A study by the International Monetary Fund found that the design of most central bank digital currencies (CBDC) wasn’t compatible with the Islamic banking system, increasing the global risks of banking intermediation.
According to the International Monetary Fund (IMF) study, central bank digital currencies must be “well-designed” to minimize their impact on monetary policy. Analysts say the main difficulty in this issue becomes the global compliance of CBDC mechanisms with the principles of Islamic law.
The thing is that the Islamic banking system prevents the use of traditional mechanisms of liquidity management based on interest. The principles of Islamic law prohibit Riba or Usury (interest payments) and speculation, so “CBDC cannot be used for foreign exchange derivatives transactions.” All these restrictions under Shariah compliance complicate not only the design of local CBDCs but also the compatibility process of the various state digital currencies. As a result, CBDCs can unintentionally increase the risks of banking intermediation.
Only two countries, Iran and Sudan, have fully Islamic banking systems and account for less than 2% of global finance. However, the Islamic financial system is present in 34 countries and systemically significant in 15 jurisdictions. Therefore, its limitations must be taken into account in the design of CBDC.
According to IMF analysts, compliance with Shariah requirements is what hinders the pilot project of the digital rial, announced back in April 2022.
The largest Islamic organizations in Indonesia ruled that cryptocurrencies are unacceptable for devout Muslims. And, in case of “wrong design” development, CBDCs can also become haram.
