Islamic Finance

World Bank – IMF – Federal Reserve System

Seminar for Senior Bank Supervisors from
Emerging Economies
Washington DC USA
October 17-21, 2016

Zamir Iqbal, PhD.

Lead Financial Sector Specialist
The World Bank Global Islamic Finance Development Center
Istanbul, Turkey
ziqbal@worldbank.org
Globalization of Islamic Finance…

Source: IFSB Financial Stability Report 2015, KFHR, IMF

Islamic Finance makes into G-20 agenda

2015- The G20 group of major nations has included discussion of Sukuk (Islamic bonds) as an
infrastructure financing tool in its annual agenda, a move that could potentially spur the use of project-
based Sukuk. In addition, Islamic Finance is subject of study under G20 themes of long-term investments
and Financial inclusion.
….there is increasing interest in Islamic finance from non-Muslim
countries

Recent transactions include sovereign issuance by United Kingdom (UK), South Africa, Hong Kong,
and Luxemburg.

UK
 2010 – The Financial Services and Markets Act 2000
Order 2010 was introduced by Treasury to support
Islamic finance and the issuance of corporate sukuk
within the UK
 2012 - The UK Government launched an Islamic Finance
Task Force with the aim of securing London’s status as
the Western hub for Islamic finance
 2013 - London hosted the World Islamic Economic
Forum during which the UK Prime Minister announced
plans to issue a Sukuk in 2014 and to turn London into a
global center of Islamic finance.
France
 2009 - The amendment of Article 2011 of the French
Civil Code relating to the formation of trusts was
interpreted as an important step towards permitting the
issuance of sukuk out of France
 2010 - Revision of specific tax regulations covering
Sukuk, ijarah, istisna and murabaha with a view to
removing discrepancies
Source: KFH Research
Luxembourg
 2010 - The Luxembourg Tax Authority published a circular to clarify
the tax treatment of murabahah and sukuk transactions, to ensure that
they benefit from the same tax treatment as conventional products
 2011 - Luxembourg’s CSSF published a note that clarified that no
specific legislation was required for Shariah compliant investment
funds, since Luxembourg’s current law contains no obstacles to it.
Germany
 2012 - German banking regulator hosted an Islamic finance conference
in Frankfurt during which the tax treatment of different Islamic
finance products was discussed.
Hong Kong
 2014- Hong Kong has raised $1bn in its debut Islamic bond issue.
SouthAfrica
 2014- $500m sale was more than four times subscribed, with an order book
of $2.2bn according to the SA Treasury
Russia
 2016- Opened first Islamic Bank, The Partnership Banking Center in
March 2016.
World Bank Global Islamic Finance Development Center

World Bank Group President Jim Yong Kim today opened the Global Center for Islamic Finance,
together with Turkish Deputy Prime Minister Ali Babacan.
Roadmap

I. MARKET TRENDS

II. HOW ISLAMIC BANKING WORKS?

III. REGULATORY AND SUPERVISORY ENVIRONMENT

IV. STATE OF DEVELOPMENT OF ISLAMIC FINANCE

I. Market Trends
Islamic Financial Assets Have Been Growing Rapidly

Source: IFSB 2013, MIFC 2014, KFH Research, Standard & Poor’s

Source: Islamic Finance Development Report 2015, ICD-Thomson Reuters

Market Size – Islamic Banking

Source: Financial Stability Report 2016, IFSB

Composition and Domicile of Islamic Assets

Source: Financial Stability Report 2016, IFSB

Shares of Global Islamic Banking Assets

Source: Financial Stability Report 2016, IFSB

Islamic Banking Assets Growth Trend

Source: Financial Stability Report 2016, IFSB

Growth of Banking Assets

Source: World Islamic Banking Competitiveness Report 2016, Ernst&Young

Islamic Banking Average Annual Growth by Country

1H2015

Note: The growth rates in this chart for each country are calculated on data stated in local currency terms. There are some missing data points for
Saudi Arabia and Turkey. Growth rates are non-annualised and captured for two quarters between end-2014 and 1H2015.
Source: PSIFI, IFSB.
Sukuk Supply and Demand Worldwide

Thomson Reuters Barwa Sukuk Perceptions & Forecast 2016. “Industry at Crossroads”

Demand for sukuk has been surpassing the level of sukuk issuances worldwide.
 Global Takaful (Islamic Insurance) Markets

Gross Contributions by Country Groups Gross Contributions by Country

(2007–2014) (2014)

Source: IFSB (2016), Swiss Re (2015), Sigma-World Source: IFSB (2016), Swiss Re (2015), Sigma-World
Insurance Database; World Islamic Insurance Insurance Database; World Islamic Insurance
Directory 2015 Directory 2015.
II. How Islamic Banking Works?
Core Components

Economic
and Social
Justice

Ethical and
Responsible
Finance

Risk Sharing
Finance
Theoretical foundations of Islamic Financial System

Risk
Sharing

Reduction of Information Asymmetry

(Gharar)
* Prohibits contracts with high uncertainty
(Speculation/Gambling)
* Requires Full Disclosure before, during and
after the contract

Prohibition of Interest (Riba)

Eliminates Debt contracts and Leverage
Materiality

Economic and Social Justice

Wealth, Ownership and Property Rights

Preservation of Property Rights, Protection of Property Rights
of Stakeholders, Significance of Rights of the Society
The role of Wealth, Money, and Capital, Sanctity of Contracts
How a banking system is designed without “interest or debt?”

 Prohibition of interest discourages debt and leverage

 Risk sharing rather than risk-shifting
– Because interest is prohibited, pure debt security is eliminated from the system
and therefore suppliers of funds become investors, rather than creditors. The
provider of financial capital and the entrepreneur share business risks in return for
shares of the profits and losses.

 Close linkage with the Real Sector of the economy

 Promotes Asset-backed Finance

– The system introduces a “materiality” aspect that links financing directly with the
underlying asset so that the financing activity is linked to the real sector activity.
There is strong linkage between the performance of the asset and the return on the
capital used to finance it.

 Similarities with ethical and Socially Responsible Investments (SRIs).

Commonality: Ethical Investing

 Substantively: Islamic finance is “ethical finance and investing”.

 Consider: Lutheran funds, Roman Catholic funds, “green” funds,

university investment programs (WARF-UW; UC-Berkley).

 No investments in:
– Production or distribution of alcohol for human consumption
– Production of tobacco for human consumption
– Gambling
– Prostitution and pornography
– Defense and weapons
– Pornography

– Add constraint on interest-based debt => Islamic investment

Key Contracts – building blocks

Contract Function Description

Amana Custody Trust. Placing something valuable in trust with someone for custody or safekeeping.
Bay’ al-Istisna Order to build Sale in order to manufacture or construct.
Bay-mua’jjal Deferred Payment Sale contract where the price of the product or underlying asset is agreed but the payment in
lump sum or installments is deferred to a specified future date.
Bay’ al-Salam Forward Contract Sale by immediate payment against future delivery. Similar to conventional forward contract
but requires full payment at the time of contract.
Ijarah Leasing A sale contract that is not the sale of a tangible asset but rather a sale of the usufruct (the
right to use the object) for a specified period of time.
Mudarabah Trustee finance An economic agent with capital (rabbul-mal) can develop a partnership with another agent
contract (mudarib) with skills to form a partnership with the agreement to share the profits. Although
losses are borne by the capital owner only, the mudarib may however be liable for a loss in
case of misconduct or negligence on his part.
Murabahah A cost-plus-sale A cost-plus-sale contract where a financier purchases a product, that is, a commodity, raw
contract material or supplied, for an entrepreneur who does not have its own capital to do so. The
financier and the entrepreneur agree on a profit margin, often referred to as a mark-up
which is added to the cost of the product. The payment is delayed for a specified period of
time.
Musharakah Equity Equity partnership. It is a hybrid of Shiraka (partnership) and Mudarabah combining the act
partnership. of investment and management.
Qard-al-hassan Benevolent Loan Charitable loans with no interest and low expectations of return of principal.
Sukuk Islamic Bond Plural of the Arabic word Sakk meaning certificate, reflects participation rights in the
underlying assets.
Takaful Insurance Insurance contract through mutual or joint guarantee.
Wikala Agency Representation. Entrusting a person or legal entity (Wakil) to act on one’s behalf or as one’s
representative.
Islamic Financial Intermediation (Banking)

Key Highlights

Assets Liabilities
 Depositors are investors rather
than lenders
Trade Financing, Demand Deposits
Leases,  Risk Sharing through Profit and
Mudarabah
financing loss sharing.

 Assets and Liabilities are

Investments by
Partnerships Depositors
matched.
(mudarabah and
musharakah)
 Ethical and socially responsible
Securities assets
Investments
Capital
Fees
A Stylized Balance Sheet of an Islamic Bank

Assets Liabilities
Trade Financing Demand Deposits
(Salaam, Morabahah) (Amanah/ Waad)

Leasing / Rentals Investment Accounts

(Ijarah / Istisna) (Mudarabah)
Profit/Loss Sharing
Investments Special Investment Accounts
( Mudarabah) (Mudarabah)
Equity Investments
( Musharakah)
Fee for Services Capital
Equity
Reserves
III. Regulatory and Supervisory Framework
Legal Framework for Islamic Financial Institutions (IFIs)

Some countries like Iran, Kuwait, Malaysia,

Sudan, Turkey, UAE and Yemen have
Specific enacted specific laws to regulate the
Laws regulating IFIs

establishment of IFIs.
Laws

Same laws of In other countries, IFIs are established by

the same laws of conventional banks.
conventional
banks

In all the countries in which they operate,

IFIs are supervised by their respective
Supervision supervisory and regulatory bodies.
of IFIs
Approaches to prudential regulations of IFIs

In some countries, the regulation and

supervision of Islamic banks is carried out by
Specific rules
rules specifically developed for IFIs.

Same rules for In other countries, IFIs are subject to the

same prudential rules that govern their
conventional banks
conventional counterparts.

some specific prudential rules for IFIs

Dual Approach (licensing, reserve requirements, reporting
etc.) but in other matters same rules are
being applied as for conventional banks.
Islamic Banking Regulation and Supervision

Source: Song, Inwon and Carel Oosthuizen 2014, “Islamic Banking Regulation and Supervision – Survey Results and Challenges,”
IMF Working Paper No. 14/220 (Washington: International Monetary Fund).
Islamic Banking Regulation and Supervision

Source: Song, Inwon and Carel Oosthuizen 2014, “Islamic Banking Regulation and Supervision – Survey Results and Challenges,”
IMF Working Paper No. 14/220 (Washington: International Monetary Fund).
Key Stakeholders

Islamic Development Bank Group (IDB, ICD, IRTI, ICIEC, ITFC)

Islamic Financial Services Board (IFSB)

Accounting and Auditing Organization of Islamic Financial Institutions

(AAOIFI)

Multilaterals (The World Bank Group, IMF, Asian Development Bank)

International Islamic Financial Markets (IIFM)

International Islamic Rating Agency (IIRA)

International Center for Education in Islamic Finance (INCEIF)

 Islamic Financial Services Board (IFSB)
IFSB is an international standard-setting organization with a membership of 185 participants, whose work
complements the work of the Basel Committee on Banking Supervision, International Organization of Securities
Commissions and the International Association of Insurance Supervisors. As of early 2014, the IFSB has issued
17 Standards, 5 Guidance Notes and 1 Technical Note for the Islamic financial services industry.

Approved Standards
1. Risk Management
2. Capital Adequacy
3. Corporate Governance
4. Transparency and Market Discipline
5. Supervisory Review Process
6. Governance for Collective Investment Schemes
7. Special Issues in Capital Adequacy
8. Guiding Principles on Governance for Islamic Insurance (Takaful) Operations
9. Conduct of Business for Institutions offering Islamic Financial Services
10. Guiding Principles on Shariʿah Governance System
11. Standard on Solvency Requirements for Takaful Undertakings
12. Guiding Principles on Liquidity Risk Management
13. Guiding Principles on Stress Testing
14. Standard On Risk Management for Takaful Undertakings
15. Revised Capital Adequacy Standard
16. Revised Guidance on Key Elements In The Supervisory Review Process of Institutions Offering Islamic
Financial Services
17. Core Principles for Islamic Finance Regulation (Banking Segment)
 Islamic Financial Services Board (IFSB)
Standards under Development
1. Revised Guidance on Key Elements in the Supervisory Review Process of Institutions
Offering Islamic Financial Services (excluding Islamic Insurance (Takaful) Institutions
and Islamic Collective Investment Schemes)

Guidance Notes and Technical Note

1. Recognition of Ratings on Shariʿah-Compliant Financial Instruments
2. Guidance Note in Connection with the Risk Management and Capital Adequacy Standards:
Commodity Murabahah Transactions
3. Guidance Note on the Practice of Smoothing the Profits Payout to Investment Account Holders
4. Guidance Note in Connection with the IFSB Capital Adequacy Standard: The Determination of
Alpha in the Capital Adequacy Ratio
5. Guidance Note on the Recognition of Ratings by External Credit Assessment Institutions
(ECAIS) on Takaful and Re-Takaful Undertakings
6. Development of Islamic Money Markets (Technical Note)
 Accounting and Auditing Organization for Islamic Financial
Institutions (AAOIFI)

The Accounting and Auditing Organization for Islamic Financial Institutions(AAOIFI) is an Islamic
international autonomous non-for-profit corporate body that prepares accounting, auditing, governance,
ethics and Shari'ah standards for Islamic financial institutions and the industry.

Issued Standards

Accounting Standards
Auditing Standards
Ethics Standards
Governance Standards
Shari’ah Standards

Guiding Notes

Guidance Note on First time Adoption of AAOIFI Accounting Standards by an Islamic Financial
Institution
 Accounting and Auditing Organization for Islamic Financial
Institutions (AAOIFI)
ACCOUNTING STANDARDS AUDITING STANDARDS
Conceptual Framework FOR Financial Reporting by Islamic Financial
Institutions A S 1- Objective and Principles of Auditing
FAS 1- General Presentation and Disclosure in the Financial Statements of A S 2- The Auditor’s Report
Islamic Banks and Financial Institutions A S 3- Terms of Audit Engagement
FAS 2- Murabaha and Murabaha to the Purchase Orderer A S 4- Testing for Compliance with Shari’a Rules and Principles by
FAS 3- Mudaraba Financing an External Auditor
FAS 4 - Musharaka Financing A S 5- The Auditor’s Responsibility to Consider Fraud and Error in an
FAS 5- Disclosure of Bases For Profit Allocation Between Owners’ Equity Audit of Financial Statements
and Investment Account Holders
FAS 6- Equity of Investment Account Holders and their Equivalent GOVERNANCE STANDARDS
FAS 7- Salam and Parallel Salam
FAS 8- Ijarah and Ijarah Muntahia Bittamleek G S 1-Sharia Supervisory Board: Appointment, Composition, Report
FAS 9- Zakah G S 2- Shari’a Review
FAS 10-Istisna'a and Parallel Istisna’a G S 3- Internal Shari’a Review
FAS 11- Provisions and Reserves G S 4- Audit & Governance Committee for Islamic Financial
FAS 12-General Presentation and Disclosure in the Financial Statements of Institutions
Islamic Insurance Companies G S 5- Independence of Shari’a Supervisory Board
FAS 13- Disclosure of Bases for Determining and Allocating Surplus or G S 6- Statement on Governance Principles and Disclosure for
Deficit in Islamic Insurance Companies Islamic Financial Institutions
FAS 14- Investment Funds G S 7- Corporate Social Responsibility Conduct and Disclosure for
FAS 15- Provisions and Reserves in Islamic Insurance Companies Islamic Financial Institutions
FAS 16- Foreign Currency Transactions and Foreign Operations
FAS 17- Investments
FAS 18- Islamic Financial Services offered by Conventional Financial ETHICS
Institutions
FAS 19- Contributions in Islamic Insurance Companies Code of Ethics for Accountants of Islamic Financial Institutions
FAS 20- Deferred Payment Sale Code of Ethics for the Employees of Islamic Financial Institutions
FAS 21- Disclosure on Transfer of Assets
FAS 22- Segment Reporting
FAS 23- Consolidation
FAS 24- Investments in Associates
FAS 25- Investment in Sukuk, Shares and Similar Instruments
FAS 26 - Investments in Real Estate
Regulation and Supervision of Islamic Banks

o Similar objectives as conventional banking

 Same objective to create a strong environment with enhancing risk management,
internal control and audit, corporate governance and market discipline
 Current international standards and best practices like Basel Principles,
accounting and corporate governance standards as benchmark
 However they are not always applicable.

o Key differences:
 Legal framework to define the nature of Islamic banks and their specific
operating rules
 Licensing
 Corporate governance
 Shariah compliant governance
 Shariah supervisory board
Regulation and Supervision of Islamic Banks

o Recognizing the Profit and Loss Sharing financing

• Risk management
• Investment and other risks
• Focus on operational risk
• More focus on portfolio diversification, monitoring and control
• Technical expertise
• Bankers
• Examiners and experts in the regulators

o Liquidity management
• New Basel ratios
• Limited short-term liquid assets in Islamic banks
• Safety nets
• Separate deposit schemes and resolution framework
• Products (Sukuk)
Regulation and Supervision of Islamic Banks

o Capital requirements

o Alpha factor
o BCBS vs IFSB standards

o Importance of disclosure

o Risk preferences
o Performance criteria (PER, IRR)
o More incentives for depositors to monitor the bank
Corporate and Shariah Governance

 Two boards: Board of Directors and Shariah Board

 Shariah Governance System (Single or Multiple arrangements)

– Centralized vs. de-centralized Shariah-boards

 Well defined criteria in appointing Sharia Board members (clear

TOR, competence, fit and proper, confidentiality, etc)

 Sharia compliance audits

 Board and management oversight; transparency and disclosure

Malaysian Initiative:
Islamic Financial Services Act (IFSA) 2013
Three key features

I. Clarity in the nature of demand deposits and investment

accounts.
o Provisions for differentiated regulatory requirements that reflect the nature of
financial intermediation activities and their risks to the overall financial system.

II. A clear focus on Shariah compliance and governance in the

Islamic financial sector.
o Criminal prosecution of Shariah scholars for negligence or mis-conduct

III. Strengthened;
o Business conduct and consumer protection requirements
o Provisions for effective and early enforcement and supervisory intervention
Safety Nets
Issues and Challenges
o Absence of guiding principles on Islamic deposit insurance
o Operation and establishment of Islamic deposit insurance scheme
o Collaboration & cooperation between Islamic Financial Service Board
(IFSB) and InternationalAssociation Deposit Insurers (IADI)
Committee

o Limited avenue for investment on Islamic financial instruments

o Demand exceed supply
o Need for continuous innovation

o Sufficiency and enforceability of the legal and regulatory framework for an

Islamic deposit insurance system

o Lack of Sharī`ah guidance to ensure Sharī`ah compliance

Safety Nets
Issues and Challenges
o Permissibility of protecting Profit Sharing Investment Accounts (PSIA)

o Lack of Sharī`ah-compliant investment tools

o Insolvency law and policy for intervention and resolution

o Liquidation of assets in event of bank failure

o Cross border liquidation of assets - globalization

o Priority of payments of new contracts applied to deposits (e.g. wakalah,
musharakah contracts)
o Actual liquidation process (e.g. liquidation of assets funded by specific
investment accounts)
Basel III implications on IFIs
Basel III implications on IFIs
IFSB- Standards continue to be revised in light of Basel-III requirements

1. Revised Capital Adequacy Standard (IFSB-15)

2. Revised Guidance on Key Elements in the Supervisory Review Process (IFSB-
16)
3. Guidance Note in Connection with the Risk Management and Capital
Adequacy Standards: Commodity Murābahah Transactions (GN-2)
4. Guidance Note in Connection with the IFSB Capital Adequacy Standard: The
Determination of Alpha in the Capital Adequacy Ratio (GN-4)
5. Guidance Note On Quantitative Measures For Liquidity Risk Management In
Institutions Offering Islamic Financial Services [Excluding Islamic Insurance
(Takāful) Institutions And Islamic Collective Investment Schemes (GN-6)
 Basel III implications on IFIs
The supervisory authorities` discretionary role is getting importance in the implementation of
Basel III rules.

Challenges and Opportunities Operational Risks and Costs

 Impact of run-off rate for PSIA on liquidity  Increased exposure to operational risks
requirement. arising from compliance to Basel III.
 Incentive to develop HQLAs to overcome liquidity  Increased need for state-of-the art risk
issues. systems, quantitative analysis, IT systems,
 Impose of a discipline on utilization and and internal control systems and reliable
maintenance of capital. (Capital optimization credit rating systems.
through the review o their internal processes and  Increased operational costs of monitoring
through the optimal capital structure) and reporting
 A potential slow-down in growth of the sector  Robust framework for stress testing.
because of increased capital, liquidity and leverage
requirements.
 The importance of discretionary role of national
regulators in the implementation of Basel III rules,
that recognizes industry limitations.
 An incentive to develop sharia-compliant
insurance schemes, (that lowers run-off rates and
deems deposits as stable) on a takaful basis.
Core Principles for Islamic Finance Regulation

Basel Core Principles for Effective Banking Supervision

o A framework of minimum standards for sound supervisory practices and

are considered universally applicable
– Standard tools and guidance for regulatory and supervisory authorities
– Benchmark to assess the strength and effectiveness of regulation and supervision

o Define 25 principles broadly categorized into seven groups:

– Objectives, independence, powers, transparency and cooperation;
– Licensing and structure;
– Prudential regulation and requirements;
– Methods of ongoing banking supervision;
– Accounting and disclosure;
– Corrective and remedial powers of supervisors;
– Consolidated and cross-border banking supervision
Core Principles for Islamic Finance Regulation

IFSB Core Principles

o Need for core principles for Islamic financial institutions
o The nature of risks to which Islamic financial institutions are exposed;
o The financial infrastructure needed for effective regulation and supervision, which will result
in additional or different regulation and supervisory practices to address the potential risks
inherent in the operations of Islamic financial institutions

o IFSB 17 - Core Principles for Islamic Finance Regulation

(Banking Segment)
o Established in April 2015, Effective on January 2016
o Promote the development of a prudent and transparent Islamic financial services industry
through introducing new, or adapting existing, international standards consistent with Sharī`ah
principles, and recommending these for adoption.
o IFSB’s approach is to build on the standards adopted by BCBS – and to adapt or supplement
them only to the extent necessary to deal with the specificities of Islamic finance
Core Principles for Islamic Finance Regulation

Main Differences from Basel Core Principles

 Licencing Criteria
– Full-fledged institutions
– Islamic Windows
 Investment Account Holders
– Regulatory treatment
– Governance
– Capital Adequacy
– Risk Absorbency features
 Shari’ah Governance Framework
 Capital Adequacy
– Investment Account Holders
– Displaced commercial risk
– Alpha factor
Core Principles for Islamic Finance Regulation

BCBS Core Principles IFSB Approach

Supervisory powers, responsibilities and functions
CP 1: Responsibilities, objectives and powers Retained unamended: CPIFR 1
CP2: Independence, accountability, resourcing and legal protection for supervisors Retained unamended: CPIFR 2
CP3: Cooperation and collaboration Retained unamended: CPIFR 3
CP4: Permissible activities Amended: CPIFR 4
CP5: Licensing criteria Retained unamended: CPIFR 5
CP6: Transfer of significant ownership Retained unamended: CPIFR 6
CP7: Major acquisitions Amended: CPIFR 7
CP8: Supervisory approach Retained unamended: CPIFR 8
CP9: Supervisory techniques and tools Amended: CPIFR 9
CP10: Supervisory reporting Amended: CPIFR 10
CP11: Corrective and sanctioning powers of supervisors Amended: CPIFR 11
CP12: Consolidated supervision Amended: CPIFR 12
CP13: Home-host relationships Amended: CPIFR 13
Prudential regulations and requirements
CP14: Corporate governance Amended: CPIFR 15
CP15: Risk management process Amended: CPIFR 17
CP16: Capital adequacy Amended: CPIFR 18
CP17: Credit risk Amended: CPIFR 19
CP18: Problem assets, provisions and reserves Amended: CPIFR 20
CP19: Concentration risk and large exposure limits Amended: CPIFR 21
CP20: Transactions with related parties Amended: CPIFR 22
CP21: Country and transfer risks Retained unamended: CPIFR 23
CP22: Market risks Amended: CPIFR 25
CP23: Interest rate risk in the banking book N/A But CP23 replaced with CPIFR 26
CP24: Liquidity risk Amended: CPIFR 27
CP25: Operational risk Amended: CPIFR 28
CP26: Internal control and audit Amended: CPIFR 29
CP27: Financial reporting and external audit Retained unamended: CPIFR 30
CP28: Disclosure and transparency Amended: CPIFR 31
CP29: Abuse of financial services Retained unamended: CPIFR 33
Additional Core Principles
Treatment of PSIA/IAHs New: CPIFR 14
Sharī`ah governance framework New: CPIFR 16
Equity investment risk New: CPIFR 24
Rate of return risk [replacing CP23] New: CPIFR 26
IV. State of Development of Islamic Finance
Islamic Finance Indicator

Which Countries have the best developed Islamic Economy for Islamic Finance?

TOP 10
ISLAMIC FINANCE
0 20 40 60 80 100 120 140 160 180 200

Malaysia 176

Bahrain 84
78
United Arab Emirates
66
Saudi Arabia
Oman 51

Pakistan 51

Kuwait 43

Qatar 38

Indonesia 35
Sudan 33
Source: State of the Global Islamic Economy Report 2015/16, Thomson Reuters

* CRITERIA
1. Financial (Size of Islamic Finance Assets and Number of Islamic Finance Institutions)
2. Governance (e.g. Regulation for Islamic Finance and Disclosure Index Score)
3. Awareness (Number of Related News Articles, Islamic Finance Education Institutions, Research papers, and events)
4. Social (Value of Zakat and Charity and CSR Disclosure Index Score)
Adoption of IFSB Standards

 Number of Countries which adopted IFSB Standards

Source: Comparative Study on the Implementation of Selected IFSB Standards,

IFSB Working Paper Series, WP-04/10/2015, October 2015
Adoption of AAOIFI Standards

Mandatory regulatory
nal
requirement in jurisdictions In other jurisdictions including Brunei,
ds in
Dubai International Financial Centre,
Shari’ah Accounting Shari’ah Accounting France, Egypt, Jordan, Kuwait, Lebanon,
Standards Standards Standards Standards Saudi Arabia, Qatar, Qatar Financial Centre,
South Africa, United Arab Emirates and
Bahrain Bahrain Indonesia onesia United Kingdom as well as in Africa,
In Central Asia and North America, AAOIFI
d Shari’ah standards and/or AAOIFI
Oman Jordan Malaysia Pakistan accounting standards have been used
Pakistan Oman voluntarily as basis of internal guidelines by
leading Islamic financial institutions.
Sudan Qatar
Syria Qatar Financial
Centre AAOIFI auditing, governance and ethics
standards are not part of mandatory
Islamic Sudan regulatory requirement for Islamic
Development finance. Instead, these standards are used
Bank voluntarily by leading Islamic financial
institutions across all major Islamic
Syria
finance jurisdictions.
Islamic
Development
Bank

Source: AAOIFI website

Islamic Finance Sub-Indicators

REGULATION SUB-INDICATORS TOP

COUNTRIES GOVERNANCE INDICATORS SHARIA GOVERNANCE SUB-
TOP 10 COUNTRIES INDICATORS
Indicator Value
TOP 10 COUNTRIES
Malaysia 100 1- BAHRAIN 93
Indicator Value
Pakistan 100 2- MALAYSIA 90
Bahrain 142
Bahrain 100 3- KUWAIT 67
Malaysia 116
Nigeria 100 4- PAKISTAN 66 Kuwait 106
Indonesia 100 5- OMAN 62 Bangladesh 92
Iran 83 6- INDONESIA 58 Sudan 89
Maldives 67 7- SUDAN 54 Oman 70
Unidet Arab Emirates 67 8- UNITED ARAB 54 Indonesia 57
Qatar 67 EMIRATES Pakistan 56
Sudan 67 9- QATAR 52 Lebonan 53
Brunei Darussalam 67 10- MALDIVES 48 Egypt 48
Kazakhstan 67

Source: Islamic Finance Development Report 2015, ICD-Thomson Reuters

Key Challenges

 Regulatory and supervisory framework is still evolving.

 Standardization of contracts and practices

 Corporate Governance and Corporate Social Responsibility

 Liquidity and LOLR issues

 Shallow money and capital markets

 Limited risk and portfolio management instruments

 Thank You

For your further questions please contact:

Zamir Iqbal
World Bank Global Islamic Finance Development Center
T: +90 212 385 3443
E-mail: ziqbal@Worldbank.org
Disclaimers
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