IMF Survey : Islamic Finance: Meeting Global Aspirations

IMF News, November 9, 2015

Source details

Publication: IMF Survey; November 9, 2015.
Event: Islamic Finance: Meeting Global Aspirations conference taking place on November 11, 2015 in Kuwait City.
Industry scale:
- Worldwide Islamic finance industry assets exceed $1.87 trillion—up from $150 billion in the mid-1990s.
Market reach and inclusion:
- Research suggests over one third of the world's adult population—about 2.5 billion people—lacks access to formal financial services.
Terminology and institutions referenced: Shari’ah, Sukūk, microTakāful, Islamic Financial Services Board (IFSB), International Islamic Liquidity Management Corporation (IILM), Basel Committee on Banking Supervision, Basel III, Financial Sector Assessment Programs (FSAPs).

Drivers of recent growth:
- Core characteristics (profit-and-loss sharing; socially responsible and environmentally sustainable investments; linking finance with real economic activities) gained popularity since the global financial crisis of 2008.
- Rising demand for Shari’ah-compliant retail and corporate services and infrastructure financing in both Islamic and non-Islamic countries, attracting conventional banks via Islamic windows.
- Development of innovative Islamic financial products and instruments—expanding client services but creating supervisory challenges.
- Availability of conducive regulatory frameworks and enabling infrastructure in many countries with legal and regulatory amendments to accommodate Islamic finance.
Remaining structural features and limits:
- Islamic finance remains fragmented, bank-centric, and concentrated in a few countries.
- Islamic financial assets account for only 1 percent of global financial assets.

Market development challenges:
- Low market penetration despite notable strides.
- Heavy bank-centric structure and country concentration.
- Need for improvements in legal, regulatory, and disclosure norms and stronger market infrastructure (including secondary markets) to develop Sukūk for infrastructure financing and sustainable development.
Supervisory and regulatory challenges:
- Ensuring an enabling supervisory, regulatory and legal environment, suitable accounting and auditing frameworks, supportive financial market infrastructure, and capacity building.
- Ensuring consistent application of "rules of the road" set by Islamic standard setters; inconsistent application may stifle development and create systemic vulnerabilities.
- Evolving regulatory issues: ensuring a level playing field for Islamic finance; implementing Basel III reforms; complementing micro with macro-prudential regulations; cross-sector and cross-border supervision; safety nets and resolution regimes.
Liquidity and prudential relevance:
- Sukūk have the potential to serve as high quality liquid assets relevant for Basel III liquidity and capital adequacy frameworks, but market development is required for this role.

Current and past IMF involvement:
- IMF played a key role in the establishment of the IFSB and has an Interdepartmental Working Group for Islamic finance.
Suggested areas for IMF action:
- Provide policy advice and capacity building, including technical assistance and training to strengthen regulation and supervision of Islamic financial institutions and to develop domestic Sukūk markets.
- Focus on delivering key regulatory practices in areas such as liquidity and Shari’ah governance to achieve further convergence.
- Promote further integration of Islamic finance with international financial standards to foster financial stability and improve prudential regulations across jurisdictions, including in the IMF’s annual economic consultations and FSAPs.
- Facilitate assessment of regulation and supervision of the Islamic banking sector using the IFSB Core Principles for Islamic Finance Regulation.

Financial system structure:
- Kuwait has a bank-centric financial system, with the banking sector accounting for about 84 percent of the domestic financial sector.
Islamic finance in Kuwait:
- Islamic finance in Kuwait dates back to 1977 when the first Islamic bank, the Kuwait Finance House, was established.
- Islamic finance now constitutes almost 39 percent of the country’s entire banking system.
Legal and supervisory developments:
- In 2003, the Central Bank of Kuwait promoted a legislative framework by adding a special section to existing Law No. 32 of 1968 to establish prudent regulatory and supervisory policies and procedures for Islamic finance.
- Prudential regulations for Islamic banks were developed drawing from the Basel Committee on Banking Supervision and the IFSB to establish a level playing field between Islamic and conventional banks.
Institutional contributions:
- The Central Bank of Kuwait was a founding member of the IFSB and the IILM and continues active participation through board membership and technical committees.

Foster financial inclusion via Islamic microfinance, financing to small and medium-sized enterprises, and microTakāful, alongside broader efforts to enhance access to basic banking services, regulatory environments, and public financial awareness.
Prioritize consistent application and refinement of regulatory frameworks informed by Basel Committee and IFSB recommendations to reduce systemic vulnerabilities.
Develop Sukūk and other long-term instruments for infrastructure financing by improving legal, regulatory, disclosure norms, and market infrastructure (including secondary markets).
Continue collective stakeholder efforts—industry, regulators, and international institutions—to sustain innovation, market development, and convergence with international financial standards.

IMF Survey : Islamic Finance: Meeting Global Aspirations — November 9, 2015