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 projectbased 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 Londons 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 - Luxembourgs CSSF published a note that clarified that no
specific legislation was required for Shariah compliant investment
funds, since Luxembourgs 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 & Poors

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

(20072014)

Source: IFSB (2016), Swiss Re (2015), Sigma-World

Insurance Database; World Islamic Insurance
Directory 2015

Gross Contributions by Country

(2014)

Source: IFSB (2016), Swiss Re (2015), Sigma-World

Insurance Database; World Islamic Insurance
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
Bay-muajjal

Order to build
Deferred Payment

Bay al-Salam

Forward Contract

Ijarah

Leasing

Mudarabah

Trustee finance
contract

Murabahah

A cost-plus-sale
contract

Musharakah
Qard-al-hassan
Sukuk

Equity
partnership.
Benevolent Loan
Islamic Bond

Takaful
Wikala

Insurance
Agency

Sale in order to manufacture or construct.

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.
Sale by immediate payment against future delivery. Similar to conventional forward contract
but requires full payment at the time of contract.
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.
An economic agent with capital (rabbul-mal) can develop a partnership with another agent
(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.
A cost-plus-sale contract where a financier purchases a product, that is, a commodity, raw
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.
Equity partnership. It is a hybrid of Shiraka (partnership) and Mudarabah combining the act
of investment and management.
Charitable loans with no interest and low expectations of return of principal.
Plural of the Arabic word Sakk meaning certificate, reflects participation rights in the
underlying assets.
Insurance contract through mutual or joint guarantee.
Representation. Entrusting a person or legal entity (Wakil) to act on ones behalf or as ones
representative.

Islamic Financial Intermediation (Banking)

Key Highlights
Assets
Trade Financing,
Leases,
Mudarabah
financing

Partnerships
(mudarabah and
musharakah)

Liabilities

Depositors are investors rather

than lenders

Risk Sharing through Profit and

loss sharing.

Assets and Liabilities are

matched.

Ethical and socially responsible

assets

Demand Deposits

Investments by
Depositors

Securities
Investments
Fees

Capital

A Stylized Balance Sheet of an Islamic Bank

Assets

Liabilities

Trade Financing
(Salaam, Morabahah)

Demand Deposits
(Amanah/ Waad)

Leasing / Rentals
(Ijarah / Istisna)
Profit/Loss Sharing
Investments
( Mudarabah)
Equity Investments
( Musharakah)
Fee for Services

Investment Accounts
(Mudarabah)

Special Investment Accounts

(Mudarabah)

Capital
Equity
Reserves

III. Regulatory and Supervisory Framework

Laws regulating IFIs

Legal Framework for Islamic Financial Institutions (IFIs)

Specific
Laws

Same laws of
conventional
banks

Supervision
of IFIs

Some countries like Iran, Kuwait, Malaysia,

Sudan, Turkey, UAE and Yemen have
enacted specific laws to regulate the
establishment of IFIs.

In other countries, IFIs are established by

the same laws of conventional banks.

In all the countries in which they operate,

IFIs are supervised by their respective
supervisory and regulatory bodies.

Approaches to prudential regulations of IFIs

Specific rules

In some countries, the regulation and

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

Same rules for

conventional banks

In other countries, IFIs are subject to the

same prudential rules that govern their
conventional counterparts.

Dual Approach

some specific prudential rules for IFIs

(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.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.

Risk Management
Capital Adequacy
Corporate Governance
Transparency and Market Discipline
Supervisory Review Process
Governance for Collective Investment Schemes
Special Issues in Capital Adequacy
Guiding Principles on Governance for Islamic Insurance (Takaful) Operations
Conduct of Business for Institutions offering Islamic Financial Services
Guiding Principles on Shariah Governance System
Standard on Solvency Requirements for Takaful Undertakings
Guiding Principles on Liquidity Risk Management
Guiding Principles on Stress Testing
Standard On Risk Management for Takaful Undertakings
Revised Capital Adequacy Standard
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 Shariah-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
Shariah 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
Conceptual Framework FOR Financial Reporting by Islamic Financial
Institutions
FAS 1- General Presentation and Disclosure in the Financial Statements of
Islamic Banks and Financial Institutions
FAS 2- Murabaha and Murabaha to the Purchase Orderer
FAS 3- Mudaraba Financing
FAS 4 - Musharaka Financing
FAS 5- Disclosure of Bases For Profit Allocation Between Owners Equity
and Investment Account Holders
FAS 6- Equity of Investment Account Holders and their Equivalent
FAS 7- Salam and Parallel Salam
FAS 8- Ijarah and Ijarah Muntahia Bittamleek
FAS 9- Zakah
FAS 10-Istisna'a and Parallel Istisnaa
FAS 11- Provisions and Reserves
FAS 12-General Presentation and Disclosure in the Financial Statements of
Islamic Insurance Companies
FAS 13- Disclosure of Bases for Determining and Allocating Surplus or
Deficit in Islamic Insurance Companies
FAS 14- Investment Funds
FAS 15- Provisions and Reserves in Islamic Insurance Companies
FAS 16- Foreign Currency Transactions and Foreign Operations
FAS 17- Investments
FAS 18- Islamic Financial Services offered by Conventional Financial
Institutions
FAS 19- Contributions in Islamic Insurance Companies
FAS 20- Deferred Payment Sale
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

AUDITING STANDARDS
A S 1- Objective and Principles of Auditing
A S 2- The Auditors Report
A S 3- Terms of Audit Engagement
A S 4- Testing for Compliance with Sharia Rules and Principles by
an External Auditor
A S 5- The Auditors Responsibility to Consider Fraud and Error in an
Audit of Financial Statements
GOVERNANCE STANDARDS
G S 1-Sharia Supervisory Board: Appointment, Composition, Report
G S 2- Sharia Review
G S 3- Internal Sharia Review
G S 4- Audit & Governance Committee for Islamic Financial
Institutions
G S 5- Independence of Sharia Supervisory Board
G S 6- Statement on Governance Principles and Disclosure for
Islamic Financial Institutions
G S 7- Corporate Social Responsibility Conduct and Disclosure for
Islamic Financial Institutions
ETHICS
Code of Ethics for Accountants of Islamic Financial Institutions
Code of Ethics for the Employees of Islamic Financial Institutions

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.

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

More focus on portfolio diversification, monitoring and control

Technical expertise

Investment and other risks

Focus on operational risk

Bankers
Examiners and experts in the regulators

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
BCBS vs IFSB standards

Importance of disclosure
o
o
o

Risk preferences
Performance criteria (PER, IRR)
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

II.

A clear focus on Shariah compliance and governance in the

Islamic financial sector.
o

III.

Provisions for differentiated regulatory requirements that reflect the nature of

financial intermediation activities and their risks to the overall financial system.

Criminal prosecution of Shariah scholars for negligence or mis-conduct

Strengthened;
o

Business conduct and consumer protection requirements

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

Limited avenue for investment on Islamic financial instruments

o Demand exceed supply
o Need for continuous innovation

Sufficiency and enforceability of the legal and regulatory framework for an

Islamic deposit insurance system

Lack of Shar`ah guidance to ensure Shar`ah compliance

Safety Nets
Issues and Challenges
o

Permissibility of protecting Profit Sharing Investment Accounts (PSIA)

Lack of Shar`ah-compliant investment tools

Insolvency law and policy for intervention and resolution

Liquidation of assets in event of bank failure

o
o
o

Cross border liquidation of assets - globalization

Priority of payments of new contracts applied to deposits (e.g. wakalah,
musharakah contracts)
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 (IFSB16)

3.

Guidance Note in Connection with the Risk Management and Capital

Adequacy Standards: Commodity Murbahah 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

(Takful) 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

Impact of run-off rate for PSIA on liquidity

requirement.
Incentive to develop HQLAs to overcome liquidity
issues.
Impose of a discipline on utilization and
maintenance of capital. (Capital optimization
through the review o their internal processes and
through the optimal capital structure)
A potential slow-down in growth of the sector
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.

Operational Risks and Costs

Increased exposure to operational risks

arising from compliance to Basel III.
Increased need for state-of-the art risk
systems, quantitative analysis, IT systems,
and internal control systems and reliable
credit rating systems.
Increased operational costs of monitoring
and reporting
Robust framework for stress testing.

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

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

Need for core principles for Islamic financial institutions
o
o

The nature of risks to which Islamic financial institutions are exposed;

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

IFSB 17 - Core Principles for Islamic Finance Regulation

(Banking Segment)
o
o

Established in April 2015, Effective on January 2016

Promote the development of a prudent and transparent Islamic financial services industry
through introducing new, or adapting existing, international standards consistent with Shar`ah
principles, and recommending these for adoption.
IFSBs 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

Investment Account Holders

Full-fledged institutions
Islamic Windows

Regulatory treatment
Governance
Capital Adequacy
Risk Absorbency features

Shariah Governance Framework

Capital Adequacy

Investment Account Holders

Displaced commercial risk
Alpha factor

Core Principles for Islamic Finance Regulation

BCBS Core Principles
Supervisory powers, responsibilities and functions
CP 1: Responsibilities, objectives and powers
CP2: Independence, accountability, resourcing and legal protection for supervisors
CP3: Cooperation and collaboration
CP4: Permissible activities
CP5: Licensing criteria
CP6: Transfer of significant ownership
CP7: Major acquisitions
CP8: Supervisory approach
CP9: Supervisory techniques and tools
CP10: Supervisory reporting
CP11: Corrective and sanctioning powers of supervisors
CP12: Consolidated supervision
CP13: Home-host relationships
Prudential regulations and requirements
CP14: Corporate governance
CP15: Risk management process
CP16: Capital adequacy
CP17: Credit risk
CP18: Problem assets, provisions and reserves
CP19: Concentration risk and large exposure limits
CP20: Transactions with related parties
CP21: Country and transfer risks
CP22: Market risks
CP23: Interest rate risk in the banking book
CP24: Liquidity risk
CP25: Operational risk
CP26: Internal control and audit
CP27: Financial reporting and external audit
CP28: Disclosure and transparency
CP29: Abuse of financial services
Additional Core Principles
Treatment of PSIA/IAHs
Shar`ah governance framework
Equity investment risk
Rate of return risk [replacing CP23]

IFSB Approach
Retained unamended: CPIFR 1
Retained unamended: CPIFR 2
Retained unamended: CPIFR 3
Amended: CPIFR 4
Retained unamended: CPIFR 5
Retained unamended: CPIFR 6
Amended: CPIFR 7
Retained unamended: CPIFR 8
Amended: CPIFR 9
Amended: CPIFR 10
Amended: CPIFR 11
Amended: CPIFR 12
Amended: CPIFR 13

Amended: CPIFR 15
Amended: CPIFR 17
Amended: CPIFR 18
Amended: CPIFR 19
Amended: CPIFR 20
Amended: CPIFR 21
Amended: CPIFR 22
Retained unamended: CPIFR 23
Amended: CPIFR 25
N/A But CP23 replaced with CPIFR 26
Amended: CPIFR 27
Amended: CPIFR 28
Amended: CPIFR 29
Retained unamended: CPIFR 30
Amended: CPIFR 31
Retained unamended: CPIFR 33
New: CPIFR 14
New: CPIFR 16
New: CPIFR 24
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

176

Malaysia

84

Bahrain

78

United Arab Emirates

66

Saudi Arabia
Oman

51

Pakistan

51

Kuwait

43

Qatar

38

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

200

35
33

* 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
requirement in jurisdictions

nal
ds in

Shariah
Standards

Accounting
Standards

Shariah
Standards

Bahrain

Bahrain

Indonesia

Accounting
Standards
onesia
In

Oman

Jordan

Pakistan

Oman

Sudan

Qatar

Syria

Qatar Financial
Centre

Islamic
Development
Bank

Sudan

Syria
Islamic
Development
Bank
Source: AAOIFI website

d
Malaysia

Pakistan

In other jurisdictions including Brunei,

Dubai International Financial Centre,
France, Egypt, Jordan, Kuwait, Lebanon,
Saudi Arabia, Qatar, Qatar Financial Centre,
South Africa, United Arab Emirates and
United Kingdom as well as in Africa,
Central Asia and North America, AAOIFI
Shariah
standards
and/or
AAOIFI
accounting standards have been used
voluntarily as basis of internal guidelines by
leading Islamic financial institutions.
AAOIFI auditing, governance and ethics
standards are not part of mandatory
regulatory requirement for Islamic
finance. Instead, these standards are used
voluntarily by leading Islamic financial
institutions across all major Islamic
finance jurisdictions.

Islamic Finance Sub-Indicators

REGULATION SUB-INDICATORS TOP

COUNTRIES
Malaysia
Pakistan
Bahrain
Nigeria
Indonesia
Iran
Maldives
Unidet Arab Emirates
Qatar
Sudan
Brunei Darussalam
Kazakhstan

Indicator Value
100
100
100
100
100
83
67
67
67
67
67
67

GOVERNANCE INDICATORS
TOP 10 COUNTRIES
1- BAHRAIN
2- MALAYSIA
3- KUWAIT

93
90
67

4- PAKISTAN
5- OMAN
6- INDONESIA
7- SUDAN
8- UNITED ARAB
EMIRATES
9- QATAR
10- MALDIVES

66
62
58
54
54

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

52
48

SHARIA GOVERNANCE SUBINDICATORS

TOP 10 COUNTRIES
Indicator Value
Bahrain
142
Malaysia
116
Kuwait
106
Bangladesh
92
Sudan
89
Oman
70
Indonesia
57
Pakistan
56
Lebonan
53
Egypt
48

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

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