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Constraints to Islamic finance growth

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Published: Fri, 03 Mar 2017



The global financial system:

Facing the challenge:

Reaching critical mass:


Malaysia as case of study:




The Islamic financial industry today is an important component of the global financial world, the total Islamic assets ballooned from US$150 billion in the 1990s to US$1 trillion in 2010.The most successful and fast developing sector of Islamic financial industry is namely –SUKUK, Islamic banking, TAKAFUL, and fund management.

SUKUK market at the end of 2010 was estimated to reach US$143 billion; the Islamic banking sector worldwide is valued at US$850 billion in term of assets, while Islamic fund industry under management grew by 15% globally. The IFSB expects the value of global Islamic financial assets to reach US$1.6 trillion by 2012. Islamic finance has demonstrated its competitiveness and resilience during the global financial crisis.

Today Islamic finance is in transition to the next stage of development, greater international integration and Islamic finance institution to mobilize a higher level of global cooperation will help to further propel the prospects of Islamic finance moving forward. Several countries now in the race to become Islamic finance hubs such as –London, Hong Kong and Singapore, also new market such as-Luxembourg, South Korea and Australia, in addition they aspire to become Islamic finance centers.

The global financial system:

Global wealth currently held by 4.4 billion people has increased 72% since 2000 to reach US$195 trillion driven by robust growth in emerging markets, many of which are comprised of large, diverse Muslim populations. Global wealth is estimated to grow 61% to US$315 trillion by 2015.

On the other hand, US banking assets are valued at approximately US$13.3 Trillion at the end of 2010.while global banking assets reached US$85 Trillion by end of 2011.The value of global Islamic across all asset closes remains minuscule in comparison to that of their conventional counterpart .Total Islamic financial assets make up less than 1% of the total global financial assets.

Facing the challenge:

Nowadays market capitalization of Islamic banking dwindles in comparison to their conventional counterpart, the capitalization was only 4.1%, and actually Islamic banks were much less affected by the global financial crisis. The Islamic banks are facing a larger challenge as the conventional banks recapitalize and merge. Conventional banks have been able to return to profit in NO time in 2010 only, the ten top conventional banks (by –Pre-crisis market capitalization) net profit increase by 139% year on year. Meanwhile the Islamic banks suffered 55% decline in net profit during the same period.

Reaching critical mass:

Islamic finance needs to reach the critical mass and cannot be underestimated. It has been identified as the number one for Islamic finance to become truly competitive with the conventional system, ways to get this goal could include reaching out to untapped markets and audiences or build an entity can influence multiple areas of the market with expertise and capital. Large –scale institutions which will have all the capabilities to penetrate the various segmented markets with expertise and knowledge while providing Shariah- compliant financial solutions.

Another often mentioned challenge in the Islamic finance industry is the issue of liquidity. The Islamic finance markets currently lack the liquidity , but in the last ten years Islamic financial institutions (IFI) developed rapidly to meet the demand from both retail and corporate entities, and IFIs still face the challenge of a lack of instruments to manage liquidity as a result product being short -term given under the current constraints. But the large Islamic finance institutions can enhance market liquidity and hence offer product pricing by integrating their global and regional market operations.

Also Islamic finance needs to meet the human capital requirement. Many Islamic banks still have limited capabilities and expertise to consistently create, therefore increase with development of Islamic financial product and services need for high skilled staff.

Further areas of focus in capacity building and talent development include:

  1. The need for practitioners and stakeholders to be highly qualified.
  2. The need for specialized training and educational institutions.
  3. The development and adoption of industry best practices.
  4. The collaboration and exchange of knowledge across jurisdictions and supplementary research into and development of key specialized areas.

Second area for reaching critical mass is Islamic microfinance, currently there are more than 200 Islamic microfinance institutions around the world, the main countries are Indonesia, Bangladesh and Afghanistan; but Islamic microfinance is still in its nascent stage. A 2007 global survey on Islamic microfinance undertaken by the (GAP) group to assist the poor shows that only 350.0000 customers and accounts for only around 0.005% of total microfinance outreach. Although 2010 estimates now put this figure at 0.05%, the slow growth in Islamic microfinance is due mainly to the fact that the facilities were usually provided by specialized institutions such as non-government organization (NGOs) and not by Islamic banks.

Islamic microfinance should be integrated into countries mainstream banking and financial system, this will help to:

  1. Create greater awareness of product.
  2. Encourage product innovation
  3. Improve access to microfinance.
  4. Widen and strengthen the distribution channels.
  5. Standardize regulation and improve transparency.


Global financial sector lost almost US$ 1.8 trillion as a result of the financial crisis and a big part of the recent financial crisis can be blamed on regulatory failure .The absence of rules during the global depression resulted in many economists to reconsider their views on the model based on market in economic theory and is continuous in current communities in conventional banking. Many governments all over the world have introduced financial and economic reforms as a kind of government intervention to produce well- regulated financial systems,

Malaysia as case of study:

Malaysia was resilient against the global financial crisis due to strong fundamentals and inherently sound financial regulatory framework. Islamic banking in the country was well protected from the effects of the crisis because of the Islamic financial institution strict commitment to Islamic principles, which prevents high level of benefit speculative activities. The regulatory authorities have introduced a comprehensive regulatory and supervisory framework for Malaysia’s dual financial system. Stronger standards have been set for corporate transparency governance, accountability, disclosure, risk management, customer protection, and market discipline. Below are some of the introduced internal regulations:

1- Corporate Governance Guidelines

2-Rate of Return Framework

3-Guidelines on Financial Disclosure

4_Sharia Committee Guidelines

5-Islamic Money Market Guidelines

6-Capital Adequacy Standards

7-Musharakah and Mudarabah

8-Firewalls for Islamic Window Operations.

Generally, these initiative and regulation have the following effects on the Malaysian Islamic financial system:

  • System, maintain the confidence of the public with IFIs as the custodians of public funds.
  • Strengthen a competitive financial system which offers efficient and reliable services.
  • Ensure the health of each IFI for development
  • Prevent the risk of a contagion and methodology failure of the financial system
  • Promote good market practices and high standards of corporate governance
  • Protect customer and shareholders interest.


There are some elements that are likely to comprise the growth of Islamic finance as below:

  • The present Islamic banking is based on reproduction of conventional banking products, this is lacking to achieve the overall aims of Islamic finance system which is based on impartial distribution of economic advantages and makes Islamic finance less effective than their conventional counterparts.
  • Not all the conventional products have an Islamic finance identical treasury and liquidity management tools.
  • Islamic finance needs changes in the legal regulatory and tax environment to absorb finance without incurring additional cost to the customers.
  • The different interpretations of sharia provisions have resulted in the absence of unification; common understanding is required to merge local market with the global market.
  • Shortage of necessary tools to manage liquidity
  • Expertise and human resource in Islamic finance are rare.

For Islamic finance to get good stage of growth should be extended to reach critical mass, chances to get there include:

1-Large scale institutions have the possibility and capability to penetrate the different fragmented markets with experts while providing sharia compatible with financial solutions.

2-Microfinance has ability to find opportunities for the untapped SME market of the emerging economies and to capture interest in Islamic microfinance.

3-Sound regulation, to make sure that Islamic finance has a decent opportunity of growth and development while expending to critical mass.

Some of the remaining challenges to be overcome include the development of human capital.



IFSB 4th public lecture on financial policy and stability, lecture by Baljeet Kaur Grewal-

Amman- Jordan -2011


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