Diversification of Islamic Financial Instruments
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INTRODUCTION
Globally, the Islamic finance industry has a total size of USD 1.893 trillion by June 2016 (IFSB
report 2017) and is estimated to reach $3.2 trillion (or $6 trillion by some estimates)
according to ICD Thomson Reuters Islamic Finance Development indicator. Though the whole
industry is still only about 1% of the global finance industry and largely segregated in some
jurisdictions, there is no doubt that it has witnessed consistent, profound growth in the past 30
years.
In terms of jurisdictions, Islamic finance is present in almost 90 countries across the globe,
with about 50 Muslim countries. Iran and Sudan are two Muslim countries that operate wholly
Shariah compliant banking systems. By the end of 2016, there were a total of 12 jurisdictions
in which Islamic banking industry had a share of 15% or more in the whole banking industry.
The major OIC jurisdictions also include Saudi Arabia, Bahrain, UAE and Malaysia (the leaders
in the industry), Pakistan, Indonesia, Bangladesh, Jordan, Qatar, Bahrain, Kuwait, Turkey,
Yemen, Brunei, Algeria, Azerbaijan, Kenya, Oman, Lebanon etc. Of these, Saudi Arabia,
Malaysia, Yemen, Kuwait, Bangladesh and UAE have a substantial share (18 – 50%) of Islamic
banking in their overall banking industry. More recently, countries such as Maldives, Palestine
and Djibouti (in Africa) have also entered the landscape.
This study examines the different financial instruments and products used in the Islamic
financial industry in different countries across the globe. The Islamic finance industry can be
divided into (a) Islamic banking segment, (b) Islamic capital markets segment and (c) Islamic
insurance or Takaful segment. Today, Islamic finance has an important presence in the largely
Muslim 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.
The Islamic Finance Country Index (IFCI) splits the countries in four categories – a)
Established Leaders in Islamic Finance (Malaysia, Iran and Saudi Arabia), b) the Emerging
Leaders, c) the Potential Leaders and d) the Tail-enders. Geographically, the major countries in
the Islamic finance world can be divided between those in the Arab Group, the Asian Group
(including South and South East Asia), the African Group, and Others (such as Europe, North
America etc.). This study selects ten different countries covering these groups and examines
the different financial instruments, the best practices and the challenges in each of the three
segments of Islamic finance.
Malaysia is selected from the Established Leaders, representing the Asian Group. Among the
Emerging Leaders, Bahrain from the Arab Group and Indonesia from the Asian Group are
selected. From the Potential Leaders, Sudan is selected from the Arab Group, Pakistan,
Bangladesh and Turkey from the Asian Group, and the United Kingdom is selected
representing the non-OIC member countries. Oman from the Arab group and Nigeria from the
African Group make up the Tail-enders. Since Islamic finance is more dominant in terms of its
size, development and history in the Asian countries, from Turkey in the west to Malaysia and
Indonesia in the south-east, five of the selected ten countries fall in this region.