Diversification of Islamic Financial Insturments
1
EXECUTIVE SUMMARY
The growth of the global Islamic finance sector over the last decade has been steady and
relatively fast, even with the economic challenges the world witnessed. These range from
energy price crash, geopolitical conflicts, and exchange rate depreciations in many key Islamic
finance markets, including Turkey, Malaysia and Indonesia, and an asset sell-off spree in
emerging markets. This report takes the inquiry on Islamic finance a step further, as it
deliberates on the different instruments and products that are prevalent in different countries.
The report structures the Islamic finance industry into three main components for the ease of
analysis: Islamic banking segment, Islamic capital markets segment and the Islamic insurance
or Takaful segment. Today, Islamic finance has an important presence in the OIC world as well
as the non-OIC world. Different products based on the structures of Mudarabah, Musharakah,
Ijarah, Wakala, Salam, Istisna, Qard-e-Hasan etc. and hybrid structures such as Diminishing
Musharakah, Wakala-Waqf etc. are used across all three segments.
This study selects ten different countries covering the Arab, Asian and African Groups as Case
Studies, and examines the different financial instruments, the best practices and the challenges
in each of the three segments of Islamic finance.
As Chapter 2 highlights, despite the huge growth of the Islamic finance and banking industry
over the past few years, the industry currently faces considerable challenges in product
diversification. These include: lack of human capital, Shariah harmonization across
jurisdictions, regulatory evolution for financial innovation and challenges, customer awareness
and public awareness, promotion of risk sharing, greater product innovation for better
financial inclusion and adaptation of Fintech, etc.
The Islamic financial sector in Nigeria (Chapter. 3.1) has high prospects of growth, though it
needs a more developed architecture for development. Diversified products based on Qard-e-
Hasan, Murabahah, Mudarabah and Ijarah dominate. Recommendations include specialized
human capacity development programs for better product development and diversification,
developing a separate legal framework for IFIs, an Islamic financial engineering training
program from regulatory bodies (for better product development) and more attractive
products targeting the low income groups.
In Indonesia (Chapter 3.2), Islamic banking has been commenced only in the 1990s. With the
biggest Muslim population in the world, it has a promising Islamic banking market for global
growth, but a greater adaptation of international financial standards as developed by IFSB and
AAOIFI is recommended. The dominating structures in Indonesian Islamic banking are based
on Murabahah financing, and it is recommended to encourage IFIs to offer equity-financing
based on the principle of risk sharing to promote the development of the real economic
sectors.
In Pakistan (Chapter 3.3), though Islamic banking commenced only in 2003, it dominates the
Islamic finance industry and has shown a steady and impressive double digit growth compared
to the conventional banking sector. However, even with and an impressive share in the
consumer financing market, with Diminishing Musharakah and Murabahah-based financing
products dominating, there is a need to encourage more equity-based products, and to
increase Shariah compliant financing in infrastructure development, SMEs, agriculture and