National and Global Islamic Financial Architecture:
Problems and Possible Solutions for the OIC Member Countries
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7.3. Lessons and Conclusions
7.3.1. National Level Infrastuture Institutions
While establishing most of the financial architecture is the prerogative of government level
bodies, the case studies show that the development of Islamic financial infrastructural
institutions has taken different paths. While in some countries the financial architecture has
progressed, in other countries it is relatively underdeveloped. The experience of Pakistan
shows the important role financial architecture plays in the development of Islamic finance.
Islamic finance was initiated in the1980s with the publication of a report on interest-free
economic system Council of Islamic Ideology (CII). However, as the infrastructure institutions
were not established, the implementation of Islamic finance in practice could not be realized as
was apparent in the conclusion of the Shariat Appellate Bench of the Supreme Court in 1991
that the system adopted was not Islamic. In 1999, the Appellate Bench declared that certain
fundamental changes were needed to make the financial system Islamic. Thereafter, Pakistan
took a gradual approach and adopted a dual banking model where Islamic banks operated
parallel to their conventional counterparts. The relevant government bodies started to
strengthen various architectural institutions for Islamic finance which has resulted in the
sound growth of the sector.
There are different factors that determine whether the supporting architectural institutions
are developed in any country. The case studies show that the public policy approaches taken to
develop Islamic financial architectural institutions in different countries can be broadly
classified into three types. First there is the proactive approach where governments have taken
initiatives to provide a sound legal and regulatory framework and other infrastructural
institutions. In some countries, the intent and interest in developing Islamic finance is reflected
in some public policy strategic documents. For example, Malaysia’s strategic documents issued
by the central bank and securities commission identify the development of Islamic finance
segments as key strategic goals. Therefore, relevant public bodies have taken initiatives to
develop the elements of the architectural institutions significantly to support the industry. In
Oman where Islamic finance is relatively new, supportive political will is reflected in laying
down a sound legal and regulatory framework for Islamic finance. As a result, the share of the
Islamic banks in the total banking sector in the country has risen close to 4.5% in 3 years,
which is similar to Indonesia where Islamic banks have been operating since early 1990s.
Second, in the reactive approach, public bodies initiate infrastructural institutions as a reaction
to developments of industry at the ground level. The strategies taken in the reactive approach
can be varied. In some countries, the relevant governmental bodies have adjusted laws and
regulations and have also developed some of the infrastructural institutions. For example,
other than adjusting the laws and regulations, Indonesia has introduced other initiatives such
as developing Islamic money market instruments and using the national Shariah Board for
product clearance. Other countries have changed some of its laws and regulations but have not
been active in developing other infrastructural institutions. In some cases, instead of
developing infrastructural institutions themselves, the public bodies have encouraged the
stakeholders of the Islamic financial sector to establish certain supporting infrastructural
institutions. For example, in Bangladesh the central Shariah board and inter-bank money
market have been established at the initiatives of Islamic banks. Similarly, Participation Bank
Association of Turkey plays an important role in framing necessary policies and strategies
related to the development of Islamic banking in the country.