National and Global Islamic Financial Architecture:
Problems and Possible Solutions for the OIC Member Countries
2
markets in OIC MCs are higher than the world average. Though the financial institutions
appear to be stable, the financial markets indicate lower levels of stability compared to the
world average.
The experience of the development of Islamic finance in non-OIC countries with global
financial centers varies across jurisdictions and sectors. Industries such as Islamic retail
banking and takaful sectors catering to the needs of domestic clients are limited to countries
that have significant Muslim minorities. These sectors have developed in the United Kingdom
and Singapore with institutional support from governments. While Germany has a relatively
large Muslim minority group, no takaful companies exist and Islamic retail banking has only
just been initiated there recently. This is partly because the government and regulators have
not shown strategic interest in the development of Islamic finance. The international market
segment in the global financial sectors consists of retakaful, wholesale banking, and the
provision of capital market products such as funds and sukuk. While reinsurance companies
based in Singapore are offering retakaful services, German companies are offering these
services from their overseas offices based in Muslim countries. The United Kingdom and
Singapore have also taken initiatives to encourage the development of wholesale banking
markets to cater to the needs of Muslims for wealth management. With the exception of
Germany, the key focus of remaining global financial centers studied has been the capital
markets segment. Governments in these countries have promoted the sector, sometimes by
accommodating laws and regulations to attract globally mobile Islamic financial businesses.
The OIC MCs case-studies show that countries have different levels of development of Islamic
financial architecture. On average, other than ‘information infrastructure’ and ‘consumer
protection infrastructure’ which are ‘underdeveloped’, most of the architectural elements are
in the ‘developing’ stage. At the international level, development of standards and guidelines
by multilateral institutions can help promote sound architectural institutions. Countries with
underdeveloped infrastructures can benefit by using the framework provided by international
benchmarks to develop institutions that can support the Islamic financial industry. The key
features of the financial architectural elements are highlighted below:
Legal Infrastructure: The results from the legal infrastructure for Islamic finance indicate
that there is scope to strengthen legal institutions. Not only is there need to enact supporting
Islamic financial laws and adjust tax laws, the bankruptcy framework and dispute resolution
institutions also need to accommodate the Islamic financial sector. At the international level,
the gaps in legal infrastructure in terms of laws related to Islamic finance will be easier to fill if
there are model laws that the countries can refer to. However, currently there are no global
initiatives that deal with legal matters. Initiatives from organization such as IDB can develop
templates for Islamic financial laws and also come up with a framework for harmonizing
national laws with Shariah principles governing Islamic finance for both civil law and common
law countries.
Regulation and Supervision Framework: The regulatory authorities need to understand the
nature of the risks arising in the Islamic financial industry to develop appropriate regulatory
frameworks. This may require not only appropriate regulations for all Islamic financial sectors
but also separate departments/units in regulatory bodies dealing with the Islamic financial
sectors. Although the IFSB has published many regulatory standards and guidelines for the
Islamic financial industry, the coverage for different sectors has not been even. As the Islamic
financial industry is expected to grow in the future, there may be a need to strengthen the