Industry framework

Industry framework

Islamic financial institutions take different forms. They may be
  1. Full-fledged Islamic financial institutions (for example Islami Bank Bangladesh Ltd, Meezan Bank in Pakistan);[183]
  2. Islamic "windows" — i.e. separate, sharia-compliant units[184] — in conventional financial institutions (for example: HSBC, American Express Bank, ANZ Grindlays, BNP-Paribas, Chase Manhattan, UBS, Kleinwort Benson, Commercial Bank of Saudi Arabia, Ahli United Bank Kuwait, Riyad Bank);[183] (Scholars debate compliance of this form, according to Faleel Jamaldeen, "primarily" because of "where" the funds for these windows come from.)[185]
  3. Islamic subsidiaries of conventional financial institutions (for example: Citibank subsidiary Citi Islamic Investment Bank (Bahrain), Union Bank of Switzerland subsidiary Noriba Bank).[183]

Size and locations

Percentage of world market share of Islamic banking industry by country, 2014
Saudi Arabia 33
Malaysia 15.5
UAE 15.4
Kuwait 10.1
Qatar 8.1
Turkey 5.1
Indonesia 2.5
Bahrain 1.6
Pakistan 1.4
Rest of the world 7.3
Source: World Islamic Banking Competitiveness Report 2016[186]
Sharia-compliant banking grew at an annual rate of 17.6% between 2009 and 2013, faster than conventional banking,[9] and is estimated to be $2 trillion in size,[9] but at 1% of total world,[9][10][187] still much smaller than the conventional sector. As of 2010, Islamic financial institutions operate in 105 countries. Statistics differ on which country has the largest Islamic banking sector. According to the 2016 World Islamic Banking Competitiveness Report (see table), Saudi Arabia, Malaysia, United Arab Emirates, Kuwait, Qatar, and Turkey represented over 87% of the international Islamic banking assets.[188] (A 2006 report by ISI Analytics also lists Saudi Arabia at the top and Iran as insignificant.)[189][61] However, according to Ibrahim Warde, Shia-majority Iran dominates Islamic banking with $345 billion in Islamic assets, Saudi Arabia with $258 billion, Malaysia $142 billion, Kuwait with $118 billion and UAE with $112 billion.[183][190] And according to Reuters, Iranian banks accounted for "over a third" of the estimated worldwide total of Islamic banking assets, (although sanctions have hurt Iran's banking industry and "its Islamic financial system has evolved in ways that will complicate ties with foreign banks"). According to the latest central bank data, Iran's banking assets as of March 2014 totalled 17,344 trillion riyals or $523 billion at the free market exchange rate.[191][192] According to The Banker, as of November 2015, three out of ten top Islamic banks in the world based on return on assets were Iranian.[193]

Sharia advisory councils and consultants

An Islamic bank branch in the UMNO building in Kota Kinabalu
Because compliance with shariah law is the raison d'être of Islamic finance, Islamic banks and banking institutions that offer Islamic banking products and services should establish a Shariah Supervisory Board (SSB) — to advise them on whether or not some proposed transactions or products follows the Sharia, and to ensure that the operations and activities of the banking institutions comply with Shariah principles.[194][195] According to various Islamic banking organizations some requirements for SSBs include: In addition, their duties should include:[200][201]
  • calculating zakat payable by Islamic financial institutions, (AAOIFI);
  • disposing of non-shariah-compliant income, (AAOIFI);
  • advising on the distribution of income among investors and shareholders, (AAOIFI).
Since the beginning of modern Islamic finance, the work of the Shariah boards has become more standardized. Among the organizations that have issued guidelines and standards for Shariah compliance are the AAOIFI,[202] Fiqh Academy of the OIC, Islamic Financial Services Board (IFSB) (2009). The guidelines and standards are not regulations though, and each Islamic financial institution has its own SSB, which are not generally obliged to follow them.[196] However, their home country many have a regulatory organization that they are required to follow. As of 2013, regulators in Bahrain, Indonesia, Jordan, Kuwait, Lebanon, Malaysia and Pakistan have developed guidelines for SSBs in their respective jurisdictions. Some countries, like Indonesia, Kuwait, Malaysia, Pakistan, Sudan, and the UAE have centralized SSBs[203] (In Malaysia that SSB is called the Shariah Advisory Council, and was set up at Bank Negara Malaysia (BNM).) A number of Shariah advisory firms have now emerged to offer Shariah advisory services to the institutions offering Islamic financial services.


Some Islamic Banking observers believe the industry suffers from handpicked, highly-paid Shariah experts who have been approving financial products using ḥiyal (legal stratagem) to follow sharia law,[204] "shunning controversial issues", and/or "rubber stamping" bank management decisions after perfunctory reviews,[205][206] and that the banking practices approved by this small number of Islamic jurists have moved closer and closer to the practices of conventional non-Islamic banking.[207]
"Fatwa shopping", independence
Journalist John Foster quotes an "investment banker based in Dubai":
“We create the same type of products that we do for the conventional markets. We then phone up a Sharia scholar for a Fatwa ... If he doesn't give it to us, we phone up another scholar, offer him a sum of money for his services and ask him for a Fatwa. We do this until we get Sharia compliance. Then we are free to distribute the product as Islamic.”[208]
According to Foster, this practice of "shopping" for an Islamic scholar who will issue a fatwa testifying that a banking product obeys Shari'ah law has led to "top scholars" earning "six-figure sums" for each fatwa, and to Islamic financing mechanisms that appear to outsiders to be mortgages "dressed up in Arabic terminology"—such as Mudarabah, or Ijarah (lease agreements).[208] Mahmoud El-Gamal believes that from the 1970s to the 2000s there has been an evolution of the industry towards "progressively closer approximations" of the practices of conventional banking, approved by "progressively smaller" numbers of jurists (with only a small group for example approving "unsecured lending" to retail and corporate customers through the tawarruq mode in the early 2000s).[207] The scarcity of qualified shariah supervisors — who need to be trained in both Islamic commercial law and contemporary financial practices — has been noted. One study found the 20 most popular shariah scholars holding 621 sharia board positions,[209] — creating potential conflicts of interest.[210] This scarcity also increases fees. Two researchers noted the small group of Shariah experts "earn as much as US$88,5000 per year per bank" and can "charge up to US$500,000 for advice on large capital market transactions."[211][212] Income far in excess of what has been customary for Islamic scholars — luxury air travel and five star hotel — as well as being eagerly asked for their legal opinion by wealthy, high status people,[213][214] may lead to what one writer (Muhammad O. Farooq) calls a "certain changes in viewpoint" resulting in "over-stretching the rules of Shariah".[204][215] A study of the practice of boards of financial institutions setting the pay and employment of SSB members found this arrangement "compromise(s) the independence of the SSB".[216] Another study found Islamic financial institutions do "not have practices which ensure transparency in the role and functions of the SSBs".[217]

Financial accounting standards

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), has been publishing standards and norms for Islamic financial institutions since 1993.[70] By 2010, it had issued "25 accounting standards, seven auditing standards, six governance standards, 41 shari'ah standards and two codes of ethics."[70] (By 2017 it had issued 94 standards in the "areas of Shari’ah, accounting, auditing, ethics and governance".)[218] Although it is an independent body, its "pronouncements on the acceptability or otherwise of contractual structures in relation to Islamic financial instruments are to be viewed in the same vein as regulatory edicts."[219][220] Its standards are mandatory for Islamic financial institutions in Bahrain, Sudan, Jordan and Saudi Arabia, and recommended for other Muslim countries and Islamic financial institutions according to Muhammad Akram Khan.[70] [Note 13] Established in Algiers in 1990, its original name was Financial Accounting Organization for Islamic Banks and Financial Institutions. It later moved its headquarters to Bahrain.[70] The International Islamic Financial Market — a standardization body of the Islamic Financial Services Board for Islamic capital market products and operations — was founded in November 2001 through the cooperation of the governments and central banks of Brunei, Indonesia and Sudan. Its secretariat is located in Manama Bahrain. It is not a regulatory body and its recommendations are "not implemented by most Islamic banks".[222] Faleel Jamaldeen differentiates its controlling body (Islamic Financial Services Board) from the other Islamic Financial standards organ, the AAOIFI, saying,
the AAOIFI sets best practices for handling the financial reporting requirements of Islamic financial institutions, IFSB standards are mainly concerned with the identification, management, and disclosure of risk related to Islamic financial products.[223]
Individual countries also have accounting standards. The Institute of Chartered Accountants of Pakistan issues Islamic Financial Accounting Standards (IFAS).