IMF to Establish Islamic Finance Categories in SNA/BPM

The International Monetary Fund (IMF) plans to provide separate categories for Islamic finance in its next update to the System of National Accounts (SNA25) and Balance of Payments Manual (BPM7). This move is expected to enhance data quality, comparability, and transparency. Fitch Ratings have welcomed this development. This global credit rating agency believes the disaggregation of Islamic finance activities will not impact national headline accounts or balance-of-payments data.

The new SNA/BPM chapter on Islamic finance guides accounting for Islamic finance in national accounts and external sector statistics. It includes areas such as the sectoral classification of Islamic financial institutions, the treatment of insurance-like businesses, and the special financing arrangements that characterize Islamic finance – including sale-based contracts, lease-based contracts, equity-based contracts, or profit or profit or loss sharing.

Moreover, the chapter discusses potential changes in terminologies to ensure consistency with the principles of Islamic finance. For example, it is proposed that interest payments in the primary income account of the balance of payments will be relabelled as’ interest and similar returns’. The ‘similar returns’ part will describe the broader interest-like returns on Islamic deposits, financing, and debt securities.

The disaggregation of Islamic finance data in the planned update will provide a way of assessing the importance of the Islamic finance industry in an economy and its growth. National accounts measure value added in the financial sector, a different approach to International Financial Reporting Standards (IFRS) accounting. The separation of Islamic finance data will enable more precise measurement of economic activities and flows related to Islamic finance and allow cross-country comparisons. It will also recognize the increased role of Islamic finance within the international financial system.

On the balance-of-payments side, the disaggregation of funds in Islamic investments through the financial account and the associated investment income flows through the primary income account could provide insights into trends in the foreign ownership of these assets. The chapter also includes specificities such as Islamic windows in conventional banks, off-balance-sheet restricted investment accounts, takaful and retakaful, Islamic funds, waqf funds, and hajj funds.

The SNA/BPM chapter on Islamic finance highlights some challenges in compiling the data caused by differences between Islamic finance structures and similar transactions in conventional finance. For instance, the economic ownership of non-financial assets in Islamic finance (the commodity, real estate, or lease assets that underpin various Islamic transaction contracts).

Agreement on the new methodologies is targeted to take two years, with the second round of consultation on chapter outlines concluded last month. Implementation by national statistical agencies is likely to take much longer. The global talk shows strong support for including a section on Islamic finance in the updated SNA and BPM and developing compilation guidelines for Islamic finance.

Fitch estimates that Islamic finance is present in more than 70 countries, and the new data will allow clearer identification of these activities and their extent. It will also enhance transparency and comparability of the investment flow of Islamic finance instruments (sukuk), which are increasingly issued by non-core market sovereigns. Fitch currently rates over 164 outstanding sukuk worldwide and over 38 Islamic finance-based issuers.

The IMF’s plan to provide separate categories for Islamic finance in its next update to the SNA25 and BPM7 is a positive step toward enhancing data quality, comparability, and transparency. It recognizes the increased role of Islamic finance within the international financial system. It will enable more precise measurement of economic activities and flows related to Islamic finance and cross-country comparisons. The new data will allow clearer identification of Islamic finance activities and their extent, enhancing transparency and comparability.