But that needn’t be so – because key aspects of Islamic finance make it particularly well suited to financing the post-Covid recovery:   First, the philosophical focus on equity-like sharing of risk and reward will become increasingly relevant as market participants get to grips with the scale of debt accumulated in response to Covid. The attractions of debt are obvious when interest rates are so low – particularly for those able to lock in long-term fixed rates in local currencies. But those borrowing at floating rates, at short maturities, or in foreign currencies, face sharp negative income shocks when rates rise, debt rolls over, or local currencies depreciate. Risk-sharing contracts, including those promoted by Islamic finance, pose materially lower medium-term risks to stability.12 The Bank of England has long advocated the risk-sharing merits of GDP-linked instruments, which could be packaged in sukuk form. 13 And, together with HM Treasury and the FCA, we have recently announced a high-level working group to consider ways to foster a longer-term financial markets culture to support productive investment.14    Second, Islamic finance seeks to avoid investing in socially detrimental activities. In fact, it was pro-ESG before the term was ever invented!
But as I mentioned earlier, confidentiality and privacy should not be compromised. Part of future-proofing our payment systems is to enhance the efficiency of cross-border payment services. In this globalised world, there is a growing demand for faster, reasonably priced and more transparent cross-border payments. This will become even more important as international trade and investment linkages deepen, such as through the growth of e-commerce. Yet, cross-border payment services still pale in comparison to domestic payments, which are increasingly real time and zero cost. PayNet and the payment system operators in Indonesia, Singapore, Thailand and Vietnam have entered into a Memorandum of Understanding (MoU) to link their respective real-time payment systems. This will give rise to great opportunities for the region to forge closer economic and financial integration. The industry should capitalise on such developments to enhance their cross-border payment offerings to better serve their customers, reduce costs and enhance safety. Harnessing greater efficiencies of cross-border payments can be a lucrative area and those who can innovate will certainly benefit most. Embracing digital disruption that redefine payments This brings me to my second point. Technology, as you know, is fundamentally changing the way we live. Many industries have redefined themselves and embraced digital disruption to remain relevant. Unlike previous disruptions that came from within the industry, we now see enormous interest in mobile payments and the proliferation of non-bank payment providers. Data collected showed an increase in the number of non-bank e-money issuers from 26 in 2016 to 41 as at the end of last month.