Risk Management in
Islamic Financial Instruments
2
Around 50% of total Islamic financial assets are geographically concentrated in Islamic banks
in the Middle East and Asia. Although contributions the total assets invested in sukuk, Islamic
funds and takaful institutions are relatively small at present, these alternate asset classes have
enjoyed remarkable growth and have expanded the breadth and depth of the Islamic Financial
Industry in general. Table 1 presents the summary distribution of Islamic Financial Industry
Assets across major geographical regions.
Table 1.1: Breakdown of Islamic Financial Assets (in USD billion, as of 2012)
Banking
Assets
Sukūk
Outstanding
Islamic Funds’
Assets
Takāful
Contributions
Asia 171.8 160.3 22.6 2.7
GCC 434.5 66.3 28.9 7.2
MENA (exc. GCC) 590.6 1.7 0.2 6.9
Sub-Saharan Africa 16.9 0.1 1.6 0.4
Others 59.8 1.0 10.8 0.0
Total 1,273.6 229.4 64.2 17.2
Source: Regulatory authorities, Bloomberg, Zawya, IFIS, The Banker, KFHR
The Islamic finance industry is composed of four asset classes: banking, sukuk, funds, and
takaful. A brief discussion on the present status of these four asset classes is presented in the
following segments.
1.2 CURRENT STATUS OF ISLAMIC BANKS
In the early 2000s, Islamic banking was a niche market in most jurisdictions, with only a few
institutions offering basic depository and financing instruments. Additionally, there was low
awareness and demand for Islamic banking services, particularly in the Asia Pacific and
developed markets. Beginning in the mid-2000s, regulatory authorities in different
jurisdictions started introducing and amending legislation to make the legal system more
supportive of the Islamic banking industry’s growth. In addition, following the financial crisis,
increased interest about Islamic banking has increased the level of awareness among
investors, regulators and other stakeholders.
As a result, assets under management in Islamic banks 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. Among financial institutions and asset classes, Islamic banks have
contributed to the overwhelming majority of the total assets managed over the last decade
(“GIFF 2012 Executive Summary” 1). In 2013, the assets of Islamic commercial banks were
expected to grow to USD $1.7 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.