DEVELOPING ISLAMIC FINANCE OPPORTUNITIES FOR TRADE FINANCING: ESSAYS ON ISLAMIC TRADE VIS-À-VIS THE OIC TEN-YEAR PROGRAMME OF ACTION

Abstract

International trade has been defined as the engine of growth by international development institutions as more cross-border trade associated with more economic activity, higher employment, hence, poverty alleviation. If trade is the engine of growth, trade finance can be defined as grease for the engine. Hence, availing more funds to finance the enormous amount of international trade, counting about half of global GDP, is an important agenda for the OIC as well as many multilateral development institutions. The main reason behind the efforts to avail more funds for trade finance is to direct valuable financial resources from speculation to explore opportunities to increase international trade in a way to grease and roll the wheel of real economy. With reference to the OIC Ten-Year Programme of Action to Meet the Challenges Facing the Muslim countries in the 21st century, this research aims to introduce outward-looking, cost-effective, and informal policy options for a resilient OIC trade integration to increase international trade among OIC countries.
In this regard, the first essay aims to explore the determinants of recent increase in intra-OIC trade to ascertain if it is due to policy instruments implemented by OIC organs or some other externalities. It is argued that recent increase in intra-OIC trade percentage is likely to be the product of reverse effects of oil price surge and Euro appreciation but not trade diversion effect of OIC membership. OIC membership itself alone would not increase intra-OIC trade if not accompanied with policy instrument for trade facilitation to make cross-border trade easier among member countries. However, as customs revenue constitutes the bulk of public revenue for many OIC countries, they need to be convinced about benefit of trade facilitation. Accordingly, with reference to the unwillingness of OIC countries for trade facilitation, the same essay scrutinizes the effect of tariff and WTO Customs Valuation Agreement on customs’ revenue of OIC countries. The results suggest that increasing tariffs might increase customs revenue for big countries but not for small countries. Besides, the implementation of WTO Customs Valuation Agreement does not decrease customs revenue as its indirect undervaluation effect would be surpassed by its direct effect of less incentive for tax evasion.
As a crucial crop for public finances in many OIC countries and initial stage of industrialization, special emphasis is given to development of the cotton sector under the OIC Ten-Year Programme of Action. The Third Expert Group Meeting on Enhancing Production Efficiency and International Competitiveness in OIC Cotton-Producing Countries adopted the Five-Year OIC Cotton Plan of Action (2007-2011). As per the mandate of OIC, two Islamic trade finance products are proposed, one for the cotton sector through the resources mobilized with mudarabah, by proposing salam for complete supply chain financing in the second essay, and another for resource mobilization based on 2-Step murabahah in the context of international trade as an alternative to commodity murabahah, sukuk as well as mudarabah in the third essay.
In conclusion, based on further findings of the survey, the questionnaire and interviews; capacity building in trade facilitation for small countries to be complemented with OIC mutual recognition agreement for standard and conformity assessment within halal food standard development; integrated single window among OIC countries’ customs; OIC cumulation system of rules of origin for market access; inward processing relief as an alternative to free trade zones; development of the cotton sector among OIC countries to address production constraints of LDMCs and 2-Step murabahah to mobilize trade finance resources to boost trade of OIC countries, particularly for LDMCs, are proposed as a part of concretely defined and well-grounded OIC trade integration framework.