The COVID-19 pandemic coupled with the Ukraine–Russia crisis led to the deterioration of the global food security situation over the last years into 2022 and beyond, impacting severely the trade finance industry. Indeed, many countries involved in trade are hit so much that the recovery of the global economy has been further slowed down. Because of the crisis, countries are impacted at different levels (high food and fuel prices, currency fluctuations, etc), forcing them to request more financing support than ever from various institutions, including Islamic finance.
Review of 2022
As a result of the crisis, Islamic financial institutions are required to play an active role in assisting countries to face their needs. Among them, the International Islamic Trade Finance Corporation (ITFC) continues to assist its member countries facing these variety of challenges all happening at once. Indeed, in June 2022 alone, the ITFC signed 12 agreements totaling an amount of US$7 billion dedicated to member countries to help address their food, health and energy needs. This number is expected to increase significantly as we get closer to the end of the year.
The role of the ITFC does not focus only on the financial needs as it extends technical assistance to its clients whenever needed. In September 2022, the ITFC cooperated with the Sustainable Coffee Platform of Indonesia in order to facilitate the transfer of knowledge to different stakeholders regarding the latest opportunities and challenges in the coffee sector.
In addition, it is worth mentioning that the Islamic trade finance industry is positively growing and impacting the financial market. In fact, one can note that Faysal Bank of Pakistan plans to complete its conversion into a fully-fledged Islamic bank in January 2023 while it is envisaged that the Islamic banking landscape in Africa will significantly grow in the coming years.
In a nutshell, Islamic finance and Islamic trade finance are growing and welcomed by the players of the industry; although they face challenges, but if the challenges are overcome in the coming years, it will help extend their roots further and further.
Preview of 2023
Despite the fact that Islamic finance has received its letters of nobility, it will gain a lot in improving its infrastructure. Indeed, the industry would gain a lot by having, among others, unification or standardization of the Shariah’s interpretation and audit rules and regulations. In addition, Islamic trade finance would be more impactful were the Muslim countries to provide a more enabling macroeconomic environment by developing sound financial policies, trade infrastructures (warehousing for Islamic products such as Salam), good governance and a strong Islamic banking system.
In fact, there is a need to adopt a very effective and inclusive Islamic legal framework which incorporates not only accounting standards, but also corporate governance and a pre-drafted agreement template. In this regard, the IIFM is playing a crucial role aiming at standardizing most if not all of an Islamic product’s legal agreements.
Furthermore, COVID-19 forced the acceleration in the development and progress of technologies, in order to ease the movement of goods, capital and investments. In this regard, the UK has introduced, on the 12th October 2022, the Electronic Trade Documents Bill into its parliament for the purpose of digitalizing its trade industry.
There is no doubt that new technologies will help speed the digitalization of Islamic trade finance and facilitate its adoption globally since the need for creative technological solutions is now more vital than ever. It is important to note, indeed that, the use of technology in the Islamic trade finance industry will simplify the entire process, decrease costs and improve trading efficiencies.
Conclusion
Trade represents one of the important drivers of growth of the economy as well as is an essential labor-intensive sector that might help in raising income levels and reducing the high unemployment rates in most of Muslim countries. With experience as a player in the industry, one of the challenges facing Islamic trade finance is the regulatory aspect as well as the need for consistency of the Shariah’s interpretation, the poor infrastructure of the Muslim countries and lack of a wider use of technology.
Indeed, weaknesses in trade infrastructure development, trade facilitation and Islamic finance infrastructure development have created an unfavorable environment for Islamic finance to be easily accessed by the trading enterprises.
However, multilateral development banks such as the ITFC, with resources, experience and exposure, can play a great role in the enhancement of the Islamic trade finance landscape. As for the regulatory challenges and the differences in the Shariah’s interpretation, the OIC can play an important role in setting unified rules and standards for Islamic trade finance and more unified rules regarding the interpretations of Shariah principles.
Ahmadou Kane is the senior manager of the Legal Transaction Team, Risk, Legal and Compliance at the International Islamic Trade Finance Corporation. He can be contacted at [email protected].