Risk Management in
Islamic Financial Instruments
1
CHAPTER 1: OVERVIEW OF ISLAMIC FINANCE INDUSTRY
This report presents a summary of risk management analysis for Islamic banks in the OIC
member states, which comprises 57 countries in Asia and Africa. The member countries are:
Afghanistan, Albania, Algeria, Azerbaijan, Bahrain, Bangladesh, Benin, Brunei-Darussalam,
Burkina-Faso, Cameroon, Chad, Comoros, Cote D'ivoire, Djibouti, Egypt, Gabon, Gambia,
Guinea, Guinea-Bissau, Guyana, Indonesia, Iran, Iraq, Jordan, Kazakhstan, Kuwait, Kyrgyz,
Lebanon, Libyan, Malaysia, Maldives, Mali, Mauritania, Morocco, Mozambique, Niger, Nigeria,
Oman, Pakistan, Palestine, Qatar, Saudi Arabia, Senegal, Sierra Leone, Somalia, Sudan,
Suriname, Syrian, Tajikistan, Togo, Tunisia, Turkey, Turkmenistan, Uganda, United Arab
Emirates, Uzbekistan, Yemen.
Among the member countries, 157 Islamic banks from 31 countries are represented in the
BankScope database as of 2013: Bahrain, Bangladesh, Brunei Darussalam, Cayman Islands,
Egypt, Gambia, Indonesia, Iran, Iraq, Jordan, Kuwait, Lebanon, Malaysia, Maldives, Mauritania,
Oman, Pakistan, Philippines, Qatar, Russia, Saudi Arabia, Singapore, Sudan, Syrian Arab
Republic, Tunisia, Turkey, United Arab Emirates, United Kingdom, United States, West Bank
and Gaza, and Yemen. Accordingly, only this subset of OIC member countries considered for
the risk management analysis. Country macro-economic data are collected from the IMF, IFC,
World Bank and IRTI reports.
The remaining parts of this chapter present an overview of Islamic finance industry in general,
followed by discussions on the current status of the Islamic banking sector, the Islamic capital
market and Islamic microfinance.
1.1 OVERVIEW OF ISLAMIC FINANCE INDUSTRY
Over the last three decades, the Islamic finance industry (hereafter IFSI) has emerged as an
effective alternative to conventional finance. Following the global financial crisis of 2007, the
IFSI has gained importance as it provides another alternative to diversify investible funds.
Since April 2010, the IFSI has expanded in new jurisdictions. The number of participating
financial institutions has increased and countries have implemented regulatory reforms and
provided various incentives for development. As a result, assets under management in the IFSI
have reached USD 1.6 trillion as of the end of 2012, representing a 20.4% increase since 2011
(IFSB-IFSI 2013).
According to the GIFF 2012 report, Islamic finance is “the fastest growing segment of the
international financial system (GIFF 2012 14).” 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.
Additionally, as of 2012, there were more than 600 Islamic financial institutions operating in
75 countries. With the growing demand for more ethical investment, a growing Muslim
population around the world, and the diversity and strength of Islamic finance products, more
countries are seeking to integrate Islamic financial principles and tools in their financial
markets (GIFF 2012 11).