Diversification of Islamic Financial Instruments
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 Amongst all OIC member countries, Iran and Sudan are the only two jurisdictions
which follow a 100% Islamic banking framework.
 Brunei has shown considerable betterment where nearly half of the banking sector is
Shariah compliant. Brunei joins Saudi Arabia in this category which nearly has 50% of
their banking Shariah compliant.
 Kuwait and Yemen follow in the relative Islamic Banking size with Islamic banking at
38% and 33% respectively of the total banking industry in the country.
 Qatar at 26.1% and Malaysia at 23.0%, Bangladesh at 19.4% and the United Arab
Emirates at 18.4% all have shown improving Islamic banking sizes over the last couple
of years.
Shariah compliance is at the core of the activities for Islamic products. The Sharia compliance
is ensured or verified by bank’s own Shariah boards with Sharia scholars. There are differing
opinions of how to apply or interpret Shariah law amongst the different banking regions. Also,
currently there are a number of regulatory frameworks within which Islamic banking is
developing. These frameworks and rules can often be contradictory and lead to differences in
the application compliance.
Over the recent years Islamic banking has been expanding across different jurisdictions, and
the key indicators for each jurisdiction have been influenced by the local context and
macroeconomic conditions. As per data collected by IFSB return on equity (ROE) for stand-
alone Islamic banks in the first half of 2016 stood at 13.81% up from 13.4% in 2015. These
numbers are impressive considering the global state of banking sector where banks in United
States and European Union had ROE of 9.45% and 5.7%. Within the OIC member countries the
recent persistent lower prices have dampened the profitability. GCC Islamic banks while on a
year to year basis the ROE decreased in 2016 but it still remained above 10% for them.
Amongst all the Islamic banking jurisdictions in OIC member countries, only Nigeria and Oman
had negative ROEs in recent years. Oman’s case is unique in the sense as it is a new comer with
only two full-fledged Islamic banks which are in the buildup phase, and are expanding. The
trend is generally expected to reverse in 2017 and onwards as Islamic banking penetration
increases in the country.
While on the liquidity of Islamic banks, the latest General Council for Islamic Banks and
Financial Institutions (CIBAFI) report highlights liquidity as a risk priority for Islamic banks,
particularly larger banks. This appears to be a consequence of general macroeconomic
conditions and negative sentiment resulting from lower oil prices, as well as of the need to
comply with the new Basel III liquidity standards. However, data from Pakistan and
Bangladesh indicate that many Islamic banks experience excess liquidity, and are unable to
earn returns on liquid assets given the low supply of short-term Shariah compliant investment
instruments.
A major concern of banking sector is the asset quality, where Islamic banks have been
consistently improving over the last few years. Data for financial half year of 2016 shows that
asset quality in more mature Islamic banking markets like Saudi Arabia, Malaysia and Bahrain
is relatively lesser than the developing Islamic banking markets. The major share of poor
quality is witnessed in real estate and household sector which is owing to the economic