The IMF warned about the risks of government digital currencies for Islamic banks

The International Monetary Fund drew the attention of Islamic states to the problems that local banking systems may face when launching digital currencies of central banks.

IMF experts believe that the lack of uniform development Islamic banking, a limited number of credit institutions severely limits the development of Islamic liquidity management tools, in particular, the use of CBDC.

Among countries practicing Sharia banking, the level of penetration of digital assets into the financial system is highly uneven. If galloping rates of implementation are recorded in the countries of the Middle East, then in other Islamic states, such as Morocco and Algeria, a complete ban on digital currencies has been introduced.

The issuance of CBDCs still creates serious problems for ordinary commercial banks, with a traditional European value system, IMF experts complain. Restrictions on banking activities in accordance with Sharia norms complicate not only the “design of Islamic CBDCs”, but also the process of compatibility of state digital currencies of different countries with each other.

The fact is that the Islamic banking system does not allow the use of traditional interest-based liquidity management mechanisms. The principles of Islamic law prohibit usury and speculation. That is why CBDC cannot be used for transactions with currency derivatives. IMF analysts conclude that since the halal state digital currency will not bring income to Islamic banking structures, then, most likely, their interest and involvement in the processes of creating and using CBDC will be extremely low.

"The usual interest-based liquidity management mechanisms - the interbank market, secondary market financial instruments, the central bank discount window and the lender of last resort (LOLR) - are unacceptable for Islamic banks," the IMF said.

An IMF study says that only two countries, Iran and Sudan, have fully Islamic banking systems, and they account for less than 2% of global finance. However, the Islamic financial system is present in 34 countries and is of systemic importance in 15 jurisdictions. Therefore, limitations need to be taken into account when developing national versions of the CBDC. According to IMF analysts, it is the need to comply with Sharia requirements that prevents most Islamic states from bringing pilot projects to the stage of practical testing.

In early March, the Central Bank of Iran (CBI) announced the completion of the preliminary stage of testing the state digital currency, as well as plans to integrate it into the country's payment system.