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Editor's PickCIBAFI urges Islamic banks to develop CBDC technical capacity

CIBAFI urges Islamic banks to develop CBDC technical capacity

The General Council for Islamic Banks and Financial Institutions (CIBAFI) has made five recommendations to Islamic banks in light of central banks adopting central bank digital currencies (CBDCs).

The recommendations were outlined in CIBAFI’s latest briefing which explores CBDCs in detail and weighs the implications of CBDCs on Islamic banks.

“Countries where Islamic banks are prevalent are increasingly researching or in the process of developing a CBDC. This means that Islamic banks in these countries will very soon be confronted with these novel structures,” CIBAFI noted. “The implications of a CBDC would be very dependent on the architecture decided on by the central bank of a given jurisdiction.”

Saudi Arabia and the UAE are among the jurisdictions which are exploring CBDCs. They both embarked on Project Aber together and continue to work on the asset class separately on their own: Saudi Arabia is working on domestic wholesale CBDC use cases while the UAE recently launched a new program to catalyze digital transformation and the utilization of CBDC.

To date, 11 countries have successfully launched their CBDCs including Nigeria, 17 have deployed pilot projects such as Saudi Arabia and the UAE as well as Malaysia while 33 others are currently developing CBDCs including Bahrain, Turkiye and Indonesia. According to CIBAFI, 39 other central banks are actively researching CBDCs, such as Morocco, Qatar, Oman, Bangladesh and Pakistan.

For Islamic banks, one of the biggest factors of considerations relates to the design of CBDCs.

“In the case where a central bank of a given jurisdiction decides to deploy the CBDC for monetary policy and adopt an interest-bearing embedded feature in its design, this could have effects on Islamic banks’ dealings in the CBDC of the respective jurisdiction. Islamic banks may be excluded in this case from any CBDC dealings, losing business to conventional counterparts,” cautioned CIBAFI.

The good news is that interest-bearing CBDCs do not appear to be attractive to central banks currently. Although CIBAFI also warned that even without such a feature embedded, monetary policy and financial safety net instruments based on CBDCs may well emerge and Islamic banks would thus require parallel developments on a non-interest basis, as they do in relation to existing forms of money.

There is also the question of the types of CBDC modes that central banks could deploy: direct, hybrid or an indirect/synthetic model.

According to CIBAFI, the adoption of a CBDC model that bypasses the role of commercial banks, either totally or by sharing the market with payment service providers, could lead to the weakening or destruction of the business of Islamic banks.

“This could compromise the stability of the financial system, with the role of banks diminishing,” it said.

To better prepare themselves to handle these unfolding developments, CIBAFI has recommended for Islamic banks to:

  • Engage with their respective central banks to understand the technical options of the CBDC that is being pursued and the possible implications on their business models;
  • Develop the necessary technical capacity to respond to the policy choices under consideration by the central bank;
  • Map out scenarios to anticipate compliance and privacy requirements relating to CBDCs;
  • Provide training and awareness to employees on CBDCs and their related processes;
  • Engage with global institutions and national or regional banking bodies to understand developments in CBDCs and build related strategies.

“Banks and financial institutions should be vigilant to what developments are happening in this regard and take a proactive approach to ensure that any future structure proposed by the central banks of their respective jurisdictions takes these considerations fully into account. Islamic banks, in particular, should ensure that they are able to keep pace with conventional banks of similar size and with similar business models; they should also ensure that any required Islamic specificities are taken into account, notably in the way monetary policy and financial safety net instruments based on CBDCs may develop,” CIBAFI concluded.


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