Financial Outlook of the OIC Member Countries 2017

FINANCIAL OUTLOOK OF THE OIC MEMBER COUNTRIES

The liberalization of financial markets during the 1990s and 2000s has played an important

role in shaping today’s financial structure all over the world. The financial sector has a critical

role in modern market economies. It can provide payment and transaction services, channeling

households’ savings to its best investment areas to the different sectors of the economy such as

households, enterprises and governments. However, it can also be a source of fragility and

crisis, as seen during the recent Global Financial Crisis as well as during numerous banking

crises in emerging and developing markets.

The financial sector performs various functions that facilitate the efficient functioning of the

economy and promote economic growth. The functions of a financial system are identified as

“the trading of risk, allocating capital, monitoring managers, mobilizing savings, and easing the

trading of goods”. For the financial sector to contribute to growth and mitigate risks, the

industry itself has to be resilient and be able to reduce its own vulnerabilities. Given the

complexity and dynamism of modern financial products and markets, appropriate institutions

are needed to reduce the risks and vulnerabilities that can potentially lead to harmful and

costly economic downturns.

It has been accepted that modern financial institutions and financial markets exert a powerful

influence on economic development, poverty alleviation, and economic stability. For example,

when banks screen borrowers and identify firms with the most promising prospects, this is a

key step that helps allocate resources efficiently, expand economic opportunities, and foster

growth. When banks and securities markets mobilize savings from households to invest in

promising projects, this is another crucial step in fostering economic development. When

financial institutions monitor the use of investments and scrutinize managerial performance,

this is an additional ingredient in boosting the efficiency of corporations. Additionally equity,

bond, and derivative markets enable the diversification of risk, this encourages investment in

higher-return projects that might otherwise be shunned.

The financial sector is critically connected to the overall institutional framework in a country.

Given that the intertemporal of financial transactions makes it one of the most institution

sensitive sector, a financial system can only thrive in an environment with effective

institutions that reduce agency conflicts between contract parties. There might also be reverse

influences from a thriving financial sector to institutional strengthening of a country.

A financial system consists of institutional units and markets that interact for the purpose of

mobilizing funds for investment and providing facilities for the financing of commercial

activity. The role of financial institutions within the system is primarily to intermediate

between those that provide funds and those that need funds, and typically involves

transforming and managing risk. In this regard financial system has significant effects for

whole economic systems and a healthy financial system contributes to economic growth by

easing access to finance, increasing financial literacy, and allocating resources efficiently.

National and Global Islamic Financial Architecture, COMCEC Financial Working Group Report, 2016

Cihak, M., Demirgüç-Kunt, A., Feyen E., Levine, R. , “Benchmarking Financial Systems around the World”, World Bank

Policy Research Working Paper 6175. Washington, D.C.: World Bank, 2012

Beck, Thorsten, “Finance, Institutions and Development: Literature Survey and Research Agenda”, Cass Business School,

City University and CEPR, August 2016