Development of Islamic financial services industry is a reaction to specific questionable practices (from religious perspectives) under existing capitalistic financial system. The practices include dealing in riba (interest & usury), gharar (uncertainty in price or delivery of object), maisir & qimar (speculation, gambling), and absence of ethical filtration. From economic perspective, objectives of Islamic financial system include financial stability and equitable distribution of wealth. Islamic Finance is a faith-based financial system regulated by Islamic commercial laws. Interest (the foundation of modern conventional banking) is prohibited by Islamic law; hence, operations of Islamic banking are different from conventional banking, although both types of banking fulfil the similar needs of customers. In financing customers’ needs, Islamic banks use either trading or profit and loss sharing modes of financing. Islamic banking was started in the last quarter of the 20th century to cater the needs of Muslims around the world, although it is not limited to Muslims only. It has shown tremendous growth and expansion worldwide.
The global volume of assets under the Islamic
financial system has reached the figure of US$ 2.5 trillion by the end of 2018
(potential size is above US$ 9.0 trillion), depicting average yearly growth
around 16% from 2010-18 [GIFR-2019]. Within eight years, the industry volume of
assets is more than double. However, the increase in assets is not even for all
the years. In earlier years [2011-14] average annual growth rate is 18.48%
while in later four years [2015-18] yearly average growth rate is 7.69%,
signifying the reduction in growth in assets under management of Islamic
financial system.
Industry
Progress 2010-18—Asset Volume $Billion
Source: Global
Islamic Finance Report-2019
Although growth is positive, however, the potential is
very high. GIFR 2019 estimates the potential size of the industry above US$ 9.0
trillion and catch period to realize the potential is estimated close to 40
years. Islamic finance expands in allied financial sectors, including
insurance, capital market operations (equity and Sukuk) and
microfinancing in addition to the traditional banking sector. However, dominant
share in assets under Islamic financial system is concentrated in the banking
sector. According to IFSB (report-2019) share of banking in global Islamic
financial services industry [volume 2.19 trillion] is 71.7%, followed by
capital market operations with 27% [Sukuk 24.2% & Islamic funds 2.8%] and
Islamic insurance (Takaful) 1.3%. Although it was
started as merely an alternative option for Halal financing, now
it has become a complete financial solutions industry and expanding day by day.
There are multiple Sukuk [Islamic bonds] issues, including private and
public sectors, alike. Islamic indices based on Shari’ah compliance
filters are developed globally in Muslim and non-Muslim countries. Firms
engaged in screening of Shari’ah compliant equities include DJIM,
S&P, MSCI, FTSE and Bloomberg in addition to multiple country-specific
Islamic indices.
The geographic concentration of Islamic finance is
primarily in OIC-region from Indonesia to Morocco; however, the UK has shown
some progress from the European region. Important regions which contribute in
global Islamic financial services industry include GCC (42.3%), Asia (28.2%),
MENA-ex GCC (25.1%) and balance (4.4%) from rest of the world [IFSB-2018]. Arabian
Gulf area is the centre of modern Islamic
financial system with a significant share in global Islamic banking assets,
followed by South and Southeast Asia (Statistics in appendix). Arabian gulf
region includes SIX GCC (Gulf Cooperation Council) countries—Kuwait, Bahrain,
Saudi Arabia, Qatar, UAE and Oman—plus Iran. In the Gulf region, there are 92
Islamic banks with a vast branch network of above 22,000. Above 250,000 people
are directly employed by the Islamic banking sector. Total assets under
management of Islamic banking amounting to US$ 1,582 billion, while providing
financing of US$ 842 billion. Gulf region is Centre of Muslim civilization and
remained Muslim controlled area since the advent of Islam in the 7th
century.
South and Southeast Asia (S&SA) region include
FIVE Muslim nations [with Islamic finance]—Indonesia, Brunei, Malaysia,
Bangladesh, and Pakistan. Based on the volume of assets under the Islamic
banking system, the region is placed as second. Total assets under management
of Islamic banking amounting to US$ 294 billion, while provided financing of
US$ 216 billion. In S&SA region there are 107 Islamic banks with a branch
network of above 9,450. Around 240,000 people are directly employed by the Islamic
banking sector. S&SA consists of a significant Muslim population. Indonesia
and Pakistan are top in the list with largest Muslim population, respectively.
IFSB (Islamic Financial Services Board) identifies
systematically important jurisdictions for the Islamic banking system in its
annual report—Islamic finance stability report-2019. A country with a volume of
assets under the Islamic banking system reaches 15% share in total domestic
banking assets is considered systematically important. As per the ranking, 12
countries qualify the mark of 15% or more banking assets under the Islamic
banking system. The list includes Iran and Sudan (100%), Brunei 64%, Saudi
Arabia 52%, Kuwait 41%, Malaysia 27%, Qatar 25%, UAE 21%, Bangladesh 20%,
Djibouti 19% and Jordan 16%. Bahrain and Palestine are 1% less than the target
of 15%, while Pakistan and Oman are next in line. The 12 [including Bahrain]
systematically important jurisdictions contribute 91% to the global Islamic
banking assets and host 80% of the global Sukuk outstanding in 2018.
Country-wise Islamic banking share in domestic banking Assets (2018)
