Diversification of Islamic Financial Insturments
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4 POLICY RECOMMENDATIONS
4.1 ISLAMIC BANKING
Islamic Banking has been the dominant component of the Islamic financial sector over the
years, with its assets at nearly $2 trillion and with presence in almost 50 Muslim and non-
Muslim countries. With the development towards more risk sharing instruments from the
traditional risk transfer and risk shifting instruments, this is the right time for the Islamic
banks to promote more financial inclusion by focusing on more risk-sharing. From an
objectivity perspective, as Islam finds itself based in justice and equality, and shared
prosperity, this can be achieved through expanding outreach to the micro, small, and medium
enterprises (MSME) sector.
The Islamic banking structure is not structured in the same way as a traditional bank is: it’s
more focused towards being an intermediary offering banking and asset management services.
The current model of Islamic banking which we are operating in is restricting the growth of the
Islamic banking sector, as it is focused on replication of the conventional banking. Some of the
challenges that Islamic banking faces which the policy makers need to address arise primarily
of structural matters. These structural issues arise out of the prevalence of debt-based
instruments and the aspirations of financing predominantly through equity and risk sharing, to
the need for increased social capital, and the challenges of creating an enabling regulatory
framework. From a policy-makers aspect, the focus should be on the following key measures,
which are geared towards a mutually shared prosperity objective.
To contribute to shared prosperity, the following actions need to be undertaken.
 Creation of an enabling regulatory environment by supporting consistent regulations
and development of standards to promote risk sharing.
 Development and introduction of risk-sharing products and services instead of
focusing on replication of conventional risk- -transfer products
 Move towards harmonization of Shariah governance standards and policies across
different jurisdiction.
 Expanding Islamic finance’s reach to the lower income group of society.
 Development and training of human capital and literacy in Islamic finance.
These policy recommendations are further broken down to specific steps and the
implementing agency that should be responsible for them in the following table.