The Promise of Islamic Finance: Further Inclusion with Stability

By Mohamed Norat, Marco Pinon and Zeine Zeidane

(Versions in عربي)

Since the global financial crisis, policymakers have sought to press the “reset” button to strengthen financial intermediation that is performed by conventional banks and non-bank financial institutions. The aim has been to address the fault lines that helped trigger one of the most devastating financial crises in a century, and to enable a more inclusive, stable financial system that promotes stability as well as economic development and growth.

Islamic finance offers several features that are consistent with these objectives. Islamic finance refers to financial services that conform with Islamic jurisprudence, or Shari’ah, which bans interest, speculation, gambling and short-sales; requires fair treatment; and institutes sanctity of contracts. And these principles hold the promise of supporting financial stability, since a key tenet of Islamic finance is that lenders should share in both the risks and rewards of the projects and loans they finance. 

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Canada’s Financial Sector: How to Enhance its Resilience

By Hamid Faruqee and Andrea Pescatori

(Version in Français)

In the aftermath of the 2008 financial crisis, Canada’s financial system held up remarkably well—making it the envy of its Group of Seven peers. This relative resilience was particularly impressive considering its most important trading and financial partner, the United States, was the epicenter of the crisis.

Part of Canada’s success story lies in the fact that its banking system is dominated by a handful of large players who are well capitalized and have safe, conservative, and profitable business models concentrated in mortgage lending—much of it covered by mortgage insurance and backstopped by the federal government. Notwithstanding such an enviable record and sound financial system, we need to keep an eye on certain financial risks.

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Where Danger Lurks

blanchardBy iMFDirect

Lurking conjures up images of spies, flashers and other dodgy types.  The IMF’s chief economist Olivier Blanchard takes readers into the dark corners of the financial crisis in his latest article ‘Where Danger Lurks’  in our recent issue of Finance & Development Magazine, and looks at small shocks, sudden stops and liquidity.

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Monetary Policy Will Never Be the Same

WEOBy Olivier Blanchard

(Version in Español)

Two weeks ago, the IMF organized a major research conference, in honor of Stanley Fischer, on lessons from the crisis. Here is my take.   I shall focus on what I see as the lessons for monetary policy, but before I do this, let me mention two other important conclusions.

One, having your macro house in order pays off when there is an (external) crisis.  In contrast to previous episodes, wise fiscal policy before this crisis gave emerging market countries the room to pursue countercyclical fiscal policies during the crisis, and this made a substantial difference.

Second, after a financial crisis, it is essential to rapidly clean up and recapitalize the banks. This did not happen in Japan in the 1990s, and was costly.  But it did happen in the US in this crisis, and it helped the recovery.

Now let me now turn to monetary policy, and touch on three issues: the implications of the liquidity trap, the provision of liquidity, and the management of capital flows.

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Seeing Our Way Through The Crisis: Why We Need Fiscal Transparency

by Carlo Cottarelli

Version in Français

Without good fiscal information, governments can’t understand the fiscal risks they face or make good budget decisions. And unless that information is made public, citizens and their legislatures can’t hold governments accountable for those decisions.

Fiscal transparency—the public availability of timely, reliable, and relevant data on the past, present, and future state of the public finances—is thus crucial to the foundation of effective fiscal management.

A new paper from the IMF on fiscal transparency, accountability, and risk considers the progress we have made in opening up the “black box” of fiscal policymaking over the past decade, the lessons of the recent crisis for current fiscal reporting standards and practices, and the steps we need to take to revitalize the global fiscal transparency effort.

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Not Making the Grade: Report Card on Global Financial Reform

by Laura Kodres

Despite a host of reforms in the right direction, the financial structures that were in place before the global crisis have not actually changed that much, and they need to if the global financial system is to become a safer place.

Although the intentions of policymakers are clear and positive, the system remains precarious.

Our new study presents an interim report card on progress toward a safer financial system. Overall, there is still a long way to go.

How we measure progress

In our study, we first tried to pay attention to those features of financial systems related to the crisis—the large dominant, highly interconnected institutions, the heavy role of nonbanks, and the development of complex financial products for instance—features that need to be addressed in some way.

To do this we needed to construct measures of these features in a way that would allow us to gauge how well the reforms are working toward changing them. We looked at a lot of data, but we focus on three types of features.

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Promoting Multilateral Solutions for a Globalized World

Jeremy CliftBy Jeremy Clift

(Version in Español عربي)

We live in an increasingly globalized and interconnected world, helping to spread ideas, information, and technology ever more quickly. The globalized economy has created a complex and interlocking network of capital and trade flows that have brought major economic gains, lifting hundreds of millions of people out of poverty around the world.

But, as we have seen from the prolonged global financial crisis, our interconnectedness carries grave risks as well as benefits. With instant communication comes the risk of rapid contagion. There is, thus, a strong public interest in ensuring that global economic integration is supported by a coherent set of coordinated national macroeconomic policies and a harmonized international regulatory regime that addresses the fragilities in our global financial system.

The new issue of Finance & Development magazine looks at different aspects of interconnectedness. Kishore Mahbubani, dean of the National University of Singapore’s Lee Kuan Yew School of Public Policy and author of the forthcoming book The Great Convergence: Asia, the West, and the Logic of One World, argues that what he terms the global village increasingly requires global solutions to big emerging problems such as climate change.

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