## 1. Comprehensive internationally-endorsed recommendations to account for Islamic finance

## Source details

**Canonical URL:** [1. Comprehensive internationally-endorsed recommendations to account for Islamic finance](https://www.imf.org/-/media/files/data/statistics/bpm6/approved-guidance-notes/if1-islamic-finance-endorsed.pdf)

## Other formats

- [Markdown version](/-/media/files/data/statistics/bpm6/approved-guidance-notes/if1-islamic-finance-endorsed.pdf.md)
- [Structured JSON version](/-/media/files/data/statistics/bpm6/approved-guidance-notes/if1-islamic-finance-endorsed.pdf.json)

---

### Introduction and background
- Shari’ah principles prohibit "riba" (normally translated as interest), "gharar" (excessive uncertainty), "maysir" (gambling), and short sales or financing activities considered harmful to society; parties must share risks and rewards and transactions should have a real economic purpose without undue speculation or exploitation.
- Islamic financial corporations use special financing arrangements including profit and loss sharing joint ventures, profit and loss sharing partnerships and leasing.
- Global Islamic finance size and composition (2019, Islamic Finance Development Report 2020):
  - Global Islamic finance assets: increased from US$1761 billion in 2012 to US$2875 billion in 2019.
  - Regional distribution in 2019:
    - GCC: US$1253 billion, or 43.6 per cent
    - Middle East and North Africa (excluding GCC): US$755 billion, or 26.3 per cent
    - Southeast Asia: US$685 billion, or 23.8 per cent
  - By segment in 2019:
    - Islamic banking: US$1993 billion (69.3 per cent)
    - Islamic capital markets (Sukuk, other Islamic financial institutions and Islamic funds): US$831 billion (28.9 per cent)
    - Islamic insurance sector (gross contributions): US$51 billion (1.8 per cent)
  - Islamic banking is considered systemically important in 15 jurisdictions of the Islamic Financial Services Board (IFSB) (jurisdictions meet criterion of having a more than 15 percent share of Islamic banking assets in their total domestic banking sector assets).
- Gap addressed: comprehensive internationally-endorsed recommendations to account for Islamic finance in the national accounts and external sector statistics based on the 2008 SNA and BPM6 were absent prior to recent initiatives.
- Institutional response: Islamic Finance Task Team (IFTT) formed in 2020 to develop consistent guidance.

### Key issues identified
- Classification and terminology
  - How to classify Islamic financial instruments within the 2008 SNA and BPM6 frameworks.
  - Need for appropriate terminology for investment income on Islamic instruments classified as deposits, loans and debt securities because 2008 SNA classifies investment income for those instruments as interest.
  - Applicability of the 2008 SNA FISIM formula to calculate implicit financial services for Islamic deposits and loans, and what reference rate and terminology to use.
- Sectorization and output
  - Sectorize and calculate output for entities unique to Islamic finance (Islamic windows, off-balance sheet restricted investment accounts, waqf funds, Hajj funds).
  - Determine institutional unit status and subsector placement within financial corporations; calculate their output.
- Economic ownership of non-financial assets
  - Determine economic ownership (rewards, risks, identity of the actual user in production) for non-financial assets underlying sales, equity and leasing arrangements legally recorded on Islamic financial corporations' balance sheets.
  - Reconcile differing practices between SNA economic-ownership principles and Islamic accounting frameworks that often record assets with Islamic financial corporations.
- Islamic insurance (takaful and retakaful)
  - Need explicit statistical treatment because Islamic insurance business models are not explicitly covered by part 1 of chapter 17 of the 2008 SNA and appendix 6 of BPM6.
- Data presentation and international comparability
  - Some economies use separate reference rates to calculate FISIM for conventional and Islamic instruments denominated in the same currency, contrary to 2008 SNA recommendation of a single reference rate; empirical tests in Indonesia, Malaysia and the State of Palestine showed significant differences between single and separate reference-rate approaches for nominal FISIM.
- Outreach and existing materials
  - Existing standards and guidance (AAOIFI, IFSB, MFSMCG Annex 4.3, Handbook on Securities Statistics Annex 3, Financial Soundness Indicators Compilation Guide Annex 7.4, PSIFIs Revised Compilation Guide) informed work but did not provide comprehensive internationally-agreed recommendations within a holistic 2008 SNA-based framework.

### IFTT work program and consultation
- IFTT activities:
  - Expanded on the 2017 IFTF and organized six sub-task teams addressing specific topics.
  - Developed recommendations summarized in section IV of the guidance note.
- Consultation timeline:
  - Guidance note circulated for global consultation from 14 December 2021 to 25 January 2022.
  - Outcomes and discussions presented at the joint AEG/BOPCOM meeting in March 2022 (results in section VI).
  - Follow-up work and next steps presented in section VII.

### Options considered and sub-task team findings (summary)
- Terminology for investment income on Islamic deposits, loans and debt securities (Issues 1.1–1.3)
  - Two main terminology options considered:
    - “interest and similar investment returns”
    - “financing and investment income”
  - Presentation options:
    - a. Assign a separate code to these returns within interest (D41) or its proposed new nomenclature.
    - b. Retain current classification but allow economies with significant Islamic activity to create a sub-category within interest (D41).
  - Sub-task team reviewed 2008 SNA and BPM6 paragraphs to identify required nuances.
- Sectorization and output of Islamic financial entities (Issues 2.1–2.4)
  - Identified entities: off-balance sheet restricted investment accounts; Islamic windows in conventional banks; waqf funds; Hajj funds.
- Economic ownership of non-financial assets (Issues 3.1–3.2)
  - Research focus: treatment of economic ownership in Murabaha, Bai Muajjal, Mudaraba, diminishing Musharaka, Bai Salam, Istisna'a, Operating Ijarah, Financing Ijarah, Tawarruq; ownership when clients default.
- FISIM and reference rates (Issues 5.1–5.6)
  - Empirical tests in Indonesia, Malaysia and the State of Palestine found significant nominal FISIM differences depending on single vs separate reference rates.
  - Recommendations provided on feasibility of using FISIM for Islamic deposit-taking corporations and on reference rates and terminology, including cross-border FISIM.
- Islamic insurance (takaful and retakaful)
  - Developed recommendations to capture economic nature of Islamic insurance business models in national and external sector accounts.

### Deliverables and structure of recommendations
- Six thematic recommendation areas (sub-task teams):
  - Terminology for investment income for Islamic deposits, loans and debt securities.
  - Sectorization and output of Islamic financial entities.
  - Economic ownership of non-financial assets legally owned by Islamic financial corporations in sales, lease and equity financing.
  - Classification of Islamic financial instruments and corresponding investment income.
  - Reference rates and terminology to calculate Islamic FISIM.
  - Islamic insurance (takaful and retakaful).
- Guidance note organization:
  - Recommendations summarized in section IV.
  - Consultation outcomes in section VI.
  - Follow-up work in section VII.

### Recommendations: terminology for investment income (Issues 1.1–1.3)
- Issue 1.1 (terminology):
  - Recommendation: use the term “interest and similar returns”.
  - Rationale:
    - Retains continuity with 2008 SNA and BPM6.
    - “Similar returns” captures broader interest-like returns on Islamic deposits, loans and debt securities.
    - Do not use “investment” alone because of its broad meaning in financial account and IIP.
- Issue 1.2 (presentation):
  - Preferred option: rename "interest (D41)" to "interest and similar returns (D41)" and give economies the option to create a sub-category within D41:
    - "Interest and similar returns" (D41); of which: Returns on Islamic deposits, loans and debt securities.
- Issue 1.3 (textual changes):
  - Recommend amending SNA 7.113, SNA 7.114 and BPM 11.48 to include “interest and similar returns” and explore a footnote with examples of "similar returns".
  - No structural changes to SNA and BPM proposed because returns of Islamic deposits, loans and debt securities are functionally parallel with interest payments by conventional banks.
  - Exact recommended terminology: "interest and similar returns (D41)".

### Sectorization and output of Islamic financial entities (Issues 2.1–2.4)
- Agreement: sub-task team agrees with recommended sectorization and output methods in annex D.
- Table 1 recommendations (exact entries preserved):
  - Off-balance sheet restricted investment accounts
    - Institutional unit? Yes
    - Sectorization: Non-money market investment funds (S124)
    - Output method: Sum of costs and FISIM on financing arrangements such as Murabaha and Ijarah
  - Islamic windows in conventional banks
    - Institutional unit? Yes
    - Sectorization: Deposit-taking corporations except the central bank (S122)
    - Output method: Combination of FISIM, fees and commissions
  - Waqf funds
    - Institutional unit? Yes
    - Sectorization: Captive financial institutions and money lenders (S127)
    - Output method: Sum of costs
  - Hajj funds
    - Institutional unit? Yes
    - Sectorization: Non-money market investment funds (S124)
    - Output method: Sum of costs
- Off-balance sheet restricted investment accounts:
  - Recommendation: classify those that comply with Islamic accounting standards as institutional units because funds are held in segregated investment funds with complete accounts and equity of account holders recorded.
  - Mudaraba contracts do not give IFI authority over use/distribution of funds; IFI acts as administrator/manager and may receive a share of investment income as Mudarib recorded as a single income item.
- Islamic windows in conventional banks:
  - Recommendation: treat as institutional units where windows take deposits under Mudaraba and maintain separate full accounts and independent management.

### Economic ownership of non‑financial assets (Issues 3.1–3.2)
- Issue 3.1 recommendations:
  - Islamic financial corporations can establish a separate institutional unit (often in partnership) that will be the economic owner of underlying non-financial assets.
  - If no separate institutional unit exists, Islamic financial corporations can act as facilitators by transferring economic ownership from seller to client so Islamic financial corporations are not classified as economic owners.
  - Brief ownership by Islamic financial corporations (constructive or physical possession) should not be considered economic ownership.
  - Shari’ah standard 46 of AAOIFI supports establishing separate institutional units.
  - Economic owners should be considered ultimate purchasers entitled to benefits/risks; record acquisition when economic ownership changes hands, or when physical possession and control is acquired (paragraph 3.169 of the 2008 SNA).
- Issue 3.2 recommendation:
  - If a client defaults on payment, the client is still considered the economic owner of the underlying asset because default is essentially a default on a financial payment; confiscation by the IFI may be possible if feasible.

### Classification of Islamic financial instruments and slotting-in approach (Issues 4.1–4.2)
- Approach: slotting-in approach from economic statistics perspective—no fundamentally new conceptual framework required.
- Slotting-in purpose:
  - Establish consensus on coverage, factual description and proposed accounting treatment of Islamic instruments and future instruments.
  - Recognize slotting-in works better for some instruments than others.
- Classification factors to consider (Annex B):
  - Form of institutional unit of recipient (equity classification only if recipient is a corporation).
  - Reliability of profit magnitude.
  - Recording of instrument on issuer's balance sheet.
  - Investment account holder claim on ventures/funds.
  - Claim on residual value.
  - Whether lender supplies goods/services (trade credit).
  - Negotiability of securities.
  - Foreign direct investment thresholds (10 per cent) and existing FDI relationships.
- Recommendation (Issue 4.2): construct a “decision tree” incorporating these parameters for a compilation guide.

### Reference rates and FISIM options (Issues 5.1–5.6)
- Issue 5.1 (measure FISIM):
  - Option 1: measure financial intermediation services provided by Islamic deposit-taking corporations using the FISIM formula in the 2008 SNA: difference between rate paid by borrowers and a reference (service-free) rate plus difference between reference rate and rate paid to depositors.
  - Option 2: FISIM formula does not apply; directly measure services as income on Islamic loan-like instruments less distributions on Islamic deposit-like instruments.
  - Most sub-task team members recommend using the FISIM formula (option 1) because Islamic deposit-taking corporations perform intermediation similar to conventional deposit-taking corporations.
- Issue 5.2 (reference-rate options if FISIM used):
  - Option 1: One unique reference rate for conventional and Islamic FISIM (consistent with 2008 SNA and BPM6).
  - Option 2: One unique reference rate with explicit recognition of different risk profiles for Islamic deposit-taking corporations.
  - Option 3: Different reference rates for conventional and Islamic FISIM on the basis of partial bifurcation and distinct risk/market segments.
- Issue 5.3 (scope of instruments for Islamic FISIM):
  - General agreement to include Islamic instruments in the bundle of deposits/loans; preference to use total deposits and total loans rather than instrument-by-instrument approach.
  - Discussion whether Qard, Wadiah, Amanah, and Qard-hasan deposits (paying hibah or no income) should be included.
- Issue 5.4 (cross-border reference rates):
  - Recommendation: separate reference rates for each currency involved in cross-border Islamic deposits and loans, taken from financial markets of the home market of the currency (paragraph 10.130 of BPM6).
- Issue 5.5 (terminology):
  - Use terminology recommended by the sub-task team on terminology for investment income (“interest and similar returns”).
- Issue 5.6 (empirical testing):
  - Invite economies to participate in empirical tests on reference rates for domestic and cross-border FISIM; prior empirical tests (Indonesia, Malaysia, State of Palestine) showed significant nominal FISIM differences between single and separate reference-rate approaches.

### Takaful and retakaful (Issues 6.1–6.3)
- Institutional-unit status (Issue 6.1):
  - Recommendation: classify takaful operators and takaful funds as separate institutional units.
  - Applies also to retakaful operators and funds.
  - Variations:
    - “Light” takaful: no segregation of operator and fund—treat combined unit as institutional unit (sectorize into insurance corporations subsector S128).
    - Takaful windows: part of a conventional institution but with distinctly identified assets/liabilities—consider as institutional units.
- Sectorization (Issue 6.2):
  - If institutional units:
    - Takaful operators → financial auxiliaries subsector (S126).
    - Takaful funds → insurance corporations subsector (S128).
  - “Light” takaful combined unit → insurance corporations subsector (S128).
  - Takaful windows → insurance corporations subsector (S128).
- Output calculation (Issue 6.3):
  - Takaful operators: output = wakalah fees charged to administer takaful funds and/or share of profits from investing takaful funds.
  - Takaful funds: output = sum of costs as wakalah fees paid to operators and/or share of profit payable to operators plus other intermediate consumption.
  - For “light” takaful: use existing 2008 SNA methods for conventional insurance.
  - For takaful windows: calculate output as sum of costs.

### Waqf and Hajj funds (Annex F.2) — classification and output
- Waqf funds:
  - Concept: charitable institution contracts with fund manager to establish a dedicated, open-ended asset fund managed according to Shari’ah; donor's investment constitutes an irrevocable donation; beneficiary is economic owner of units; waqf funds keep a complete set of accounts.
  - Recommendation: waqf funds meet criteria to be institutional units.
  - Sectorization: captive financial institutions and money lenders subsector (S127).
  - Financial instrument classification: beneficiary has “other equity” (F519) claim on assets; donors' “purchases” imputed as miscellaneous current transfers (D75) by donors to beneficiary.
  - Output: fees payable to fund manager classified as gross output (P11) of financial auxiliaries subsector (S126); re-routing of fees to beneficiary recommended with an imputed additional quantum of profit payable as property income to beneficiary.
- Hajj funds:
  - Definition: market enterprise managing long-term savings open to individuals intending to undertake Hajj in compliance with Shari’ah.
  - Recommendation: can be institutional units if legally established with autonomous management and complete financial accounts.
  - Sectorization: depends on savings scheme:
    - If savings meet deposit conditions → deposit-taking corporations except the central bank (S122).
    - If collective, not restricted to monetary investments and savers bear risks/rewards → non-MMF investment funds subsector (S124).
  - Output: sum of costs; for off-balance sheet restricted investment accounts FISIM on loans such as Murabaha or Ijarah may need to be calculated.

### Annex B: classification of Islamic financial instruments and investment income (high-level)
- Liability/source classifications (selected examples preserve exact coding and income mapping):
  - Qard, Wadiah, Amanah → FA: Transferable deposits (F22) or Other deposits (F29); Income: Interest and similar returns (D41); ESS: D41O.
  - Qard-hasan → FA: Other deposits (F29); Income: Interest and similar returns (D41).
  - Mudaraba / PSIA (restricted/unrestricted; fixed/negotiable certificates) → FA: Other deposits (F29) or Equity (F51) or Debt security (F3) or Equity security (F5); Income: Interest and similar returns (D41) or Dividends (D421); ESS mappings preserved (D41O, D42P).
  - Participation term certificates → FA: Debt security (F3) or Equity security (F5); Income: Interest and similar returns (D41) or Dividends (D421).
  - Profit and loss sharing certificates → FA: Other deposits (F29) or Debt securities (F3); Income: Interest and similar returns (D41).
  - Sukuk (equity-like, fixed-income, variable profile) → FA: Debt security (F3) or Equity security (F5); Income: Interest and similar returns (D41) or Dividends (D421).
  - Wakalah deposits → FA: Transferable deposits (F22) or Other deposits (F29); Income: Interest and similar returns (D41).
- Asset/use classifications (selected examples):
  - Qard-hasan (assets) → FA: Loans (F4); Income: Interest and similar returns (D41).
  - Murabaha, Bai Muajjal, Bai Salam, Istisna’a, Tawarruq, Bai bil Wafa → FA: Loans (F4) or Trade credits and advances (F81); Income: Interest and similar returns (D41).
  - Ijarah:
    - Operating Ijarah → Production account: market output (P11); External sector: CA: Trade in Services: Other business services.
    - Financing Ijarah → FA: Loans (F4); Income: Interest and similar returns (D41).
  - Musharaka, Mudaraba financing, Mushtarakah → FA: Loans (F4) or Equity (F5); Income: Interest and similar returns (D41) or Dividends (D421).
- Overarching classification principle: where instrument designed to produce a profit with a "comparatively high reliability as to its magnitude," classify as debt yielding "interest and similar returns."

### Annex D: sectorization framework, methods to calculate output, and FISIM formulas
- Sectorization framework (selected subsectors and output methods):
  - Central Bank (S121): Monetary policy services — Sum of costs; Financial intermediation services — FISIM formula.
  - Deposit-taking corporations except the central bank (S122): Output combination of:
    - (a) For loans and deposits, FISIM formula: (rL–rr)×YL+(rr–rD)×YD, where rL, rD, rr, YL and YD represent the loan dividend rate, deposit dividend rate, reference rate, average stock of loans and average stock of deposits, respectively.
    - (b) Explicit fees.
  - Non-MMF investment funds (S124): Output treated same as conventional non-MMFs; sum of various fees; for off-balance sheet restricted investment accounts FISIM on loans such as Murabaha or Ijarah may need calculation.
  - Financial auxiliaries (S126): Explicit fees.
  - Captive financial institutions and money lenders (S127): Holding companies and waqf funds — Sum of costs; Sharī`ah-compliant money lenders — combination of explicit fees and implicit financial service charge (rL–rr)×YL.
  - Insurance corporations (S128) and Takaful windows: Output of takaful and retakaful funds computed as wakalah fees paid to operators and/or share of profit payable to operators; insurance formulae in 2008 SNA applied.
- FISIM and formulas preserved for Islamic finance:
  - Deposit-taking corporations (S122) FISIM formula: (rL–rr)×YL+(rr–rD)×YD (variables defined above).
  - Implicit financial service charge for other intermediaries: (rL–rr)×YL.
  - Recommendations:
    - Retain the 2008 concept, formula, instrument scope and terminology for FISIM as applied to Islamic financial intermediation activities.
    - Include clarifying footnote (to para 10.126 of BPM6 and para 6.163 of 2008 SNA): "FISIM should likewise be understood to arise in Islamic banking services whenever there are margins between rates of profit (or, 'interest and similar returns') on depositor or borrower funds."

### Consultation outcomes and follow-up
- Global consultation (14 December 2021 to 25 January 2022) and joint AEG/BOPCOM meeting (March 2022) outcomes:
  - Global consultation revealed solid support for almost all recommendations.
  - Diverging views on reference rate for calculating conventional and Islamic FISIM (Issue 5.2); slight preference for recognizing only one reference rate.
  - Joint AEG/BOPCOM meeting:
    - Unanimously supported IFTT recommendations except on issue 5.2.
    - Agreed IFTT should organize experimentation and testing exercise on reference rates for conventional and Islamic FISIM.
    - Suggested refining wording of proposed definition of “interest and similar returns” because reference to profit may cause confusion with distributed income of corporations.
- Follow-up work planned by IFTT:
  - a. Refine wording of proposed definition of “interest and similar returns” in consultation with editors of 2025 SNA and BPM7.
  - b. Conduct experimentation and testing exercise for Issue 5.2, incorporate results and revised wording into the next guidance note version, and circulate to AEG and BOPCOM for final approval via written procedure.

*Guidance note prepared by the Islamic Finance Task Team (IFTT).*

### 1. Comprehensive internationally-endorsed recommendations to account for Islamic finance

### 1. Comprehensive internationally-endorsed recommendations to account for Islamic finance

### Introduction and background
- Islamic finance operates according to Shari’ah principles which prohibit "riba" (normally translated as interest), "gharar" (excessive uncertainty), "maysir" (gambling), and short sales or financing activities considered harmful to society. Parties must share risks and rewards and transactions should have a real economic purpose without undue speculation or exploitation.
- Islamic financial corporations use special financing arrangements to comply with these principles, including profit and loss sharing joint ventures, profit and loss sharing partnerships and leasing.
- Islamic finance is prevalent in some regions:
  - Global Islamic finance assets increased from US$1761 billion in 2012 to US$2875 billion in 2019 (Islamic Finance Development Report 2020).
  - Regional distribution in 2019:
    - GCC: US$1253 billion, or 43.6 per cent
    - Middle East and North Africa (excluding GCC): US$755 billion, or 26.3 per cent
    - Southeast Asia: US$685 billion, or 23.8 per cent
  - By segment in 2019:
    - Islamic banking: US$1993 billion (69.3 per cent)
    - Islamic capital markets (Sukuk, other Islamic financial institutions and Islamic funds): US$831 billion (28.9 per cent)
    - Islamic insurance sector (gross contributions): US$51 billion (1.8 per cent)
  - Islamic banking is considered systemically important in 15 jurisdictions of the Islamic Financial Services Board (IFSB) (jurisdictions meet criterion of having a more than 15 percent share of Islamic banking assets in their total domestic banking sector assets).
- Comprehensive internationally-endorsed recommendations to account for Islamic finance in the national accounts and external sector statistics based on the 2008 SNA and BPM6 were absent prior to recent initiatives.
- An Islamic finance task team (IFTT) was formed in 2020 to develop consistent guidance on the treatment of Islamic finance in the national and external sector accounts.

### Key issues identified
- Classification and terminology
  - How to classify Islamic financial instruments within the 2008 SNA and BPM6 frameworks.
  - The 2008 SNA classifies investment income for deposits, loans and debt securities as interest; Shari’ah implications require appropriate terminology for investment income on Islamic instruments classified as deposits, loans and debt securities.
  - Whether the 2008 SNA FISIM formula can be used to calculate implicit financial services associated with Islamic deposits and loans, and what reference rate and terminology should be used.
- Sectorization and output
  - Need to sectorize and calculate output for entities unique to Islamic finance (including Islamic windows, off-balance sheet restricted investment accounts, waqf funds established for a defined purpose and managed by financial institutions, and Hajj funds as dedicated saving vehicles).
  - Whether certain Islamic entities should be classified as institutional units, and if so, how to sectorize them within subsectors of the financial corporation sector and calculate their output.
- Economic ownership of non-financial assets
  - Determination of economic ownership (rewards, risks, and identity of the actual user in production) for non-financial assets underlying sales, equity and leasing arrangements legally recorded on Islamic financial corporations' balance sheets.
  - Differing practices between SNA economic-ownership principles (assets recorded with economic owner, i.e., user who assumes risks/receives benefits) and Islamic accounting frameworks that record such assets with Islamic financial corporations.
- Islamic insurance (takaful and retakaful)
  - Need for explicit statistical treatment of Islamic insurance and reinsurance given fully reshaped business model of Islamic insurance not explicitly covered by part 1 of chapter 17 of the 2008 SNA and appendix 6 of BPM6.
- Data presentation and international comparability
  - Some economies use separate reference rates to calculate FISIM on conventional and Islamic deposits and loans denominated in the same currency, which appears inconsistent with the 2008 SNA recommendation of a single reference rate; empirical tests in Indonesia, Malaysia and the State of Palestine showed significant differences between single and separate reference-rate approaches for nominal FISIM.
- Outreach and existing materials
  - Existing standards and guidance from AAOIFI, IFSB, MFSMCG (Annex 4.3), Handbook on Securities Statistics (Annex 3), Financial Soundness Indicators Compilation Guide (Annex 7.4), PSIFIs (Revised Compilation Guide) and independent expert contributions informed the work but did not provide comprehensive internationally-agreed recommendations within a holistic 2008 SNA-based framework.

### IFTT work program and consultation
- The IFTT, expanding on the 2017 Islamic finance task force (IFTF), organized six sub-task teams addressing specific topics and developed recommendations summarized in section IV of the guidance note.
- The guidance note was circulated for global consultation from 14 December 2021 to 25 January 2022.
- The outcome of the global consultation and discussions at the joint AEG/BOPCOM meeting in March 2022 are presented in section VI of the guidance note.
- Section VII of the guidance note presents follow-up work arising from those discussions.

### Options considered and sub-task team findings
- Terminology for investment income on Islamic deposits, loans and debt securities (issues 1.1–1.3)
  - Two main terminology options were the focus:
    - “interest and similar investment returns”
    - “financing and investment income”
  - Presentation options for investment income in updated SNA and BPM:
    - a. Assign a separate code to these returns within interest (D41) or its proposed new nomenclature, respecting universality of international statistical standards.
    - b. Retain current classification of investment income, but allow economies with significant Islamic activity the option to create a sub-category within interest (D41) or its proposed new nomenclature.
  - The sub-task team reviewed relevant paragraphs of 2008 SNA and BPM6 to assess required nuances to reflect interest-like returns.
- Sectorization and output of Islamic financial entities (issues 2.1–2.4)
  - Tasks: review annex 5 of the earlier 2020 information note for completeness and consistency with SNA recommendations; identify Islamic financial entities not previously included and determine institutional unit status, sectorization within financial corporation subsectors, and output calculation.
  - Identified entities for consideration:
    - The off-balance sheet restricted investment accounts
    - Islamic windows in conventional banks
    - Waqf funds established for a defined purpose and managed by financial institutions (private or public)
    - Hajj funds dedicated for pilgrims’ savings
- Economic ownership of non-financial assets related to sales, lease and equity financing (issues 3.1–3.2)
  - Research issues identified:
    - Treatment of economic ownership in Murabaha, Bai Muajjal, Mudaraba, diminishing Musharaka, Bai Salam, Istisna'a, Operating Ijarah, Financing Ijarah and Tawarruq (issue 3.1).
    - Economic ownership when clients default on paying for assets in arrangements such as Murabaha and Bai Muajjal (issue 3.2).
- FISIM and reference rates
  - Empirical tests in three economies (Indonesia, Malaysia and the State of Palestine) indicate significant nominal FISIM differences depending on whether single or separate reference rates are used for conventional and Islamic deposits/loans denominated in the same currency.
  - The guidance note provides recommendations on the feasibility of using the FISIM formula for Islamic deposit-taking corporations and on reference rates and terminology to use, including cross-border FISIM on Islamic deposits and loans (IFTF did not previously discuss cross-border reference rate).
- Islamic insurance (takaful and retakaful)
  - The guidance note develops recommendations to capture the economic nature of Islamic insurance business models in the national and external sector accounts, addressing the absence of explicit treatment in 2008 SNA and BPM6.

### Deliverables and structure of recommendations
- Six thematic recommendation areas developed by IFTT sub-task teams:
  - Terminology for investment income for Islamic deposits, loans and debt securities
  - Sectorization and output of Islamic financial entities
  - Economic ownership of non-financial assets in sales, lease and equity financing legally owned by Islamic financial corporations
  - Classification of Islamic financial instruments and corresponding investment income
  - Reference rates and terminology to calculate Islamic FISIM
  - Islamic insurance (takaful and retakaful)
- The guidance note summarizes recommendations in section IV, reports consultation outcomes in section VI, and outlines follow-up work in section VII.

*Guidance note prepared by the Islamic Finance Task Team (IFTT).*

### 18. Issue 3.1 is relevant in the context of Islamic finance because without a concept of interest

### if1-islamic-finance-endorsed - 18. Issue 3.1 is relevant in the context of Islamic finance because without a concept of interest

### Economic ownership and balance sheet treatment
- Islamic financial corporations often generate income through financing arrangements such as Murabaha, Bai Muajjal, Mudaraba, diminishing Musharaka, Bai Salam, Istisna'a, Operating Ijarah, Financing Ijarah and Tawarruq which include the sale or leasing of underlying goods and equity financing.
- Islamic finance accounting standards recommend recording ownership of the underlying non-financial assets in the balance sheets of Islamic financial corporations even when:
  - the assets are not actually used in the corporations' productive activities, or
  - the assets are held only briefly.
- Risk identified:
  - Apparent balance sheets could suggest Islamic financial corporations are more involved in non-financial activities than is economically true.
- Statistical need:
  - Determine the economic ownership of these non-financial assets to reflect the true nature of Islamic financial corporations’ economic activities, particularly when clients default on payment in financing arrangements such as Murabaha or Bai Muajjal (issue 3.2).
- Reference:
  - The macroeconomic statistics community emphasizes that the concept of economic ownership remains the fundamental principle to determine ownership of assets.

### Classification of Islamic financial instruments and slotting-in approach
- Starting point:
  - A fundamentally new conceptual framework for Islamic finance was not required; a slotting-in approach was adopted from the economic statistics perspective (issue 4.1).
- Purpose of slotting-in:
  - Establish consensus on coverage, factual description and proposed accounting treatment of Islamic financial instruments and any newly considered instruments.
  - Recognize that slotting-in will work more satisfactorily for some instruments than for others and may apply to future developments.
- Substantive examination:
  - Classification must examine substantive properties of each instrument; proposed classification may be conditional on particular features.
  - Discussed feasibility of constructing a “decision tree” for a compilation guide to facilitate future classification decisions (issue 4.2).

### Reference rates and terminology to calculate Islamic FISIM
- Issues identified for research (issue numbers preserved):
  - Relevance of using the FISIM formula to measure the financial services provided by Islamic deposit-taking corporations (issue 5.1);
  - Reference rate to use to calculate FISIM on Islamic deposits and loans if the FISIM formula is to be used (issue 5.2);
  - The scope of the Islamic financial instruments to be included in the calculation of Islamic FISIM (issue 5.3);
  - Reference rate to use in the calculation of exports and imports of Islamic FISIM (issue 5.4);
  - Terminology to use in the Islamic FISIM formula (issue 5.5);
  - Invite economies to participate in empirical tests such as what reference rate to use to calculate domestic and cross-border FISIM on Islamic deposits and loans (issue 5.6).
- Options for issue 5.1:
  - Option 1 – measure financial intermediation services provided by Islamic deposit-taking corporations using the FISIM formula in the 2008 SNA: difference between rate paid by borrowers and a reference (service-free) rate plus difference between reference rate and rate paid to depositors.
  - Option 2 – FISIM concept and formula in the 2008 SNA does not apply to Islamic deposit-taking corporations; instead, directly measure services as the sum of income generated on Islamic loan-like instruments less distributions paid on Islamic deposit-like instruments.
- Options for issue 5.2 (reference rate if FISIM formula is used):
  - Option 1 – Only one unique reference rate is recognized for conventional and Islamic FISIM (consistent with 2008 SNA and BPM6).
  - Option 2 – One unique reference rate is recognized, with explicit recognition of different risk profiles for Islamic deposit-taking corporations.
  - Option 3 – Different reference rates are recognized for conventional and Islamic FISIM on the basis that prohibition on interest and restriction to engage only in Shari’ah-compliant activities will tend to internalize Islamic banking activity within a specific subsector of the general economy.
- Scope issues (issue 5.3):
  - Whether Qard, Wadiah, Amanah, and Qard-hasan deposits should be included in calculation of Islamic FISIM on deposits, and whether Qard-hasan financing should be included in calculation of Islamic FISIM on loans, given they pay hibah or pay no investment income.
  - Consideration of instrument-by-instrument classification as loans or deposits for FISIM calculations.
- Terminology (issue 5.5):
  - Discussed terms such as financing and investment income to replace interest receipts, and distribution of profits to depositors/investors to replace payments of interest to depositors.
  - Recommended terminologies should align with sub-task team on terminology for investment income for Islamic deposits, loans and debt securities.
- Empirical testing (issue 5.6):
  - Invite economies to test reference rates for domestic and cross-border FISIM on Islamic deposits and loans denominated in the same currency, noting significant differences in nominal FISIM values based on single vs. separate reference rates in empirical tests by three economies under the IFTF.

### Takaful and retakaful
- Issues to resolve:
  - Whether takaful operators and takaful funds involved in various takaful/retakaful business arrangements should be considered separate institutional units (issue 6.1);
  - Sectorization of takaful operators and takaful funds if they are separate institutional units (issue 6.2);
  - Calculation of output of takaful operators and takaful funds if they are separate institutional units (issue 6.3).
- Rationale:
  - Fulfilment of Shari’ah principles results in three groups of units in takaful/retakaful arrangements: takaful participants, takaful funds and takaful operators.
  - Islamic finance accounting standards require takaful funds and takaful operators to compile complete and separate sets of accounts, including balance sheets; this raises the question of whether they satisfy SNA rules to be institutional units.
- Applicability:
  - Issues and resultant recommendations for takaful equally apply to retakaful activities.

### Recommendations: terminology for investment income (Issues 1.1–1.3)
- Issue 1.1 (terminology):
  - Recommendation: use the term “interest and similar returns”.
  - Rationale:
    - Retaining “interest” ensures continuity with current terminology in the 2008 SNA and BPM6.
    - “Similar returns” captures broader interest-like returns on Islamic deposits, loans and debt securities, enabling integration into existing macroeconomic statistical frameworks.
    - Do not use the term “investment” in the terminology because it has a broad meaning in the financial account and international investment position (IIP).
- Issue 1.2 (presentation in updated SNA and BPM):
  - Preferred option: retain current classification of investment income components, rename "interest (D41)" to "interest and similar returns (D41)", and give economies with significant Islamic financial activities the option to create a sub-category within D41 to present:
    - "Interest and similar returns" (D41); of which: Returns on Islamic deposits, loans and debt securities.
  - Reason: preserves universality of international statistical standards.
- Issue 1.3 (proposed textual changes):
  - Recommend changing key paragraphs to include “interest and similar returns” in 2008 SNA and BPM6, including:
    - SNA 7.113 and SNA 7.114 to define and explain “Interest and similar returns” including applicability to Islamic financial instruments.
    - BPM 11.48 to include Islamic financial instruments within “Interest and similar returns”.
  - Also propose reviewing other relevant paragraphs describing interest as a form of investment income to include the term “interest and similar returns” and exploring a footnote with examples of "similar returns".
  - Overall: no structural changes to SNA and BPM proposed because returns of Islamic deposits, loans and debt securities are functionally parallel with interest payments by conventional banks.
  - Exact terminology recommended: "interest and similar returns (D41)".

### Sectorization and output of Islamic financial entities (Issues 2.1–2.4)
- Agreement:
  - Sub-task team agrees with recommended sectorization and methods to calculate output in annex D, with detailed discussion of entities listed in table 1.
- Table 1 summary of recommendations (exact entries preserved):
  - Off-balance sheet restricted investment accounts
    - Are they institutional units (issue 2.2)? Yes
    - Sectorization (issue 2.3): Non-money market investment funds (S124)
    - Methods to calculate output (issue 2.4): Sum of costs and FISIM on financing arrangements such as Murabaha and Ijarah
  - Islamic windows in conventional banks
    - Are they institutional units (issue 2.2)? Yes
    - Sectorization (issue 2.3): Deposit-taking corporations except the central bank (S122)
    - Methods to calculate output (issue 2.4): Combination of FISIM, fees and commissions
  - Waqf funds
    - Are they institutional units (issue 2.2)? Yes
    - Sectorization (issue 2.3): Captive financial institutions and money lenders (S127)
    - Methods to calculate output (issue 2.4): Sum of costs
  - Hajj funds
    - Are they institutional units (issue 2.2)? Yes
    - Sectorization (issue 2.3): Non-money market investment funds (S124)
    - Methods to calculate output (issue 2.4): Sum of costs
- Institutional units (issue 2.2) — off-balance sheet restricted investment accounts:
  - Recommendation: classify off-balance sheet restricted investment accounts that comply with Islamic finance accounting standards as institutional units.
  - Justification:
    - Funds of account holders are placed in an investment fund managed independently from the Islamic bank through which funds are channeled.
    - A complete set of accounts, including financial position showing equity of account holders, is maintained.
    - Mudaraba contracts do not give the Islamic bank authority over decisions regarding use and distribution of funds; the Islamic bank acts as administrator/manager and may only receive a share of investment income as Mudarib, recorded as a single income item in the Islamic bank’s income statement.
- Institutional units — Islamic windows in conventional banks:
  - Where Islamic windows are organized to take deposits under Mudaraba and maintain separate full accounts and independent management (including a Shari’ah Council and separation of funds), the sub-task team recommends treating such Islamic windows as institutional units independent of the conventional banks.

*Published by the sub-task team in the guidance note on classification and statistical treatment of Islamic finance instruments and entities.*

### 38. Annex F.2 describes the different waqf arrangements and how they relate to waqf funds.

### Annex F.2 describes the different waqf arrangements and how they relate to waqf funds.

### Waqf funds — definition and institutional-unit recommendation
- Waqf fund concept considered by the sub-task team: a distinctive arrangement in which a charitable institution, such as a waqf, contracts with a fund manager to establish a dedicated, open-ended asset fund managed according to Shari’ah principles, open to the public to make donations by “purchasing” units of the fund.
- The charitable institution is the beneficiary and is the economic owner of all the units.
- Under the agreement:
  - the waqf fund will reinvest or distribute specified amounts of the fund's profits to the beneficiary;
  - the waqf fund will charge fund management fees;
  - the donor's investment in the fund constitutes an irrevocable donation to the beneficiary;
  - the function of the fund is to provide financial management of the beneficiary's portfolio of assets.
- Waqf funds are required to keep a complete set of accounts.
- Recommendation: waqf funds meet the criteria to be institutional units (sub-task team).

### Hajj funds — definition and institutional-unit recommendation
- Term used: "Hajj fund" — a market enterprise that undertakes as a significant part of its activities the management of long term savings open to individuals intending to undertake the Hajj pilgrimage in compliance with Shari’ah principles.
- Recommendation: Hajj funds can be considered institutional units if they are legally established entities with an autonomous management and keep a complete set of financial accounts.

### Sectorization recommendations (Issue 2.3)
- Off-balance sheet restricted investment accounts:
  - Recommendation: sectorize as non-money market investment funds (non MMF) (S124).
  - Rationale: clients' money is held in segregated investment funds; losses borne by providers of the funds except where due to breach of trust or misconduct by units managing the funds; profits distributed to investors in proportion to investment value.
- Islamic windows in conventional banks:
  - Recommendation: sectorize into the deposit-taking corporations except the central bank subsector (S122).
  - Rationale: funds provided under Mudaraba contract have characteristics of deposits and are used to provide financing using various Islamic financial instruments.
- Waqf funds:
  - Recommendation: sectorize into the captive financial institutions and money lenders subsector (S127).
  - Rationale: beneficiary is sole client; waqf funds are similar to endowment funds.
  - Financial instrument classification: beneficiary has an "other equity" (F519) claim on the assets of the waqf fund.
  - Treatment of donors' “purchases” of units: impute as miscellaneous current transfers (D75) by donors to the beneficiary.
- Hajj funds:
  - Recommendation: classify as financial corporations.
  - Sectorization depends on nature of savings scheme:
    - If savings meet the conditions of deposits → sectorize into deposit-taking corporations except the central bank subsector (S122) (likely regulated deposit-taking entity).
    - If collectively organized, not restricted to monetary investments, savers bear risks and rewards → sectorize into non-MMF investment funds subsector (S124), provided general conditions for this classification are met.

### Calculation of output (Issue 2.4)
- Output methods depend on sectorization; many outputs calculated as sum of costs, reflecting role of financial auxiliaries in managing funds and re-routing of fees.
- Example for waqf funds:
  - Fees payable by waqf fund to fund manager:
    - Classified as gross output (P11) of financial auxiliaries subsector (S126);
    - Also classified as intermediate consumption (P2) and gross output (P11) of captive financial institutions and money lenders subsector (S127).
  - Although fees are contractually payable by the waqf fund rather than the beneficiary, they should be re-routed as payable by the beneficiary to the waqf fund because they are payable out of profits.
  - A corresponding additional quantum of profit should be imputed to the waqf fund, payable as property income to the beneficiary.

### Economic ownership of non‑financial assets in Islamic financing arrangements (Issues 3.1–3.2)
- Recommendation (Issue 3.1):
  - Islamic financial corporations can establish a separate institutional unit (often in partnership) that will be the economic owner of the underlying non-financial assets (example: real estate investment co-investment).
  - If no separate institutional unit is set up, Islamic financial corporations can act as facilitators by transferring economic ownership from seller to client so that Islamic financial corporations are not classified as economic owners.
  - Brief ownership by Islamic financial corporations can be considered constructive (qabd hukmi) or physical possession (qabd fe'eli) and should not be considered economic ownership.
  - Shari’ah standard 46 of AAOIFI supports the option of establishing separate institutional units.
- Recommendation (Issue 3.1, continued):
  - Economic owners of the underlying non-financial assets should be considered the ultimate purchasers of these assets because they are entitled to claim benefits or assume risks associated with use.
  - Time of recording acquisition: the moment when economic ownership changes hands; when change not obvious, entering in the books of transaction partners, or when physical possession and control is acquired (paragraph 3.169 of the 2008 SNA).
- Recommendation (Issue 3.2):
  - If a client defaults on payment, the client is still considered the economic owner of the underlying non-financial asset because default is essentially a default on a financial payment.
  - It may be possible for the Islamic financial corporation to confiscate the underlying assets, if feasible.

### Classification of Islamic financial instruments and investment income (Issues 4.1–4.2)
- Classification approach: slotting-in approach summarized in annex B (issue 4.1).
- No perfect one-to-one mapping in many instances; multiple deciding factors must be considered, including:
  - Form of institutional unit represented by recipient of finance (equity classification possible only for an entity that is a corporation).
  - Whether the instrument provides a profit with comparatively high reliability as to its magnitude.
  - Whether the instrument is recorded on the balance sheet of the Islamic financial institution.
  - Whether the investment account holder has an investment‑like claim on ventures or funds offered by the issuing institution (and hence the venture/fund behaves like an institutional unit).
  - Whether the investment account holder has a claim on the residual value of the issuing institution.
  - Whether the lender is the supplier of goods or services being financed (trade credit or loan classification).
  - Whether the financial instrument provides negotiable securities (e.g., participation term certificates).
  - Whether equity holdings exceed the 10 per cent threshold for foreign direct investment.
  - Whether an existing foreign direct investment relationship already exists.
- Annex B provides classification based on these factors; annex B is not necessarily exhaustive. Compilers can classify instruments not in the annex based on these factors.
- Recommendation (Issue 4.2): construct a “decision tree” incorporating the above parameters to enable compilers to classify Islamic financial instruments appropriately in both the SNA and ESS; include decision tree in a proposed compilation guide on Islamic finance.

### Reference rates and terminology to calculate Islamic FISIM (Issues 5.1–5.6)
- Relevance of FISIM formula (Issue 5.1):
  - Most sub-task team members recommend using the FISIM formula in the 2008 SNA to calculate financial intermediation services provided by Islamic deposit-taking corporations (option 1).
  - Rationale: Islamic financial corporations classified as deposit-taking corporations and involved in financial intermediation.
- Reference-rate debate (Issue 5.2):
  - Option 1: one unique reference rate for conventional and Islamic FISIM (proponents argue reference rate is a service-free rate used to derive SNA interest on deposits and loans; no reason to use different rate for Islamic deposits/loans).
  - Option 2: one unique reference rate with explicit recognition of different risk profiles for Islamic deposit-taking corporations (provides flexibility to consider differences arising from profit-sharing arrangements).
  - Option 3: different reference rates for conventional and Islamic FISIM (bifurcation of mixed systems and limited Islamic subsector justifies different reference rates).
- Instrument scope of Islamic FISIM (Issue 5.3):
  - General agreement to include Islamic instruments in the bundle of deposits/loans to calculate FISIM and SNA interest.
  - Preference to use total deposits and total loans rather than an instrument-by-instrument approach.
- Reference rates for cross-border FISIM (Issue 5.4):
  - Recommendation: separate reference rates for each currency involved in cross-border Islamic deposits and loans.
  - Rate should be taken from financial markets of the home market of the currency (paragraph 10.130 of BPM6).
  - Whether these reference rates should differ from corresponding conventional cross-border reference rates depends on outcome of Issue 5.2.
- Terminology (Issue 5.5):
  - Recommendation: use terminology recommended by the sub-task team on the terminology for investment income for Islamic deposits, loans and debt securities.
- Empirical tests (Issue 5.6):
  - Recommendation: invite economies to participate in empirical tests on what reference rate(s) to use for domestic and cross-border FISIM on Islamic deposits and loans; test results will inform final recommendation on Issue 5.2.

### Takaful and retakaful — classification, sectorization, and output (Issues 6.1–6.3)
- Institutional-unit status (Issue 6.1):
  - Recommendation: classify takaful operators and takaful funds as separate institutional units in national and international accounts statistics.
  - Rationale: both groups have main attributes of institutional units, including complete set of accounts and balance sheets.
  - Recommendation also applies to retakaful operators and retakaful funds.
  - Two noted variations:
    - “Light” takaful/retakaful: insurance contracts need not be based on tabarru principles and there is no segregation of takaful operators and takaful funds — similar to conventional insurance; for statistical purposes consider the combined unit as an institutional unit.
    - Takaful/retakaful windows: part of a conventional financial institution (branch or dedicated unit) providing takaful/retakaful services; have distinctly identified assets and liabilities separate from conventional operation; finances/profits not intertwined with conventional operation — consider takaful/retakaful windows as institutional units.
- Sectorization (Issue 6.2):
  - If classified as institutional units:
    - Takaful operators → financial auxiliaries subsector (S126).
    - Takaful funds → insurance corporations subsector (S128).
  - Rationale: takaful funds function like insurance corporations (collect contributions equivalent to premiums, maintain reserves that belong to them); takaful operators manage and administer funds, charging fees without taking economic ownership of assets/liabilities of takaful funds.
  - For “light” takaful: sectorize combined unit into insurance corporations subsector (S128).
  - Takaful windows: sectorize into insurance corporations subsector (S128).
- Calculation of output (Issue 6.3):
  - If classified as institutional units:
    - Takaful operators: output = wakalah fees charged to administer takaful funds and/or share of profits earned from investing takaful funds.
    - Takaful funds: output = sum of costs as the wakalah fees they pay to takaful operators and/or the share of profit payable to takaful operators plus other intermediate consumption, if any.
  - For “light” takaful: calculate output of combined unit using existing methods for conventional insurance in the 2008 SNA.
  - For takaful windows: calculate output as the sum of costs (given similar economic features between takaful funds and takaful windows).

*Guidance note sub-task team (Islamic finance guidance note).*

### 63. In many economies, the local takaful/retakaful industry is likely to provide its services to

### if1-islamic-finance-endorsed - 63. In many economies, the local takaful/retakaful industry is likely to provide its services to 

### Cross-border takaful/retakaful transactions
- Resident takaful/retakaful providers often supply services to non-residents; resident units can purchase takaful/retakaful services from non-resident providers.
- These cross-border interactions require accounting in external sector statistics.
- Preferred data collection approach:
  - Directly ask resident takaful/retakaful and other units to provide estimates of exported and imported takaful/retakaful transactions, including takaful/retakaful fees and other transactions such as contributions, claims and investment income.
- If direct reporting is not possible, next-best estimation approach:
  - Use a combination of sources, including ratios such as those relating contributions paid by non-residents to total contributions and partner economy data.

### General recommendations on statistical treatment of Islamic finance (paragraph 64 and related)
- Recognized challenge: Capturing transactions, other flows and positions related to Islamic finance in national and international accounts can be daunting; Islamic finance statistics will often be invisible in highly aggregated macroeconomic accounts.
- Recommendations from the IFTT:
  - Include a special section or an appendix on Islamic finance in the updated SNA and BPM which:
    - highlights the differences between conventional and Islamic finance;
    - brings together all the entries in the accounts connected with Islamic finance; and
    - explains their interconnections.
  - Develop an Islamic finance compilation guide to:
    - discuss the differences between conventional and Islamic finance;
    - provide guidance on developing an Islamic finance satellite account to enhance its statistical visibility; and
    - provide practical guidance and illustrative numerical examples on how to record Islamic financial activities in the national and international accounts.

### Consultation questions posed for global consultation and AEG/BOPCOM meetings (Sections on terminology, sectorization, ownership, classification, reference rates, takaful)
- Terminology for investment income on Islamic deposits, loans and debt securities:
  - Issue 1.1: Recommendation to use the term “interest and similar returns” to broaden the scope of interest to encompass interest-like returns on Islamic deposits, loans and debt securities.
  - Issue 1.2: Recommendation to present data on the investment income on Islamic deposits, loans and debt securities in the updated SNA and BPM.
  - Issue 1.3: Recommendation to nuance paragraphs 7.113 and 7.114 of the 2008 SNA and paragraph 11.48 of the BPM6 to reflect the interest and similar returns on Islamic deposits, loans and debt securities.
- Sectorization and output of Islamic financial entities:
  - Issue 2.1: Seek agreement with overall recommended sectorization of Islamic financial corporations and methods to calculate their output in annex D.
  - Issue 2.2: Seek agreement on classification as institutional units for Islamic financial entities in table 1.
  - Issue 2.3: Seek agreement on sectorization into subsectors of financial corporations sector.
  - Issue 2.4: Seek agreement on methods to calculate output.
- Economic ownership of non-financial assets linked to Islamic arrangements:
  - Issue 3.1: Do Islamic financial corporations:
    - a. Can set up separate institutional units which will then be the economic owners of the underlying non-financial assets for Islamic financial arrangement, and/or
    - b. Can facilitate transferring the economic ownership of these non-financial assets from the sellers to clients?
  - Issue 3.2: Do you agree that clients who default on payment for the underlying non-financial assets in Murabaha and Bai Muajjal are still the economic owners of these assets?
- Classification of Islamic financial instruments and investment income:
  - Issue 4.1: Recommendation to use the slotting-in approach in annex B for classification of Islamic financial instruments from an economic statistics perspective and that this approach is capable of future application as Islamic finance evolves.
  - Issue 4.2: Recommendation to construct a “decision tree” for inclusion in a compilation guide to facilitate future classification decisions.
- Reference rates and terminology to calculate Islamic FISIM:
  - Issue 5.1: Recommendation to use FISIM formula in the 2008 SNA to calculate financial intermediation services provided by Islamic deposit-taking corporations (option 1).
  - Issue 5.2: Which reference rate(s) should be used to calculate conventional and Islamic deposits and loans denominated in the same currency?
  - Issue 5.3: Recommendation to include Qard, Wadiah, Amanah, and Qard-hasan deposits and Qard-hasan financing in the bundle of deposits/loans to calculate Islamic FISIM and to use total deposits and total loans to calculate Islamic FISIM.
  - Issue 5.4: Recommendation to use separate reference rates for each currency involved in cross-border Islamic deposits and loans.
  - Issue 5.6: Proposal that economies be invited to participate in empirical tests (e.g., what reference rate to use to calculate domestic and cross-border FISIM on Islamic deposits and loans) and request for indicated willingness to participate.
- Takaful and retakaful:
  - Issue 6.1: Recommendation to classify the following as institutional units:
    - a. Takaful operators and takaful funds in the common takaful model;
    - b. Combined units in “light” takaful; and
    - c. Takaful windows.
  - Issue 6.2: Recommendations on sectorization of:
    - a. Takaful operators and takaful funds;
    - b. The combined units in “light” takaful; and
    - c. Takaful windows.
  - Issue 6.3: Recommendations on methods to calculate the output of:
    - a. Takaful operators;
    - b. Takaful funds;
    - c. The combined units in “light” takaful; and
    - d. Takaful windows.
- General recommendations (question 82):
  - a. Include a special section or an appendix on Islamic finance in the updated SNA and BPM.
  - b. Develop an Islamic finance compilation guide (which will also include guidance on developing an Islamic finance satellite account).

### Outcome of global consultation and joint AEG/BOPCOM meeting (paragraphs 83–84)
- Global consultation was conducted from 14 December 2021 to 25 January 2022 and presented at the joint AEG/BOPCOM meeting in March 2022.
- Outcome of the global consultation:
  - Revealed solid support for almost all recommendations in the guidance note.
  - Diverging views on the appropriate reference rate for calculating conventional and Islamic FISIM (issue 5.2), with a slight preference to recognize only one reference rate for both types of FISIM.
- Joint AEG/BOPCOM meeting conclusions:
  - Unanimously agreed with the outcome of the global consultation supporting all IFTT recommendations, apart from issue 5.2 related to reference rates for calculating conventional and Islamic FISIM.
  - Agreed that the IFTT should organize an experimentation and testing exercise to decide which reference rates to use for calculating conventional and Islamic FISIM.
  - The experimentation will include economies that volunteered during the global consultation and those that expressed interest afterwards.
  - Suggested refining the wording of the proposed definition of “interest and similar returns” because the reference to profit in the definition may cause confusion with distributed income of corporations.

### Follow-up work planned by the IFTT (paragraph 85)
- Based on the joint AEG/BOPCOM meeting, the IFTT will:
  - a. Refine the wording of the proposed definition of the term “interest and similar returns” in consultation with the editors of the 2025 SNA and BPM7.
  - b. Conduct the experimentation and testing exercise for issue 5.2 (on the reference rate for conventional and Islamic FISIM), incorporate the results of the exercise and revised wording of the proposed definition of the term “interest and similar returns” into the next version of the guidance note and then circulate it to the AEG and BOPCOM for final approval via written procedure.

*Consolidated guidance note of the Islamic Finance Task Team (IFTT) and outcomes of the joint AEG/BOPCOM meeting.*

### Annex B: Classification of Islamic financial instruments and corresponding investment income

### Annex B: Classification of Islamic financial instruments and corresponding investment income in the System of National Accounts and External Sector Statistics

### SOURCE OF FUNDS — LIABILITIES
- Qard, Wadiah, and Amanah
  - Description: Withdrawable on demand, at par, without penalty or restriction; not linked to profit-making ventures; IFIs guarantee nominal value; usually no returns but small returns may be offered on the basis of gift (hibah).
  - National Accounts: FA: Transferable deposits (F22) or Other deposits (F29)
  - Income: Interest and similar returns (D41)
  - External Sector Statistics: FA/IIP: Other investment: Currency and deposits: Transferable deposits or other deposits
  - Income (ESS): Primary income: Investment income: Other investment: Interest and similar returns (D41O)

- Qard-hasan (liabilities)
  - Description: Return-free deposits voluntarily placed for financing needy individuals or social purposes; interest-free; meant to help stabilize cash flows.
  - National Accounts: FA: Other deposits (F29)
  - Income: Interest and similar returns (D41)
  - External Sector Statistics: FA/IIP: Other investment: Currency and deposits: Other deposits
  - Income (ESS): N/A

- Mudaraba / Profit Sharing Investment Account (PSIA)
  - Description: Contract where investors provide funds and IFI as silent partner invests in a commercial venture; profit sharing predetermined; types: restricted and unrestricted.
  - Restricted Mudaraba
    - National Accounts: FA: Other deposits (F29) or Equity (F51) (restricted held off-balance sheet treated as equity)
    - Income: Interest and similar returns (D41) or dividends (D421)
    - External Sector Statistics: FA/IIP: Other investment: Currency and deposits: Other deposits or Portfolio investment: Equity
    - Income (ESS): Primary income: Investment income: Other investment: Interest and similar returns (D41O) or Portfolio investment: Dividends (D42P)
  - Unrestricted Mudaraba
    - Mudaraba - not fixed
      - National Accounts: FA: Other deposits (F29)
      - Income: Interest and similar returns (D41)
      - External Sector Statistics: FA/IIP: Other investment: Currency and deposits: Other deposits
      - Income (ESS): Primary income: Investment income: Other investment: Interest and similar returns (D41O)
    - Mudaraba – fixed
      - National Accounts: FA: Other deposits (F29)
      - Income: Interest and similar returns (D41)
      - External Sector Statistics: FA/IIP: Other investment: Currency and deposits: Other deposits
      - Income (ESS): Primary income: Investment income: Other investment: Interest and similar returns (D41O)
    - Mudaraba – fixed with mudaraba certificates
      - National Accounts: FA: Debt security (F3) or Equity security (F5)
      - Income: Interest and similar returns (D41) or dividends (D421)
      - External Sector Statistics: FA/IIP: Portfolio investment – Debt or Equity security
      - Income (ESS): Primary income: Portfolio investment: Debt or equity securities: Interest and similar returns (D41O) or dividends (D42P)

- Participation term certificates
  - Description: Long-term instruments entitling holder to a share of corporation’s profit; classified as debt securities if treated as debt liabilities, and as equity if part of capital base.
  - National Accounts: FA: Debt security (F3) or Equity security (F5)
  - Income: Interest and similar returns (D41) or dividends (D421)
  - External Sector Statistics: FA/IIP: Portfolio investment – Debt or Equity security
  - Income (ESS): Primary income: Portfolio investment: Debt or equity securities: Interest and similar returns (D41P) or dividends (D42P)

- Profit and loss sharing certificates
  - Description: Resemble shares but do not provide claim on residual value or governance; classified as other deposits if not negotiable and debt securities if negotiable.
  - National Accounts: FA: Other deposits (F29) or Debt securities (F3)
  - Income: Interest and similar returns (D41)
  - External Sector Statistics: FA/IIP: Other investment – Currency and deposits or Portfolio investment – Debt securities
  - Income (ESS): Primary income: Investment income: Other investment: Interest and similar returns (D41O) or Primary income: Portfolio investment: Interest and similar returns (D41P)

- Sukuk (general)
  - Description: Investment certificates representing undivided ownership rights in assets, usufruct, services, debts, pool of assets, or business ventures; may involve SPEs; types include sukuk ijarah, sukuk musharaka, sukuk murabaha. Classification depends on whether owner has claim on residual value.
  - National Accounts: FA: Debt security (F3) or Equity security (F5)
  - Income: Interest and similar returns (D41) or dividends (D421)
  - External Sector Statistics: FA/IIP: Portfolio investment – Debt or Equity security
  - Income (ESS): Primary income: Portfolio investment: Debt or equity securities: Interest and similar returns (D41P) or dividends (D42P)
  - Equity-like Sukuk
    - Examples: Musharaka; Mudaraba
    - National Accounts: FA: Equity security (F5)
    - Income: Dividends (D421)
    - External Sector Statistics: FA/IIP: Portfolio investment – Equity security
    - Income (ESS): Primary income: Portfolio investment: Equity securities: Dividends (D42P)
  - Fixed-income Sukuk
    - Examples: Murabaha; Salaam; Istisna’a; Ijarah
    - National Accounts: FA: Debt security (F3)
    - Income: Interest and similar returns (D41)
    - External Sector Statistics: FA/IIP: Portfolio investment – Debt security
    - Income (ESS): Primary income: Portfolio investment: Interest and similar returns
  - Variable profile Sukuk
    - Examples: Wakalah; Hybrid sukuk
    - National Accounts: FA: Debt security (F3) or Equity security (F5)
    - Income: Interest and similar returns (D41) or dividends (D421)
    - External Sector Statistics: FA/IIP: Portfolio investment – Debt or Equity security
    - Income (ESS): Primary income: Portfolio investment: Debt or equity securities: Interest and similar returns (D41P) or dividends (D42P)

- Wakalah deposits
  - Description: Bank acts as agent for investment in exchange for a fee usually in the 1½ to 2 per cent range; depositor offered indicative return; depositor receives actual return if lower; if actual return is higher bank pays only indicative return and keeps excess as an “incentive fee.”
  - National Accounts: FA: Transferable deposits (F22) or Other deposits (F29)
  - Income: Interest and similar returns (D41)
  - External Sector Statistics: FA/IIP: Other investment: Currency and deposits: Transferable deposits or other deposits
  - Income (ESS): Primary income: Investment income: Other investment: Interest and similar returns (D41O)

### USE OF FUNDS / FINANCING — ASSETS
- Qard-hasan (assets/financing)
  - Description: Return-free financing to needy individuals or social purposes; debtor repays principal only; debtor may voluntarily pay extra without promise.
  - National Accounts: FA: Loans (F4)
  - Income: Interest and similar returns (D41)
  - External Sector Statistics: FA/IIP: Other investment: Loans
  - Income (ESS): Primary income: Investment income: Other investment: Interest and similar returns (D41O)

- Murabaha financing
  - Description: Sale of goods at cost plus agreed profit margin; IFI purchases goods for client who makes deferred payments; IFI handles supplier payments; resembles collateralized loans.
  - National Accounts: FA: Loans (F4)
  - Income: Interest and similar returns (D41)
  - External Sector Statistics: FA/IIP: Other investment: Loans
  - Income (ESS): Primary income: Investment income: Other investment: Interest and similar returns (D41O)

- Bai Muajjal
  - Description: IFI supplies commodities or services with deferred payments; classified as loans if goods/services are from third parties or trade credit if direct extension by supplier.
  - National Accounts: FA: Loan (F4) or Trade credits and advances (F81)
  - Income: Interest and similar returns (D41)
  - External Sector Statistics: FA/IIP: Other investment: Loans or Other investment: Trade credit and advances
  - Income (ESS): Primary income: Investment income: Other investment: Interest and similar returns (D41O)

- Bai Salam
  - Description: Short-term agreement with full prepayment for future delivery of specified goods; classified as loans if goods not for IFI's own use, or trade credit if for the lender's use.
  - National Accounts: FA: Loan (F4) or Trade credits and advances (F81)
  - Income: Interest and similar returns (D41)
  - External Sector Statistics: FA/IIP: Other investment: Loans or Other investment: Trade credit and advances
  - Income (ESS): Primary income: Investment income: Other investment: Interest and similar returns (D41O)

- Istisna’a financing
  - Description: Partnership where IFI finances manufacturing/constructing goods or buildings for delivery; classified as loans if goods/buildings are not for IFI's own use, otherwise trade credit and advances.
  - National Accounts: FA: Loan (F4) or Trade credits and advances (F81)
  - Income: Interest and similar returns (D41)
  - External Sector Statistics: FA/IIP: Other investment: Loans or Other investment: Trade credit and advances
  - Income (ESS): Primary income: Investment income: Other investment: Interest and similar returns (D41O)

- Ijarah
  - Description: Lease-purchase contract; two types: operating ijarah (title not transferred; IFI bears ownership risks) and financing ijarah (lease with transfer of ownership at end).
  - Operating Ijarah
    - National Accounts: Production account: market output (P11)
    - External Sector Statistics: CA: Trade in Services: Other business services
  - Financing Ijarah
    - National Accounts / Financial Accounts: FA – Loans (F4)
    - Income: Interest and similar returns (D41)
    - External Sector Statistics: FA/IIP: Other investment: Loans
    - Income (ESS): Primary income: Investment income: Other investment: Interest and similar returns (D41O)

- Musharaka
  - Description: Partnership where both IFI and enterprise contribute capital and share profits/losses; can be structured as loan (IFI no claim on residual value) or equity participation.
  - National Accounts: FA: Loan (F4) or equity (F5)
  - Income: Interest and similar returns (D41) or dividends (D421)
  - External Sector Statistics: FA/IIP: Other investment – Loans or Portfolio investment – Equity security
  - Income (ESS): Primary income: Investment income: Other investment: Interest and similar returns (D41O) or Primary income: Portfolio investment: Equity securities: Dividends (D42P)

- Mudaraba Financing (assets)
  - Description: Partnership where IFI provides capital and client provides labor/skill; profits shared, losses borne by IFI except for client misconduct; classified as a loan due to fixed-term nature representing fixed-term claim on client.
  - National Accounts: FA: Loan (F4)
  - Income: Interest and similar returns (D41)
  - External Sector Statistics: FA/IIP: Other investment – Loans
  - Income (ESS): Primary income: Investment income: Other investment: Interest and similar returns (D41O)

- Tawarruq (commodity murabaha)
  - Description: Buyer purchases commodity from IFI on deferred basis then sells commodity to third party on spot basis to obtain cash; effectively an extension of murabaha.
  - National Accounts: FA: Loan (F4)
  - Income: Interest and similar returns (D41)
  - External Sector Statistics: FA/IIP: Other investment – Loans
  - Income (ESS): Primary income: Investment income: Other investment: Interest and similar returns (D41O)

- Bai bil Wafa, Bai bil-Istighlal
  - Description: Sale where seller has contractual right to repurchase underlying property; majority jurists view ba'i al-wafa as impermissible though some contemporary jurists permit it; used in Islamic capital markets in some jurisdictions.
  - National Accounts: FA: Loan (F4)
  - Income: Interest and similar returns (D41)
  - External Sector Statistics: FA/IIP: Other investment – Loans
  - Income (ESS): Primary income: Investment income: Other investment: Interest and similar returns (D41O)

- Ju’alah
  - Description: Essentially an Istisna'a applicable for services.
  - National Accounts: FA: Loan (F4) or Trade credits and advances (F81)
  - Income: Interest and similar returns (D41)
  - External Sector Statistics: FA/IIP: Other investment: Loans or Other investment: Trade credit and advances
  - Income (ESS): Primary income: Investment income: Other investment: Interest and similar returns (D41O)

- Mushtarakah
  - Description: Combination of both Musharaka and Mudaraba.
  - National Accounts: FA: Loan (F4) or equity (F5)
  - Income: Interest and similar returns (D41) or dividends (D421)
  - External Sector Statistics: FA/IIP: Other investment – Loans or Portfolio investment – Equity security
  - Income (ESS): Primary income: Investment income: Other investment: Interest and similar returns (D41O) or Primary income: Portfolio investment: Equity securities: Dividends (D42P)

- Istijrar
  - Description: Agreement where buyer purchases commodities under a single agreement in parts over time when all terms and conditions are finalized.
  - National Accounts: FA: Trade credits and advances (F81)
  - Income: Interest and similar returns (D41)
  - External Sector Statistics: FA/IIP: Other investment – Trade credit and advances
  - Income (ESS): Primary income: Investment income: Other investment: Interest and similar returns (D41O)

*Annex B, System of National Accounts and External Sector Statistics*

### Annex C: Diagrams illustrating the flows between Islamic financial

### Annex C: Diagrams illustrating the flows between Islamic financial corporations and their clients for various Islamic financial instruments

### A. Sources of Funds
- Instrument 1) Qard, Wadiah, Amanah
  - Notes:
    - Hibah: at the discretion of the IFI, on basis of gift, likely to be small or nil. Although non-contractual, may be expected by Client.
  - National accounts:
    - FA: Transferable deposits (F22) if directly usable for making payments by check, draft, giro order, direct debit, or direct payment facility.
    - Otherwise: Other deposits (F29)
    - Income: Property income: Interest and similar returns (D41)
  - External sector statistics:
    - FA/IIP: Other investment: currency and deposits: Transferable deposits or other deposits.
    - Income: Primary income: Investment income: Other investment: Interest and similar returns (D41O)

- Instrument 2) Qard-Hasan
  - Notes:
    - Return-free deposits voluntarily placed for needy individuals / social purposes, etc.
  - National accounts:
    - FA: Other deposits (F29)
    - Income: Property income: Interest and similar returns (D41)
  - External sector statistics:
    - FA/IIP: Other investment: currency and deposits: Other deposits.
    - Income: Primary income: Investment income: Other investment: Interest and similar returns (D41O)

- Instrument 3) Mudaraba, or Profit-Sharing Investment Account (PSIA)
  - Notes:
    - Client invests capital and IFI provides entrepreneurship in a commercial venture. Client and IFI share any profits on a pre-determined basis.
    - Commercial venture may be a business, market investment fund, etc.
    - Different categories: restricted / unrestricted Mudaraba; fixed period / continuing basis; Mudaraba may be on-balance or off-balance sheet for IFI.

- Instrument 3) Restricted Mudaraba (or PSIA); on-balance sheet for IFI
  - Notes:
    - Client restricts where, how or for what purpose funds are invested.
    - IFI: on-balance sheet; maintains Statement of Restricted Investment.
  - National accounts:
    - FA: Other deposits (F29)
    - Income: Interest and similar returns (D41)
  - External sector statistics:
    - FA/IIP: Other investment: Currency and deposits: Other deposits
    - Income: Primary income: Investment income: Other investment: Interest and similar returns (D41O)

- Instrument 3) Restricted Mudaraba (or PSIA); off-balance sheet for IFI
  - Notes:
    - Client restricts where, how or for what purpose funds are invested.
    - IFI: off-balance sheet.
  - National accounts:
    - FA: Equity (F51), if imputed to a non-banking sector counterparty.
    - Income: Dividends (D421)
  - External sector statistics:
    - FA/IIP: Portfolio investment: Equity
    - Income: Portfolio investment: Dividends (D42P)

- Instrument 3) Unrestricted Mudaraba (or PSIA)
  - Notes:
    - Management of funds authorized to IFI. Mixing of funds from other sources including shareholder funds permitted.
    - On-balance sheet for IFI; but separate disclosure required.
    - Three types by maturity/status: not fixed maturity; fixed maturity; fixed maturity with Mudaraba certificates.

- Instrument 3) Unrestricted Mudaraba (or PSIA); not-fixed maturity
  - Notes:
    - Management of funds authorized to IFI. Mixing of funds from other sources including shareholder funds permitted.
    - On-balance sheet for IFI; but separate disclosure required.
  - National accounts:
    - FA: Other deposits (F29).
    - Income: Interest and similar returns (D41)
  - External sector statistics:
    - FA/IIP: Other investment: Currency and deposits: Other deposits
    - Income: Primary income: Investment income: Other investment: Interest and similar returns (D41O)

- Instrument 3) Unrestricted Mudaraba (or PSIA); fixed maturity
  - Notes:
    - Management of funds authorized to IFI. Mixing of funds from other sources including shareholder funds permitted.
    - On-balance sheet for IFI; but separate disclosure required.
  - National accounts:
    - FA: Other deposits (F29).
    - Income: Interest and similar returns (D41)
  - External sector statistics:
    - FA/IIP: Other investment: Currency and deposits: Other deposits
    - Income: Primary income: Investment income: Other investment: Interest and similar returns (D41O)

- Instrument 3) Unrestricted Mudaraba (PSIA); fixed period, negotiable certificates
  - Notes:
    - Management of funds authorized to IFI. Mixing of funds from other sources including shareholder funds permitted.
    - On-balance sheet for IFI; but separate disclosure required.
  - National accounts:
    - FA: Debt securities (F3); or Equity securities (F5), if claim on residual value of (IFI).
    - Income: Interest and similar returns (D41); or Dividends (D421).
  - External sector statistics:
    - FA/IIP: Portfolio investment: Debt security; or Equity security
    - Income: Primary income: Portfolio investment: Debt securities or Equity securities: Interest and similar returns (D41P); or Dividends (D42P)

- Instrument 4) Participation term certificates
  - Notes:
    - Long-term investment instrument that entitle holder to share of the corporation’s profit.
    - Treat as equity if part of the capital base of the issuer.
  - National accounts:
    - FA: Debt security (F3) or Equity security (F5)
    - Income: Interest and similar returns (D41); or Dividends (D421).
  - External sector statistics:
    - FA/IIP: Portfolio investment: Debt or Equity securities
    - Income: Primary income: Portfolio investment: Debt or Equity securities: Interest and similar returns (D41P); or Dividends (D42P)

- Instrument 5) Profit and loss-sharing certificates
  - Notes:
    - Investors’ deposits that resemble shares in a company, but do not provide a claim on residual value of IFI and participation in its governance.
  - National accounts:
    - FA: Other deposits (F29), if not negotiable; otherwise, Debt securities (F3)
    - Income: Interest and similar returns (D41)
  - External sector statistics:
    - FA/IIP: Other investment: currency and deposits; or, Portfolio investment: Debt securities
    - Income: Primary income: Investment income: Other investment: Interest and similar returns (D41O). Or Portfolio investment: Interest and similar returns

- Instrument 6) Sukuk
  - Notes:
    - Investment certificates issued/originated by IFIs. Sukuk can be securitization vehicles overlying multiple alternative contractual arrangements.
    - If issued by a special purpose entity (SPE), consider whether SPE constitutes an institutional unit, and is counterparty. Sukuk may have:
      - Equity-like features, e.g. Musharaka (pure partnership), Mudaraba.
      - Fixed-income features, e.g. Murabaha, Salam, Istisna’a (sale-based) or Ijarah (lease-based).
      - Variable profile / hybrid features, e.g. Wakalah, hybrid basis.
  - National accounts:
    - FA: Equity securities (F5); or Debt securities (F3), depending on type of Sukuk.
    - Income: Dividends (D421); or Interest and similar returns (D41).
  - External sector statistics:
    - FA/IIP: Portfolio investment: Debt securities or Equity securities.
    - Income: Primary income: Portfolio investment: Interest and similar returns (D41P); or, Equity securities, Dividends (D42P)

- Instrument 7) Wakalah deposits
  - Notes:
    - Bank acts as agent for depositor, charging a fee, e.g. 1.5% to 2%.
    - Investors are offered an indicative return; actual return may differ. IFI can retain excess of profits over indicative return; has incentive to cancel fee.
  - National accounts:
    - FA: Transferable deposits (F22), if applicable; or Other deposits (F29)
    - Income: Property income: Interest and similar return (D41).
  - External sector statistics:
    - FA/IIP: Other investment: currency and deposits: Transferable deposits or other deposits.
    - Income: Primary income: Investment income: Other investment: Interest and similar returns (D41O)

### B. Uses of Funds
- Instrument 1) Qard-Hasan financing
  - Notes:
    - Financing offered to needy individuals or for a social purpose. No formal fees charged, but debtor at their discretion may pay additional amount as a token of appreciation to creditor.
    - As discretionary payments conform to an established norm for Qard-Hasan, treat as Interest and similar returns (D41).
  - National accounts:
    - FA: Loans (F4)
    - Income: Property income: Interest and similar returns (D41)
  - External sector statistics:
    - FA/IIP: Other investment: loans (F4).
    - Income: Primary income: Investment income: Other investment: Interest and similar returns (D41O)

- Instrument 2) Murabaha
  - Notes:
    - Form of purchase finance: IFI sells goods to client at cost plus agreed profit.
    - Price of underlying goods is disclosed to client.
  - National accounts:
    - FA: Loans (F4)
    - Income: Property income: Interest and similar returns (D41)
  - External sector statistics:
    - FA/IIP: Other investment: loans.
    - Income: Primary income: Investment income: Other investment: Interest and similar returns (D41O)

- Instrument 3) Bai Muajjal
  - Notes:
    - Form of purchase finance similar to Murabaha: IFI sells goods in form of 'Sale on credit' with no necessary mark-up profit. Both profit and loss may arise under the transaction.
    - There is no obligation to disclose the cost price and the profit mark-up separately to the Client.
  - National accounts:
    - FA: Loans (F4)
    - Income: Property income: Interest and similar returns (D41)
  - External sector statistics:
    - FA/IIP: Other investment: loans.
    - Income: Primary income: Investment income: Other investment: Interest and similar returns (D41O)

- Instrument 4) Bai Salam
  - Notes:
    - Form of supplier finance: IFI buys goods in advance from client at discount to expected future price. The profit is the difference between the spot payment and the future value of the goods.
    - IFI may undertake a second contract of “Parallel Salam” where it becomes seller of goods in advance to a third party. The two contracts must be independent.
  - National accounts:
    - FA: Loans (F4), if goods not for IFI own use. If goods for own use of lender, then Trade credit (F81).
    - Income: Property income: Interest and similar returns (D41)
  - External sector statistics:
    - FA/IIP: Other investment: loans; or, trade credit.
    - Income: Primary income: Investment income: Other investment: Interest and similar returns. (D41O)

- Instrument 5.1) Istisna’a
  - Notes:
    - Typically, a form of construction or project finance.
    - Profit is difference between payment to Contractor and deferred payment by Customer.
    - Trade credit if project / building for lender’s own use; otherwise loans.
  - National accounts:
    - FA: Loans (F4); or, Trade Credit and advances (F81)
    - Income: Property income: Interest and similar returns (D41)
  - External sector statistics:
    - FA/IIP: Other investment: loans; or, trade credit.
    - Income: Primary income: Investment income: Other investment: Interest and similar returns (D41O)

- Instrument 5.2) Ju’alah
  - Notes:
    - Ju’alah is essentially an Istisna’a contract applicable to provision of services.
    - Profit is difference between payment to Contractor and deferred payment by Customer.
    - Trade credit if project / building for lender’s own use; otherwise loans.
  - National accounts:
    - FA: Loans (F4); or, Trade Credit and advances (F81)
    - Income: Property income: Interest and similar returns (D41)
  - External sector statistics:
    - FA/IIP: Other investment: loans; or, trade credit.
    - Income: Primary income: Investment income: Other investment: Interest and similar returns (D41O)

- Instrument 6) Ijarah
  - Notes:
    - Contract wherein a lessor (mu’ajjir) leases physical asset or property to a lessee (musta’jir) who receives benefits associated with ownership against predetermined rentals for a known time period.
    - Ijarah comparable (but not identical) to conventional leasing with two types:
      - Operating Ijarah < similar to > operating lease
      - Financing Ijarah < similar to > financial lease
    - A financing Ijarah involves a second contract for the transfer of ownership at the end of the period (promise of sale or gift to be recorded in a separate document).
  - National accounts:
    - [Operating Ijarah] PA: Production account: market output (P11)
    - [Financing Ijarah] FA: Loans (F4)
    - Income: Interest and similar return (D41)
  - External sector statistics:
    - [Operating Ijarah] CA: Trade in Services: Other business services
    - [Financing Ijarah] FA/IIP: Other investment: Loans (F4)
    - Income: Primary income: Investment income: Other investment: Interest and similar return (D41)

- Instrument 7) Musharaka
  - Notes:
    - Partnership between IFI and enterprise in which each party contributes capital, and profits and losses are shared by pre-agreed ratio.
    - IFI contribution can be equity or loan participation.
  - National accounts:
    - FA: Loans (F4); or, Equity (F5)
    - Income: Interest and similar returns (D41); or, Dividends (D421)
  - External sector statistics:
    - FA/IIP: Other investment: loans; or, Portfolio investment: Equity security.
    - Income: Primary income: Investment income:
      - Other investment: Interest and similar returns (D41O).
      - Portfolio income: Equity securities: Dividends (D42P)

- Instrument 8) Mudaraba financing
  - Notes:
    - Partnership where IFI provides capital and client provides labour and skills. Fixed term.
    - Profits are shared by agreement; losses (subject to exceptions) borne by IFI.
    - Mudaraba classified as loan, not equity.
  - National accounts:
    - FA: Loans (F4)
    - Income: Interest and similar returns (D41)
  - External sector statistics:
    - FA/IIP: Other investment: loans
    - Income: Primary income: Investment income: Other investment: Interest and similar returns (D41O)

- Instrument 9) Tawarruq financing (commodity Murabaha)
  - Notes:
    - Extension of Murabaha, also termed ‘commodity Murabaha’.
    - Financing arrangement enabling buyer to purchase asset on deferred payment basis and to sell it to a third party at a lower price on spot basis for liquidity management.
    - Not widely used due to conflicting views of different Islamic scholars.
  - National accounts:
    - FA: Loans (F4)
    - Income: Interest and similar returns (D41)
  - External sector statistics:
    - FA/IIP: Other investment: loans.
    - Income: Primary income: Investment income: Other investment: Interest and similar returns (D41O)

- Instrument 10) Bai bil Wafa, Bai bil-Istighlal
  - Notes:
    - A sale in which seller has contractual right to repurchase underlying asset from buyer at the same price. Buyer pledges to sell back the asset to the original owner at a fixed future date.
  - National accounts:
    - FA: Loans (F4)
    - Income: Interest and similar returns (D41)
  - External sector statistics:
    - FA/IIP: Other investment: loans.
    - Income: Primary income: Investment income: Other investment: Interest and similar returns (D41O)

- Instrument 11) Istijrar
  - Notes:
    - Commodities financing under a single agreement with different instalments; sale price computed as the average of market prices during financing period based on a public undisputed source of price information.
    - Contract has embedded options for buyer and IFI to fix sale price at a different predetermined level; embedded options are not tradable and contract is backed by real purchase, ownership and sale of a commodity.
  - National accounts:
    - FA: Trade credit and advances (F81)
    - Income: Interest and similar returns (D41)
  - External sector statistics:
    - FA/IIP: Other investment: trade credit and advances.
    - Income: Primary income: Investment income: Other investment: Interest and similar returns (D41O)

*Annex C: Diagrams illustrating the flows between Islamic financial corporations and their clients, IMF.*

### Annex D: Sectorization of Islamic financial corporations and methods to calculate their output

### Annex D: Sectorization of Islamic financial corporations and methods to calculate their output

### Sectorization framework and general methods
- Central Bank (S121)
  - Generic examples: Central Bank, Monetary Authority
  - Examples of financial services provided: Monetary policy services
  - Proposed method to calculate output:
    - Monetary policy services — Sum of costs
    - Financial intermediation services — FISIM formula
    - Borderline cases, such as supervisory services — Market output: explicit fees; Non-market output: Sum of costs

- Deposit-taking corporations except the central bank (S122)
  - Generic examples: Islamic Banks, Commerce and Development Banks, Online Banks, Commercial Banks, Islamic Microfinance Banks, Islamic Windows in conventional Banks
  - Examples of financial services provided: Financial intermediation services
  - Proposed method to calculate output:
    - Output is a combination of:
      - (a) For loans and deposits, FISIM formula: (rL–rr)×YL+(rr–rD)×YD, where rL, rD, rr, YL and YD represent the loan dividend rate, deposit dividend rate, reference rate, average stock of loans and average stock of deposits, respectively
      - (b) Explicit fees

- Money market funds (MMFs) (S123)
  - Generic example: Sharī`ah-compliant MMFs
  - Examples of financial services provided: Sharī`ah-compliant investment services
  - Proposed method to calculate output:
    - Output and value added of Islamic MMFs treated the same way as conventional MMFs
    - Output may be computed as the sum of various fees that MMFs charge investors: purchase and redemption fees, exchange fees, account fees, and operating fees

- Non-MMF investment funds (S124)
  - Generic example: Sharī`ah-compliant Non-MMF investment funds
  - Examples of financial services provided: Sharī`ah-compliant investment services
  - Proposed method to calculate output:
    - Output and value added treated the same way as conventional non-MMFs
    - Output may be computed as the sum of various fees that non-MMFs charge investors: purchase and redemption fees, exchange fees, account fees, and operating fees
    - For off-balance sheet restricted investment accounts (e.g., Hajj Funds), FISIM on loans such as Murabaha or Ijarah may need to be calculated

- Other financial intermediaries except insurance corporations and pension funds (S125)
  - Generic examples: Islamic investment banks, Investment companies
  - Examples of financial services provided:
    - Sharī`ah-compliant (advisory) investment banking services such as structured finance (Istisna’a or Ijarah), investment placement, raising funds (often on the basis of joint Mudaraba) in equity and debt markets and trade finance (Murabaha contracts dominant)
    - Murabaha or Bai Ajel installment sales
  - Proposed method to calculate output:
    - Output is a combination of:
      - (a) Explicit fees
      - (b) Implicit financial service charge calculated as (rL–rr)×YL, where rL, rr and YL represent the lending return, reference rate and average stock of loans, respectively

- Financial auxiliaries (S126)
  - Generic examples: Asset management corporations complying with Sharī`ah
  - Examples of financial services provided: Management of Sharī`ah-compliant investments and funds; Brokerage (e.g., takaful products)
  - Proposed method to calculate output: Explicit fees

- Takaful and retakaful operators
  - Examples of services: Manage and administer takaful and retakaful funds on behalf of participants; Sharī`ah advisors required in many countries
  - Proposed method to calculate output:
    - Output of takaful and retakaful operators calculated as the wakalah fees they charge to administer takaful and retakaful funds and/or the share of profits earned from investing takaful and retakaful funds
    - Sum of costs for certain activities (as indicated)

- Captive financial institutions and money lenders (S127)
  - Generic examples: Holding companies, Sharī`ah-compliant money lenders, Waqf funds
  - Examples of services: Holding of assets at controlling levels of equity; Sharī`ah-compliant money lending services; Holding Waqf assets and working on growth and development
  - Proposed method to calculate output:
    - Holding companies, Waqf funds — Output calculated as the sum of costs
    - Sharī`ah-compliant money lenders — Output is a combination of:
      - (a) Explicit fees
      - (b) Implicit financial service charge calculated as (rL–rr)×YL, where rL, rr and YL represent the lending return, reference rate and average stock of loans, respectively

- Insurance corporations (S128) and Takaful windows
  - Generic examples: Takaful funds, Retakaful funds, Family takaful plans, General takaful plans, Retakaful undertakings
  - Proposed method to calculate output:
    - Output of takaful and retakaful funds computed as the wakalah fees they pay to takaful operators and/or the share of profit payable to takaful operators plus other intermediate consumption, if any
    - Output is calculated using the insurance formulae in the 2008 SNA
    - The “light” version of takaful observed in some economies (less complex/compliant arrangements where insurance contracts do not have to segregate takaful operators and takaful funds) is considered similar to conventional insurance arrangements and thus the combined unit is sectorized into the insurance corporations subsector (S128)

- Pension funds (S129)
  - Generic examples: Defined contribution pension funds, Defined benefit pension funds
  - Examples of services: Pension fund services
  - Proposed method to calculate output: Sum of costs

### FISIM and formulas preserved for Islamic finance
- The FISIM formula for loans and deposits recommended for deposit-taking corporations (S122):
  - (rL–rr)×YL+(rr–rD)×YD, where rL, rD, rr, YL and YD represent the loan dividend rate, deposit dividend rate, reference rate, average stock of loans and average stock of deposits, respectively
- The implicit financial service charge for other intermediaries may be calculated as:
  - (rL–rr)×YL, where rL, rr and YL represent the lending return, reference rate and average stock of loans, respectively
- Recommendations on FISIM:
  - Retain the 2008 concept, formula, instrument scope and terminology for FISIM as applied to Islamic financial intermediation activities
  - Include a clarifying footnote (to para 10.126 of BPM6 and para 6.163 of the 2008 SNA): "FISIM should likewise be understood to arise in Islamic banking services whenever there are margins between rates of profit (or, 'interest and similar returns') on depositor or borrower funds."

### Terminology and classification changes proposed for SNA/BPM6
- Terminological change: replace or interpret references to "interest" as "interest and similar returns" to account for returns in Islamic finance that are typically termed 'profits' or 'gifts'
- Optional supplementary sub-category recommendation:
  - Create a sub-category within Interest and similar returns (D41) to present the investment income for Islamic deposits, loans and debt securities
  - Proposed label: "Interest and similar returns: of which Investment income on Islamic deposits, loans and debt securities"
  - Proposed code convention: XD41IS (supplementary item with 'X' and suffix 'IS' to refer to 'Islamic' income)
- Suggested amendments to SNA text (paragraph references preserved exactly):
  - Amend paragraph 7.113 and add new paragraphs (7.114 and following text) to clarify that:
    - Interest and similar returns is receivable by owners of deposits, debt securities, loans and possibly other accounts receivable
    - In the context of Islamic finance, prohibition of 'riba' means finance providers may not impose a fixed or unconditional finance charge independent of borrower use; terminology such as 'profits' or 'gifts' is typically used
    - "Interest and similar returns also includes profits receivable or other expected accruals of rewards such as gifts, that are earned by providers of finance in the context of Islamic finance, on financial instruments that are classified as: deposits, debt securities, loans and (possibly) other accounts receivable."
    - For economies with significant Islamic financial activities, consider optional supplementary sub-category XD41IS
- BPM6 amendment:
  - Amend paragraph 11.48 to reflect that interest and similar returns is a form of investment income for deposits, debt securities, loans, and other accounts receivable, and that some flows may instead be commissions or fees (see paragraphs 10.118–10.136 on financial services)

### Guidance and compilation support
- Recommendation to include a short introduction on applicability of the SNA to Islamic finance under "Expanding the Scope of the SNA" (Chapter 1, Section G) and to anticipate development of an Islamic finance compilation guide providing practical guidance and numerical examples
- For BPM6, consider where to place equivalent introductory material, noting BPM6 structure differs from SNA
- Existing references (e.g., para 5.16) to older manuals (Monetary and Financial Statistics Manual 2000) should be reconsidered and possibly updated to refer to a new compilation guide
- Not all references to 'interest' should be changed; the formulation 'Interest and similar returns' should be used where formal listings of property income concepts occur (e.g., para 7.111 and Annex 1 in SNA) and in similar tables in the BPM
- Issue 5.2 (Reference rates to calculate FISIM): current draft indicates no conclusive view; when resolved, consider an appropriate recommendation

*International Monetary Fund guidance note (Annex D, Annex E, Annex F excerpts).*

### 4. In  order  to  be  compliant  with  Islamic  principles,  in  many  cases  an  Islamic  financial

### if1-islamic-finance-endorsed - 4. In  order  to  be  compliant  with  Islamic  principles,  in  many  cases  an  Islamic  financial

### Classification of returns and recommended terminology
- Islamic financial instruments frequently generate an anticipated amount of profit that "may be more or less dependable as to its magnitude, but cannot be fixed in advance with certainty."
- Criterion for classification:
  - Where an Islamic financial instrument is designed to produce a profit with a "comparatively high reliability as to its magnitude," the instrument should be classified as a debt instrument, yielding "interest and similar returns" as a flow of income.
- Recommended terminology:
  - The guidance note recommends the terminology "interest and similar returns".
  - This terminology is reflected in Table F.1.1 and Table F.1.2.
  - Table F.1.2 shows the optional category "Returns on Islamic deposits, loans and debt securities" for economies where Islamic finance is prevalent.

### Integration into SNA / BPM frameworks and sub-task team work
- Key findings of the sub-task team on terminology for investment income:
  - It is possible to integrate Islamic financial activities into the conventional macroeconomic statistical frameworks without necessarily revisiting them.
  - The sub-task team coordinated with the classification sub-task to develop alternative options to describe broader interest-like returns on Islamic deposits, loans and debt securities and proposed which paragraphs of the 2008 SNA and BPM6 should be changed to incorporate the proposed terminology.

### Equity vs debt recording for participative arrangements
- Mudaraba and similar participative, longer-term arrangements:
  - Their participative and longer-term nature might suggest a quasi-equity flavour.
  - An equity recording is only possible in the SNA / BPM frameworks if the financial venture involves the creation of an institutional unit (or a notional unit) acting as a distinct corporation or quasi-corporation.
  - Where no such institutional unit exists, it is difficult to avoid classifying the arrangement as a debt relationship.

### Presentation in primary income accounts (Table references and codes)
- Table F.1.1: Overview of the Primary Income Account in table 11.1 of BPM6 (selected lines and codes preserved)
  - Investment income
    - Direct investment
      - Income on equity and investment fund shares
      - Dividends and withdrawals from income of quasi-corporations
      - Reinvested earnings
      - Interest and similar returns (D41D)
    - Portfolio investment
      - Income on equity and investment fund shares
      - Dividends on equity other than investment fund shares
      - Investment income attributable to investment fund shareholders
      - Dividends on investment fund shares
      - Reinvested earnings on investment fund shares
      - Interest and similar returns (D41P)
    - Other investment
      - Withdrawals from income of quasi-corporations
      - Interest and similar returns (D41O)
    - Reserve assets
      - Income on equity and investment fund shares
      - Interest and similar returns (D41R)
- Table F.1.2: Change to property income in the 2008 SNA (current → suggestion)
  - D4 Property income
  - D41 Interest → D.41 Interest and similar returns
    - of which: Returns on Islamic deposits, loans and debt securities
  - D42 Distributed income of corporations
    - D421 Dividends
    - D422 Withdrawals from income of quasi-corporations
  - D43 Reinvested earnings on direct foreign investment
  - D44 Other investment income
    - D441 Investment income attributable to insurance policy holders
    - D442 Investment income payable on pension entitlements
    - D443 Investment income attributable to collective investment fund shareholders
  - D45 Rent

### Sectorization and output of Islamic financial entities (Annex F.2)
- Core Shari’ah principles affecting classification:
  - Prohibition of 'riba' (normally translated as interest), products with excessive doubts (gharar), and gambling.
  - Transactions backed by real economic activities and the sharing of risks in economic transactions.
- Features of Islamic financial institutions (IFIs):
  - IFIs use various contracts to obtain funds and provide financing; a single IFI can deal with multiple activities and multiple types of contracts.
  - Off-balance sheet restricted investment accounts:
    - Do not provide the IFI authority over use/deployment of funds; account holders impose restrictions on where/how funds are invested.
    - Underlying assets and liabilities are not reported on the balance sheets of the IFIs.
    - Investments from these accounts are not guaranteed by IFIs, deposit insurance schemes, or any third party.
    - Clients face restrictions and penalties for early withdrawal; penalties are proportional to the percentage of their investments in the investment funds.
- Islamic windows:
  - Separate parts of conventional institutions providing Islamic financial services.
  - Often expected to be separate from parent institution and to keep separate financial reports.
  - Islamic windows considered here: established within conventional banks to take deposits according to the Mudaraba contract; conventional banks required to maintain a full set of accounts for these windows and have independent management and a Shari’ah Council.

### Waqf, Hajj funds, and classification guidance
- Waqf institutions:
  - Historical arrangement separating legal and beneficial ownership to apply assets for charitable or private purposes.
  - Charitable waqf institutions not controlled by government are highly applicable to the 2008 SNA concept of non-profit institutions serving households (NPISHs).
  - Investment management strategies should be classified according to particular circumstances in line with the 2008 SNA.
  - Example classifications for assets held by a waqf: deposit (F21), investment fund (F522), counterparts S122 or S123/S124, or contracting fund manager in S126 while retaining assets on own balance sheet.
  - Waqf fund concept for guidance: a charitable institution contracts with a fund manager to establish a dedicated, open-ended Shari’ah-compliant asset fund open to the public; the charitable institution is the economic owner of all units; donor investments constitute irrevocable donations; fund management fees apply; the waqf fund keeps a complete set of accounts.
- Hajj funds:
  - Savings plans associated with pilgrimage (Hajj) are becoming popular; can be market arrangements or involve subsidies.
  - Classification follows normal criteria (market producer, government ownership/control, NPISH).
  - Recommended use of the term "Hajj fund" for a market enterprise managing long-term savings open to individuals intending to undertake Hajj in compliance with Shari’ah principles.
  - Hajj funds may be professionally managed collective investment schemes with a long-term horizon; savings are invested using different Islamic financial instruments including restricted investment accounts.

### Economic ownership of non-financial assets and accounting (Annex F.3)
- Islamic financial corporations often record legal ownership of underlying non-financial assets in their balance sheets even if held briefly, consistent with Islamic accounting frameworks such as the IFSB’s DFS.
  - An Islamic bank must have legal ownership of the underlying assets even if only instantaneously, during which the bank incurs risks and rewards.
- Accounting framework and balance sheet structure:
  - Defined as recording, summarizing and reporting transactions to provide an accurate picture of financial position and performance.
  - Determination of amounts at which assets, liabilities and equity of investment account holders and owners are recognized in the IFI’s statement of financial position.
  - Economic ownership and changes in ownership are fundamental to compilation of macro-economic accounts; recording occurs when ownership is acquired by the IFI.
- Typical Islamic financing arrangements listed:
  - Murabaha, diminishing Musharaka, Mudaraba, Bai Salam, Istisna'a, Bai Muajjal, operating Ijarah, financing Ijarah, and Tawarruq.
  - These arrangements are typically based on trading models or profit and loss sharing models involving underlying real non-financial assets.
- Operating Ijarah vs financial Ijarah (Table F.3.1 highlights)
  - Definition:
    - Operating Ijarah: lease where all risks and rewards remain with the lessor; asset returned after lease term.
    - Financial Ijarah: risks and rewards related to ownership are transferred to the lessee.
  - Ownership:
    - Operating Ijarah: ownership remains with lessor during the lease.
    - Financial Ijarah: ownership transfer option available at end of lease period; title may or may not be transferred.
  - Accounting effect:
    - Operating Ijarah treated like renting; lease payments treated as operating expenses; asset does not show on balance sheet.
    - Financial Ijarah treated like a loan; asset appears on the balance sheet.
  - Purchase option:
    - Operating Ijarah: no purchase option during leasing period.
    - Financial Ijarah: lessee has option to buy during leasing period.
  - Lease term:
    - Operating Ijarah: lease term < 75% of projected useful life of asset.
    - Financial Ijarah: lease term generally the substantial economic life of asset.
  - Expenses borne:
    - Operating Ijarah: lessee pays monthly lease payment; other expenses borne by lessor.
    - Financial Ijarah: lessee bears insurance, maintenance and taxes.
  - Tax benefit:
    - Operating Ijarah: lease payment considered expense; no depreciation claim by lessee.
    - Financial Ijarah: lessee can claim both interest and depreciation.
  - Running and administrative costs:
    - Operating Ijarah: borne by lessor.
    - Financial Ijarah: borne by lessee.
  - Examples:
    - Operating Ijarah: projectors, computers, laptops, coffee dispensers.
    - Financial Ijarah: plant and machinery, land, office building.

### Measuring financial services by Islamic deposit-taking corporations and reference rates (Annex F.4)
- Two views on measurement of financial services by Islamic deposit-taking corporations:
  - First view (option 1 in issue 5.1 in the guidance note):
    - Supports measuring financial services provided by Islamic deposit-taking corporations using the FISIM formula in the 2008 SNA.
    - Basis: Islamic deposit-taking corporations provide an intermediation mechanism like conventional deposit-taking corporations allowing surplus units to lend to deficit units.
    - Interpretation: the SNA is a general system intended to cover a wide range of circumstances and should not apply differently to different segments of society.
    - The prohibition of interest under Shari’ah does not imply exclusion of financial intermediation; the FISIM core concept in the 2008 SNA that applies to conventional deposit-taking corporations also applies to Islamic deposit-taking corporations.

*International Monetary Fund — if1-islamic-finance-endorsed (selected guidance note excerpts)*

### 3. The alternative view (i.e., option 2 in issue 5.1 in the guidance note) notes that the concept

### 3. The alternative view (i.e., option 2 in issue 5.1 in the guidance note) notes that the concept

### Alternative concept for measuring financial intermediation by Islamic deposit-taking corporations
- The alternative view notes that the concept of FISIM does not apply to Islamic deposit-taking corporations as Sha’riah prohibits interest.
- In interest free systems, returns can be generated by sharing the risk involved in profit-sharing arrangements between Islamic deposit-taking corporations and their clients.
- With profit-and-loss arrangements, Islamic deposit-taking corporations do not levy interest as such but rather participate in the yield resulting from the use of funds, while proceeds and losses are divided between depositors and the Islamic deposit-taking corporations.17
- This process can help derive estimates of bank production directly without reference to interest and the FISIM method.18
- The financial intermediation services provided by Islamic deposit-taking corporations can instead be directly measured as:
  - the sum of income generated on Islamic loan-like instruments less the distributions paid on Islamic deposit-like instruments.
- This view can be described as an alternative concept of interest-like production provided by Islamic banking — “Islamic Financial Intermediation Services (IsFIS) is similar to the method to estimate FISIM in the 1993 SNA.”19

### Divergent views on the choice of reference rates for FISIM applied to Islamic institutions
- Supporters of using the FISIM formula in the 2008 SNA to measure services of Islamic deposit-taking corporations nonetheless differ on reference-rate choice.

- First view (option 1 in issue 5.2):
  - Supports the use of one unique reference rate in the calculation of Islamic and conventional FISIM on deposits and loans denominated in the same currency.
  - This view is consistent with guidance in the 2008 SNA and BPM6.
  - Preference for a single reference rate is driven by the view that FISIM should include liquidity transformation services and recognition that excluding liquidity transformation services would often result in implausibly low estimates of a bank’s output.
  - The basis and calculation of that single reference rate should reflect national circumstances.20
  - A single rate should be used for transactions in the domestic currency, whereas different rates should be applied for loans and deposits in other currencies.

- Second view (option 2 in issue 5.2):
  - Supports the use of one unique reference rate with explicit recognition of different risk profiles for Islamic deposit-taking corporations.
  - Notes the unresolved treatment of credit default risk (CDR) in FISIM for conventional loans discussed at prior AEG meetings; there was no consensus on whether to exclude or include CDR.
  - Observes that some Islamic arrangements, such as profit-sharing investment accounts (PSIA), share gains or losses between the bank and the investment account holder (IAH), which may be different in nature from the conventional CDR discussion.21

- Third view (option 3 in issue 5.2):
  - Supports using different reference rates to calculate conventional and Islamic FISIM on deposits and loans denominated in the same currency.
  - Rationale: prohibition on interest and restrictions to engage only in Shari’ah-compliant (SC) activities will tend to internalize Islamic banking activity within a specific subsector of the general economy, producing a “partial bifurcation” of mixed conventional/Islamic systems.
  - Islamic activity may be limited to an Islamic finance subsector of entities that deposit in Islamic banks and obtain Shari’ah-compliant financing; banks themselves will be constrained to use only SC instruments and transact primarily with other Islamic financial institutions.

### Annex F.5 — Takaful and retakaful: scope and main issues
- Purpose:
  - Discusses treatment of Islamic insurance and reinsurance in national and international accounts.
  - Recognizes structural differences between conventional and Islamic insurance/reinsurance.
  - Examines implications for classification and sectorization of units and for calculation of output, recording of transactions, other flows, and positions of takaful and retakaful.
  - Identifies three main issues after analysing takaful/retakaful types and business models and presents recommendations deserving further practical guidance.

### Takaful/retakaful business arrangements: definitions and structure
- Takaful principles avoid uncertainty, gambling and predetermined interest-based investments; based on mutual assistance (ta’awun), donations commitment (tabarru’) and cooperative risk-sharing.
- Definition cited: “the process in which a group of people, who face certain risk(s), agree that each of them contributes a specific amount, based on cooperation, to a non-profit fund that is to be used for compensating anyone of them for the harms he would encounter when the risk in question materializes, as per signed contracts and adopted regulatory legislations.”22
- Business types:
  - General takaful: protection against material loss or damage on a short-term basis.
  - Family takaful: combination of protection and long-term savings, usually covering more than one year; generally deemed composite unless regulation requires separate registration.
- Retakaful: reinsurance based on Islamic finance principles to mitigate takaful business risk and increase direct insurance capacity; small retakaful markets may lead to significant cross-border retakaful trade.

### Institutional and accounting implications
- Shari’ah principles result in three groups of units in takaful/retakaful arrangements: takaful participants, takaful funds, and takaful operators.
- Takaful funds and takaful operators are required to compile complete and separate sets of accounts, including balance sheets, to conform to Islamic finance accounting standards.23
- A takaful operator is not an insurer in the conventional sense; participants are simultaneously insurer and insured.24
- Two contractual relationship types characterize takaful:
  1. Tabarru’ underlying contract among participants to donate part of contributions to a takaful fund for mutual indemnity.
  2. Contractual relationship between participants and the takaful operator to manage and invest the takaful fund using contracts such as Mudaraba (profit sharing), Wakalah (agency fees), Ju’alah (reward), or combinations.

### Main takaful models and profit/loss allocation
- Four prevailing business models:
  - Mudaraba-based: operator (Mudarib) receives a share of profits from takaful fund investments; losses borne by the takaful fund unless operator negligence.
  - Wakalah-based: operator acts as agent (Wakil) and is paid an agency fee; investment surplus goes to participants.
  - Wakalah-Mudaraba (hybrid): operator receives both a fee and a share of profits.
  - Waqf takaful: surplus retained in the takaful fund by the operator rather than transferred to participants.
- Family takaful typically disaggregates funds into Participants’ Risk Fund (PRF) and Participants’ Investment Fund (PIF); contributions are allocated between PRF (for claims) and PIF (for investment/savings).
- Underwriting surplus:
  - Calculated as excess of participant contributions plus technical reserves and profits, after deducting indemnities and expenses including retakaful.
  - Disposal depends on model: accumulation of reserves, reduction of contribution, charitable donations, and/or distribution to participants; treatment depends on whether surplus transfers to participants (Wakalah), is shared with operator (Mudaraba), or retained (Waqf).

### Recording and measurement implications relative to conventional insurance
- Islamic insurance requires different statistical arrangements because:
  - Service provision may diverge from conventional insurance where service derives as the margin between amounts accruing to companies and to policyholders.
  - Service component is clearly identifiable under wakalah contracts when participants appoint the operator as agent to manage/invest the fund.
  - Options exist for recording share of surplus depending on the adopted takaful business model.
- Consistencies with conventional insurance to observe:
  - Statistical recording of positions and financial transactions, takaful contributions and claims within secondary income, and profits and losses from investment activities within primary income.

### Standards and annexed materials
- Annex F.5.1 lists published standards on takaful and retakaful from AAOIFI and IFSB (standards enumerated in the annex).
- Annex F.5.2 summarizes specific differences between conventional insurance and takaful business arrangements (tabulated contrasts provided).
- Annex F.5.3 provides selected illustrative models for takaful business models (source: IFSB-8 (December 2009)).

---


_Source: https://www.imf.org/-/media/files/data/statistics/bpm6/approved-guidance-notes/if1-islamic-finance-endorsed.pdf_