National and Global Islamic Financial Architecture:
Prolems and Possible Solutions for the OIC Member Countries
7
population does not deal with the interest-based financial sector due to religious convictions.4
Inclusive financial systems in many OIC member countries (MCs), therefore, require providing
Shariah compliant financial services so that all segments of the population can benefit from the
financial system and contribute to the development process. Although Islamic finance
predominantly serves the financial needs of Muslims who do not want to engage with
conventional finance for religious reasons, it can also be an alternative source for ethical and
social finance for much wider markets.
With USD 1.88 trillion worth of assets in 2015, the Islamic financial sector has expanded
globally in its short history (IFSB 2016). While the conventional financial sector stalled after
the global financial crisis, the Islamic financial industry grew at a compound annual growth
rate of 17% between 2009 and 2013 (IFSB 2015). It is expected that by 2020, a significant part
of the banking and finance in the Gulf and in some South-east Asian countries such as Malaysia
and Indonesia will be Islamic. The global role of Islamic finance is also expected to expand as
many global financial centers such as the UK, Luxembourg, Singapore, Hong Kong, Japan, etc.
have taken initiatives to introduce Islamic finance.
With its growth, the Islamic financial sector is expected to become systematically important in
many jurisdictions. A sound financial architecture will be crucial for its development as a
robust and resilient industry. However, being a relatively new industry in most countries, the
infrastructural institutions supporting the industry remain weak and are still evolving. This is
reflected in a survey conducted by MEGA (2016: 50) which reveals that 38% of the
respondents identify regulatory costs and 18% point out Shariah compliance costs as factors
that limit the growth of Islamic banks. Meanwhile, 29% of the respondents identify regulatory
issues and 17% identify the lack of liquid markets as being among the biggest external threats.
Furthermore, the internal threats identified were a shortage of qualified personnel, identified
by 28% of the respondents, and Shariah compliance issues, identified by 21% of the
respondents (MEGA 2016: 51).
While most of the elements of financial architecture that bring about stability and promote
development in conventional finance also apply to the Islamic financial sector, there are certain
specific issues that arise in the latter due to some unique features arising from Shariah
compliance. Compliance with Shariah introduces some unique risks in Islamic financial
institutions and also restricts the use of certain risk-mitigating tools that are available to their
conventional counterparts. Furthermore, Islamic finance operates in countries that have legal
and regulatory systems that are not Islamic. Given the above, specific architectural institutions
are needed for the future development of Islamic finance. This study attempts to identify these
institutions, examines their statuses in selected countries, and suggests ways in which these
can be developed.
The remainder of the chapter is organized as follows. The next section presents a brief
overview of the evolution of the notion of financial architecture in conventional finance
followed by a section that outlines the aim and scope of the study. The concluding section
provides the outline of the key architectural institutions that will be examined in this study.
4 Karim et al (2008) find that an estimated 72 percent of the people living in Muslim countries do not use formal financial
services and a large percentage of the population (ranging from 20 to more than 40 percent) would not avail conventional
microfinance to avoid interest.