XVII
EXECUTIVE SUMMARY
CHAPTER 1: OVERVIEW OF ISLAMIC FINANCE
Following the global financial crisis of 2007, the Islamic finance industry has gained
importance as it provides another alternative to diversify investible funds. The Islamic finance
industry grew from having USD 150 billion in assets under management in the mid-1990s to
USD 1.3 trillion in 2011. Around half of the total assets of the Islamic finance industry is
geographically concentrated, with an estimated 47.06% of total assets being held in Islamic
banks in the Middle East and Asia.
Beginning in the mid-2000s, regulatory authorities in different jurisdictions started
introducing and amending legislation to make the legal systems more supportive of the Islamic
banking industry’s growth. Besides, following the financial crisis, the increased interest
surrounding Islamic banking has increased the level of awareness among investors, regulators
and other stakeholders. As a result, assets under Islamic bank management and Islamic
banking windows have grown at a compound annual growth rate (hereafter CAGR) of 40.3%
between 2004 and 2011 to reach USD1.1 trillion. The average return on equity for the top 20
Islamic banks was 12.6%, which is comparable to the 15% ROE of conventional banks.
Over the past decade, the Islamic capital market has developed in terms of both sophistication
and size. Increased demand for diversification of the Sharī`ah-compliant assets has fostered
innovations in the Islamic capital market. With the development of Islamic debt (sukuk),
Islamic indices, and equities, a vibrant Islamic capital market is facilitating cross-border capital
flows and funding economic activities.
Since the launch of the early Islamic indices in 1999, Islamic indices have expanded across
both regional and economic geographies. Four major global Islamic index providers are: 1)
Dow Jones Islamic Market Indices, 2) S&P Sharī`ah Indices, 3) MSCI Global Islamic Indices, 4)
FTSE Global Islamic Indices.
The growth of Islamic Funds is dependent on the availability of other Sharī`ah-compliant
solutions. Despite the challenges associated with the limited number of Shriah-compliant
assets, Islamic Funds have evolved as a significant niche segment and have experienced stable
grown since 2004, because of the rising financial wealth in emerging Muslim economies and
the oil-rich countries. By the end-2011, assets under management of Islamic funds grew to
USD 60 billion from USD 29.2 billion in 2004, representing a CAGR of 10.8%.
Sukuk is the Islamic alternative for conventional bonds. Over the last decade, Sukuk has
evolved as an important and vibrant part of the Islamic financial system. In the mid-2000s,
government institutions and central banks started short-term Sukuk programs to enhance
market liquidity management. Following the sovereign debt crisis in Europe, slower global
economic growth has left investors with fewer investment options, which has led to capital
flows to emerging markets, commodities, and alternative investments such as Sukuk. Despite a