National and Global Islamic Financial Architecture:
Prolems and Possible Solutions for the OIC Member Countries
1
Executive Summary
The financial sector performs various functions that facilitates the efficient functioning of the
economy and promotes economic growth. For the financial sector to contribute to growth and
mitigate risks, however, the industry itself has to be resilient and be able to reduce its own
vulnerabilities. Recognizing this, various international organizations such as the International
Monetary Fund, World Bank, Basel Committee for Banking Supervision, etc. are working
ondeveloping various institutional standards, tools and policies necessary for the creation of a
sound framework for the development of the financial sector. Other than prudent financial
system supervision and regulation, the WB and IMF (2005) identify legal infrastructure,
systemic liquidity infrastructure, governance and information infrastructure, payments and
securities settlement systems, creditors’ rights, the provision of incentives for strong risk
management, credit reporting systems, etc. as being among the key architectural institutions
needed to promote the development and stability of the financial sector.
The Islamic financial sector has expanded globally in its short history with total global assets
valued at USD 1.88 trillion in 2015 (IFSB 2016). Growing at a compound annual growth rate of
17% between 2009 and 2013 (IFSB 2015), the industry is expected to become systematically
important in many jurisdictions. The global role of Islamic finance has grown in many global
financial centers such as the UK, Luxembourg, Singapore, Hong Kong, Japan, etc. Given the
above, a sound financial architecture will be crucial for its future development as a robust and
resilient industry. While most of the elements of financial architecture that promote
development in conventional finance also apply to Islamic finance, there are certain specific
issues that arise in the latter due to unique features arising from Shariah compliance. However,
being a relatively new industry in most countries, the infrastructure institutions supporting
the industry remain weak and are continuing to evolve.
Given the vital roles that architectural institutions play in promoting the growth and stability
of the financial sector, this study aims to identify the unique features of the financial
architecture governing Islamic finance, assess their statuses in selected OIC member countries
(MCs), and provide policy recommendations for improvement at both the domestic and
international levels. The study examines the status of seven categories of the Islamic financial
architecture (legal infrastructure; regulation and supervision framework; Shariah governance
framework; liquidity infrastructure; information infrastructure and transparency; consumer
protection architecture; and human capital and knowledge development framework) for 12
OIC MCs. It also explores the status of Islamic finance in five countries with global financial
centers (the UK, Germany, Luxemburg Singapore, Hong Kong). After presenting the overall
sizes of the financial sectors, the approaches taken towards Islamic finance in these countries
are discussed.
The study first examines the legal environment and the features of the financial sector of OIC
MCs. Most OIC MCs have adopted some variant of common law and civil law systems, with 16
countries having the former and 40 adopting the latter. The study shows that while the overall
average size of the banking sector in OIC MCs is similar to the world average on the liabilities
side, it is smaller for banking assets and the insurance sector. While the debt securities market
is underdeveloped in OIC MCs compared to the world average, stock market capitalization is
relatively higher. Information on the features of the financial sector shows that the average
depth and access of the financial institutions and financial markets in OIC MCs is lower than
the world average. However the average efficiency of both financial institutions and financial