A recent study published by the International Monetary Fund (IMF) suggests that a central bank digital currency (CBDC) can have significant impacts on the monetary policy of a country, especially in the Islamic banking system.

The research reveals that even when a CBDC is not designed to affect monetary policy, it can increase money velocity, disintermediation, volatility of bank reserves, currency substitution, and altered capital flows.

The Islamic financial system, which is present in 34 countries and systemically important in 15 jurisdictions, accounts for less than 2% of global finance.

However, only Iran and Sudan have fully Islamic banking systems, and 10 countries with an Islamic financial presence are currently considering CBDCs. This situation poses a challenge for CBDC design since Islamic law prohibits usury and speculation.

The research highlights that the traditional mechanisms of liquidity management based on interest, such as interbank market, secondary market financial instruments, central bank discount window, and Lender of Last Resort (LOLR), are not permissible for Islamic banks.

Additionally, the prohibition on speculation implies that CBDC cannot be used for foreign exchange derivatives transactions.

Moreover, the infrastructure for Islamic banking is lacking in many countries, resulting in Islamic banks holding excess cash. Because deposits in Islamic-finance banks and a halal (Islamic law compliant) CBDC do not pay interest, the risk of bank disintermediation is increased, which can impact liquidity management.

The IMF study reveals that the reaction to cryptocurrency in the Islamic world has not been uniform. While some countries in the Middle East and North Africa region have seen rapid growth in crypto adoption, others have experienced stagnation. Opinions also vary among Islamic scholars, with some endorsing crypto trading, and others rejecting it.