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ISLAMIC DEVELOPMENT BANK

SHAPING THE POST-CRISIS WORLD:

REGIONAL IMPLICATIONS AND COORDINATED

RESPONSES BY MEMBER COUNTRIES

Proceedings of the 20th IDB Annual Symposium

9 Jumada Thani 1430H (2 June 2009)

Ashgabat, Turkmenistan


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Coordinated by:

Dr. Nosratollah Nafar

Economic Research and Policy Department

Islamic Development Bank

P.O. Box. 5925, Jeddah 21432Kingdom of Saudi Arabia

Telephone: + 9662 646 6531

Facsimile : + 9662 646 7478

E-mail : [email protected]

Home Page: http://www.isdb.org

ISSN 1658-449X

The views expressed in this document are those of the authors/speakers and do not necessarily reect the position,

views and policies of the Islamic Development Bank or its member countries.


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CORPORATE PROFILE OF THE ISLAMIC DEVELOPMENT BANK

Establishment

The Islamic Development Bank (IDB) is an international nancial institution established

in pursuance of the Declaration of Intent issued by the Conference of Finance Ministers of

Muslim Countries held in Jeddah in Dhul Qadah, 1393H ( December 1973). The Inaugural

Meeting of the Board of Governors took place in Rajab, 1395H (July 1975), and the IDB

formally commenced operations on 15 Shawwal, 1395H (20 October 1975).

Purpose

The purpose of the IDB is to foster the economic development and social progress of member

countries and Muslim communities in non-member countries individually as well as jointlyin accordance with the principles of the Shariah ( Islamic Law).

Functions

The main function of the IDB is to provide various forms of development assistance for

poverty alleviation, human development, forging economic cooperation, promoting trade and

investment and enhancing the role of Islamic nance in the social and economic development

of member countries. It also establishes special funds for specic purposes, including a fund

for assistance to Muslim communities in non-member countries.

IDB mobilizes nancial resources using Shariah-compliant modes and provides technical

assistance to member countries, including provisions of training facilities for personnel

engaged in development activities in member countries.

Membership

The present membership of the IDB stands at 56 countries spreading across different

continents and regions. The basic condition for its membership is that the prospective country

should be a member of the Organization of the Islamic Conference (OIC), pays the rst

installment of its minimum subscription to the Capital Stock of IDB and accepts any terms

and conditions that may be decided upon by the Board of Governors.

Capital

Pursuant to the decision of the Board of Governors in their 31st Annual Meeting held in

Kuwait in Jumada Awwal 1427H (May 2006), the Authorized Capital of IDB was doubled

from ID15 billion to ID30 billion and the Issued Capital was also increased from ID8.1

to ID15 billion. The Issued Capital was further increased to ID16 billion by the Board of

Governors in their 33rd Annual Meeting held in Jeddah, Kingdom of Saudi Arabia, on 29-30

Jumada Awwal 1429H (3-4 June 2008); of which ID15.1 billion was subscribed with ID3.3

billion paid-up as of end 1429H.


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Head Ofce and Regional Ofces

Headquartered in Jeddah, Kingdom of Saudi Arabia, the IDB has four regional ofces in

Rabat, Morocco, Kuala Lumpur, Malaysia, Almaty, Kazakhstan and Dakar, Senegal.

Financial Year

The IDBs nancial year is the lunar Hijrah Year (H).

Accounting Unit

The Accounting Unit of IDB is the Islamic Dinar (ID) which is equivalent to one SDR-

Special Drawing Rights of the International Monetary Fund.

Language

The ofcial language of the IDB is Arabic, but English and French are additionally used as

working languages.


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TABLE OF CONTENTS

Preface ......................................................................................................................... vi

Welcome Address

H.E. Dr. Ahmad Mohamed Ali,

President of the Islamic Development Bank Group ................................................... 1

Implementation Issues of G-20 Reform Agenda in the Area of New Global Financial

System and Implications for MENA Region

H.E. Dr. Ibrahim Bin Abdel Aziz Al-Assaf,

Minister of Finance, Kingdom of Saudi Arabia ........................................................ 3

Implementation Issues Arising From the G-20 Reform Agenda and the Role of

the IMF and the Financial Stability Board in the New Global Financial System

H.E. Mr. Ibrahim Halil Canakci,

Undersecretary of Treasury, Republic of Turkey ....................................................... 6

Key Proposals Made by the Task Force on Islamic Finance and Global

Financial Stability

Prof. Rifaat Ahmed Abdel Karim,

Secretary General of the Islamic Financial Services Board (IFSB) andMember of Task Force on Islamic Finance and Global Financial Stability .............. 10

General Discussion .................................................................................................. 16

Major Conclusions and Recommendations .......................................................... 20

Issues Paper ............................................................................................................. 22


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Preface

The Islamic Development Bank (IDB) has been organizing annual symposia on various

themes of interest to member countries as well as its own mission in conjunction with theAnnual Meetings of the Board of Governors since 1409H. The purpose of the symposia has

been to generate and disseminate ideas to orientate and encourage best practices as a way of

enhancing the banks catalytic role in fostering economic and social development in member

countries. Nineteen such symposia have already been organized. In line with this tradition,

the IDB, in cooperation with the Government of Turkmenistan, organized its 20th Annual

Symposium on the occasion of the 34th Annual Meeting of the IDB Board of Governors

in Ashgabat on 2 June 2009. The topic of the Symposium was Shaping the Post-Crisis

World: Regional Implications and Coordinated Responses by Member Countries. The main

objective of the Symposium was to address (i) the major reform agenda in shaping the post-

crisis world; (ii) its implications for member countries from regional perspectives; and (iii)coordinated responses to the needs of member countries emerging from global economic

crisis.

The program of the Symposium was particularly designed to serve as a forum for member

countries to share experiences and learn lessons in managing crisis and engendering economic

recovery. The Symposium underlined the need for IDB member countries to enhance regional

and global cooperation in dealing with the emerging challenges in the new millennium.

The Symposium mainly focused on (i) key structural factors inuencing post-crisis world

at the global level; (ii) post-crisis world: key implications at the regional level; and (iii)

G-20 reform agenda concerning international nancial architecture, International MonetaryFund, and the MDBs. The panelists in the Symposium stressed that member countries

need to reconsider their growth strategies, learn how to cope with a dramatically altered

international nancial landscape in moving to the post-crisis world, and follow through the

implications of potentially new global patterns of trade and investment. In this context, all

multilateral development banks, including IDB, need to ensure rapid delivery of short-term

and long-term development assistance. However, cognizance of maintaining long-term

debt sustainability of developing countries, including IDB member countries, must be also

ensured. The Symposium also highlighted the signicant role of Islamic nance in providing

safeguards against leveraging and excessive risk-taking and in promoting resilience and

stability of nancial institutions against shocks.

The Symposium was chaired by H.E. Mr. Rahimberdi J. Jepbarov, Chairman of the Board

of Governors. H.E. Dr. Ahmad Mohamed Ali, President IDB Group delivered a welcome

address. A three-member panelist comprising of H.E. Dr. Ibrahim bin Abdel Aziz Al-Assaf,

Minister of Finance of the Kingdom of Saudi Arabia and IDB Governor, H.E. Mr. Ibrahim

Halil Canakci, Undersecretary of Treasury of Republic of Turkey and IDB Governor, and

Prof. Rifaat Ahmed Abdel Karim, Secretary-General of the IFSB and Member of the Task

Force on Islamic Finance and Global Financial Stability covered G-20 reform agenda and

its implementation issues as well as concerns arising from the effects of global economic

recession on Islamic nancial institutions. Mr. Sami Zeidan, Senior Anchor in Al-JazeeraEnglish Television Channel very ably moderated the event.


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Finally, I acknowledge the efforts of Dr. Lamine Doghri, former Director of the Economic

Policy and Statistics Department, in organizing the Symposium as well as Dr. Mohammad

Ahmed Zubair for preparing the Issues Paper that laid out emerging issues and concerns in

Shaping the Post-Crisis World, which is attached as an Annex.

As expected, the Symposium generated useful discussion on pertinent issues and produced anumber of useful ideas in devising a clear vision of the post-crisis world and a coordination

mechanism at the OIC level. Evidently, the process of reforming the global nancial system

and economic recovery is well underway. By publishing the Proceedings of the Symposium, it

is my fervent hope that a wider audience will benet from the insights in addressing a variety

of structural challenges and designing regional solutions towards robust and sustainable

economic growth.

Ifzal Ali

Chief Economist


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Welcome Address

H.E. Dr. Ahmad Mohamed Ali

President, Islamic Development Bank Group

In the Name of Allah, the Most Gracious, the Most Merciful

Praise be to Allah, Cherisher and Sustainer of the World and

Peace and Blessings be upon the Last of the Prophets and

Messenger and upon His Family and All His Companions

H.E. Mr. Rahimberdi J. Jepbarov,

Acting Chairman of the Board of the State Bank for Foreign Economic Affairs ofTurkmenistan and Chairman of the IDB Board of Governors,

Assalamu Alaikum Wa Rahmatullahi Wa Barakatuh

Excellencies, Governors and Alternate Governors,

Ladies and Gentlemen,

Distinguished Guests,

On behalf of the Islamic Development Bank (IDB), I would like to very warmly welcome

you all to the 20th IDB Annual Symposium on Shaping the Post-Crisis World: RegionalImplications and Coordinated Responses by Member Countries.

It is indeed a privilege for IDB that its Governors and member of their delegations, Executive

Directors and leading experts from international organization are participating in this

Symposium to address the major reform agenda in shaping the post-crisis world and its

implications for member countries from regional perspectives. I am sure all of you agree that

IDB member countries need to reconsider their growth strategies, learn how to cope with a

dramatically altered international nancial landscape, and follow through the implications of

potentially new global patterns of trade and investment.

Dear Brothers and Sisters,

As you are aware, because of the crisis and the resultant recession, IDB member countries

face sizeable declines in their foreign capital inows both from public and private sources.

In addition, economic prospects of our member countries appear uncertain as their growth is

projected to drop from 6.1 percent in 2007 to 1.3 percent in 2009. It has been estimated that

the fall in global demand brought on by the biggest economic downturn in decades will drive

exports down by about 13.5 percent during 2009.

This global nancial crisis impacted on macroeconomic stability and growth of our

member countries through various channels. These are: (i) declining ODA ows; (ii)reduced access to international capital markets; (iii) stock market turbulence and outow of


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portfolio investments; (iv) decline in global demand for country exports; (v) postponement

of large investment projects due to withdrawal by banks and investors; and (vi) decline in

remittance.

Dear Brothers and Sisters,

Policymakers around the world have announced many programs and plans to confront the

current nancial and economic crisis. Four steps which have been already taken to restore

condence to the nancial markets and stimulate the economic growth are : (i) buying risky

assets in troubled banks; (ii) injecting liquidity into the global nancial system to keep the

worlds nancial infrastructure intact by; (iii) a cut in interest rates to prevent the economy

recession; and (iv) implementing economic stimulus packages to revive the demand. Despite

these wide-ranging policy actions, nancial strains remain acute, pulling down the real

economy. According to IMF, world economic growth is estimated to decline by -1.3 percent

in 2009, which is global recession for the rst time since World War II.

At the global level, the leaders of G-20 countries, held a Summit meeting in London on2nd April, agreed that a wide range of actions is needed to help the global economy and the

nancial system regain their footing. In line with the global efforts, we need well-focused

and specic measures to reect on new challenges and forge common positions on regional

and global challenges in a post-crisis world as well as assist the IDB Group to better align its

development assistance to the new and emerging needs of member countries. Today, we will

hear about G-20 reform agenda and its implication issues from the honourable IDB Governor

of Saudi Arabia and Turkey. We will also hear from Honourable IDB Governors of Indonesia,

Kazakhstan, and Nigeria about the implication issues arising from the G-20 reform agenda

from regional perspectives.

On behalf of IDB, I wish to express my sincere gratitude to H.E. Dr. Ibrahim bin Abdel Aziz

Al-Assaf, IDB Governor of Saudi Arabia; H.E. Mr. Ibrahim Halil Canakci, IDB Governor of

Turkey; and Professor Rifaat Ahmed Abdel Karim, Secretary-General of the Islamic Financial

Services Board (IFSB) for having so kindly agreed to participate in the proceedings, and for

their various presentations which will address the major reform agenda in shaping the post-

crisis world and its implications for IDB member countries. Clearly, by so doing, they will

share their wide and rich experiences with us.

I am condent that this Symposium will provide a platform for sharing of experiences and

lessons learnt in managing crisis and engendering economic recovery, as well as in enhancing

regional and global cooperation in dealing with the challenges of our economy in the new

millennium.

With these words, I once again welcome you all to the Symposium and wish you every

success in your deliberations.

Wassalamu Alaikum Wa Rahmatullahi Wa Barakatuhu


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In the monetary and banking area, the Saudi Arabian Monetary Agency has maintained close

supervision of our banks to ensure they have adequate liquidity and depositors are protected.

In the area of trade, Saudi Arabia remains committed to open trade. The World Bank in

a recent paper has identied the Kingdom as one of only three G-20 countries that have

implemented the standstill commitment of the G-20 Washington Summit. We have alsostrongly supported the goal of reaching a successful conclusion to the Doha Round, which

will open up new growth opportunities for all countries, including our region.

All in all, I can say that Saudi Arabia has played, and will continue to play, an active role in

international cooperation to resolve this crisis.

The G-20 actions, and the Saudi contribution to them, as well as other countries actions, will

help boost global growth in the period ahead. The return of global growth would increase

exports from our region, including oil, and enhance capital inows. The expansionary

policies will also help the continued ow of remittances to a large number of countries. I

need not emphasize that nancial remittances, especially from expatriate workers, do playa vital part in the economies of a number of Islamic Development Bank member countries

as well as other countries from many regions. Indeed, the estimated 14 million expatriate

workers in the GCC countries send home about 40 billion dollars a year. Thus the policies

agreed by the G-20 Leaders are good not only for the health of the G-20 economies, but

would also have positive spillover effects on other economies.

The G-20 Leaders have acknowledged that major failures in the nancial sector and in

nancial regulation and supervision were fundamental causes of the crisis. The nancial

crisis, which has triggered the global economic crisis, has shown that self-regulation

is insufcient and counterproductive. It is tting, therefore, that the G-20 Leaders haveagreed to extend prudential regulation and oversight to all systemically important nancial

institutions, instruments, and markets, including systemically important hedge funds.

The focus on discouraging excessive leverage and emphasis on short-term results is also

a welcome development. Encouraging countercyclical policies such as building up capital

buffers during upswings and allowing these buffers to be drawn in a downturn is also an

important measure agreed in the Summit.

In Saudi Arabia, we have worked very diligently over the past few years to strengthen the

capacity of the Saudi banking system to withstand adverse macroeconomic shocks, which

has served the economy well at this difcult juncture. The capitalization and provisioning

policies of our banks have enhanced their buffers. Moreover, exposure to real estate markets

has been limited. On the regulatory side, Saudi banks have completed the implementation of

Basel II. Going forward, we are committed to remain vigilant and will monitor the evolving

risks closely. I am condent that other countries will also work toward ensuring a strong

regulatory system, which will result in a more resilient global nancial system. This would

also help our region in terms of higher foreign direct investment, which is important for

further promoting private-sector led growth.

Another important area that attracted the attention of the G-20 Leaders related to resisting

protectionism and promoting global trade and investment. The crisis has caused a collapse of

global trade not only due to global recession, but also because of rising protectionist pressuresand drying up of trade nance. So the restoration of global trade growth would require


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stimulating demand, maintaining open trade regimes, and taking measures to encourage

trade-related nance.

To help mitigate the impact of the sharp fall in capital ows to emerging market and developing

countries and the difculty in access to nancing, the G-20 Leaders have agreed to work

toward increasing the IMFs resources substantially and to review the capital adequacy of allmultilateral development banks. The IMF is already providing substantial nancial supportto a number of affected countries while the World Bank is well on way to triple its lending

this scal year. The regional development banks are also expanding nancing substantially.

These are welcome developments as emerging market and developing countries have been

the engine of recent global growth. Accordingly, the return to health of these economies

is essential for restoring worldwide growth and prosperity, which as I stated earlier would

benet growth in our region.

Another important outcome of the G-20 deliberations is the recognition of the need to enhance

the roles of the IMF and the Financial Stability Board (FSB), and increase coordination

between them, in monitoring nancial markets and contributing to the stability of the global

nancial system. The Leaders have agreed to expand the membership of the FSBformerly

known as the Financial Stability Forumto all G-20 members, which will help establish its

legitimacy and effectiveness.

I want to conclude by sharing some thoughts on how our great institutionthe Islamic

Development Bank can contribute to a sound and stable nancial system. First and

foremost, we should be proud that the Islamic Development Bank is the only major MDB

that is exclusively owned by developing countries. The World Bank and other MDBs are

frequently criticized for lack of voice and participation of developing countries. Here we

have an institution where voice is a non-issue.

Secondly, I want to recognize another unique achievement of the Islamic Development Bank.

Among the MDBs, it is a pioneer and a long time provider of trade nance facilities to its

members. The current crisis has underscored the critical importance of trade nance in global

recovery. It is also an opportunity for the Islamic Development Bank to assume a leading role

in reviving the real economy in its member countries by scaling up trade nancing operations.

Last but not least, it is clear that excessive leverage and risk-taking behavior in major nancial

markets, coupled with a lack of regulation, were key factors behind the global nancial and

economic crisis. We also know that the Shariah-based nancing has built-in safeguards

against such behavior. In my view, the practitioners of traditional and Islamic nancing

systems can learn a lot from each other. The Islamic Development Bank has played a vital

role in the evolution and spread of the Shariah-based nancing modalities and instruments.

Nevertheless, there is scope for doing more. The rapid growth of the Sukuk market globally is

an indication that the upside is virtually unlimited. I also sense a keenness on the part of major

global nancial institutions to learn more about Islamic nance. I, therefore, believe that the

Islamic Development Bank and the Islamic nancial institutions across its membership can

take this opportunity to fully harness and exploit the potential of Islamic nance.


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Implementation Issues Arising From the G-20 Reform Agenda

and the Role of the IMF and the Financial Stability Board in

the New Global Financial System

H.E. Mr. Ibrahim Halil Canakci,

Undersecretary of Treasury, Republic of Turkey

When in October 2008 the global nancial turmoil has turned into a full edged crisis,

the G-20 took the leadership in designing a global response which would restore market

condence and minimize the negative impact on growth and employment.

The rst G-20 Leaders Summit held in November 2008 in Washington, and the April 2009

London Summit, have been the key milestones in this process where political will were

turned into concrete outcomes that might make a difference for the world economy both in

the short and medium run.

Looking back, I can tell that our undertaking within the G-20 has contributed signicantlyin restoring condence and containing the downturn in global nancial markets. I believe

the broad representation at the G-20 was a key factor that enhanced the effectiveness and

relevancy of the decisions.

Let me remind you some of the key decisions of the G-20.

As G-20 countries, we have agreed on a number of actions aimed at broadly two goals.

First goal is to minimize the impact of the crisis and to achieve quick recovery. Towards this

goal our leaders decided:

to provide an unprecedented scal stimulus;

to support an increase in lending to emerging market countries by the International

Financial Institutions; and

to promote global trade and investment and to avoid protectionism.

Second goal is to establish a stronger nancial architecture to prevent future crises. To support

this goal, the G20 has decided:

to improve the regulation and supervision of the global nancial system and enhance

international coordination; and

to improve the governance structure of the IFIs.

Now, I would like to elaborate on the decisions taken towards achieving the second goal

which I think more relevant for todays discussion.

Improving the Regulation and Supervision of the Financial System

The current crisis has highlighted two shortcomings in the current nancial system. First,

the system has several supervisory and regulatory loopholes which left excessive risks in the

system unaddressed.

Second, is the need for global institutions that could oversee and govern todays international

nancial system, which cross-border rms and nancial ows play an important role.


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Fullling these tasks requires a more effective IMF surveillance. However, to achieve this,

the Funds enforcement capacity and legitimacy needs to be further improved. This need was

particularly evident during two occasions in the pre-crisis period:

First one was the unwillingness of some systemically important nancial centers to undergo

FSAP reviews and to be open to listening to the Fund advice.

Second one is the Multilateral Consultations which was initiated by the Fund in 2006 to

bring together the relevant counterparties in order to address the global imbalances. These

consultations were useful but had only a limited practical impact. I believe, the crisis has now

provided an opportunity for reviving these consultations to prevent rebuilding of excessive

risks in the global nancial system.

Another necessary ingredient for ensuring that IMFs advice is taken seriously by both

advanced and developing countries is to improve its legitimacy.

To this end, the G-20 recognized that IMFs governance structure should be improved bygiving more representation to the emerging market and developing countries and by the

selection of senior managers of the IFIs on a merit basis.

In particular, the IMFs next general quota review which is now scheduled to be completed

by January 2011, should provide a signicant improvement in the quota shares of emerging

market economies. I believe several IDB member countries which play an important role in

the global economy deserve a better representation in the IFIs.

Overall Assessment

So when looking at the recent efforts to redesign the international global nancial system Isee two main implications for developing countries like us:

First, as we all recognize, there is a move towards further enhancing the cooperation among

countries that are part of the global nancial system. This cooperation will be realized through

international forums and bodies such as the G-20, the IMF and the FSB and the decisions of

these international bodies will be more inuential and will affect our lives more deeply in the

coming period.

As developing countries we should contribute to the work of these bodies and try to make our

voice heard as much as possible. In this regard, having three of our fellow members being also

represented in the G-20 and FSB is an invaluable opportunity for the IDB. Turkey is willingto collaborate more with fellow IDB member countries and is keeping its communication

channels open to reect the perspective of IDB members to the work of these bodies.

Secondly and related to the rst item, I see that international standards in the nancial system

will be tighter, and enforced more strictly going forward. As developing countries, if we do

not want to be left outside, we should prepare our nancial systems for tighter international

nancial regulation and be open to peer reviews and international scrutiny.

Turkey, following the 2001 banking crisis, had been very open-minded on this front and

introduced best practices and rules to its nancial system. This generated a boost to oureconomy through increased condence and efciency, as acknowledged by the FSAP review


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that we have gone through in 2007. The strength of our nancial system is now also providing

a buffer against the negative impact of the current crisis on Turkey. Following my speech we

will distribute a paper that summarizes the nancial sector restructuring experience of Turkey

over the last few years.

We should also prepare our nancial sectors for the challenges that might arise by theintroduction of tighter regulations, particularly in advanced countries. It would be critically

important to ensure that credit ows to emerging and developing countries are not hampered

by these tighter regulations. In this regard, we suggest that IDB initiate a comprehensive

assessment on how the nancial systems in IDB countries, including the Islamic nancial

systems, could be prepared for the post crisis regulatory regime.

The Role of the MDBs and the IDB Member Countries

My nal words will be regarding the role of the Multilateral Development Banks and IDB

members in supporting global economic recovery.

MDBs, including the IDB should boost their efforts to minimize the damage to the poor

to prevent the fading away of hard won gains on achieving the Millennium Development

Goals. By fully utilizing their capital base, the MDBs should boost their development

assistance both to low income countries and to middle income countries where around

70% of the worlds poor lives. This vision was reected in the G-20 commitment to

increase MDBs lending by $100 billion. We are looking forward to the quick realization

of these commitments.

In response to the crisis, countries with adequate scal space should continue to stimulate

their domestic demand. However, measures should be reversible to ensure medium

term sustainability and be focused on high-quality infrastructure investments. This will

support the diversication of the economy in these countries and will provide positive

externalities to the global economy.


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Key Proposals Made by the Task Force on Islamic Finance and

Global Financial Stability

Prof. Rifaat Ahmed Abdel Karim,

Secretary-General of the Islamic Financial Services Board,

on behalf of the IDB-IFSB Task Force onGlobal Financial Stability and Islamic Finance

Your Excellency Mr. Rahimberdi J. Jepbarov,

Chairman of the Board of Governors, Islamic Development Bank (IDB)

Your Excellencies Members of the Board of Governors, IDB

Your Excellency Dr. Ahmad Mohamed Ali, President of the IDB Group

Your Excellencies Board of Executive Directors, IDB

Excellencies and Distinguished Guests,

Good afternoon to all of you.

It gives me great pleasure to participate in this 20th IDB Symposium in conjunction with the

34th Annual Meeting of the IDB Board of Governors in Ashgabat, Turkmenistan. I would

like to thank the IDB for inviting the Task Force on Global Financial Stability and Islamic

Finance, which is chaired by H.E. Tan Sri Dr. Zeti Akhtar Aziz, Governor of Bank Negara

Malaysia, to share with you some updates on the work of the Task Force.

I would like to convey Governor Zetis sincerest apologies for not being able to be here today

due to her busy schedule, although she highly appreciates the importance of this Symposium

to the IDB and its member countries.

The Islamic Development Bank (IDB) GroupIslamic Financial Services Board (IFSB) Task

Force on Global Financial Stability and Islamic Finance was established through the initiative

of H.E. the President of the IDB Group, following the recommendations of the Forum on the

Global Financial Crisis and its Impact on the Islamic Financial Services Industry.

In addition to H.E. Dr. Zeti as chairperson and myself representing the IFSB, the Task Force

includes eminent international scholars and experts in Islamic nance.

The Task Force was given the following terms of reference:

(i) to examine the key elements in Islamic nance that contribute to its viability, resilience

and nancial inclusion;

(ii) to take stock of progress in the development of the Islamic nancial services industry

(IFSI) in the current challenging global nancial environment; and

(iii) to examine the building blocks in the development of the Islamic nancial architecture

to further strengthen the resilience of the IFSI.

Excellencies, Ladies and Gentlemen

As we have heard, several international initiatives, including the UN and the G-20, are

addressing the global nancial crisis. As the crisis continues to unfold and expand to become

an economic crisis, it has become clearer to us that fundamental changes must be introduced


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to the existing nancial system, and that Islamic nance can be benecial in addressing these

challenges.

The IFSI has proven relative resilience compared to its conventional counterpart during the

early waves of the nancial tsunami, while signs of a recent slowdown are actually related to

an overall downturn in the real economic sectors.

In this respect, the Task Force observes that the Islamic nance model of nancial

intermediation, if embraced in its entirety, has the following characteristics:

(i) it involves real economic activity that generates income and wealth;

(ii) it is inclusive by extending nancial services to various segments of the population;

(iii) it is ethically and socially responsible; and

(iv) it does not endorse engaging in over-leveraging or other excessive speculative activities.

One can easily appreciate how Islamic nance, by upholding and promoting certain values

grounded in Shariàh rules and principles, contributes to a system that preserves soundness

and stability.

The prohibition of Riba that is, lending and borrowing on the basis of interest minimizes

the likelihood of creating inverted pyramids of debts that make crashes inevitable. Similarly,

by prohibiting gharar that is, excessive uncertainty and risk Islamic nance puts strong

emphasis on controlling risk-taking, thus preventing the creation of toxic assets. Further,

Islamic nance emphasizes transparency, disclosure and clear documentation of contracts,

thus minimizing informational asymmetries and the chances of deception and malpractice.

Hence, the adherence to Islamic nance principles pre-empts expansion of credit that isnot backed by real assets, and restricts speculation. Although institutions that offer Islamic

nancial services (IIFS) have debt receivables on their balance sheets arising from credit

sale nancing transactions, they cannot securitize and ofoad these debt receivables. This

condition eliminates the ability of IIFS to purchase instruments that carry credit risks that are

highly dispersed beyond identication.

The Task Force further notices how Islamic nance fundamentally discourages excessive

leveraging, inter alia, through the Shariàh prohibition of selling something that you do

not own, which effectively restricts speculative short-selling transactions. Similarly, by

capping the interest-based debt-to-equity ratio at not more than a third as part of the portfolio

screening process of shares, Shariàh scholars further inhibit any high-gearing and aggressiveexpansion strategies.

In a nutshell, Islamic nance has beneted immensely from these pillars of strength and

steadfastness that have contributed to its stability amidst rampaging turbulence. Indeed,

we should further harness these elements of Islamic nance in the national nancial sector

development policies, so that they become an integral part of the risk management culture

and prudential framework in the reform initiatives for the global nancial system.

The Task Force is aware that several independent reports have indicated the relative resilience

of the IFSI compared with its conventional counterpart throughout 2008, while several

Shariàh-compliant stock indices have recorded lower losses compared with the main indicesduring recent stock market crashes.


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Notwithstanding this, the Task Force acknowledges that the IFSI is not immune to risks and,

hence, should expect challenging and uncertain prospects in the near future, for the following

main reasons:

First, as Islamic nance is closely linked to the real sector, adverse developments in that

sector would adversely affect the business activities and performance of IIFS.

Second, some IIFS, perhaps due to naivety and enthusiasm for pursuing aggressive

expansions, particularly during economic booms, may have neglected fundamental and

sound risk management standards. As the current crisis has proven, aggressive lending and

inadequate risk management can have negative consequences.

Third, IIFS may, out of immense competitive and economic pressures, be tempted to tamper

with their duciary responsibilities towards investment account holders in their business

operations and conduct, thereby resulting in nancial losses and triggering a crisis of

condence and systemic risks in the Islamic nancial system.

The Task Force notes that these and other considerations have conrmed the need for robust

and consistently applied global standards of prudent risk management and other supporting

infrastructure for enhancing nancial stability and promoting nancial development and

inclusion. Both these goals are catered for through different types of prot-based institutions

and social institutions, such as Zakat and Awqaf, which address the diverse needs and

heterogeneous components of society.

Excellencies, Ladies and Gentlemen,

Let me now share with you the Task Forces analysis of how Islamic nance attempts to

achieve nancial stability. As we know, in Islamic nance, prot-based institutions includingbanks, securities rms, insurance/takaful operators and investment companies are governed

by several fundamental requirements that require them to adopt a different business model

than their conventional counterparts.

The IIFS mobilizes funds on a prot-sharing or agency basis, rather than on a lenderborrower

basis. Since pure lending is ruled to be a strictly benevolent transaction and transfer of debt

can only be done at par value, nancing activities by IIFS are required to be conducted on

an asset-backed or production basis, rather than being merely lending and borrowing, thus

further making the packaging, repackaging and trading of debt a repugnant concept.

Similarly, the prohibition of gharar forces Islamic insurance/takaful operators to adopt

a model of sharing risk among the takaful participants, rather than transferring risk. The

prohibition of gharar further rules out highly risky assets, not the least of which are the

toxic assets that, by their design, imply a very high degree of risk.

Finally, the portfolio screening process that is required to be adopted, especially by Islamic

securities rms and investment companies, helps to ensure that they invest only in stocks that

are permissible within the parameters set out by their Shari`ah boards.

The social institutions of Zakat and Awqaf provide social safety nets that strongly promote

philanthropy, address the needs of the more vulnerable segments of society, and complementother government-initiated safety nets. This helps to mitigate economic decline and prevent it


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from escalating into a crisis. Islamic nance principles also highlight forbearance to debtors

under distress as a mechanism to consider in managing imminent defaulters, thus avoiding

massive foreclosures and re-sale liquidations, which can only bring further catastrophes

upon the economy.

Excellencies, Ladies and Gentlemen,

The Task Force is pleased to note that various ground-breaking initiatives have been

undertaken by the international community to pursue nancial stability, including those

for the IFSI. As you may know, the IFSB, which is based in Malaysia and was granted by

its government the immunities and privileges that are accorded to diplomatic missions and

international organizations, was established in 2002 by eight central banks and the IDB, in

response to the need to pursue nancial stability for the IFSI. The current 185 members of

the IFSB comprise 43 regulatory and supervisory authorities, including the central banks

of Japan, China, Korea, the Philippines, Hong Kong and Singapore; six international

intergovernmental organizations, namely the IDB, International Monetary Fund, World

Bank, Bank for International Settlements, Asian Development Bank and the IDBs sister

company, the Islamic Corporation for the Development of the Private Sector; as well as 136

nancial and professional institutions operating in 35 jurisdictions.

On the nancial stability front, the IFSB has been issuing international standards designed

not only to address the specicities of Islamic nancial services, its risks and Shari`ah

compliance, but also to take a cross-sectoral approach to the regulation and supervision of

IIFS that encompasses both the banking and the investment and securities market sectors.

On the nancial sector development front, the IDB has been active for the past 34 years

in fostering the economic development and social progress of its member countries, andMuslim communities in non-member countries, by addressing, inter alia, poverty eradication

and nancial inclusion. These strategic objectives are described in more detail in the IDB

Vision 1440H. In addition, the IDBIFSB 10-Year Framework for the development of the

IFSI highlights the need for the development of the Islamic nancial sector.

The need for the IDB and the IFSB to further strengthen their partnership in pursuing both

nancial stability and nancial development cannot be overemphasized. In this respect,

the Task Force acknowledges that six key building blocks will crucially form the basis

of an Islamic nancial architecture that is imperative in order to support orderly nancial

development and sustained nancial stability in the IFSI.

The rst building block relates to the effective implementation and enforcement of a set of

robust and consistently applied prudential standards for risk management and supervision,

which takes into account the specicities of the IIFS that, if properly implemented, should

enhance the soundness and stability of the nancial system in which the IIFS operate.

The second building block is the development of a robust systemic liquidity infrastructure

that encompasses monetary policy and exchange operations, payment and settlement systems,

and the microstructure of the money, exchange and securities markets.

The third building block relates to the strengthening of the nancial safety net mechanisms namely, liquidity risk management of IIFS, emergency nancing arrangements, deposit


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protection and insurance, as well as the lender of last resort facility. This calls for the

development of an adequate range of tools and instruments for liquidity and risk management

that are consistent with the core objectives and principles of Shari`ah, both in form and

economic substance.

The fourth building block involves the development of a reliable crisis management andresolution framework, which includes (in addition to nancial safety nets), bank insolvency

laws and arrangements for dealing with non-performing assets, asset recovery and bank

restructuring.

The fth building block refers to the requirement for close cooperation among policy-makers

and nancial supervisors with different mandates, in both national and different jurisdictions,

in enhancing the resilience and stability of the IFSI.

The sixth building block refers to macro-prudential surveillance and nancial stability,

which is an integral part of the strategy to help strengthen the resilience of the Islamic

nancial system and to limit the risks of nancial fragility. The traditional micro-prudential

supervision approach cannot effectively address system-wide stress that might develop due

to the common exposure of nancial institutions and markets to macroeconomic risk factors,

often leading to prudential policies that aggravate the impact of economic shocks.

While the IDB and IFSB have been exerting efforts within their own respective mandates

to develop and put in place these building blocks, the Task Force is of the view that some

of these initiatives require the collaboration of the stakeholders of both institutions who

are concerned with nancial developmentnamely, the ministries in charge of nance and

economic development, entrepreneurship, Zakat and Awqaf as well as those who are

directly concerned with nancial stability, such as central banks and nancial supervisoryauthorities.

Upon analysing the challenges posed in developing the building blocks, the Task Force

believes there is an urgent need for a conducive and synergistic dialogue platform that

assembles together the IDB Board of Governors and members of the IFSB Council.

The Financial Stability Forum (now known as the Financial Stability Board), which was

set up following the onset of the Asian nancial crisis and gathers together the various

stakeholders with a vested interest in international nancial stability, provides a model for

the IFSI to replicate. Hence, the Task Force is entertaining the idea of recommending theestablishment of an Islamic nancial stability forum for the IFSI, which will become, inter

alia, just such a broad-based and constructive dialogue platform where the IDB Board of

Governors and the IFSB Council members can address the emerging challenges and policy

issues of nancial stability and development. In this respect, the IFSB would be pleased to

host the Secretariat of the proposed forum.

The Task Force also notes that the IDB has taken the initiative to establish the Islamic

Financial Sector Development Forum (IFSDF) as a broad-based and constructive dialogue

platform for stakeholders with a vested interest in Islamic nancial development through

nancial inclusions, poverty eradication, and capacity building and empowerment of thevulnerable segments of society.


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Given the impact of the current nancial crisis, this Forum needs to be further strengthened

to enhance the sound development of the industry.

The Task Force hopes that the views and recommendations of the Report will provide useful

insights into the value propositions of Islamic nance for the global nancial community in

the current reform process of the international nancial system.

On that note, I thank you for your attention.


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20th IDB Annual Symposium: General Discussion

Floor Participant 1:

To what extent the panelists believe that the IMF has the required resources to help developing

countries cope with the consequences of the global nancial and economic crisis? Thank you.

IDB Governor, Saudi Arabia:

Well, the IMF already has the resources estimated at US$250 billion; in addition, there are

plans to augment resources by US$ 500 billion. The idea is that by augmenting IMF resources,

both the nancial markets and the developing countries will be reassured that widespread

crisis can be mitigated. In this regard, augmenting IMF resources will be achieved through

various mechanisms such as new agreements to borrow, by bilateral means between countries

and IMF, and also by issuing IMF bonds. But as yet, there are no immediate or urgent needsfor the mobilization of these resources.

On the expansion of IMF mandate, what many of us in the developing countries are saying

is that the IMF should focus more on surveillance activities in the developed economies. The

present crisis has shown that perhaps the IMF and other international organizations should

have been much more involved in highlighting the systemic risks in developed countries.

The Ministerial Committee of the IMF, which is called the IMFC, has been calling developed

countries to have more supervision and more intensive monitoring of volatile prices in

international commodity markets, especially price developments in the oil market during

2007 and 2008, which in our view was caused by speculative bubbles.

IDB Governor, Uganda:

I want to say that this global nancial crisis is disturbing for all of us because it is very

difcult to understand why the world best economies are unable to put the best facilities

for surveillance and receive early warning signals of an imminent crisis. I also want to say

that most of the Third World countries are being adversely impacted by the global nancial

crisis, especially through the trade and nancial ows channels. We have been spared from

the direct or the rst-round impact on our banking system primarily due to the fact that our

banks are not exposed to the CDS and such instruments. Furthermore, our central banks have

exercised due diligence over the banking system, which should continue because I do notbelieve that we have seen the last of the nancial crises.

In Africa, we have been concentrating our efforts in achieving social development and

ensuring social safety for the poorest in pursuit of Millennium Development Goals. I think

there is likely to be a widening of a gap in external capital inows, both ofcial and FDI

types of inows. Looking ahead, we are likely to experience a shortage of foreign exchange

in the short-run and thats why a number of African countries now believe that funding the

emerging imbalances in the balance of payments will become a critical issue. I think this is

where IMF needs to be more exible and responsive so as to be able to help us to protect the

development gains achieved in African countries.


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And, again on our side, we need to focus on certain priorities, we need to invest in infrastructure

projects in preparation for the revival of the global economy because many African countries

still dont have regional networks of roads and electricity. We need this because most of

our communities are agro-based and we cannot do our agriculture effectively and protably

without regional infrastructure.

On the question of how to cope with the recent food crisis, I think this is an opportunity for

Africa and for all the development partners, to support African countries organize itself as the

food basket of the world because we have all the advantages to produce food to the poor. We

need more public and private funds for the long term development of the agriculture sector.

The Moderator:

What would Honorable Governors in this room, who are all from developing countries, like

to communicate to your colleagues in the G-20 and the MDBs, including the IDB, in terms

of development priorities in the context of the post-crisis world?

IDB Governor, Uganda:

I would like to see the IDB to play a more catalytic role in attracting investors to Africa. For

the development partners, I want them to support the private sector in African countries,

particularly in the value-added export sector. In Africa, we are changing our attitudes - instead

of exporting raw materials, we now want to export nished products. If our development

partners can encourage their companies in Africa to produce and export value-added products

to their countries, it could be a lot cheaper rather than exporting raw materials and processing

in their countries. Furthermore, in a period of global recession, we need to identify new

investment opportunities in African countries.

The Moderator:

From the oor, if I may have questions on the role of Islamic nance in terms of shaping the

post-crisis world. Can we think of supportive policies for Islamic nance in terms similar to

the role played by pro-FDI policies in years in the developing world? Looking at the gures

on the relative market share of Islamic nance in IDB member countries, suggests to me

that there is still a huge untapped potential. Is it possible that, going forward, bulk of Islamic

nance will be intermediated through nancial centers in Hong Kong in the east and London

in the west? Perhaps the Honorable Governors can think of other questions along these lines.

Floor Participant 2:

Before I partially answer questions raised by the Moderator, I would like to remind this

august gathering that the global nancial crisis originated in the developed countries whose

economic philosophy is against government interventions in the market mechanisms. But

when the crisis broke out, ofcial interventions or responses to correct the market failure

were almost immediate and they save the world from the meltdown of the international

nancial institutions. Even the due diligence of nancial institutions and nancial papers

by private sector entities such as the rating agencies failed in their duciary role. Dr. Rifaat

can conrm whether or not the rating agencies also bear the primary responsibility for the

outbreak of the crisis.


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For the Islamic banking sector, I do not have correct statistics, but I do think that Islamic

banks have smaller market share in many countries. As indication of its huge potential, we

know the industry is growing with an annual increase of 20% to 25%. The reality is that IDB

is a manifestation of a doctrine and visualization of Islamic economics. I would encourage

IDB to exert maximum efforts to put into practice the Islamic economic theories, whether in

the nancial or economics areas. Thank you.

Prof Dr. Rifaat Ahmed Abdel Karim

I understand that the rating agencies have played a role in spreading the current crisis perhaps

by not rating certain products in terms of the probability of default of those instruments.

However, I would like to digress from the question and instead focus on how we engage with

these rating agencies with respect to Islamic nance. I think thats the core of your question

as well. We did have a very constructive dialogue with the major international rating agencies

in order to try to give them a better understanding of the business model of Islamic nance.

In fact, we stressed that when they give a rating to an institution, that rating could be best

represented as the sum of the probability of defaults on individual contracts.

I am referring to, for example, the investors (holders) whose funds are mobilized on the basis

of the mudarabah where the prots are shared proportionately except in the case negligence

or failure in carrying out duciary responsibilities. In this respect, a holder of an investment

account is an investor rather than a depositor and then one can calculate the probability of

default. I believe that almost all the international rating agencies now publish their reports on

Islamic nance based on modied rating methodologies that takes on board the specicities of

Islamic nance. In addition to this, the Islamic Financial Services Board has communicated a

technical note that helps the supervisors and regulators of Islamic banks when they designate

a rating agency with regards to the risk weighting of the assets of those institutions. This isalso in line with the practice of the Basel Committee for Banking Supervision. Thank you.

IDB Governor, Saudi Arabia:

We have been involved, since last October, in extensive discussions on the role of the rating

agencies, the hedge funds, the accounting standards, etc. At the beginning, there were denials

and resistance to touching those areas and only to focus on the nancial institutions. At the

last G20 Summit, all these issues became no more untouchable and the workings of all these

areas, including the rating agencies, were reviewed.

IDB Governor, Morocco:

I would like to thank all the Honorable Governors and Excellencies for clarifying the precise

implication of the global nancial crisis on our countries. I would like to take this opportunity

to ask a question about the coordination amongst the Government representatives of the IDB

member countries. Is there a mechanism for coordination between the member countries on

how to communicate our views to the G20 Leaders? And, I think the Islamic Development

Bank, which today gave us this opportunity, could help in setting up a coordination mechanism.

I would like to raise a policy concern regarding the huge debt overhang arising from the current

economic recovery programs. In order to mitigate the impact of the global nancial crisis,countries around the world have instituted scal measures to support economic recovery


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Major Conclusions and Recommendations of the 20th Annual Symposium

IDB organized its 20th Annual Symposium on Shaping the Post-Crisis World: Regional

Implications and Coordinated Responses by Member Countries, which was held in

conjunction with the 34th Annual Meeting of the IDB Board of Governors on 2nd June 2009

in Ashgabat, Turkmenistan. The major point of departure of the Symposium was that it wasa Governors Seminar with the active participation of many Governors.

The Symposium was chaired by H.E. Mr. Rahimberdi J. Jepbarov, Chairman of the Board

of Governors. H.E. Dr. Ahmad Mohamed Ali, President IDB Group delivered a welcome

address. A three-member panel comprising H.E. Dr. Ibrahim bin Abdel Aziz Al-Assaf,

Minister of Finance of the Kingdom of Saudi Arabia and IDB Governor; H.E. Mr. Ibrahim

Halil Canakci, Undersecretary of Treasury of Republic of Turkey and IDB Governor; and

Prof. Rifaat Ahmed Abdel Karim, Secretary-General of the IFSB and Member of the Task

Force on Islamic Finance and Global Financial Stability discussed the G-20 reform agenda

and its implementation issues as well as issues arising from the effects of global economic

recession on Islamic nancial institutions.

The major conclusions of the Symposium were the following:

1. Due to the synchronized nature of the on-going global nancial and economic crisis,

economic recovery is likely to be protracted across all regions. The G-20 reform agenda

provides a global response to the global crisis.

2. The challenges of addressing the on-going global economic crisis, which originated in

developed countries, require partnership and collaboration with international bodies and

institutions. The role and contributions of the three IDB member countries viz. Indonesia,

Saudi Arabia and Turkey were greatly appreciated in shaping the G-20 reform agenda. Inthis regard, readiness was expressed to coordinate with other member countries to bring

up their key concerns and voices in the G-20 forum.

3. Among the G-20 countries, Saudi Arabia announced the highest scal stimulus package.

Adequate national countercyclical initiatives for rapid recovery in member countries will

also have benecial regional spillover effects, including through remittances channel to

other member countries.

4. While IMF has sufcient resources to provide emergency support for balance of

payments crisis, it needs to introduce greater exibility and policy space in its lending

instruments.

5. Self-regulation by key nancial institutions has been proved to be insufcient and

counterproductive. Member countries need to prepare for an era of intrusive and tougher

nancial sector regulations.

6. Due to the negative spillover effects of nancial and economic policies in developed

countries, multilateral consultations to address global imbalances and IMF surveillance

of macro-nancial policies need to be greatly strengthened and made more effective.

7. In order to achieve greater acceptance of Financial Stability Board (FSB) work, this

Board needs to be made more inclusive through broadening its membership of developing

countries. In this regard, the membership of G-20 developing countries in the Steering

Committee of the Financial Stability Board needs to be ensured.


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ANNEX

ISSUES PAPER

Shaping the Post-Crisis World: Regional

Implications and Coordinated Responses by

Member Countries


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i. At the national-level, economic and scal stimulus packages in the G-20 countries

have been announced, totaling $5 trillion, that aim to stem the falloff of aggregate

demand, reviving consumer condence and to lay the foundations from turning

recession to economic recovery phase in the short-run3. In addition, initiatives for

injecting liquidity in the nancial markets and unfreezing of credit markets have been

adopted.

ii. Supporting developing countries to face the consequences of global economic

recession through expanding resources of IMF ($500 billion), injecting liquidity

through allocation of new SDRs ($250 billion), strengthening capital adequacy of

multilateral development banks for lending (total: $300 billion, including additional

measures: $100 billion), and expanding ofcially supported trade nancing through

export credit agencies and the World Bank Group ($250 billion).

iii. Implementing a comprehensive G-20 reform agenda for the global nancial system

in key areas such as macro-prudential regulatory framework, enhanced prudential

regulations for all segments of nancial sector, assessing vulnerabilities of nancialsystems through expanded and strengthened Financial Stability Board, improving

and harmonizing accounting standards, regulating credit rating agencies and

mainstreaming non-cooperative tax jurisdictions.

It is critical that steps to repair international nancial institutions and G-20 reform agenda

are rapidly implemented in order to re-establish a climate of stability and condence in the

global nancial system as well as to prevent potential future recurrences of such crisis. For

many developing countries, including IDB member countries, key concerns remain with

regard to pricing and volume of external ofcial and private inows which are important

to sustain their programs of poverty alleviation and infrastructure development as accessto international capital markets become more difcult in terms of higher rates and shorter

maturities.

Emerging Issues

From the standpoint of policymakers, it is critical to look ahead to assess how existing geo-

economic linkages are likely to be altered and to anticipate new patterns that are likely to

present both challenges and opportunities. More specically, in the post-crisis world, member

countries need to reconsider their growth strategies, learn how to cope with a dramatically

transformed international nancial landscape, and follow through the implications of

potentially new global patterns of trade and investment.

Major global and regional level trends and issues, key implications of G-20 reform agenda,

critical issues in mainstreaming Islamic nancial intermediation, and expanded mandate of

the multilateral development banks (MDBs) to support developing countries as they face the

consequences of global economic crisis are presented in parts 1 to 6 annexed to this paper.

Some of the emerging issues raised in parts 1 to 6 are listed below for the consideration of

the Honorable Governors.

3It is noteworthy to point out that Saudi Arabia has announced, among the G-20 countries, the highest scal stimulus packages

estimated at 2.8 percent of GDP in 2008, 3.3 percent in 2009, and 3.5 percent in 2010. Besides helping to maintain growth momentum,

such sustained scal stimulus over the three years will also have benecial regional spill over effects through remittances channel.


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I: Growth, Trade and Financial Flows in the Post-Crisis World

1. What does revival of global economic growth mean? Does it mean a new normal

characterized by lower credit intermediation at the global level and reduced capacity

for sustained, non-inationary growth?

2. Is it correct to say that this crisis has forced adjustment of global imbalances?

3. Is a recovery in the G3 (i.e. U.S.A., Japan and Eurozone) a pre-requisite for recovery

in developing countries?

4. Given the rollover size of external debt combined with likelihood of reduced cross-

border ows, will countries face a liquidity crisis? What is the risk that spreads may

resume their northern journey?

5. Given the balance of external funding risks, is there need to put together contingencyplans to counteract a potential liquidity crisis triggering a solvency crisis for the private

sector in IDB member countries?

6. Is the OIC intra-trade target of 20% to be achieved by 2015, under the Ten-Year OIC

Plan of Action, still feasible?

II: Regional Implications for Member Countries

1. In the medium-term, to what extent is rebalancing the economic growth model from

a reliance on external demand to stimulating domestic demand desirable and feasible

for Asian countries?

2. Will a strategy to rebalance economic growth also imply structural adjustment

issues? To what extent structural adjustment in the industrial sector is likely to lead to

dislocations in labor market?

3. Within the context of rebalancing growth, is the banking sector sufciently resilient to

withstand shocks and potential loan delinquencies?

4. Is long term investment in developing the regional trade potential in hydrocarbons and

hydropower sector the way forward for Central Asia region?

5. In view of developments in the nancial sector of GCC countries during the crisis-

period, is there a case to re-examine the desirability of maintaining full capital account

convertibility?

6. Will there be a strategic rebalancing of portfolio by GCC-based investment funds away

from investment in nancial assets towards longer term investments in developmental

projects at home, Asian or African countries?

7. Given the global economic recession and slower growth in SSA region, will it be

appropriate to defer the target year of MDGs from 2015 to (say) 2020?


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III: Key G-20 Reform Agenda for Global Financial System: Regional Impact and

Islamic Financial Industry (IFIs)

1. In repairing institutions and reforming global nancial system, how can fundamental

insights of Islamic nance become part of the international discourse?

2. In deference to insights from Islamic nance, can stability and resilience of the

nancial system be achieved by managing a consistent linkage between growth in

nancial intermediation and real GDP growth?

3. Given the scale of destruction of global nancial assets, is it an opportune moment to

mainstream Islamic nance in the national nancial system?

4. Going forward, is there a clear case for coordinating the development of a common

regulatory framework for banks plus nonbanks plus Islamic nancial institutions at

the regional level?

5. How can non-G20 member countries better liaise with G-20 countries in terms of

communicating their views on the work of standard-setting bodies?

IV: Expanded Mandate for MDBs: What are the Key Strategic Implications for

IDB Group?

1. In the context of expanded mandate of MDBs, will member countries prefer joint

programming engagement with all MDBs?

2. In the context of structural adjustment issues, how can IDB address policy concernsrelated to upgrading productivity and competitiveness, including re-training and skills

development of the workforce?

3. To what extent IDB-sponsored projects will be protected from potential cutbacks in

counterpart funds?

4. Compared to other MDBs, will it be appropriate to double the planned growth in

IDBs Operations Plan?


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Part 1:Global Imbalances: The Dark Heart of Global Financial Instability1

Analysis

Global imbalances continued to

widen right up to 2006. Policy-

induced rigidity prevented

exchange rates to correct sustained

build-up.

Global imbalances accompanied

by low interest rate policy, de-

regulation of nancial institutions

and weak risk management

practices fostered leverage and

search for yields. This underpinnedcreation of riskier assets (such as

CDS, hedge funds, US subprime mortgages) and speculative bubbles in commodities

and energy markets.

Net Exporters of Capital (2008) Net Importers of Capital (2008)

Combined share of ve IDB member countries as net exporters of capital was 18.1% of

the worlds total in 2008. This share roughly corresponds to Japan.

Dramatic drop in prices of nancial assets in the private sector and near-zero policy

interest rates on treasury papers in developed countries will represent, for net capitalexporters, at least valuation losses on nancial assets and low yields on treasury papers.

United States alone absorbed 43% of net global capital exports followed by U.K. plus

Eurozone countries at 23.6% in 2008.

For the rest of the world, particularly developing countries, a potential correction in global

imbalances could imply sharper exchange rate adjustments (with possibility of exploiting

newer trade opportunities) which can be offset by an eventual stiff competition for capital

(i.e. a rise in cost of capital).

1Graphs are from Martin Wolf, Financial Times (2008): Crisis and Aftermath; and IMF (2009): Global Financial Stability Report.


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Domestic demand has contributed in the range of 2.4% age points in GDP growth

during 2001 to 2006.

US household consumption is 71% of its total GDP of about $14.3 trillion. As percent of

global GDP, US household consumption is estimated at 15% which is more than twice the

size of the Japanese economy.

With domestic demand collapsing

in US, spare capacity is being

turned for exports. Contributions

of net exports to growth rose

steadily to about 2% points by

end-2008.

Issues for Honorable Governors

1. Why is it that the G-20Summit in London did not

make an attempt on how to

resolve global imbalances?

2. Why is that sustained global imbalances could not be resolved?

3. Without correcting global imbalances, what is the risk of a disorderly movement in

exchange rates?

4. Has the world run out of large and willing creditworthy borrowers?

5. Can households in emerging economies build-up liabilities to compensate for loss ofUS consumers?

Part 1: Global Imbalances in the Post-Crisis World2

Analysis

With the onset of US subprime crisis, US dollar depreciated by 8 percent from June

2007 to July 2008. After Jan.

2009, US dollar has steadily

appreciated, mainly due to capital

ight to safety reasons.

Beginning from 2006, US current

account decit has started to

contract. This was due to relatively

slower growth in US and lagged

effects of US dollar depreciation.

As the nancial crisis intensied,

ight to safety concerns became

dominant resulting in reversal of private capital inows back to the US.

2Graphs are from IMF (2009): World Economic Outlook (p. 35 and 38).


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Surge in demand for US treasury

securities was mainly led by private

sector (in particular, nancial

institutions) while overseas ofcial

sources liquidated their investment.

IMF is projecting adjustments

in global imbalances from three

channels: increase in US private

savings, lower global credit

intermediation and terms of trade

improvements (or deterioration) for

oil for commodity importing (or

exporting) countries.

US decit is expected to improve

from a peak of 6% in 2006 to 3%in 2009.

Oil-exporting countries and Japan are

likely to experience disappearance

of current account surpluses in 2009.

However, with projected global

recovery beyond 2010, current account

surpluses will again appear, albeit at

much reduced levels.

Global imbalances are projected tosharply decline from 5% in 2007 to

4% in 2009.

Beyond 2009, key issues are home

bias, i.e. contraction of global

imbalances accompanied by a fall in

cross-border gross capital ows.


1. Is it correct to say that this crisis has forced adjustment of global imbalances?

2. Does revival of global economic growth means a new normal characterized by

lower credit intermediation at the global level and reduced capacity for sustained, non-

inationary growth?

3. Has rebalancing growth model by moving away from export-led growth to reliance on

domestic and regional growth become imperative?

4. What are the prospects for P.R. of China proposal to use SDR as an international reserve

currency gaining popularity?

5. Looking ahead, to what extent it is feasible to invest current account surpluses at home ininfrastructure projects rather in nancial assets overseas?


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Part 2: Rebalancing Growth in the Post-Crisis World: Trade Channels

Analysis

Economic growth in OECD countries, developing countries and IDB member countries

are all projected to recover in 2010 and 2011, albeitat a lower rate compared to 2007.

During 2002-07, developing countries

registered per capita growth at 9% while

it grew in IDB member countries by 4%.

Rising prosperity in developing countries

was mainly predicated on export-led

growth whose nal buyers were consumers

in developed countries, who, in turn,

nanced their purchases by building up net

liabilities.

In emerging Asian countries, national

savings are in excess of 30% with China

at over 50% in 2007. Corporate savings

in East Asian countries, including China,

while growth in household savings in India

dominates the national savings rate.

In the pre-crisis period, import by emerging

Asian countries was about 3% of global

GDP while by IDB member countries

(IDB-MCs) was 3.1%.

Share of total exports of IDB-MCs in

global exports increased from 8.1% in

2003 to 9.9% in 2007.

Decline in exports of IDB-MCs to

developed countries increased by over 3%

age points to developing countries and

intra-trade ratio.

IMF projections for exports growthby OECD countries is -13.5% in 2009

followed by 0.5% in 2010.

For developing countries, exports growth

is projected to decline by -6.4% in 2009

followed by recovery of 1.2% in 2010.

Oil prices are projected to decline by

-46.4% in 2009 followed by 20.2%

recovery in 2010. Nonfuel commodities

are expected to decline by -27.9% in 2009 followed by 4.4% in 2010.


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1. With nal demand collapsing in developed countries, can trade ever recover and grow to

pre-crisis rates?

2. Is it likely that, in the near term, Asian economies can signicantly contribute in creating

a virtuous cycle of growth and intra-regional trade?3. Is the intra-OIC target of 20% to be achieved by 2015, under the Ten-Year OIC Plan of

Action, still feasible?

4. What policy measures can assist in fostering look East trade policy?

Part 2: Rebalancing Growth in the Post-Crisis World: Financial Flows Channel

Analysis

IMF-WEO (2009) states that there is broad-

based withdrawal of foreign investors and

banks from developing countries: issuanceof new securities has come to a virtual halt,

bank ows are reduced and bond spreads

have spiked.

Since the onset of crisis, a sharp rise in

the premium on US dollar bond index for

sovereigns and corporate in both Asia and

Middle-East regions is reective of a broad-

based repricing of risks. For most of the

crisis-period, this has drastically reduced

new bond issuance by emerging economiesin the international capital markets.

Beginning from 2nd quarter 2009, some

emerging economies (such as Indonesia)

and MDBs (such as World Bank) have

returned to international capital markets.

Beginning from 2nd quarter 2009, pricing

of bonds for both sovereigns and corporate

in the Middle-East region are still elevated:about 200 bps compared to peak during

2008 and about 400 bps compared to

average during 2007.

Prior to the crisis-period, spread on sukuks

was generally below the spread on bond

index. However, during the crisis-period,

spread on sukuks has been relatively higher

than bond index, which probably reects

risk-quality of sukuk issuers in the Middle-East region.

JP Morgan EMBI stripped spreads3

Middle-East US$ Bond Index Spread4

Sukuk US$ Index Spread

3Source: Asian Development Outlook (2009, p.33), published by Asian Development Bank.4Source: HSBC-DIFX Index, downloaded on 11 May 2009.


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IMF-WEO (2009) estimates that rollover

needs5 of emerging economies are $1.8

trillion in 2009.

External private debt nancing by both

sovereigns and corporates in 40 IDB

member countries is estimated at about

$102 billion in 2008.

Deleveraging process of nancial

institutions in developed countries is likely

to be protracted. Weight of new regulations can also add to dampening of gross cross-

border private ows.

Issues for Honorable Governors:

1. With global imbalances narrowing, is it likely that era of rapid growth of global nance

is over for the foreseeable future?

2. Can there ever be a longer term increase in home bias? (i.e. a potential decline in cross-

border gross capital ows)?

3. Given the rollover size of external nancing combined with signicantly reduced cross-

border ows, what is the risk that spreads may resume their northern journey?

4. Given the balance of external funding risks, is there need to put together contingency

plans to counteract a potential liquidity crisis triggering a solvency crisis for the private

sector in IDB member countries?

Part 3:Shaping the Post-Crisis World: Regional Implications for Member Countries inAsian Region

Analysis

Member countries in Asia region are expected

to grow close to 2% in 2009 and then gradually

recover to about 4.8% by 2011.

Economic recovery is expected to be below an

average of 6% growth recorded during 2006 to

2008.

Strong foreign exchange reserves positioncombined with partial capital account

convertibility have limited signicant recourse

to external nancing.

Over two-thirds of external nancing is based on

loan syndications.

Beyond 2009, remittance inows are projected

to remain steady after a slight drop from $24.5

billion in 2008.

5Rollover needs are dened as short-term debt plus amortization of medium- and long-term debt.


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Bangladesh, Indonesia and Pakistan each annually receive remittance inows of about $6

billion.

After a period of reforms, banking sector by 2008 is well positioned in terms of declining

share of nonperforming loans.

A key vulnerability is that banks regulatory capital to risk-weighted assets has declined

from (weighted average) 16% in 2003 to 14% in 2008.


1. In the medium-term, to what extent rebalancing economic growth model from reliance

on external demand to stimulating domestic demand is both desirable and feasible policy

choice?

2. Within the context of rebalancing growth, is the banking sector sufciently resilient to

withstand shocks and potential loan delinquencies?

2. Is it likely that rollover needs combined with prohibitive cost of access to externalnance can be potentially threatening to external sector viability?

4. In a complicated external environment, is targeted stability in real effective exchange rate

the best policy option?

Part 3: Shaping the Post-Crisis World: Regional Implications for Member Countries in

Central Asia Region

Analysis

Member countries in CIS region are

expected to grow close to 2% in 2009and then gradually recover to about 6%

by 2011.

Economic recovery is expected to be

below an average of about 9% growth

recorded during 2006 to 2008.

External nancing ows to CIS region

mainly reect loan syndications by

Kazakhstan.


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For 2009, Kazakhstan appears to have

covered its nancing needs during 2009

through large loan syndications during the

3rd quarter of 2008.

The overall volume of remittance inows to

CIS member countries is still modest about

$5billion each in 2007 and 2008.

Remittance inows, after ODAs, are critical

to underpinning external sector viability.

With major downturn in the Russian

economy, remittance inows are projected

to sharply decline.

Banking sector in CIS region appears to

be vulnerable with share of nonperforming

loans sharply rising during 2008.

Another source of vulnerability is that

banks regulatory capital to risk-weighted

assets has declined from (weighted average) 19% in 2003 to 15% in 2008.


1. Given the prospects of depressed prices

of major commodities exported by CIS

member countries, what strategic choices

are available to underpin long termeconomic development?

2. Is long term investment in developing

regional trade potential in hydrocarbons

and hydropower sector the way forward for

CIS region?

3. Is the banking sector sufciently resilient to withstand shocks and potential loan

delinquencies?

Part 3: Shaping the Post-Crisis World: Regional Implications for Member Countriesin MENA Region

Analysis

Member countries in MENA region are

expected to grow close to 1% in 2009 and

then gradually recover to about 4% by 2011.

Economic recovery is expected to be below

an average of about 5.3% growth recorded

during 2006 to 2008.

Bond issuance and loan syndications inMENA region dropped from $33 billion and


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$75 billion in 2007 to $15 billion and $58

billion in 2008, respectively.

In the GCC region, these volumes mainly

reect private sector borrowings. In other

part of MENA, these volumes include both

ofcial and private sector borrowings.

After a sharp drop in growth of remittance

inows in 2009, MENA countries are

projected to receive a steady ow of about

$33 billion annually during 2009 to 2011.

In 2008, major recipient of remittance

inows in MENA region were: Egypt -$9.5

billion, Lebanon -$6 billion and Morocco

-$6.7 billion.

Banking sector in MENA region appears

to be well positioned in terms of declining

share of nonperforming loans.

Banks regulatory capital to risk-weighted

assets declined from (weighted average)

18.4% in 2006 to 14% in 2008.


1. In the post-crisis world, what will be thekey drivers of long term economic growth

in MENA region?

2. With projected narrowing of global

imbalances and near-zero current account surpluses of GCC countries, are pricing

pressures likely to build-up through reduced gross capital ows for sovereign and

corporate borrowers?

3. Will there be a strat

21 Symposium Proceedings

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