COMCEC Financial Outlook 2018
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1. 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 market and developing economies.
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 the 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.2
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. 3
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.4
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.
2 National and Global Islamic Financial Architecture, COMCEC Financial Working Group Report, 2016
3 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
4 Beck, Thorsten, “Finance, Institutions and Development: Literature Survey and Research Agenda”, Cass Business School, City
University and CEPR, August 2016