Ali Babacan says Islamic finance model offers additional financial instruments with less risk.
Turkey, as the chair of G20 group, promotes Islamic finance because it offers additional financial instruments with less uncertainty and shared risks, according to the country’s deputy prime minister on Thursday.
Ali Babacan’s comments were made during a panel discussion at the annual spring meetings of the IMF and World Bank Group in Washington.
"As the G20 chair, we are highlighting the merits of the Islamic finance, in the first ministerial communique which we issued in February in our Istanbul meetings," Babacan said referring to the way corporations and banking institutions in the Muslim world raise capital in accordance with Sharia, or Islamic law.
After assuming leadership of the G20 last December, the bloc endorsed for the first time, asset based financing and Islamic financial instruments such as sukuk – commonly referred to as the Islamic equivalent of bonds.
Because fixed-income, interest-bearing bonds are not permitted under Islamic law, sukuk securities are structured to comply with Islam’s religious tenets and investment principles which prohibit charging or paying interest.
Islamic finance is “safer,” according to Babacan, who cited the 2000 and 2009 financial crises that he said "proved once again that the risks are managed better under the Islamic financial schemes."
"Also for regulation purposes, macro credential purposes, it is considered as a less risky kind of financing means," he added.
The more countries develop stronger legal frameworks to support Islamic finance, the more attention the system would get as issuers and investors who are sensitive to Islamic rules participate in the structure.
Central to Islamic banking and finance is an understanding of the importance of risk sharing as part of raising capital and the avoidance of "interest" or "usury," he said.
"It is important to look at this inclusiveness point of view, because in many Muslim countries there are mass populations, wide segments of the society who are very sensitive about the Islamic rules but they are somehow outside of the system just because of the lack of options – Islamic compliant instruments," he added.
Along with roughly 13,000 others, Babacan is in Washington for the meetings of the financial institutions.
Approximately the same amount, including a number of world leaders are expected to attend the G20 Leaders' Summit in Turkey in November, according to Turkish officials.
Resource: Daily Sabah, April 17, 2015