National and Global Islamic Financial Architecture:
Problems and Possible Solutions for the OIC Member Countries
14
2. Financial Sector in OIC Member Countries & Islamic Finance:
Global Status & Evaluation
This chapter provides an overview of the status of the financial sector of OIC MCs and the
global standing of Islamic finance. The chapter is divided into three broad themes. The first
theme covers the general features of the financial sector in OIC MCs vis-à-vis other countries
of the world. In this part, the legal and regulatory framework that affect the financial sector is
presented, followed by a section that presents the relative size of the banking insurance and
capital market segments. Different features of the financial institutions and markets (depth,
access, efficiency and stability) in OIC MCs relative to the countries in different income groups
are also presented.
The second theme of the chapter provides background material on the Islamic financial
industry. After presenting the basic principles and values of Islamic economics and finance,
the structures of the basic contracts used in Islamic finance are discussed. This is followed by
a brief historical overview of the development of Islamic financial institutions and the global
infrastructure institutions for the Islamic financial industry.
The final theme of the chapter covers the global status of Islamic finance by presenting the
size of the global Islamic financial institutions and financial markets across different
geographical regions. Specifically, the global status of financial institutions (Islamic banking,
takaful and nonbank financial institutions) and capital market products (Islamic funds under
management and sukuk) are presented.
2.1. Legal/Regulatory Environment in OIC Member Countries: A Brief
Overview
As modern finance is ‘legally constructed’ (Pistor 2013: 315), a well-developed legal
framework is necessary for the efficient and effective functioning of financial markets and
institutions. Stability and resilience of financial systems partly depend on the ability of the
legal environment supporting contractual agreements used by markets and institutions to
promote exchanges and decision making by economic units and prevent harmful practices
such as fraud, collusion, corruption, etc. A sound legal infrastructure would include various
laws that promote growth by mobilizing savings and converting it into productive capital
(Moskow 2002).
Although the personal law in most Muslim countries is still Islamic, most Muslim countries
have adopted some variant of western legal systems either due to colonization or imitation. In
general, the legal systems can be broadly classified as common law and civil law systems.
While common law is associated with English law, the legal systems of continental Europe
constitute civil law. Thus, with the exception of a few countries, the commercial laws of most
OIC MCs are either common law or civil law based. Specifically, countries that were ex-British
colonies have adopted the English common law framework and ex-French colonies have
adopted a civil law regime. Many countries in the Arab world have adopted variants of the
Egyptian legal system which has a legal code based on the French and European civil law. Each
legal family shapes the legal rules that affect the financial markets and their development (La
Porta 1999). Table 2.1 shows the distribution of the legal regimes of OIC MCs in different