Diversification of Islamic Financial Insturments
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1 GLOBAL OVERVIEW OF THE ISLAMIC FINANCIAL SYSTEM
Globally, the Islamic finance industry had a total size of USD 1.893 trillion by the end of 2016
(IFSB report 2017). However, the years 2016 and 2015 saw a relatively modest growth in the
Islamic finance industry, noticeably lower than the double-digit growth rates of previous years.
This was attributed1 partially to low energy prices and economic growth rates, some geo-
political conflicts, and in particular, to the exchange rate depreciations in many key Islamic
finance markets, including Turkey, Malaysia and Indonesia.
The Islamic financial system can be divided into the Islamic banking, Islamic capital markets
(including Sukuk) and the Takaful sectors. Islamic banking sector is by far the dominating
segment in the international Islamic finance industry, representing about 78.9% of the overall
Islamic financial services industry by June 2016 (IFSB May 2017). The global Takaful sector
was estimated at USD 23.2 billion in size (2015). 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,
Nigeria, Yemen, Brunei, Thailand, 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.
Today, Islamic finance is no longer targeted at only Muslim populations, with its presence in
major non-Muslim countries such as United Kingdom (one of the earliest leaders in the
industry with London as one of the 4 major Islamic finance hubs), Singapore, South Africa, and
Sri Lanka etc. Other states such as Germany, China in particular (with Hong Kong entering
Islamic capital markets hub), the United States, Canada and Australia have also shown a
growing interest in the Islamic banking or Islamic capital markets industry.
The Islamic finance industry is deemed inherently asset-based with risk-sharing instruments
such as Mudarabah and Musharakah, and claims to be more financially stable than the recently
fragile (albeit recovering) conventional system. Other common Islamic finance contracts used
in the different banking, insurance and asset management products include Wakala (agency),
Ijarah (rental lease), Murabahah (cost plus sale), Salam (deferred sale with full payment on
spot), Istisna (order for manufacture), Tawarruq, and supporting contracts such as Qard-ul-
Hasan, Wadiah, Hiba, Waqf, etc.
The industry has seen phenomenal growth at the global level in the last three decades, though
this has not come without several challenges and emerging areas of concern. Today, there are
over a thousand Islamic Financial Institutions operating in the world, in over 50 Muslim
1 IFSB Stability Report 2017