IFCCR

3.0 THE ISLAMIC FINANCE CENTRES

COMPETITIVE REVIEW
3.1 Overview
The Islamic Finance Centres Competitive Review (IFCCR)
2012 initiated the study of jurisdictions with respect to their
competitiveness within the Islamic nance space. This was slightly
different compared to the previous study conducted for the GIFF
2010 Report, as this time around the survey was designed to
accommodate the theme of bridging business-friendly jurisdictions
with regards to Islamic nance. Each jurisdiction was selected
based not only on the breadth and depth of its Islamic nancial
market, but also the emerging viability and potential for the further
expansion of this edgling industry. Essentially, the survey aimed
to deduce an overall status of development in relation to each
jurisdictions Islamic nancial market and its growth.
The competitiveness of the centres is gauged based on the results
of the IFCCR survey. The survey questions were categorised
by importance and assigned points based on their perceived
signicance and relevance to the development of Islamic nance.
A standardised point scheme was developed to ensure results
were unbiased. From the survey responses collected, points
scored for each question are totalled per section of the survey
(as shown below).
Results are then grouped by country and subsequently averaged
across the six sections. Final rankings came from cumulative
weighted average across sections. To remove any unintended
sampling bias, jurisdictions with more than 10 respondents were
averaged without the top and bottom two respondents by overall
score. Similarly, jurisdictions with below two responses were
excluded unless further information was provided either through
communication with regulators or further research.
Subsequently, the jurisdictions were clustered according to their
overall level of development of its Islamic nance industry, as
determined by the survey responses. The classication used to
cluster these centres were Developed, Emerging and Niche
(as dened below). For further details on the survey methodology
kindly refer to the Appendix.
It was noted that most of the developed markets had scored
highly in all categories under the survey. On the other end of the
ranking, the niche markets scored much lower from the various
sections under the survey. Meanwhile, the emerging markets
scored somewhat in between the scores of the developed and
niche markets and showed a variety of scores under the various
sections of the survey.
From the survey, countries such as Malaysia, the United Arab
Emirates and Bahrain emerged as some of the centres under the
developed cluster. Each of these countries showed a relatively
advanced environment for establishing an Islamic nance
business. The survey also covered a number of emerging countries
that have recently taken steps to develop Islamic nance within
their respective jurisdictions. These include France, Luxembourg,
Turkey and Morocco, and each has given its committment to
bolster the promising growth potential of Islamic nance moving

Distribution of Survey Respondents by

Development of Islamic Finance
Developed
38.0%

Niche
41.0%

Emerging
21.0%

Source: Survey results, KFHR

forward, supported by on-going efforts to develop conducive

regulatory, legislative and supporting infrastructure and framework
necessary to facilitate Islamic nance business operations. The
survey results also revealed interest from advanced economies
with untapped potential for Islamic nance. Some of the niche
markets identied based on the survey results included Australia,
Hong Kong, China and Japan. Centres from the niche cluster
showed promising interest in Islamic nance, comprising a major
portion of the respondents to the survey. This has shed positive
light to the growth momentum of the Islamic nance landscape in
those countries going forward.
Based on the survey, Malaysia has a clear lead in all the areas
examined in the survey (regulation, products and services,
infrastructure, ease of doing Islamic nance business, risk
management and audit, statistics, marketing and education).
This was mainly due to the countrys vision in turning itself into
an Islamic nance powerhouse both regionally and globally.
Various developmental initiatives and enhancements to its
regulatory environment have been implemented over the past
three decades to further facilitate its Islamic nance market.
The result is a robust Islamic nancial market covering a broad
range of asset classes that provide alternative products and
services for almost all conventional offerings. In addition to these
developments, Malaysia has been an active participant in the
promotion of Islamic nance globally; among others becoming an
international disseminator of knowledge of Islamic nance through
internationally acknowledged universities and professional
education/training centres. Going forward, Malaysia is expected
to continue championing the growth of Islamic nance both
regionally and globally.
As one of the Islamic nance focal points in the Middle East, Dubai
plays an important function as the bridge between the European
and Middle Eastern markets. Its Islamic nance industry expanded
rapidly with the establishment of the Dubai International Financial
Centre (DIFC), hence its developed market categorisation under

GIFF 2012

41

IFCCR

the survey. The DIFC is one of the many Free Trade Zones in
Dubai which provides various incentives, including 100.0% tax
exemption, 100.0% foreign ownership, full repatriation of capital
and prots, quick approval procedures and business continuity
facilities. The current infrastructure for its Islamic nance industry
was found to be relatively advanced, with a broad range of
Islamic banking products and services supported by a robust
regulatory environment to regulate and develop the market. The
establishment of a liquidity management tool, in the form of a
Shariah-compliant Facility called the Collateralised Murabahah
Facility (CMF), is an example of the advanced offerings from the
many Islamic equities, funds and takaful products offered in Dubai
Islamic nance market.
One of the new entrants in the list of markets for Islamic nance
is Indonesia, with its vast population of Muslim consumers. The
Indonesian regulatory regime on Islamic nance has so far acted
on a case-by-case basis, initiating amendments as and when
required. Indonesias Islamic nance industry offers a broad range
of products and services, from retail and corporate banking
products, such as car and housing nancing, to syndications and
trade nancing facilities. Credit cards and sophisticated wealth
management products are also in the pipeline. The countrys
overall development in Islamic nance, from the conducive
regulatory support to the broad range of product offerings, makes
it another attractive market in Asia.
France is another new entrant to the IFCCR list this year and
is included as one of the emerging markets for Islamic nance.
The initiatives pursued by the French government have turned
its edgling Islamic nance market into a promising and
attractive proposition for investors. Earlier initiatives included the
introduction of tax and regulatory changes, with the objectives
of facilitating the listing of sukuk, the tax treatment of Islamic
nancial transactions and, to a lesser extent, reforms regarding
duciaries (French trust) in July 2008. Subsequently, the French
government amended its laws in July 2010 to facilitate sukuk
issuances, catering for various Islamic sukuk structures, which
has resulted in increasing the diversity of Frances capital market.
Moving forward, to further spur its relatively new Islamic nance
market, the government is planning to issue additional guidelines
pertaining to other Islamic principles, including Musharakah,
Mudharabah, Salam and Wakalah.
Morocco is another emerging country, with 99.0% of its population
comprising Muslims, and represents a potentially bright market for
Islamic nance. Bank Al-Maghrib, the central bank of Morocco,
has recently examined possible options to regulate and develop
Islamic banking in its jurisdiction. Back in March 2007 Bank AlMaghrib approved the offering of Islamic nancing products like
Murabahah for trade nance, Ijarah for leasing and Musharakah
for joint ventures. Recent reports have speculated on the
possibility of Morocco introducing its rst full-edged Islamic bank
in 2013. In relation to this, there have also been announcements
from the central bank to allow foreign Islamic banks to acquire
equity stakes of up to 49.0% of the shareholding for the new
Islamic bankswhile the remaining 51.0% shareholding would
be subscribed by local players. Despite the challenges faced
in Morocco, such as the absence of tax incentives for certain
products, its Islamic nance market promises to be increasingly
attractive with increasing support from the government.
Despite being a niche market for Islamic nance, Hong Kong
has taken initiatives, through the Hong Kong Monetary Authority

42

GIFF 2012

(HKMA), to position the nancial centre as an Islamic nance hub.

Being an advanced nancial market, like France, the mostcommon
forms of Islamic nancial products in Hong Kong are Islamic funds
and sukuk. Additionally, the HKMA introduced the Hang Seng
Islamic China Index Fund which invests in the constituent stocks
of the Index that comprises selected Shariah-compliant stocks
operated in mainland China and Hong Kong, but are traded on
the Hong Kong Stock Exchange. Hong Kong itself is a potential
Islamic nance hub; with the services of many offshore rms
available, many of the SPVs being formed in other jurisdictions
can support and cater to Hong Kongs Islamic nance initiatives
in a more time and distance-friendly manner. Additionally, the
growth in the number of banks and nancial institutions hosting
Islamic nancial products cements the positive direction of Islamic
nance in Hong Kong.
On the whole, the developed economies have made major strides
in enhancing and developing their respective Islamic nancial
markets in recent years through various legislative amendments,
improvements to the business environments, and through the
growing education and awareness measures introduced. In
jurisdictions where Islamic nance remains nascent, potential lies
particularly in building the necessary infrastructure to encourage
local and cross-border transactions that comply with Shariah
principles, with the objective of improving the ease of doing
Islamic nance business in the respective jurisdictions.
Building the relevant infrastructure for the growth of Islamic nance,
particularly in terms of regulatory foundations in the emerging and
niche markets, has paved the way for the development of Islamic
nancial products and services, which subsequently results in
increased traction in terms of their marketing and distribution. A
positive effect of the increased efforts to develop Islamic nance
is that product innovation has been clearly witnessed in some
countries driven by market forces and regulatory support. These
innovations include the development of short-term products to
meet liquidity needs of Islamic banks, which also act as policy
tools for their respective central banks.
With the growth in products and services offered by Islamic
nancial institutions, the need to augment risk management and
audit has also gained in importance. It was observed that most
countries that had established Islamic nancial institutions would
at least have a Shariah supervisory body overseeing operations,
either at the national or institutional level. In fact, developed
markets could have Shariah supervisory bodies at both levels,
which goes to further enhance the role of Shariah governance
moving forward. With the growth of the Islamic nance market,
the demand for qualied individuals in Islamic nance has
grown tremendously. Specic centres and institutions of higher
education are actively providing Islamic nance related subjects
and courses. Nevertheless, the supply for these trained individuals
remains insufcient, though equilibrium should be reached in
the foreseeable future as Islamic nance related education and
training courses are expected to continue to increase in numbers.
The growth of Islamic nance globally brings huge potential for
bridging active Islamic nance countries with those that are still
in their development stages. This would be highly benecial in
terms of facilitating knowledge transfer and promoting market
best practices. Having effective collaborations amongst these
countries would further drive the growth of Islamic nance across
the various jurisdictions.

IFCCR

Key Details of the IFCCR Survey

A. The six key sections of the survey are:
1.
2.
3.
4.
5.
6.

Regulatory environment;
Products and services;
Infrastructure;
Statistics, marketing and education;
Ease of doing business; and
Risk management and audit.

The above key areas were selected based on market views as to the importance of these areas in benchmarking the
development of the Islamic nance industry in a particular country/ market/ jurisdiction. Countries/ market/ jurisdictions that
scored highly in all six areas would most likely have a developed Islamic nance industry. In this survey, a new area, which is
the Ease of doing Islamic nance business was added from the survey conducted as part of the GIFF 2010 Report in order
to gauge the extent of how business-friendly a particular country/ market/ jurisdiction is with respect to its Islamic nance
industry i.e. availability of necessary infrastructure, required regulatory environment to promote Islamic nance business, etc.
B. The denition of the categories used to cluster the survey respondents/results are:
Developed Countries/ markets/ jurisdictions that scored above 401 points from the survey. These markets have proven
to possess a well-developed Islamic nance industry based on the six key areas of the survey.
Emerging Countries/ markets/ jurisdictions that have scored between 301 to 400 points from the survey. Markets in
which some selected areas under its Islamic nance are in the midst of development or have been developed based on the
six key areas of the survey.
Niche Countries/ markets/ jurisdictions that scored below 300 points from the survey. Markets in which only specic or
niche aspects of Islamic nance are being developed based on the six key areas of the survey. This category also includes
those that are in the midst of studying/ conceptualising the feasibility of Islamic nance industry in respective country/markets/
jurisdictions
C. The survey was distributed across 52 countries/ markets/ jurisdictions. The survey results presented in this report were
majorly based on the actual responses received from participating countries/ markets/ jurisdictions. On questions/ areas
that were not responded, KFHR performed a rigorous and objective gathering of facts from a particular country/ market/
jurisdictions credible sources i.e. regulatory bodies, thus supporting the conclusions arrived at herein.

GIFF 2012

43

IFCCR

Overall Survey Ranking by Country

Overall
Score

Regulation

Malaysia
DIFC
Indonesia
Bahrain
Brunei
Pakistan
Qatar
Bangladesh
UK
UAE
Kuwait

834.2
700.0
677.5
640.0
632.5
617.5
525.0
510.0
495.0
433.3
410.0

201.7
170.0
180.0
167.5
152.5
140.0
135.0
65.0
31.7
108.3
81.7

Lebanon
France
Luxembourg
Sri Lanka
Turkey
Morocco

375.0
370.0
338.0
327.5
321.7
320.0

147.5
65.0
37.0
45.0
50.0
35.0

Hong Kong
India
Canada
USA
Australia
Netherlands
Tanzania
China
Japan

295.0
287.5
265.0
215.0
202.0
150.0
120.0
60.0
20.0

0.0
20.0
15.0
10.0
25.0
10.0
15.0
0.0
0.0

Ease of
Risk
Doing Islamic
Infrastructure
Management
Finance
and Audit
Business
Developed
230.8
157.1
110.2
45.0
220.0
122.5
65.0
42.5
227.5
122.5
42.5
25.0
226.3
81.3
43.8
32.5
220.0
77.5
50.0
45.0
230.0
80.0
60.0
27.5
215.0
35.0
60.0
35.0
220.0
90.0
45.0
30.0
206.7
101.7
48.3
18.3
201.7
58.3
15.0
10.0
203.3
23.3
40.0
10.0
Emerging
120.0
0.0
21.3
23.8
125.0
20.0
65.0
10.0
134.0
52.0
49.0
8.0
162.5
42.5
37.5
2.5
158.3
50.0
28.3
3.3
130.0
65.0
30.0
25.0
Niche
155.0
65.0
10.0
0.0
115.0
57.5
37.5
11.3
155.0
25.0
20.0
5.0
120.0
25.0
10.0
0.0
102.0
8.0
24.0
4.0
5.0
65.0
25.0
10.0
60.0
0.0
5.0
0.0
0.0
15.0
15.0
5.0
-5.0
0.0
0.0
0.0

Products
and
Services

The survey results were from countries that had provide their responses to the survey
Source: KFHR

44

GIFF 2012

Statistic,
Marketing
and
Education
89.4
80.0
80.0
88.8
87.5
80.0
45.0
60.0
88.3
40.0
51.7
62.5
85.0
58.0
37.5
31.7
25.0
60.0
46.3
45.0
50.0
39.0
35.0
40.0
25.0
25.0

IFCCR

3.2 The Survey Results

3.2.1

Regulation and Infrastructure

Survey Results by Region
Regulation and Infrastructure

Africa

Asia

Europe

MENA

North
America

15.0

237.6

100.5

167.0

37.5

Source: Based on survey results; scores averaged by region based only on survey responses by country

Regulation makes for one of the most important foundations of

any Islamic nancial system. In an environment of global nancial
instability, partly due to deregulation in the conventional space,
this survey explores the various jurisdictions and examines the
key regulation needed for a sound Islamic nancial system.

Developed Markets
The characteristic of the developed market is based on the laws
and regulations put in place by the government pertaining to
the Islamic nance industry in each country. It is expected for a
developed market to have the following in terms of regulations of
Islamic nance:

Separate act or legislative framework that governs the Islamic

nance industry in a particular country or jurisdiction.
Regulations governing each segments of Islamic nance in a
particular country or jurisdiction.
Have a dedicated Islamic banking division at the central
banks.

Malaysia has a top-down approach to Islamic nance whereby

the relevant authorities have created an efcient regulatory
environment for the development and growth of the industry.
This approach has created a vibrant two-sided nancial system
where both conventional and Islamic systems work together
harmoniously. The Malaysian authorities have put in place the
most comprehensive set of regulations covering all aspects of the
industry. This has allowed the country to retain its top spot as the
leading player in Islamic nance regulation.
Among the key infrastructure in Malaysia are the trading platform,
i.e. Bursa Suq Al-Sila, which is created to facilitate Islamic
nancial transactions, and the establishment of a national Shariah
Advisory Council (SAC) at each regulatory body that acts as
the ultimate authority for Shariah matters pertaining to Islamic
nance. The SACs serve as the nal arbiters in the interpretation
of Shariah principles in Islamic banking, Islamic capital market
and takaful practices. They also promote the harmonisation of
practices in the industry through the issuance of regulations and
Shariah standards.

Bahrain is the one of the MENA countries that has a strong

regulatory environment for the Islamic nance industry. The Islamic
nance sector has grown considerably in Bahrain since its rst
Islamic bank was licensed in 1979. The government has shown
its commitment in supporting the industry through the installation
of a comprehensive prudential and reporting framework which is
tailor-made specically for the Islamic banking and takaful sector
via the Central Bank of Bahrain. The rulebook for Islamic banks
covers areas such as licensing requirements, capital adequacy,
risk management, business conduct, nancial crime and
disclosure/reporting requirements. There is also a rulebook for the
takaful industry which addresses the specic features of takaful
and re-takaful rms. Both rulebooks were the rst comprehensive
regulatory frameworks that dealt with the Islamic nance industry
in MENA.
In addition to the numerous Islamic nancial institutions active in its
nancial sector, Bahrain also plays host to number of the various
key infrastructure organisations of Islamic nance, including
AAOIFI, IIFM and the IIRA. Together these various organisations
all perform a valuable role together to foster the development of a
strong nancial sector.

Emerging Markets
Among the emerging markets, Lebanon has scored the highest
under the regulation section. The Lebanese government,
represented by Banque du Liban (BDL), the central bank of
Lebanon, has introduced several regulatory and practice-related
policies including Law No. 575 of 2004, which regulate the Islamic
nance industry. The countrys consistent effort to introduce
a sound and prudential regulatory environment, coupled with
the introduction of internationally-accepted best practices,
encourages the ow of investments into the country.
French regulatory authorities have made a number of efforts in
recent years to encourage Islamic nance in the country. The rst
initiative taken was announced in July 2008 by which signicant
tax and regulatory changes aimed at boosting Islamic nance in
France. These changes relate to the listing of sukuk in France,
the tax treatment of Islamic nancial transactions and, to a lesser
GIFF 2012

45

IFCCR

Other Jurisdictions

extent, reforms regarding ducie (French trust). This means that

compensation paid by the issuers of the sukuk is, for tax purposes,
treated just like the interest on a traditional bond offering and is
deductible from taxable income. Additionally, the compensation
paid to non-resident sukuk investors is exempt from withholding
tax in France, regardless of whether the offering is governed
by French law or the laws of another country. In July 2010, the
French government made amendments to its laws in order to
facilitate sukuk issuances. The amendments have cleared double
stamp duty, taxation of capital gains on property, and streamlined
regulations that govern estate agents.

Saudi Arabia has a comprehensive regulatory environment to

accommodate and facilitate the growth of the Islamic nance
industry. Recently in May 2012 the Council of Minister has
approved the Saudi Mortgage Law. The introduction of the law
is a major development for the housing market in the Kingdom
where there are more than 60.0% of households that need
new units due to the young demography in the Kingdom. The
mortgage law allows for greater use of Islamic nancing schemes
within mortgage market such as Murabahah. The nod given by
the government has a huge impact not only to the mortgage
nancing business but also to the mortgage takaful segment as
well.

Niche Markets
Niche markets are characterised by specic regulations and
legislations governing a very limited and specic Islamic nancial
products and services offered in a particular jurisdiction.

Since 2009, Kazakhstan became the rst country in the

Commonwealth of Independent States to introduce fundamental
legislative amendments for purpose of Islamic nance. Among the
legislative acts that have been amended are the Civil Code, the
Tax Code, the Law on Banks and Banking Activities and the Law
on Financial Markets. Furthermore, Chapter 4-1 on requirements
and procedures for establishing and activity of Islamic banks as
well as dening certain Islamic bank products was added to Law
No. 2444 of the Republic of Kazakhstan on Banks and Banking
Activities of 31 August 1995. Such initiatives give clear indications
as to the support of the government of Kazakhstan in facilitating
the growth of Islamic nance industry in the country.

In Australia, the government is working hard to be part of

Islamic nance industry and to position itself to attract a greater
number of Shariah-compliant funds. The government utilises a
combination of market and government mechanism in regulating
its Islamic banking and nance industry. Among the regulatory
bodies that regulate and supervise the Islamic nance industry
in Australia are, The Australian Prudential Regulation Authority
(APRA) which deals with Islamic deposit-taking institutions and
takaful companies, while The Australian Securities and Investment
Commission (ASIC) deals with Islamic fund managers and sukuk
issuer. As for Reserve Bank of Australia (RBA), it is responsible
to ensure stability of the nancial system which covered under
Reserve Bank Act 1959. The Australian government is currently
looking to leverege on tax changes in order to accomodate the
growth of Islamic nance industry in the country

3.2.2

Palestine has made the most headway in terms of its regulatory

environment to accommodate and facilitate the Islamic nance
industry. The Palestinian Monetary Authority is nalising a draft
regulation for the licensing and supervision of all lending and
Islamic nancing companies operating in Palestine. This includes
all non-bank nancial institutions that provide nancial and nonnancial services mainly to the poor and to the micro, small, and
medium-size enterprises.

Products and Services

Survey Results by Region
Products and Services

Africa

Asia

Europe

MENA

North
America

60.0

185.4

142.0

178.6

137.5

Source: Based on survey results; scores averaged by region based only on survey responses by country

Over the course of the past two years, the product range of
Shariah-compliant instruments has made strides in innovating
new ways to raise funds and nance investments. This is
combined with the larger number of jurisdictions actively
marketing and distributing Islamic products and services. In fact,
as the Islamic nance jurisdictions trend remarkably upwards,
product innovation has thriven, giving Islamic nancial institutions
new ways to mobilise funds.

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GIFF 2012

Under this category, questions were designed to assess the

following characteristics:

The various segments in which Islamic nancial products and

services were present.
The utilisation of such products and services in the market.
The qualitative aspect of the various products and services
offered.

IFCCR

The extensiveness of the Islamic nancial products and

services offered within a particular jurisdiction.

By region, Asia came out slightly better than MENA which was
followed by Europe and then North America. The Asian region
has seen a burst of products introduced in the markets over the
previous years on the back of a growing Islamic nance industry
in Indonesia and Pakistan, as well as a level of sophistication
achieved in the developed markets as investors seek a diversied
portfolio amidst a risk adverse sentiment in global markets.

Turkey is one of the key emerging markets at present and has been
at the forefront of product innovation in the MENA and European
regions. Turkey was one of the pioneers of gold accounts at its
participation banks, amongst others, where depositors could
invest in and get direct exposure to the gold commodity market.
Despite this, the country still has much work to do to encourage
a greater number of products and services reach the domestic
market, as well as branch out to its neighbours, particularly
with regards to short-term liquid assets for the countrys four
participation banks.

Developed Markets

Niche Markets

Generally the developed markets had a diverse range of products

across all segments, namely Islamic banking products on both
corporate and retail levels, capital market funds and sukuk
papers, as well as a range of takaful and retakaful options.

The jurisdictions categorised as niche markets are either nascent

markets with recent initiatives or have current impediments which
prevent the distribution of Islamic products and services.
Hong Kong is a prime example of how a niche jurisdiction can
take advantage of the rising wealth and interest in Islamic nance
and utilise it to attract funds into its territory. Despite having very
little domestic demand, Hong Kong managed to domicile both a
benchmark convertible sukuk from Malaysias sovereign wealth
fund as well as a number of Islamic funds giving exposure to the
greater Asia region.

Malaysia was able to continue its market leader status since the
previous GIFF Report 2010, although competition in this area has
increased signicantly given the wide range of products available
for extensive purposes. Malaysia is one of the few countries that
has managed to introduce Shariah-compliant solutions across the
whole spectrum of investments and nancing activities, including
hedging and liquidity management instruments.

Other Jurisdictions

Kuwait this year scored relatively low in this section due to a lack
of awareness of the range of Islamic nancial products. Despite
having a large number of both conventional windows and fulledged institutions in the country with a wide product range,
the exact diversication of such products has not captured the
awareness of the consumer segment. However, the country
remains one of the industrys leaders in terms of banking having
more than USD67.0 billion in total assets as well as one of the
largest depositor bases.

A number of other jurisdictions have also managed to introduce

Islamic nancial products and services in their respective
jurisdictions.

Emerging Markets
An emerging market is characterised by the availability of few
Shariah-compliant products and services and/or the presence of
specic impediments that prevent such products from taking off
as in the case of the developed markets.

3.2.3

The Gambia is a regular issuer of sovereign sukuk papers

for its scal management and for investment opportunities
for its faith conscious business and institutions. Although
the size of the issuances are small, the papers represent an
important development undertaken in the country which so
far only Malaysia, Brunei, Indonesia, Pakistan and Bahrain
have embarked upon i.e. to have regular issuing sovereign
sukuk programmes.
Saudi Arabia is one of the largest nancial markets for
Shariah-compliant products and services which is home to
a large number of investment banks, asset management
companies and takaful operators, all providing a range of
Islamic products and services.

Risk Management and Audit

Survey Results by Region
Risk Management and Audit

Africa

Asia

Europe

MENA

North
America

0.0

29.6

11.5

21.6

2.5

Source: Based on survey results; scores averaged by region based only on survey responses by country

GIFF 2012

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IFCCR

Islamic nance has grown in size and signicance in various

countries throughout the world. In an era of globalisation,
increased market volatility and greater complexity, effective
risk management in Islamic nance deserves priority attention.
Realising the signicance of risk management, the IFSB issued
a comprehensive standards document on risk management, in
which identies and explains different risks and lists 15 guiding
principles of risk management for institutions offering Islamic
nancial services.

Based on the survey results, half of the respondent conrmed that

they have a risk management framework for Islamic nance in
their jurisdictions, however, the availability of both Shariah hedging
and liquidity instruments are yet to be extensively developed and
utilised in the market. Based on the survey ndings, Asia scored
the highest for risk management and audit followed by the MENA
region. One potential reason is the availability of instruments for
liquidity and hedging purposes which is commonly available in the
Asia and MENA (particularly in GCC).

The risk prole of Islamic nancial institutions differs from those of

conventional banking due to the structure and nature of Islamic
nancing techniques.
IFSBs Guiding Principles of Risk Management
General Requirement

Credit Risk

Equity Investment Risk

Guiding Principles

To have comprehensive risk management and reporting

process

To have a strategy for nancing

Carry out a due diligence review
To have a methodology for measuring and reporting credit risk
To have credit risk mitigation techniques

To have a risk management framework for equity investments

Appropriate valuation methodologies
Establish exit strategies

Market Risk

To have appropriate market risk management framework

Liquidity Risk

To have appropriate liquidity management framework

To assume liquidity risk commensurate to the recourse to
funds

Rate of Return Risk

Operational Risk

Establish comprehensive risk management and reporting

process
Appropriate framework for managing displaced commercial
risk
Adequate systems and controls to ensure Shariah-compliance
Appropriate mechanisms to protect fund providers

Source: IFSB, KFHR

Developed Markets
Based on the survey results, jurisdiction under the developed
market such as Malaysia, Brunei, Dubai and Qatar, it is
common for Islamic nancial institutions to have an internal risk
management framework not just in its country of operations but
across the whole group of entities including foreign subsidiaries.
These foreign subsidiaries would refer to the parent companys
group risk management committee and also its Shariah board on
a periodic basis. Jurisdictions under the developed market also
exhibit a broader spectrum method of managing risk with growing
number of Shariah-compliant hedging and liquidity instruments
helping the market players to manage various risks up to the level
of market risk.
In Middle East, the United Arab Emirates (UAE) has recently
structured a liquidity instruments in its domestic market which
justies its developed rank under liquidity and risk management.

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GIFF 2012

The instrument which is called Collateralised Murabahah Facility

(CMF) was introduced to act as a source of liquidity for Islamic
banks in the UAE market. It would also function as a monetary
policy tool for the Central Bank of UAE. Elsewhere, in Malaysia
most of the Islamic banks offer prot rate swap or Islamic forex
swap for the purpose of hedging. Additionally money market
instruments for liquidity management are also widely available in
Malaysia.
Bahrain is home to the International Islamic Financial Market (IIFM)
which has made strides in providing legal documents for the
streamlined implementation of liquidity and hedging instruments.
In June 2012, the 26th IIFM Board of Directors meeting was held in
Singapore to review the IIFM standards development, particularly
the Inter-Bank Unrestricted Wakala and the publication of new
Islamic hedging product standard on Mubadalatul Arbaah (Prot
Rate Swap), as well as the development of future standards
for foreign currency risk mitigation. Such developments is a

IFCCR

testament of the commitment made by the Bahrain-based global

standard setting body to assist the market players in overcoming
the risk management and liquidity issues faced by the industry.

money market instruments known as revenue partnership

certicates for the Islamic banks to invest short-term funds
with underlying revenue generated from government controlled
companies. This type of instrument is a positive step to develop
other feasible instruments which are not just for short-term
placements but for liquidity management as well.

Emerging Markets
As for the emerging countries, an example from the survey i.e.
Turkey, has made positive development in its Islamic nance
industry. The Turkish Islamic banking or participation banking
industry is home to some active Islamic banks. Turkeys jurisdiction
calls for self-governance through the appointment of a Shariah
board to oversee an Islamic nancial institutions activities.

Niche Markets
Given that many of the jurisdictions participating in this years
survey have only recently embarked on providing Shariahcompliant risk management tools, it comes as no surprise to
see the Niche countries scoring almost half of the advanced
markets. However, as the number of nancial institutions
offering Shariah-compliant products and services grows, it can
be expected that risk management techniques and liquidity
management instruments will also ourish.

The country also has an established capital market with a well

regulated stock exchange that has both sukuk and Shariahcompliant Exchange-Traded Funds (ETFs) listed. The countrys
central bank has among others introduced Shariah-compliant

3.2.4

Statistic, Marketing and Education

Survey Results by Region
Statistic, Marketing and Education

Africa

Asia

Europe

MENA

North
America

40.0

70.3

67.5

57.7

47.5

Source: Based on survey results; scores averaged by region based only on survey responses by country

Statistics, marketing and education are important ingredients in the

development of Islamic nance. Availability of data and statistics
helps to gauge the pulse of the industry and helps to identify
the gaps that exist in the industry and facilitate market players
to make informed decision that would best serve its interest.
Similarly, marketing also plays a pivotal role in disseminating the
available opportunities in Islamic nance and can be a useful
tool correct the misconception on Islamic nance. Education is
another key area for Islamic nance as it helps to raise awareness
among society, especially to consumers who are new to Islamic
nance. Education also plays a key role in supplying the right
blend of talent to support the growing need of the industry.
Based on the survey result, the Asia region came out on top in
the Statistics, Marketing and Education segment followed by
Europe and MENA. This can be attributed to the growing number
of Islamic nance related activities amongst the Asian countries
which resulted in the increase of data reporting and promotion
initiatives by respective regulatory authority as well as the market
participants.
Under this category (Statistics, Marketing and Education),
questions were designed to assess the following characteristics:

Availability of data/information for different Islamic nance

asset class including regulations.
Awareness on the Islamic nance industry (regulations and
availability of Shariah-compliant products and services).
Efforts/initiatives in promoting Islamic nance through
different channels.
Availability of talent development programmes to support the
Islamic nance industry.

Developed Markets
Malaysia which came on top on all indicators (Statistics, Marketing
and Education) remains the best jurisdiction in providing statistics
for Islamic nance. Statistics and guidelines on Islamic banking
and takaful are easily accessible via the Bank Negara Malaysia
website. It provides the breakdown of numbers between fulledged Islamic banking assets and Islamic windows as well as
the breakdown between insurance and takaful companies. As
for data and information on capital market, the complete set of
numbers and regulations can be accessed via the Securities
Commissions website and its quarterly bulletins detailing all asset
classes available such as sukuk, Islamic REITS, Islamic securities,
Islamic funds and others.

GIFF 2012

49

IFCCR

The Malaysia International Islamic Financial Centre (MIFC) initiative

which was launched back in 2006 has certainly helped Malaysia
to position itself as an international Islamic nancial hub in the
global market. It helped to coordinate all the marketing effort
between the regulators and the industry players to help attract
market players to make Malaysia as the preferred destination for
Islamic nance activities.

courses at postgraduate level and four universities offering

courses at undergraduate level.

Emerging Markets
Within the emerging markets, few countries exhibited good
data and information reporting. Among the notable ones are
Luxembourg, Turkey and Lebanon. Luxembourg for Finance, the
agency for the development of the nancial sector is playing the
role akin to MIFC for Malaysia. Its website has a dedicated section
providing a one-stop centre for all relevant data and information
from statistics, regulation and education related to Islamic nance
in Luxembourg. Meanwhile, data for participation banking in
Turkey and regulations governing Islamic banking in Lebanon are
easily accessible via respective central banks websites.

On the education front, Malaysia continues to strengthen itself

as a key destination for talent development with numerous
institutions catering a wide range of industry needs. Educational
institutions such as the International Centre for Education in
Islamic Finance (INCEIF) International Islamic University Malaysia
(IIUM), Universiti Teknologi MARA (UiTM), Universiti Kebangsaan
Malaysia (UKM), Universiti Sains Islam Malaysia (USIM), Universiti
Tun Abdul Razak (UNITAR), Islamic Banking and Finance Institute
Malaysia (IBFIM) and research entity such as International Shariah
Research Academy (ISRA) are gaining recognition worldwide
in producing talents and research needs to support the growth
of the vibrant industry. One notable addition last year was the
Insaniah University College (Malaysia) which collaborated with the
Islamic Research and Training Institute (IRTI) to develop an online
Masters in Islamic Banking and Finance.

Niche Markets
Canada, the US and Australia are making positive move towards
introducing Islamic nance through the education sector. This can
be seen in the growing number of Islamic nance related courses
in these countries. Latest being the University of Torontos Rotman
Business School. It launched an course in Islamic nance and it is
the rst Islamic nance course to be taught at a North American
business school. In Australia, CQ University became the latest
university offering a Masters level course in Islamic nance.

Bahrain, which came second under this category also possess

good reporting of data via its central bank. Talent development
programme are available to cater the market needs via the local
universities and the Bahrain Institute of Banking. In addition,
there is also a Waqf Fund which was established to help fund for
Research, Education and Training in Islamic nance.

Conclusively, the availability of statistics related to Islamic nance

has improved over the years but there is still much room for
improvement. Marketing activities has also increased in various
jurisdictions as more countries tries to position it to be the leading
centre for Islamic nance businesses. Education in Islamic nance
has also spread rapidly in many new jurisdictions particularly in
Europe. Moreover, with the help of internet, online courses in
Islamic nance are now widely available.

There is a growing demand for talent in Islamic nance and UK

which came in third place, has certainly positioned itself well to
meet the growing demand. It has a huge amount of courses in
Islamic nance offered at the tertiary level. Presently, there are
16 different universities in the UK offering Islamic nance related

3.2.5

Ease of Doing Islamic Finance Business

Survey Results by Region
Ease of Doing Islamic Finance Business

Africa

Asia

Europe

MENA

North
America

5.0

73.0

48.0

33.4

15.0

Source: Based on survey results; scores averaged by region based only on survey responses by country

This section covers the survey ndings on ease of doing Islamic

nance business at various jurisdictions. This section was
designed to assess the initiatives provided by the federal, states
or government entities in facilitating the development of Islamic
nance including business opportunities for the industry.

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GIFF 2012

Based on the survey results, the Asia region scored the highest
points followed by Europe and MENA. This is qualied by the
various measures taken by the relevant authority in providing
level playing elds for Islamic nancial instruments through legal
amendments and tax incentives.

IFCCR

Developed Markets
Developed markets in Islamic nance have a lot to offer in ease
of doing Islamic nance business. The survey results show that
developed markets have done their homework and provide a clear
advantage in terms of opportunities and incentives to facilitate
conduct of Islamic nance business. These developed markets
have well established and robust Islamic nance infrastructure
in terms of regulations and legislations to govern Islamic nance
industry including tax incentives.
The developed markets have various entities dedicated to the
development of Islamic nance such as the Accounting and
Auditing Organisation for Islamic Financial Institutions (AAOIFI)
and the Islamic Financial Services Board (IFSB). There are also
some dedicated Islamic nance research bodies such as the
Islamic Research and Training Institute (IRTI) and International
Shariah Research Academy for Islamic Finance (ISRA) focusing
on applied research related to Islamic nance. These institutions
have helped create certainty, standardisation in the market and
transparency within the respective jurisdictions.
Malaysia leads the way by creating incentives for Islamic nance
business, liberalising immigration policies and encouraging startup businesses that wish to undertake Islamic nance business,
other countries such as Bahrain, Qatar, Pakistan and UAE have
also facilitated conduct of Shariah compliant business on a
substantial scale.
These markets have provisions in place for entities providing
Islamic nancial services or entering into Islamic nance
transactions to ensure that the tax treatment is comparable to
that of conventional transactions. In addition, these countries have
worked on establishing a comprehensive prudential and reporting
framework both for Islamic banking and insurance businesses.
The guidelines include areas such as licensing requirements,
capital adequacy, business conduct, risk management, nancial
crimes and disclosure/reporting requirements.
Although not covered in the survey, Saudi Arabia remains one of
the top jurisdictions which has a well-developed Islamic nance
infrastructure for Islamic banking, takaful and Islamic capital
markets.

Emerging Markets
Emerging markets such as France, Luxembourg and Sri Lanka
have eased their laws and regulations for the development
of Islamic nance. Their governments have been strongly
advocating their commitment to improving the environment for
Shariah-compliant business. For example, France has passed
amendments authorising the issuance of sukuk. These markets
have announced signicant changes aimed at boosting Islamic
nance activities such as changes relating to tax treatments
of Islamic nancial transactions, listing of the sukuk and Trust
reforms.
Some of these emerging markets have made substantial
amendment in its regulatory framework to attract Islamic funds
and recycle the oil wealth which may also help ease their liquidity

positions. With increasing Muslim population in the west, countries

like UK have grown on their domestic Islamic product offerings.
Currently, about 22 banks (gure includes 5 full-edged Islamic
banks) in the UK offer Islamic banking services. Luxembourg on
the other hand has changed its scal policies to accommodate
issuance of Islamic bonds (sukuk). It now holds a substantial
portion of Islamic securities in the world market.
Although these emerging markets have made progress in
terms of developing Islamic nance, there are however, certain
jurisdictions that still need to resolve issues relating to double
taxation, separate and banking rules and regulations, corporate
governance among others.

Niche Markets
Supranational institutions such as Islamic Development Bank (IDB)
have been playing a vital role in some of the niche markets to spur
up the growth of Islamic banking and nance. In collaboration
with their local partners these institutions aid in capacity building
and help in developing required governance and regulatory
infrastructures. Countries like Kyrgyzstan and Hong Kong have
taken initiatives to develop Islamic nance products and have a
comprehensive objective to position themselves as major Islamic
nance players.
While these niche markets are moving towards dealing
with Shariah-compliant funds and securities, the initiative of
introducing and developing these markets has been initiated
more by the private sector rather than the government and the
regulatory bodies. Private players together with strong urge from
the domestic minority Muslim population are behind promoting
the retail Islamic banking and nance solutions. Although huge
potential exists in these markets, strong government will coupled
with awareness of Islamic nance will go a long way in developing
the Shariah-compliant market.
Whilst non-committal, some of the governments in these markets
have evaluated the possibilities of removing regulatory obstacles
and tax disincentives to facilitate the growth of Islamic nance
industry.
In the run-up, countries like Oman which issued circulars to
invite players to open Shariah compliant operations last year has
been very swift in formulating its Islamic nance regulations. Both
banking and takaful (Islamic Insurance) laws are expected to be
introduced by end of 2012. In countries such as South Africa
and India, Islamic funds remain promin despite the lack of proper
regulations. Although countries like The Gambia and Yemen does
not have well established Islamic nance infrastructure they have
successfully issued Islamic bonds in their markets which shows
their willingness to adopt other Islamic nance in the future.
Essentially, the key ingredient in ensuring ease of doing Islamic
nance business lies in the willingness of respective regulatory
authority to adopt measures to ensure Islamic nance has a level
playing eld through adjustment in the legal, regulatory and tax
framework. These will help to ease the process of doing Islamic
nance business and provide certainty to market participants.

GIFF 2012

51