for MENA Region
H.E. Dr. Ibrahim Bin Abdel Aziz Al-Assaf,
Minister of Finance, Kingdom of Saudi Arabia ........................................................ 3
Implementation Issues Arising From the G-20 Reform Agenda and the Role of
the IMF and the Financial Stability Board in the New Global Financial System
H.E. Mr. Ibrahim Halil Canakci,
Undersecretary of Treasury, Republic of Turkey ....................................................... 6
Key Proposals Made by the Task Force on Islamic Finance and Global
Financial Stability
Prof. Rifaat Ahmed Abdel Karim,
Secretary General of the Islamic Financial Services Board (IFSB) andMember of Task Force on Islamic Finance and Global Financial Stability .............. 10
General Discussion .................................................................................................. 16
Major Conclusions and Recommendations .......................................................... 20
Issues Paper ............................................................................................................. 22
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Preface
The Islamic Development Bank (IDB) has been organizing annual symposia on various
themes of interest to member countries as well as its own mission in conjunction with theAnnual Meetings of the Board of Governors since 1409H. The purpose of the symposia has
been to generate and disseminate ideas to orientate and encourage best practices as a way of
enhancing the banks catalytic role in fostering economic and social development in member
countries. Nineteen such symposia have already been organized. In line with this tradition,
the IDB, in cooperation with the Government of Turkmenistan, organized its 20th Annual
Symposium on the occasion of the 34th Annual Meeting of the IDB Board of Governors
in Ashgabat on 2 June 2009. The topic of the Symposium was Shaping the Post-Crisis
World: Regional Implications and Coordinated Responses by Member Countries. The main
objective of the Symposium was to address (i) the major reform agenda in shaping the post-
crisis world; (ii) its implications for member countries from regional perspectives; and (iii)coordinated responses to the needs of member countries emerging from global economic
crisis.
The program of the Symposium was particularly designed to serve as a forum for member
countries to share experiences and learn lessons in managing crisis and engendering economic
recovery. The Symposium underlined the need for IDB member countries to enhance regional
and global cooperation in dealing with the emerging challenges in the new millennium.
The Symposium mainly focused on (i) key structural factors inuencing post-crisis world
at the global level; (ii) post-crisis world: key implications at the regional level; and (iii)
G-20 reform agenda concerning international nancial architecture, International MonetaryFund, and the MDBs. The panelists in the Symposium stressed that member countries
need to reconsider their growth strategies, learn how to cope with a dramatically altered
international nancial landscape in moving to the post-crisis world, and follow through the
implications of potentially new global patterns of trade and investment. In this context, all
multilateral development banks, including IDB, need to ensure rapid delivery of short-term
and long-term development assistance. However, cognizance of maintaining long-term
debt sustainability of developing countries, including IDB member countries, must be also
ensured. The Symposium also highlighted the signicant role of Islamic nance in providing
safeguards against leveraging and excessive risk-taking and in promoting resilience and
stability of nancial institutions against shocks.
The Symposium was chaired by H.E. Mr. Rahimberdi J. Jepbarov, Chairman of the Board
of Governors. H.E. Dr. Ahmad Mohamed Ali, President IDB Group delivered a welcome
address. A three-member panelist comprising of H.E. Dr. Ibrahim bin Abdel Aziz Al-Assaf,
Minister of Finance of the Kingdom of Saudi Arabia and IDB Governor, H.E. Mr. Ibrahim
Halil Canakci, Undersecretary of Treasury of Republic of Turkey and IDB Governor, and
Prof. Rifaat Ahmed Abdel Karim, Secretary-General of the IFSB and Member of the Task
Force on Islamic Finance and Global Financial Stability covered G-20 reform agenda and
its implementation issues as well as concerns arising from the effects of global economic
recession on Islamic nancial institutions. Mr. Sami Zeidan, Senior Anchor in Al-JazeeraEnglish Television Channel very ably moderated the event.
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Finally, I acknowledge the efforts of Dr. Lamine Doghri, former Director of the Economic
Policy and Statistics Department, in organizing the Symposium as well as Dr. Mohammad
Ahmed Zubair for preparing the Issues Paper that laid out emerging issues and concerns in
Shaping the Post-Crisis World, which is attached as an Annex.
As expected, the Symposium generated useful discussion on pertinent issues and produced anumber of useful ideas in devising a clear vision of the post-crisis world and a coordination
mechanism at the OIC level. Evidently, the process of reforming the global nancial system
and economic recovery is well underway. By publishing the Proceedings of the Symposium, it
is my fervent hope that a wider audience will benet from the insights in addressing a variety
of structural challenges and designing regional solutions towards robust and sustainable
economic growth.
Ifzal Ali
Chief Economist
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Welcome Address
H.E. Dr. Ahmad Mohamed Ali
President, Islamic Development Bank Group
In the Name of Allah, the Most Gracious, the Most Merciful
Praise be to Allah, Cherisher and Sustainer of the World and
Peace and Blessings be upon the Last of the Prophets and
Messenger and upon His Family and All His Companions
H.E. Mr. Rahimberdi J. Jepbarov,
Acting Chairman of the Board of the State Bank for Foreign Economic Affairs ofTurkmenistan and Chairman of the IDB Board of Governors,
Assalamu Alaikum Wa Rahmatullahi Wa Barakatuh
Excellencies, Governors and Alternate Governors,
Ladies and Gentlemen,
Distinguished Guests,
On behalf of the Islamic Development Bank (IDB), I would like to very warmly welcome
you all to the 20th IDB Annual Symposium on Shaping the Post-Crisis World: RegionalImplications and Coordinated Responses by Member Countries.
It is indeed a privilege for IDB that its Governors and member of their delegations, Executive
Directors and leading experts from international organization are participating in this
Symposium to address the major reform agenda in shaping the post-crisis world and its
implications for member countries from regional perspectives. I am sure all of you agree that
IDB member countries need to reconsider their growth strategies, learn how to cope with a
dramatically altered international nancial landscape, and follow through the implications of
potentially new global patterns of trade and investment.
Dear Brothers and Sisters,
As you are aware, because of the crisis and the resultant recession, IDB member countries
face sizeable declines in their foreign capital inows both from public and private sources.
In addition, economic prospects of our member countries appear uncertain as their growth is
projected to drop from 6.1 percent in 2007 to 1.3 percent in 2009. It has been estimated that
the fall in global demand brought on by the biggest economic downturn in decades will drive
exports down by about 13.5 percent during 2009.
This global nancial crisis impacted on macroeconomic stability and growth of our
member countries through various channels. These are: (i) declining ODA ows; (ii)reduced access to international capital markets; (iii) stock market turbulence and outow of
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portfolio investments; (iv) decline in global demand for country exports; (v) postponement
of large investment projects due to withdrawal by banks and investors; and (vi) decline in
remittance.
Dear Brothers and Sisters,
Policymakers around the world have announced many programs and plans to confront the
current nancial and economic crisis. Four steps which have been already taken to restore
condence to the nancial markets and stimulate the economic growth are : (i) buying risky
assets in troubled banks; (ii) injecting liquidity into the global nancial system to keep the
worlds nancial infrastructure intact by; (iii) a cut in interest rates to prevent the economy
recession; and (iv) implementing economic stimulus packages to revive the demand. Despite
these wide-ranging policy actions, nancial strains remain acute, pulling down the real
economy. According to IMF, world economic growth is estimated to decline by -1.3 percent
in 2009, which is global recession for the rst time since World War II.
At the global level, the leaders of G-20 countries, held a Summit meeting in London on2nd April, agreed that a wide range of actions is needed to help the global economy and the
nancial system regain their footing. In line with the global efforts, we need well-focused
and specic measures to reect on new challenges and forge common positions on regional
and global challenges in a post-crisis world as well as assist the IDB Group to better align its
development assistance to the new and emerging needs of member countries. Today, we will
hear about G-20 reform agenda and its implication issues from the honourable IDB Governor
of Saudi Arabia and Turkey. We will also hear from Honourable IDB Governors of Indonesia,
Kazakhstan, and Nigeria about the implication issues arising from the G-20 reform agenda
from regional perspectives.
On behalf of IDB, I wish to express my sincere gratitude to H.E. Dr. Ibrahim bin Abdel Aziz
Al-Assaf, IDB Governor of Saudi Arabia; H.E. Mr. Ibrahim Halil Canakci, IDB Governor of
Turkey; and Professor Rifaat Ahmed Abdel Karim, Secretary-General of the Islamic Financial
Services Board (IFSB) for having so kindly agreed to participate in the proceedings, and for
their various presentations which will address the major reform agenda in shaping the post-
crisis world and its implications for IDB member countries. Clearly, by so doing, they will
share their wide and rich experiences with us.
I am condent that this Symposium will provide a platform for sharing of experiences and
lessons learnt in managing crisis and engendering economic recovery, as well as in enhancing
regional and global cooperation in dealing with the challenges of our economy in the new
millennium.
With these words, I once again welcome you all to the Symposium and wish you every
success in your deliberations.
Wassalamu Alaikum Wa Rahmatullahi Wa Barakatuhu
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In the monetary and banking area, the Saudi Arabian Monetary Agency has maintained close
supervision of our banks to ensure they have adequate liquidity and depositors are protected.
In the area of trade, Saudi Arabia remains committed to open trade. The World Bank in
a recent paper has identied the Kingdom as one of only three G-20 countries that have
implemented the standstill commitment of the G-20 Washington Summit. We have alsostrongly supported the goal of reaching a successful conclusion to the Doha Round, which
will open up new growth opportunities for all countries, including our region.
All in all, I can say that Saudi Arabia has played, and will continue to play, an active role in
international cooperation to resolve this crisis.
The G-20 actions, and the Saudi contribution to them, as well as other countries actions, will
help boost global growth in the period ahead. The return of global growth would increase
exports from our region, including oil, and enhance capital inows. The expansionary
policies will also help the continued ow of remittances to a large number of countries. I
need not emphasize that nancial remittances, especially from expatriate workers, do playa vital part in the economies of a number of Islamic Development Bank member countries
as well as other countries from many regions. Indeed, the estimated 14 million expatriate
workers in the GCC countries send home about 40 billion dollars a year. Thus the policies
agreed by the G-20 Leaders are good not only for the health of the G-20 economies, but
would also have positive spillover effects on other economies.
The G-20 Leaders have acknowledged that major failures in the nancial sector and in
nancial regulation and supervision were fundamental causes of the crisis. The nancial
crisis, which has triggered the global economic crisis, has shown that self-regulation
is insufcient and counterproductive. It is tting, therefore, that the G-20 Leaders haveagreed to extend prudential regulation and oversight to all systemically important nancial
institutions, instruments, and markets, including systemically important hedge funds.
The focus on discouraging excessive leverage and emphasis on short-term results is also
a welcome development. Encouraging countercyclical policies such as building up capital
buffers during upswings and allowing these buffers to be drawn in a downturn is also an
important measure agreed in the Summit.
In Saudi Arabia, we have worked very diligently over the past few years to strengthen the
capacity of the Saudi banking system to withstand adverse macroeconomic shocks, which
has served the economy well at this difcult juncture. The capitalization and provisioning
policies of our banks have enhanced their buffers. Moreover, exposure to real estate markets
has been limited. On the regulatory side, Saudi banks have completed the implementation of
Basel II. Going forward, we are committed to remain vigilant and will monitor the evolving
risks closely. I am condent that other countries will also work toward ensuring a strong
regulatory system, which will result in a more resilient global nancial system. This would
also help our region in terms of higher foreign direct investment, which is important for
further promoting private-sector led growth.
Another important area that attracted the attention of the G-20 Leaders related to resisting
protectionism and promoting global trade and investment. The crisis has caused a collapse of
global trade not only due to global recession, but also because of rising protectionist pressuresand drying up of trade nance. So the restoration of global trade growth would require
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stimulating demand, maintaining open trade regimes, and taking measures to encourage
trade-related nance.
To help mitigate the impact of the sharp fall in capital ows to emerging market and developing
countries and the difculty in access to nancing, the G-20 Leaders have agreed to work
toward increasing the IMFs resources substantially and to review the capital adequacy of allmultilateral development banks. The IMF is already providing substantial nancial supportto a number of affected countries while the World Bank is well on way to triple its lending
this scal year. The regional development banks are also expanding nancing substantially.
These are welcome developments as emerging market and developing countries have been
the engine of recent global growth. Accordingly, the return to health of these economies
is essential for restoring worldwide growth and prosperity, which as I stated earlier would
benet growth in our region.
Another important outcome of the G-20 deliberations is the recognition of the need to enhance
the roles of the IMF and the Financial Stability Board (FSB), and increase coordination
between them, in monitoring nancial markets and contributing to the stability of the global
nancial system. The Leaders have agreed to expand the membership of the FSBformerly
known as the Financial Stability Forumto all G-20 members, which will help establish its
legitimacy and effectiveness.
I want to conclude by sharing some thoughts on how our great institutionthe Islamic
Development Bank can contribute to a sound and stable nancial system. First and
foremost, we should be proud that the Islamic Development Bank is the only major MDB
that is exclusively owned by developing countries. The World Bank and other MDBs are
frequently criticized for lack of voice and participation of developing countries. Here we
have an institution where voice is a non-issue.
Secondly, I want to recognize another unique achievement of the Islamic Development Bank.
Among the MDBs, it is a pioneer and a long time provider of trade nance facilities to its
members. The current crisis has underscored the critical importance of trade nance in global
recovery. It is also an opportunity for the Islamic Development Bank to assume a leading role
in reviving the real economy in its member countries by scaling up trade nancing operations.
Last but not least, it is clear that excessive leverage and risk-taking behavior in major nancial
markets, coupled with a lack of regulation, were key factors behind the global nancial and
economic crisis. We also know that the Shariah-based nancing has built-in safeguards
against such behavior. In my view, the practitioners of traditional and Islamic nancing
systems can learn a lot from each other. The Islamic Development Bank has played a vital
role in the evolution and spread of the Shariah-based nancing modalities and instruments.
Nevertheless, there is scope for doing more. The rapid growth of the Sukuk market globally is
an indication that the upside is virtually unlimited. I also sense a keenness on the part of major
global nancial institutions to learn more about Islamic nance. I, therefore, believe that the
Islamic Development Bank and the Islamic nancial institutions across its membership can
take this opportunity to fully harness and exploit the potential of Islamic nance.
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Implementation Issues Arising From the G-20 Reform Agenda
and the Role of the IMF and the Financial Stability Board in
the New Global Financial System
H.E. Mr. Ibrahim Halil Canakci,
Undersecretary of Treasury, Republic of Turkey
When in October 2008 the global nancial turmoil has turned into a full edged crisis,
the G-20 took the leadership in designing a global response which would restore market
condence and minimize the negative impact on growth and employment.
The rst G-20 Leaders Summit held in November 2008 in Washington, and the April 2009
London Summit, have been the key milestones in this process where political will were
turned into concrete outcomes that might make a difference for the world economy both in
the short and medium run.
Looking back, I can tell that our undertaking within the G-20 has contributed signicantlyin restoring condence and containing the downturn in global nancial markets. I believe
the broad representation at the G-20 was a key factor that enhanced the effectiveness and
relevancy of the decisions.
Let me remind you some of the key decisions of the G-20.
As G-20 countries, we have agreed on a number of actions aimed at broadly two goals.
First goal is to minimize the impact of the crisis and to achieve quick recovery. Towards this
goal our leaders decided:
to provide an unprecedented scal stimulus;
to support an increase in lending to emerging market countries by the International
Financial Institutions; and
to promote global trade and investment and to avoid protectionism.
Second goal is to establish a stronger nancial architecture to prevent future crises. To support
this goal, the G20 has decided:
to improve the regulation and supervision of the global nancial system and enhance
international coordination; and
to improve the governance structure of the IFIs.
Now, I would like to elaborate on the decisions taken towards achieving the second goal
which I think more relevant for todays discussion.
Improving the Regulation and Supervision of the Financial System
The current crisis has highlighted two shortcomings in the current nancial system. First,
the system has several supervisory and regulatory loopholes which left excessive risks in the
system unaddressed.
Second, is the need for global institutions that could oversee and govern todays international
nancial system, which cross-border rms and nancial ows play an important role.
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Fullling these tasks requires a more effective IMF surveillance. However, to achieve this,
the Funds enforcement capacity and legitimacy needs to be further improved. This need was
particularly evident during two occasions in the pre-crisis period:
First one was the unwillingness of some systemically important nancial centers to undergo
FSAP reviews and to be open to listening to the Fund advice.
Second one is the Multilateral Consultations which was initiated by the Fund in 2006 to
bring together the relevant counterparties in order to address the global imbalances. These
consultations were useful but had only a limited practical impact. I believe, the crisis has now
provided an opportunity for reviving these consultations to prevent rebuilding of excessive
risks in the global nancial system.
Another necessary ingredient for ensuring that IMFs advice is taken seriously by both
advanced and developing countries is to improve its legitimacy.
To this end, the G-20 recognized that IMFs governance structure should be improved bygiving more representation to the emerging market and developing countries and by the
selection of senior managers of the IFIs on a merit basis.
In particular, the IMFs next general quota review which is now scheduled to be completed
by January 2011, should provide a signicant improvement in the quota shares of emerging
market economies. I believe several IDB member countries which play an important role in
the global economy deserve a better representation in the IFIs.
Overall Assessment
So when looking at the recent efforts to redesign the international global nancial system Isee two main implications for developing countries like us:
First, as we all recognize, there is a move towards further enhancing the cooperation among
countries that are part of the global nancial system. This cooperation will be realized through
international forums and bodies such as the G-20, the IMF and the FSB and the decisions of
these international bodies will be more inuential and will affect our lives more deeply in the
coming period.
As developing countries we should contribute to the work of these bodies and try to make our
voice heard as much as possible. In this regard, having three of our fellow members being also
represented in the G-20 and FSB is an invaluable opportunity for the IDB. Turkey is willingto collaborate more with fellow IDB member countries and is keeping its communication
channels open to reect the perspective of IDB members to the work of these bodies.
Secondly and related to the rst item, I see that international standards in the nancial system
will be tighter, and enforced more strictly going forward. As developing countries, if we do
not want to be left outside, we should prepare our nancial systems for tighter international
nancial regulation and be open to peer reviews and international scrutiny.
Turkey, following the 2001 banking crisis, had been very open-minded on this front and
introduced best practices and rules to its nancial system. This generated a boost to oureconomy through increased condence and efciency, as acknowledged by the FSAP review
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that we have gone through in 2007. The strength of our nancial system is now also providing
a buffer against the negative impact of the current crisis on Turkey. Following my speech we
will distribute a paper that summarizes the nancial sector restructuring experience of Turkey
over the last few years.
We should also prepare our nancial sectors for the challenges that might arise by theintroduction of tighter regulations, particularly in advanced countries. It would be critically
important to ensure that credit ows to emerging and developing countries are not hampered
by these tighter regulations. In this regard, we suggest that IDB initiate a comprehensive
assessment on how the nancial systems in IDB countries, including the Islamic nancial
systems, could be prepared for the post crisis regulatory regime.
The Role of the MDBs and the IDB Member Countries
My nal words will be regarding the role of the Multilateral Development Banks and IDB
members in supporting global economic recovery.
MDBs, including the IDB should boost their efforts to minimize the damage to the poor
to prevent the fading away of hard won gains on achieving the Millennium Development
Goals. By fully utilizing their capital base, the MDBs should boost their development
assistance both to low income countries and to middle income countries where around
70% of the worlds poor lives. This vision was reected in the G-20 commitment to
increase MDBs lending by $100 billion. We are looking forward to the quick realization
of these commitments.
In response to the crisis, countries with adequate scal space should continue to stimulate
their domestic demand. However, measures should be reversible to ensure medium
term sustainability and be focused on high-quality infrastructure investments. This will
support the diversication of the economy in these countries and will provide positive
externalities to the global economy.
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Key Proposals Made by the Task Force on Islamic Finance and
Global Financial Stability
Prof. Rifaat Ahmed Abdel Karim,
Secretary-General of the Islamic Financial Services Board,
on behalf of the IDB-IFSB Task Force onGlobal Financial Stability and Islamic Finance
Your Excellency Mr. Rahimberdi J. Jepbarov,
Chairman of the Board of Governors, Islamic Development Bank (IDB)
Your Excellencies Members of the Board of Governors, IDB
Your Excellency Dr. Ahmad Mohamed Ali, President of the IDB Group
Your Excellencies Board of Executive Directors, IDB
Excellencies and Distinguished Guests,
Good afternoon to all of you.
It gives me great pleasure to participate in this 20th IDB Symposium in conjunction with the
34th Annual Meeting of the IDB Board of Governors in Ashgabat, Turkmenistan. I would
like to thank the IDB for inviting the Task Force on Global Financial Stability and Islamic
Finance, which is chaired by H.E. Tan Sri Dr. Zeti Akhtar Aziz, Governor of Bank Negara
Malaysia, to share with you some updates on the work of the Task Force.
I would like to convey Governor Zetis sincerest apologies for not being able to be here today
due to her busy schedule, although she highly appreciates the importance of this Symposium
to the IDB and its member countries.
The Islamic Development Bank (IDB) GroupIslamic Financial Services Board (IFSB) Task
Force on Global Financial Stability and Islamic Finance was established through the initiative
of H.E. the President of the IDB Group, following the recommendations of the Forum on the
Global Financial Crisis and its Impact on the Islamic Financial Services Industry.
In addition to H.E. Dr. Zeti as chairperson and myself representing the IFSB, the Task Force
includes eminent international scholars and experts in Islamic nance.
The Task Force was given the following terms of reference:
(i) to examine the key elements in Islamic nance that contribute to its viability, resilience
and nancial inclusion;
(ii) to take stock of progress in the development of the Islamic nancial services industry
(IFSI) in the current challenging global nancial environment; and
(iii) to examine the building blocks in the development of the Islamic nancial architecture
to further strengthen the resilience of the IFSI.
Excellencies, Ladies and Gentlemen
As we have heard, several international initiatives, including the UN and the G-20, are
addressing the global nancial crisis. As the crisis continues to unfold and expand to become
an economic crisis, it has become clearer to us that fundamental changes must be introduced
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to the existing nancial system, and that Islamic nance can be benecial in addressing these
challenges.
The IFSI has proven relative resilience compared to its conventional counterpart during the
early waves of the nancial tsunami, while signs of a recent slowdown are actually related to
an overall downturn in the real economic sectors.
In this respect, the Task Force observes that the Islamic nance model of nancial
intermediation, if embraced in its entirety, has the following characteristics:
(i) it involves real economic activity that generates income and wealth;
(ii) it is inclusive by extending nancial services to various segments of the population;
(iii) it is ethically and socially responsible; and
(iv) it does not endorse engaging in over-leveraging or other excessive speculative activities.
One can easily appreciate how Islamic nance, by upholding and promoting certain values
grounded in Shari`ah rules and principles, contributes to a system that preserves soundness
and stability.
The prohibition of Riba that is, lending and borrowing on the basis of interest minimizes
the likelihood of creating inverted pyramids of debts that make crashes inevitable. Similarly,
by prohibiting gharar that is, excessive uncertainty and risk Islamic nance puts strong
emphasis on controlling risk-taking, thus preventing the creation of toxic assets. Further,
Islamic nance emphasizes transparency, disclosure and clear documentation of contracts,
thus minimizing informational asymmetries and the chances of deception and malpractice.
Hence, the adherence to Islamic nance principles pre-empts expansion of credit that isnot backed by real assets, and restricts speculation. Although institutions that offer Islamic
nancial services (IIFS) have debt receivables on their balance sheets arising from credit
sale nancing transactions, they cannot securitize and ofoad these debt receivables. This
condition eliminates the ability of IIFS to purchase instruments that carry credit risks that are
highly dispersed beyond identication.
The Task Force further notices how Islamic nance fundamentally discourages excessive
leveraging, inter alia, through the Shari`ah prohibition of selling something that you do
not own, which effectively restricts speculative short-selling transactions. Similarly, by
capping the interest-based debt-to-equity ratio at not more than a third as part of the portfolio
screening process of shares, Shari`ah scholars further inhibit any high-gearing and aggressiveexpansion strategies.
In a nutshell, Islamic nance has beneted immensely from these pillars of strength and
steadfastness that have contributed to its stability amidst rampaging turbulence. Indeed,
we should further harness these elements of Islamic nance in the national nancial sector
development policies, so that they become an integral part of the risk management culture
and prudential framework in the reform initiatives for the global nancial system.
The Task Force is aware that several independent reports have indicated the relative resilience
of the IFSI compared with its conventional counterpart throughout 2008, while several
Shari`ah-compliant stock indices have recorded lower losses compared with the main indicesduring recent stock market crashes.
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Notwithstanding this, the Task Force acknowledges that the IFSI is not immune to risks and,
hence, should expect challenging and uncertain prospects in the near future, for the following
main reasons:
First, as Islamic nance is closely linked to the real sector, adverse developments in that
sector would adversely affect the business activities and performance of IIFS.
Second, some IIFS, perhaps due to naivety and enthusiasm for pursuing aggressive
expansions, particularly during economic booms, may have neglected fundamental and
sound risk management standards. As the current crisis has proven, aggressive lending and
inadequate risk management can have negative consequences.
Third, IIFS may, out of immense competitive and economic pressures, be tempted to tamper
with their duciary responsibilities towards investment account holders in their business
operations and conduct, thereby resulting in nancial losses and triggering a crisis of
condence and systemic risks in the Islamic nancial system.
The Task Force notes that these and other considerations have conrmed the need for robust
and consistently applied global standards of prudent risk management and other supporting
infrastructure for enhancing nancial stability and promoting nancial development and
inclusion. Both these goals are catered for through different types of prot-based institutions
and social institutions, such as Zakat and Awqaf, which address the diverse needs and
heterogeneous components of society.
Excellencies, Ladies and Gentlemen,
Let me now share with you the Task Forces analysis of how Islamic nance attempts to
achieve nancial stability. As we know, in Islamic nance, prot-based institutions includingbanks, securities rms, insurance/takaful operators and investment companies are governed
by several fundamental requirements that require them to adopt a different business model
than their conventional counterparts.
The IIFS mobilizes funds on a prot-sharing or agency basis, rather than on a lenderborrower
basis. Since pure lending is ruled to be a strictly benevolent transaction and transfer of debt
can only be done at par value, nancing activities by IIFS are required to be conducted on
an asset-backed or production basis, rather than being merely lending and borrowing, thus
further making the packaging, repackaging and trading of debt a repugnant concept.
Similarly, the prohibition of gharar forces Islamic insurance/takaful operators to adopt
a model of sharing risk among the takaful participants, rather than transferring risk. The
prohibition of gharar further rules out highly risky assets, not the least of which are the
toxic assets that, by their design, imply a very high degree of risk.
Finally, the portfolio screening process that is required to be adopted, especially by Islamic
securities rms and investment companies, helps to ensure that they invest only in stocks that
are permissible within the parameters set out by their Shari`ah boards.
The social institutions of Zakat and Awqaf provide social safety nets that strongly promote
philanthropy, address the needs of the more vulnerable segments of society, and complementother government-initiated safety nets. This helps to mitigate economic decline and prevent it
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from escalating into a crisis. Islamic nance principles also highlight forbearance to debtors
under distress as a mechanism to consider in managing imminent defaulters, thus avoiding
massive foreclosures and re-sale liquidations, which can only bring further catastrophes
upon the economy.
Excellencies, Ladies and Gentlemen,
The Task Force is pleased to note that various ground-breaking initiatives have been
undertaken by the international community to pursue nancial stability, including those
for the IFSI. As you may know, the IFSB, which is based in Malaysia and was granted by
its government the immunities and privileges that are accorded to diplomatic missions and
international organizations, was established in 2002 by eight central banks and the IDB, in
response to the need to pursue nancial stability for the IFSI. The current 185 members of
the IFSB comprise 43 regulatory and supervisory authorities, including the central banks
of Japan, China, Korea, the Philippines, Hong Kong and Singapore; six international
intergovernmental organizations, namely the IDB, International Monetary Fund, World
Bank, Bank for International Settlements, Asian Development Bank and the IDBs sister
company, the Islamic Corporation for the Development of the Private Sector; as well as 136
nancial and professional institutions operating in 35 jurisdictions.
On the nancial stability front, the IFSB has been issuing international standards designed
not only to address the specicities of Islamic nancial services, its risks and Shari`ah
compliance, but also to take a cross-sectoral approach to the regulation and supervision of
IIFS that encompasses both the banking and the investment and securities market sectors.
On the nancial sector development front, the IDB has been active for the past 34 years
in fostering the economic development and social progress of its member countries, andMuslim communities in non-member countries, by addressing, inter alia, poverty eradication
and nancial inclusion. These strategic objectives are described in more detail in the IDB
Vision 1440H. In addition, the IDBIFSB 10-Year Framework for the development of the
IFSI highlights the need for the development of the Islamic nancial sector.
The need for the IDB and the IFSB to further strengthen their partnership in pursuing both
nancial stability and nancial development cannot be overemphasized. In this respect,
the Task Force acknowledges that six key building blocks will crucially form the basis
of an Islamic nancial architecture that is imperative in order to support orderly nancial
development and sustained nancial stability in the IFSI.
The rst building block relates to the effective implementation and enforcement of a set of
robust and consistently applied prudential standards for risk management and supervision,
which takes into account the specicities of the IIFS that, if properly implemented, should
enhance the soundness and stability of the nancial system in which the IIFS operate.
The second building block is the development of a robust systemic liquidity infrastructure
that encompasses monetary policy and exchange operations, payment and settlement systems,
and the microstructure of the money, exchange and securities markets.
The third building block relates to the strengthening of the nancial safety net mechanisms namely, liquidity risk management of IIFS, emergency nancing arrangements, deposit
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protection and insurance, as well as the lender of last resort facility. This calls for the
development of an adequate range of tools and instruments for liquidity and risk management
that are consistent with the core objectives and principles of Shari`ah, both in form and
economic substance.
The fourth building block involves the development of a reliable crisis management andresolution framework, which includes (in addition to nancial safety nets), bank insolvency
laws and arrangements for dealing with non-performing assets, asset recovery and bank
restructuring.
The fth building block refers to the requirement for close cooperation among policy-makers
and nancial supervisors with different mandates, in both national and different jurisdictions,
in enhancing the resilience and stability of the IFSI.
The sixth building block refers to macro-prudential surveillance and nancial stability,
which is an integral part of the strategy to help strengthen the resilience of the Islamic
nancial system and to limit the risks of nancial fragility. The traditional micro-prudential
supervision approach cannot effectively address system-wide stress that might develop due
to the common exposure of nancial institutions and markets to macroeconomic risk factors,
often leading to prudential policies that aggravate the impact of economic shocks.
While the IDB and IFSB have been exerting efforts within their own respective mandates
to develop and put in place these building blocks, the Task Force is of the view that some
of these initiatives require the collaboration of the stakeholders of both institutions who
are concerned with nancial developmentnamely, the ministries in charge of nance and
economic development, entrepreneurship, Zakat and Awqaf as well as those who are
directly concerned with nancial stability, such as central banks and nancial supervisoryauthorities.
Upon analysing the challenges posed in developing the building blocks, the Task Force
believes there is an urgent need for a conducive and synergistic dialogue platform that
assembles together the IDB Board of Governors and members of the IFSB Council.
The Financial Stability Forum (now known as the Financial Stability Board), which was
set up following the onset of the Asian nancial crisis and gathers together the various
stakeholders with a vested interest in international nancial stability, provides a model for
the IFSI to replicate. Hence, the Task Force is entertaining the idea of recommending theestablishment of an Islamic nancial stability forum for the IFSI, which will become, inter
alia, just such a broad-based and constructive dialogue platform where the IDB Board of
Governors and the IFSB Council members can address the emerging challenges and policy
issues of nancial stability and development. In this respect, the IFSB would be pleased to
host the Secretariat of the proposed forum.
The Task Force also notes that the IDB has taken the initiative to establish the Islamic
Financial Sector Development Forum (IFSDF) as a broad-based and constructive dialogue
platform for stakeholders with a vested interest in Islamic nancial development through
nancial inclusions, poverty eradication, and capacity building and empowerment of thevulnerable segments of society.
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Given the impact of the current nancial crisis, this Forum needs to be further strengthened
to enhance the sound development of the industry.
The Task Force hopes that the views and recommendations of the Report will provide useful
insights into the value propositions of Islamic nance for the global nancial community in
the current reform process of the international nancial system.
On that note, I thank you for your attention.
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20th IDB Annual Symposium: General Discussion
Floor Participant 1:
To what extent the panelists believe that the IMF has the required resources to help developing
countries cope with the consequences of the global nancial and economic crisis? Thank you.
IDB Governor, Saudi Arabia:
Well, the IMF already has the resources estimated at US$250 billion; in addition, there are
plans to augment resources by US$ 500 billion. The idea is that by augmenting IMF resources,
both the nancial markets and the developing countries will be reassured that widespread
crisis can be mitigated. In this regard, augmenting IMF resources will be achieved through
various mechanisms such as new agreements to borrow, by bilateral means between countries
and IMF, and also by issuing IMF bonds. But as yet, there are no immediate or urgent needsfor the mobilization of these resources.
On the expansion of IMF mandate, what many of us in the developing countries are saying
is that the IMF should focus more on surveillance activities in the developed economies. The
present crisis has shown that perhaps the IMF and other international organizations should
have been much more involved in highlighting the systemic risks in developed countries.
The Ministerial Committee of the IMF, which is called the IMFC, has been calling developed
countries to have more supervision and more intensive monitoring of volatile prices in
international commodity markets, especially price developments in the oil market during
2007 and 2008, which in our view was caused by speculative bubbles.
IDB Governor, Uganda:
I want to say that this global nancial crisis is disturbing for all of us because it is very
difcult to understand why the world best economies are unable to put the best facilities
for surveillance and receive early warning signals of an imminent crisis. I also want to say
that most of the Third World countries are being adversely impacted by the global nancial
crisis, especially through the trade and nancial ows channels. We have been spared from
the direct or the rst-round impact on our banking system primarily due to the fact that our
banks are not exposed to the CDS and such instruments. Furthermore, our central banks have
exercised due diligence over the banking system, which should continue because I do notbelieve that we have seen the last of the nancial crises.
In Africa, we have been concentrating our efforts in achieving social development and
ensuring social safety for the poorest in pursuit of Millennium Development Goals. I think
there is likely to be a widening of a gap in external capital inows, both ofcial and FDI
types of inows. Looking ahead, we are likely to experience a shortage of foreign exchange
in the short-run and thats why a number of African countries now believe that funding the
emerging imbalances in the balance of payments will become a critical issue. I think this is
where IMF needs to be more exible and responsive so as to be able to help us to protect the
development gains achieved in African countries.
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And, again on our side, we need to focus on certain priorities, we need to invest in infrastructure
projects in preparation for the revival of the global economy because many African countries
still dont have regional networks of roads and electricity. We need this because most of
our communities are agro-based and we cannot do our agriculture effectively and protably
without regional infrastructure.
On the question of how to cope with the recent food crisis, I think this is an opportunity for
Africa and for all the development partners, to support African countries organize itself as the
food basket of the world because we have all the advantages to produce food to the poor. We
need more public and private funds for the long term development of the agriculture sector.
The Moderator:
What would Honorable Governors in this room, who are all from developing countries, like
to communicate to your colleagues in the G-20 and the MDBs, including the IDB, in terms
of development priorities in the context of the post-crisis world?
IDB Governor, Uganda:
I would like to see the IDB to play a more catalytic role in attracting investors to Africa. For
the development partners, I want them to support the private sector in African countries,
particularly in the value-added export sector. In Africa, we are changing our attitudes - instead
of exporting raw materials, we now want to export nished products. If our development
partners can encourage their companies in Africa to produce and export value-added products
to their countries, it could be a lot cheaper rather than exporting raw materials and processing
in their countries. Furthermore, in a period of global recession, we need to identify new
investment opportunities in African countries.
The Moderator:
From the oor, if I may have questions on the role of Islamic nance in terms of shaping the
post-crisis world. Can we think of supportive policies for Islamic nance in terms similar to
the role played by pro-FDI policies in years in the developing world? Looking at the gures
on the relative market share of Islamic nance in IDB member countries, suggests to me
that there is still a huge untapped potential. Is it possible that, going forward, bulk of Islamic
nance will be intermediated through nancial centers in Hong Kong in the east and London
in the west? Perhaps the Honorable Governors can think of other questions along these lines.
Floor Participant 2:
Before I partially answer questions raised by the Moderator, I would like to remind this
august gathering that the global nancial crisis originated in the developed countries whose
economic philosophy is against government interventions in the market mechanisms. But
when the crisis broke out, ofcial interventions or responses to correct the market failure
were almost immediate and they save the world from the meltdown of the international
nancial institutions. Even the due diligence of nancial institutions and nancial papers
by private sector entities such as the rating agencies failed in their duciary role. Dr. Rifaat
can conrm whether or not the rating agencies also bear the primary responsibility for the
outbreak of the crisis.
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For the Islamic banking sector, I do not have correct statistics, but I do think that Islamic
banks have smaller market share in many countries. As indication of its huge potential, we
know the industry is growing with an annual increase of 20% to 25%. The reality is that IDB
is a manifestation of a doctrine and visualization of Islamic economics. I would encourage
IDB to exert maximum efforts to put into practice the Islamic economic theories, whether in
the nancial or economics areas. Thank you.
Prof Dr. Rifaat Ahmed Abdel Karim
I understand that the rating agencies have played a role in spreading the current crisis perhaps
by not rating certain products in terms of the probability of default of those instruments.
However, I would like to digress from the question and instead focus on how we engage with
these rating agencies with respect to Islamic nance. I think thats the core of your question
as well. We did have a very constructive dialogue with the major international rating agencies
in order to try to give them a better understanding of the business model of Islamic nance.
In fact, we stressed that when they give a rating to an institution, that rating could be best
represented as the sum of the probability of defaults on individual contracts.
I am referring to, for example, the investors (holders) whose funds are mobilized on the basis
of the mudarabah where the prots are shared proportionately except in the case negligence
or failure in carrying out duciary responsibilities. In this respect, a holder of an investment
account is an investor rather than a depositor and then one can calculate the probability of
default. I believe that almost all the international rating agencies now publish their reports on
Islamic nance based on modied rating methodologies that takes on board the specicities of
Islamic nance. In addition to this, the Islamic Financial Services Board has communicated a
technical note that helps the supervisors and regulators of Islamic banks when they designate
a rating agency with regards to the risk weighting of the assets of those institutions. This isalso in line with the practice of the Basel Committee for Banking Supervision. Thank you.
IDB Governor, Saudi Arabia:
We have been involved, since last October, in extensive discussions on the role of the rating
agencies, the hedge funds, the accounting standards, etc. At the beginning, there were denials
and resistance to touching those areas and only to focus on the nancial institutions. At the
last G20 Summit, all these issues became no more untouchable and the workings of all these
areas, including the rating agencies, were reviewed.
IDB Governor, Morocco:
I would like to thank all the Honorable Governors and Excellencies for clarifying the precise
implication of the global nancial crisis on our countries. I would like to take this opportunity
to ask a question about the coordination amongst the Government representatives of the IDB
member countries. Is there a mechanism for coordination between the member countries on
how to communicate our views to the G20 Leaders? And, I think the Islamic Development
Bank, which today gave us this opportunity, could help in setting up a coordination mechanism.
I would like to raise a policy concern regarding the huge debt overhang arising from the current
economic recovery programs. In order to mitigate the impact of the global nancial crisis,countries around the world have instituted scal measures to support economic recovery
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Major Conclusions and Recommendations of the 20th Annual Symposium
IDB organized its 20th Annual Symposium on Shaping the Post-Crisis World: Regional
Implications and Coordinated Responses by Member Countries, which was held in
conjunction with the 34th Annual Meeting of the IDB Board of Governors on 2nd June 2009
in Ashgabat, Turkmenistan. The major point of departure of the Symposium was that it wasa Governors Seminar with the active participation of many Governors.
The Symposium was chaired by H.E. Mr. Rahimberdi J. Jepbarov, Chairman of the Board
of Governors. H.E. Dr. Ahmad Mohamed Ali, President IDB Group delivered a welcome
address. A three-member panel comprising H.E. Dr. Ibrahim bin Abdel Aziz Al-Assaf,
Minister of Finance of the Kingdom of Saudi Arabia and IDB Governor; H.E. Mr. Ibrahim
Halil Canakci, Undersecretary of Treasury of Republic of Turkey and IDB Governor; and
Prof. Rifaat Ahmed Abdel Karim, Secretary-General of the IFSB and Member of the Task
Force on Islamic Finance and Global Financial Stability discussed the G-20 reform agenda
and its implementation issues as well as issues arising from the effects of global economic
recession on Islamic nancial institutions.
The major conclusions of the Symposium were the following:
1. Due to the synchronized nature of the on-going global nancial and economic crisis,
economic recovery is likely to be protracted across all regions. The G-20 reform agenda
provides a global response to the global crisis.
2. The challenges of addressing the on-going global economic crisis, which originated in
developed countries, require partnership and collaboration with international bodies and
institutions. The role and contributions of the three IDB member countries viz. Indonesia,
Saudi Arabia and Turkey were greatly appreciated in shaping the G-20 reform agenda. Inthis regard, readiness was expressed to coordinate with other member countries to bring
up their key concerns and voices in the G-20 forum.
3. Among the G-20 countries, Saudi Arabia announced the highest scal stimulus package.
Adequate national countercyclical initiatives for rapid recovery in member countries will
also have benecial regional spillover effects, including through remittances channel to
other member countries.
4. While IMF has sufcient resources to provide emergency support for balance of
payments crisis, it needs to introduce greater exibility and policy space in its lending
instruments.
5. Self-regulation by key nancial institutions has been proved to be insufcient and
counterproductive. Member countries need to prepare for an era of intrusive and tougher
nancial sector regulations.
6. Due to the negative spillover effects of nancial and economic policies in developed
countries, multilateral consultations to address global imbalances and IMF surveillance
of macro-nancial policies need to be greatly strengthened and made more effective.
7. In order to achieve greater acceptance of Financial Stability Board (FSB) work, this
Board needs to be made more inclusive through broadening its membership of developing
countries. In this regard, the membership of G-20 developing countries in the Steering
Committee of the Financial Stability Board needs to be ensured.
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ANNEX
ISSUES PAPER
Shaping the Post-Crisis World: Regional
Implications and Coordinated Responses by
Member Countries
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i. At the national-level, economic and scal stimulus packages in the G-20 countries
have been announced, totaling $5 trillion, that aim to stem the falloff of aggregate
demand, reviving consumer condence and to lay the foundations from turning
recession to economic recovery phase in the short-run3. In addition, initiatives for
injecting liquidity in the nancial markets and unfreezing of credit markets have been
adopted.
ii. Supporting developing countries to face the consequences of global economic
recession through expanding resources of IMF ($500 billion), injecting liquidity
through allocation of new SDRs ($250 billion), strengthening capital adequacy of
multilateral development banks for lending (total: $300 billion, including additional
measures: $100 billion), and expanding ofcially supported trade nancing through
export credit agencies and the World Bank Group ($250 billion).
iii. Implementing a comprehensive G-20 reform agenda for the global nancial system
in key areas such as macro-prudential regulatory framework, enhanced prudential
regulations for all segments of nancial sector, assessing vulnerabilities of nancialsystems through expanded and strengthened Financial Stability Board, improving
and harmonizing accounting standards, regulating credit rating agencies and
mainstreaming non-cooperative tax jurisdictions.
It is critical that steps to repair international nancial institutions and G-20 reform agenda
are rapidly implemented in order to re-establish a climate of stability and condence in the
global nancial system as well as to prevent potential future recurrences of such crisis. For
many developing countries, including IDB member countries, key concerns remain with
regard to pricing and volume of external ofcial and private inows which are important
to sustain their programs of poverty alleviation and infrastructure development as accessto international capital markets become more difcult in terms of higher rates and shorter
maturities.
Emerging Issues
From the standpoint of policymakers, it is critical to look ahead to assess how existing geo-
economic linkages are likely to be altered and to anticipate new patterns that are likely to
present both challenges and opportunities. More specically, in the post-crisis world, member
countries need to reconsider their growth strategies, learn how to cope with a dramatically
transformed international nancial landscape, and follow through the implications of
potentially new global patterns of trade and investment.
Major global and regional level trends and issues, key implications of G-20 reform agenda,
critical issues in mainstreaming Islamic nancial intermediation, and expanded mandate of
the multilateral development banks (MDBs) to support developing countries as they face the
consequences of global economic crisis are presented in parts 1 to 6 annexed to this paper.
Some of the emerging issues raised in parts 1 to 6 are listed below for the consideration of
the Honorable Governors.
3It is noteworthy to point out that Saudi Arabia has announced, among the G-20 countries, the highest scal stimulus packages
estimated at 2.8 percent of GDP in 2008, 3.3 percent in 2009, and 3.5 percent in 2010. Besides helping to maintain growth momentum,
such sustained scal stimulus over the three years will also have benecial regional spill over effects through remittances channel.
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I: Growth, Trade and Financial Flows in the Post-Crisis World
1. What does revival of global economic growth mean? Does it mean a new normal
characterized by lower credit intermediation at the global level and reduced capacity
for sustained, non-inationary growth?
2. Is it correct to say that this crisis has forced adjustment of global imbalances?
3. Is a recovery in the G3 (i.e. U.S.A., Japan and Eurozone) a pre-requisite for recovery
in developing countries?
4. Given the rollover size of external debt combined with likelihood of reduced cross-
border ows, will countries face a liquidity crisis? What is the risk that spreads may
resume their northern journey?
5. Given the balance of external funding risks, is there need to put together contingencyplans to counteract a potential liquidity crisis triggering a solvency crisis for the private
sector in IDB member countries?
6. Is the OIC intra-trade target of 20% to be achieved by 2015, under the Ten-Year OIC
Plan of Action, still feasible?
II: Regional Implications for Member Countries
1. In the medium-term, to what extent is rebalancing the economic growth model from
a reliance on external demand to stimulating domestic demand desirable and feasible
for Asian countries?
2. Will a strategy to rebalance economic growth also imply structural adjustment
issues? To what extent structural adjustment in the industrial sector is likely to lead to
dislocations in labor market?
3. Within the context of rebalancing growth, is the banking sector sufciently resilient to
withstand shocks and potential loan delinquencies?
4. Is long term investment in developing the regional trade potential in hydrocarbons and
hydropower sector the way forward for Central Asia region?
5. In view of developments in the nancial sector of GCC countries during the crisis-
period, is there a case to re-examine the desirability of maintaining full capital account
convertibility?
6. Will there be a strategic rebalancing of portfolio by GCC-based investment funds away
from investment in nancial assets towards longer term investments in developmental
projects at home, Asian or African countries?
7. Given the global economic recession and slower growth in SSA region, will it be
appropriate to defer the target year of MDGs from 2015 to (say) 2020?
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III: Key G-20 Reform Agenda for Global Financial System: Regional Impact and
Islamic Financial Industry (IFIs)
1. In repairing institutions and reforming global nancial system, how can fundamental
insights of Islamic nance become part of the international discourse?
2. In deference to insights from Islamic nance, can stability and resilience of the
nancial system be achieved by managing a consistent linkage between growth in
nancial intermediation and real GDP growth?
3. Given the scale of destruction of global nancial assets, is it an opportune moment to
mainstream Islamic nance in the national nancial system?
4. Going forward, is there a clear case for coordinating the development of a common
regulatory framework for banks plus nonbanks plus Islamic nancial institutions at
the regional level?
5. How can non-G20 member countries better liaise with G-20 countries in terms of
communicating their views on the work of standard-setting bodies?
IV: Expanded Mandate for MDBs: What are the Key Strategic Implications for
IDB Group?
1. In the context of expanded mandate of MDBs, will member countries prefer joint
programming engagement with all MDBs?
2. In the context of structural adjustment issues, how can IDB address policy concernsrelated to upgrading productivity and competitiveness, including re-training and skills
development of the workforce?
3. To what extent IDB-sponsored projects will be protected from potential cutbacks in
counterpart funds?
4. Compared to other MDBs, will it be appropriate to double the planned growth in
IDBs Operations Plan?
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Part 1:Global Imbalances: The Dark Heart of Global Financial Instability1
Analysis
Global imbalances continued to
widen right up to 2006. Policy-
induced rigidity prevented
exchange rates to correct sustained
build-up.
Global imbalances accompanied
by low interest rate policy, de-
regulation of nancial institutions
and weak risk management
practices fostered leverage and
search for yields. This underpinnedcreation of riskier assets (such as
CDS, hedge funds, US subprime mortgages) and speculative bubbles in commodities
and energy markets.
Net Exporters of Capital (2008) Net Importers of Capital (2008)
Combined share of ve IDB member countries as net exporters of capital was 18.1% of
the worlds total in 2008. This share roughly corresponds to Japan.
Dramatic drop in prices of nancial assets in the private sector and near-zero policy
interest rates on treasury papers in developed countries will represent, for net capitalexporters, at least valuation losses on nancial assets and low yields on treasury papers.
United States alone absorbed 43% of net global capital exports followed by U.K. plus
Eurozone countries at 23.6% in 2008.
For the rest of the world, particularly developing countries, a potential correction in global
imbalances could imply sharper exchange rate adjustments (with possibility of exploiting
newer trade opportunities) which can be offset by an eventual stiff competition for capital
(i.e. a rise in cost of capital).
1Graphs are from Martin Wolf, Financial Times (2008): Crisis and Aftermath; and IMF (2009): Global Financial Stability Report.
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Domestic demand has contributed in the range of 2.4% age points in GDP growth
during 2001 to 2006.
US household consumption is 71% of its total GDP of about $14.3 trillion. As percent of
global GDP, US household consumption is estimated at 15% which is more than twice the
size of the Japanese economy.
With domestic demand collapsing
in US, spare capacity is being
turned for exports. Contributions
of net exports to growth rose
steadily to about 2% points by
end-2008.
Issues for Honorable Governors
1. Why is it that the G-20Summit in London did not
make an attempt on how to
resolve global imbalances?
2. Why is that sustained global imbalances could not be resolved?
3. Without correcting global imbalances, what is the risk of a disorderly movement in
exchange rates?
4. Has the world run out of large and willing creditworthy borrowers?
5. Can households in emerging economies build-up liabilities to compensate for loss ofUS consumers?
Part 1: Global Imbalances in the Post-Crisis World2
Analysis
With the onset of US subprime crisis, US dollar depreciated by 8 percent from June
2007 to July 2008. After Jan.
2009, US dollar has steadily
appreciated, mainly due to capital
ight to safety reasons.
Beginning from 2006, US current
account decit has started to
contract. This was due to relatively
slower growth in US and lagged
effects of US dollar depreciation.
As the nancial crisis intensied,
ight to safety concerns became
dominant resulting in reversal of private capital inows back to the US.
2Graphs are from IMF (2009): World Economic Outlook (p. 35 and 38).
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Surge in demand for US treasury
securities was mainly led by private
sector (in particular, nancial
institutions) while overseas ofcial
sources liquidated their investment.
IMF is projecting adjustments
in global imbalances from three
channels: increase in US private
savings, lower global credit
intermediation and terms of trade
improvements (or deterioration) for
oil for commodity importing (or
exporting) countries.
US decit is expected to improve
from a peak of 6% in 2006 to 3%in 2009.
Oil-exporting countries and Japan are
likely to experience disappearance
of current account surpluses in 2009.
However, with projected global
recovery beyond 2010, current account
surpluses will again appear, albeit at
much reduced levels.
Global imbalances are projected tosharply decline from 5% in 2007 to
4% in 2009.
Beyond 2009, key issues are home
bias, i.e. contraction of global
imbalances accompanied by a fall in
cross-border gross capital ows.
Issues for Honorable Governors
1. Is it correct to say that this crisis has forced adjustment of global imbalances?
2. Does revival of global economic growth means a new normal characterized by
lower credit intermediation at the global level and reduced capacity for sustained, non-
inationary growth?
3. Has rebalancing growth model by moving away from export-led growth to reliance on
domestic and regional growth become imperative?
4. What are the prospects for P.R. of China proposal to use SDR as an international reserve
currency gaining popularity?
5. Looking ahead, to what extent it is feasible to invest current account surpluses at home ininfrastructure projects rather in nancial assets overseas?
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Part 2: Rebalancing Growth in the Post-Crisis World: Trade Channels
Analysis
Economic growth in OECD countries, developing countries and IDB member countries
are all projected to recover in 2010 and 2011, albeitat a lower rate compared to 2007.
During 2002-07, developing countries
registered per capita growth at 9% while
it grew in IDB member countries by 4%.
Rising prosperity in developing countries
was mainly predicated on export-led
growth whose nal buyers were consumers
in developed countries, who, in turn,
nanced their purchases by building up net
liabilities.
In emerging Asian countries, national
savings are in excess of 30% with China
at over 50% in 2007. Corporate savings
in East Asian countries, including China,
while growth in household savings in India
dominates the national savings rate.
In the pre-crisis period, import by emerging
Asian countries was about 3% of global
GDP while by IDB member countries
(IDB-MCs) was 3.1%.
Share of total exports of IDB-MCs in
global exports increased from 8.1% in
2003 to 9.9% in 2007.
Decline in exports of IDB-MCs to
developed countries increased by over 3%
age points to developing countries and
intra-trade ratio.
IMF projections for exports growthby OECD countries is -13.5% in 2009
followed by 0.5% in 2010.
For developing countries, exports growth
is projected to decline by -6.4% in 2009
followed by recovery of 1.2% in 2010.
Oil prices are projected to decline by
-46.4% in 2009 followed by 20.2%
recovery in 2010. Nonfuel commodities
are expected to decline by -27.9% in 2009 followed by 4.4% in 2010.
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Issues for Honorable Governors
1. With nal demand collapsing in developed countries, can trade ever recover and grow to
pre-crisis rates?
2. Is it likely that, in the near term, Asian economies can signicantly contribute in creating
a virtuous cycle of growth and intra-regional trade?3. Is the intra-OIC target of 20% to be achieved by 2015, under the Ten-Year OIC Plan of
Action, still feasible?
4. What policy measures can assist in fostering look East trade policy?
Part 2: Rebalancing Growth in the Post-Crisis World: Financial Flows Channel
Analysis
IMF-WEO (2009) states that there is broad-
based withdrawal of foreign investors and
banks from developing countries: issuanceof new securities has come to a virtual halt,
bank ows are reduced and bond spreads
have spiked.
Since the onset of crisis, a sharp rise in
the premium on US dollar bond index for
sovereigns and corporate in both Asia and
Middle-East regions is reective of a broad-
based repricing of risks. For most of the
crisis-period, this has drastically reduced
new bond issuance by emerging economiesin the international capital markets.
Beginning from 2nd quarter 2009, some
emerging economies (such as Indonesia)
and MDBs (such as World Bank) have
returned to international capital markets.
Beginning from 2nd quarter 2009, pricing
of bonds for both sovereigns and corporate
in the Middle-East region are still elevated:about 200 bps compared to peak during
2008 and about 400 bps compared to
average during 2007.
Prior to the crisis-period, spread on sukuks
was generally below the spread on bond
index. However, during the crisis-period,
spread on sukuks has been relatively higher
than bond index, which probably reects
risk-quality of sukuk issuers in the Middle-East region.
JP Morgan EMBI stripped spreads3
Middle-East US$ Bond Index Spread4
Sukuk US$ Index Spread
3Source: Asian Development Outlook (2009, p.33), published by Asian Development Bank.4Source: HSBC-DIFX Index, downloaded on 11 May 2009.
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IMF-WEO (2009) estimates that rollover
needs5 of emerging economies are $1.8
trillion in 2009.
External private debt nancing by both
sovereigns and corporates in 40 IDB
member countries is estimated at about
$102 billion in 2008.
Deleveraging process of nancial
institutions in developed countries is likely
to be protracted. Weight of new regulations can also add to dampening of gross cross-
border private ows.
Issues for Honorable Governors:
1. With global imbalances narrowing, is it likely that era of rapid growth of global nance
is over for the foreseeable future?
2. Can there ever be a longer term increase in home bias? (i.e. a potential decline in cross-
border gross capital ows)?
3. Given the rollover size of external nancing combined with signicantly reduced cross-
border ows, what is the risk that spreads may resume their northern journey?
4. Given the balance of external funding risks, is there need to put together contingency
plans to counteract a potential liquidity crisis triggering a solvency crisis for the private
sector in IDB member countries?
Part 3:Shaping the Post-Crisis World: Regional Implications for Member Countries inAsian Region
Analysis
Member countries in Asia region are expected
to grow close to 2% in 2009 and then gradually
recover to about 4.8% by 2011.
Economic recovery is expected to be below an
average of 6% growth recorded during 2006 to
2008.
Strong foreign exchange reserves positioncombined with partial capital account
convertibility have limited signicant recourse
to external nancing.
Over two-thirds of external nancing is based on
loan syndications.
Beyond 2009, remittance inows are projected
to remain steady after a slight drop from $24.5
billion in 2008.
5Rollover needs are dened as short-term debt plus amortization of medium- and long-term debt.
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Bangladesh, Indonesia and Pakistan each annually receive remittance inows of about $6
billion.
After a period of reforms, banking sector by 2008 is well positioned in terms of declining
share of nonperforming loans.
A key vulnerability is that banks regulatory capital to risk-weighted assets has declined
from (weighted average) 16% in 2003 to 14% in 2008.
Issues for Honorable Governors
1. In the medium-term, to what extent rebalancing economic growth model from reliance
on external demand to stimulating domestic demand is both desirable and feasible policy
choice?
2. Within the context of rebalancing growth, is the banking sector sufciently resilient to
withstand shocks and potential loan delinquencies?
2. Is it likely that rollover needs combined with prohibitive cost of access to externalnance can be potentially threatening to external sector viability?
4. In a complicated external environment, is targeted stability in real effective exchange rate
the best policy option?
Part 3: Shaping the Post-Crisis World: Regional Implications for Member Countries in
Central Asia Region
Analysis
Member countries in CIS region are
expected to grow close to 2% in 2009and then gradually recover to about 6%
by 2011.
Economic recovery is expected to be
below an average of about 9% growth
recorded during 2006 to 2008.
External nancing ows to CIS region
mainly reect loan syndications by
Kazakhstan.
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For 2009, Kazakhstan appears to have
covered its nancing needs during 2009
through large loan syndications during the
3rd quarter of 2008.
The overall volume of remittance inows to
CIS member countries is still modest about
$5billion each in 2007 and 2008.
Remittance inows, after ODAs, are critical
to underpinning external sector viability.
With major downturn in the Russian
economy, remittance inows are projected
to sharply decline.
Banking sector in CIS region appears to
be vulnerable with share of nonperforming
loans sharply rising during 2008.
Another source of vulnerability is that
banks regulatory capital to risk-weighted
assets has declined from (weighted average) 19% in 2003 to 15% in 2008.
Issues for Honorable Governors
1. Given the prospects of depressed prices
of major commodities exported by CIS
member countries, what strategic choices
are available to underpin long termeconomic development?
2. Is long term investment in developing
regional trade potential in hydrocarbons
and hydropower sector the way forward for
CIS region?
3. Is the banking sector sufciently resilient to withstand shocks and potential loan
delinquencies?
Part 3: Shaping the Post-Crisis World: Regional Implications for Member Countriesin MENA Region
Analysis
Member countries in MENA region are
expected to grow close to 1% in 2009 and
then gradually recover to about 4% by 2011.
Economic recovery is expected to be below
an average of about 5.3% growth recorded
during 2006 to 2008.
Bond issuance and loan syndications inMENA region dropped from $33 billion and
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$75 billion in 2007 to $15 billion and $58
billion in 2008, respectively.
In the GCC region, these volumes mainly
reect private sector borrowings. In other
part of MENA, these volumes include both
ofcial and private sector borrowings.
After a sharp drop in growth of remittance
inows in 2009, MENA countries are
projected to receive a steady ow of about
$33 billion annually during 2009 to 2011.
In 2008, major recipient of remittance
inows in MENA region were: Egypt -$9.5
billion, Lebanon -$6 billion and Morocco
-$6.7 billion.
Banking sector in MENA region appears
to be well positioned in terms of declining
share of nonperforming loans.
Banks regulatory capital to risk-weighted
assets declined from (weighted average)
18.4% in 2006 to 14% in 2008.
Issues for Honorable Governors
1. In the post-crisis world, what will be thekey drivers of long term economic growth
in MENA region?
2. With projected narrowing of global
imbalances and near-zero current account surpluses of GCC countries, are pricing
pressures likely to build-up through reduced gross capital ows for sovereign and
corporate borrowers?
3. Will there be a strat
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