Southeast Asia

Southeast Asia can be considered one of the key centers of Islamic banking and finance, with Malaysia being a leader. In Malaysia, the formal development of Islamic finance began with the establishment of Tabung Haji (an interest-free savings-like or deposit-taking institution for Muslims to perform hajj [pilgrimage] in Mecca) in 1963. The first Islamic bank in Malaysia, Bank Islam Malaysia, began operations in July 1983 with the passage of the Islamic Banking Act of 1983. In 1984, the government has enacted the Takaful Act 1984 to pave the way for the establishment of the first takaful (Islamic insurance) company, Syarikat Takaful Malaysia.

Since then, the Islamic banking industry has seen the participation of conventional banks in providing Islamic banking services, initially through Islamic windows at banks and presently through Islamic bank subsidiaries as well as the establishment of new domestic and international Islamic banks. Aside from experiencing a rapid development of the Islamic banking industry, Malaysia introduced the Islamic money market in 1994 to provide an avenue for short-term investment based on Shari'ah (Islamic law), and it has made its mark in the development and issuance of sukuk (an Islamic bond). In 2012, the government consolidated various acts into two separate acts, namely the Islamic Financial Services Act (IFSA) 2012 and the Financial Services (FSA) Act 2012. Both acts came into effect on June 30, 2013.

Neighboring Indonesia, which has the largest Muslim population in the world, has recently recognized the need to harness the Islamic finance industry's potential. In 2012, Indonesia's Islamic banking assets were US$17 billion, an increase of more than 50 percent from the previous year. Propelled by government support, Islamic financial assets in Indonesia are expected to continue their rapid growth. The republic is showing positive signs in Islamic retail banking, sukuk, project and infrastructure financing, takaful (insurance) and Islamic microfinance. Currently, Indonesia houses 5 Islamic banks as well as 24 banks that have Islamic windows. With a population of 230 million, Indonesia has a huge market potential for Islamic finance.

Being the international financial hub of the region, Singapore is no exception to the development of Islamic finance. The most prominent developments witnessed in recent years were the 2007 inception of the Islamic Bank of Asia, a full-fledged Islamic bank, and the issuance of more than US$11 billion worth of sukuk in January 2013.

Islamic finance has also gained prominence in Brunei with the presence of two Islamic banks and three takaful companies. In Thailand, Islamic finance has developed to provide Islamic financial services to the predominantly Muslim population in the southern part of the country and the capital city of Bangkok.

The Middle East and North Africa

Islamic finance in the Middle East and North Africa (MENA) has become an important ingredient in these countries' development agendas. The significant presence of Islamic finance can be seen in various MENA countries. These include the United Arab Emirates (UAE), Iran, Saudi Arabia, Bahrain, Kuwait, Oman, and Egypt. In addition, Islamic finance has made its way in Jordan, Morocco, and Tunisia.

The first Islamic bank was set up in the UAE when Dubai Islamic Bank came into being in 1975. Apart from Dubai Islamic Bank, there are now four other fully dedicated Islamic banks in the UAE: Sharjah Islamic Bank, Emirates Islamic Bank, Abu Dhabi Islamic Bank, and Dubai Bank. Conventional banks also offer Islamic products through either an Islamic window or a subsidiary. Several major sukuk issuances originate from the UAE financial market as well.

Iran is one of the few countries in the world to have converted its entire financial sector to an Islamic system that governs the Central Bank of Iran. Iran is the world's largest market for Islamic finance. However, the Islamic capital market has not yet developed in Iran as it has in Malaysia and the Gulf Cooperation Council (GCC), a consortium of six Persian Gulf countries. Nevertheless, Islamic bonds have existed in Iran since 1994 in the form of so-called participation bonds issued by municipalities or large companies to finance projects.

Iran's legal framework for Islamic banking envisages four types of deposits: demand deposits, which are interest-free loans to the bank; savings accounts; term deposits or investment accounts, in which the depositors share in the general profits of the banks; and, since 2011, special-purpose investment accounts, in which the investor or depositor restricts the use of funds to designated projects in which the bank is also an equity partner. Savings deposits receive some remuneration in the form of bonuses in cash or in kind through random drawing. The provisional remuneration of term deposits is set by the Money and Credit Council (MCC) each year with a view to ensuring reasonable funding costs.

Saudi Arabia's Islamic banking is making good headway despite the fact that there are no separate Islamic banking laws in the country. There are two major players in Islamic banking in Saudi Arabia: Al Rajhi Banking and Investment Corporation and Bank Al Jazira. Conventional banks are also serving the Islamic banking clientele by establishing their own Islamic windows or subsidiaries. The Saudi financial sector comprises 14 commercial banks and 5 credit unions and holds assets worth more than US$20 billion. Islamic banking operations capture 64 percent of the total market share in Saudi Arabia.

In 1978, Bahrain Islamic Bank, the first Islamic bank for Bahrain, was established. There are 351 financial institutions in Bahrain, of which 33 are Islamic and have a total capital of US$2.24 billion. Islamic banking operations in Bahrain are undertaken by full-fledged commercial banks, offshore banking units, and investments banks. A significant number of Islamic banks use Bahrain as a base from which to operate in the Gulf states, the European Union, and North America.

Kuwait has been ranked third in the holding of Islamic banking assets; it is worth US$22.7 billion. The establishment of the Kuwait Finance House in 1977 laid down the foundation of Islamic banking in Kuwait. It has had great success over time and at present is successfully competing with 12 conventional banks and 3 specialized government banks in the Kuwaiti financial market.

Meanwhile, in Oman, as the result of a decree passed by His Majesty Sultan Qaboos in 2011, two full-fledged Islamic banks and a number of conventional banks have already received licenses to start Islamic operations. The two Islamic banks, Bank Nizwa and Alizz Islamic Bank, went public in 2012, and several conventional banks have announced setting up Islamic windows.

Egypt currently accounts for about 9 percent of the Arab world's gross domestic product (GDP), and its banking system is one of the largest in the region. Yet Egypt has hardly been involved in the recent expansion of Islamic finance, the most exciting development in Middle East financial markets for decades. In January 2013, the Egyptian cabinet of ministers approved a new draft sukuk bill after Shari'ah scholars rejected a previous version.

Egypt now has 14 Islamic banking licenses but only 3 full-fledged Islamic banks, including Faisal Islamic Bank of Egypt; Al Baraka Banking Group, headquartered in Bahrain; and Abu Dhabi Islamic Bank of Egypt. Despite several more lenders with Islamic finance windows, the approximately US$17 billion of assets in Egypt's Islamic banking industry are dwarfed by Egypt's conventional banks. Total assets of the entire banking sector are about US$198 billion, according to Egypt central bank data in 2012.

In Jordan there have been many efforts by the government to cement the role of Islamic banking in the kingdom and establish a leading regional center for Islamic finance—especially after the rapid growth of Islamic banking in Jordan because of laws that organize the work of takaful and sukuk. The assets of the four Islamic banks operating in Jordan are US$4.6 billion and form 5 percent of the total banking assets. They have achieved an annual growth of 13 percent and are better than traditional banks in the growth of deposits and financing. The Jordanian government plans to issue sukuk to face the deficit in the budget once legislation has been passed that organizes that matter. The pending legislation would allow the trading of sukuk in the Amman stock market.

There are presently six Islamic banks operating in Jordan. The key financial highlights are that the total deposits and the total financing of Islamic banks increased by 16.35 percent year over year and 15.58 percent year over year, respectively, at the end of 2011. There are three takaful operators: Islamic Insurance Company, Al-Barakah Takaful Company, and First Islamic Insurance Company. Takaful products in Jordan exist in nearly all business areas, including life, medical, automobile, property, and marine insurance.

Sub-Saharan Africa

Although Islamic finance has seen the greatest growth over the past decade in Southeast Asia and the Middle East, institutions offering Shari'ah-compliant financing are making increasing inroads into African markets as well. The sizable Muslim populations drive part of this effort, but the appeal of interest-free loans in markets with large unbanked populations also plays a significant factor.

Despite setbacks in the global economy, most sub-Saharan African economies showed sustainable growth. In the last 15 years, the regional GDP growth has been almost 5 percent a year. The future outlook for sub-Saharan Africa is for growth to continue at its current pace of around 5 percent, as the region increasingly adopts growth-friendly policies and integrates more rapidly with the global economy.

The latest financial sector reforms in many sub-Saharan African countries have contributed to the development of their banking systems. These positive trends may be seen as ample room for Islamic banking to establish and grow in sub-Saharan Africa.

Sub-Saharan African countries such as South Africa, Nigeria, Kenya, and Tanzania are ramping up their Islamic banking efforts. Nigeria has introduced interest-free banking laws; Kenya is experiencing a significant growth in Islamic banking and takaful institutions; and Tanzania has a growing consumer demand for Shari'ah-compliant products. Other countries as well have pledged to set up Islamic banks and issue sukuk, such as Uganda, Malawi, Mali, and Zambia.

Europe

The European Union is emerging as a center of Islamic banking and finance; there has been a spectacular growth of the Islamic banking industry in several European countries. Despite the difficult economic climate in the region, Islamic banking is growing faster in Britain, Ireland, and Luxembourg than it is in many Islamic countries in the Middle East and Asia. Although the rapidly growing Muslim population in the region serves as an impetus for the development of Islamic finance, increasing acceptance of Islamic financial products has been also a key factor.

The United Kingdom has emerged as ground zero for Islamic banking in Europe, and London is the main center of Islamic finance outside the Muslim world. With US$19 billion in reported Islamic banking assets, the UK Islamic banking sector ranks number one in Europe and number nine in the world, surpassing even some Muslim countries, including Pakistan, Bangladesh, Turkey, and Egypt, according to the City UK Islamic Finance Report of 2012. An important feature of the development of London and the United Kingdom as the key European center for Islamic banking has been supportive government policies intended to broaden the market for Islamic financial products and services.

The United Kingdom is a home to five fully Shari'ah-compliant banks that offer discriminatory no-interest transactions to Muslims. There are also an estimated 22 conventional banks that have set up windows and are offering Islamic banking facilities in the United Kingdom. The United Kingdom is a leader in Islamic banking and finance education as well, with 55 colleges and professional institutions offering education in Islamic banking and finance at present—more than anywhere else in the world.

Other than in the United Kingdom, a large part of the Islamic financial activities of the Eurozone has taken place in Ireland. Ireland has developed a strong foundation for the Islamic finance industry, including a comprehensive tax treaty network with Muslim nations and a provision in its tax code specifically for Islamic financial instruments, such as those involving ijarah (Islamic leasing), murabahah (deferred payment sale), and takaful.

Ireland is home to more than 50 world-class fund service providers, which are all supported by more than 11,000 industry professionals, and it offers the widest range of expertise in fund domiciling and servicing. It is a significant location for Islamic funds; an estimated 20 percent of the Islamic funds market outside the Middle East is located in Ireland. The Irish government has supported the development of Islamic finance. For example, the Irish financial regulator has set up a dedicated team to deal with the establishment of Shari'ah-compliant investment funds.

Luxembourg is a popular location for sukuk listing and is the preferred place for the international investment structures of a number of sovereign wealth funds. The flexible approach for Islamic investment products and services in Luxembourg originated in the late 1970s, when the Islamic Banking System Holdings Limited Luxembourg was established as the first Islamic financial institution in Europe. This was followed by the establishment of Takafol S.A., a life insurance company, in December 1982. According to the most recent statistics, there are 15 sukuk listed in Luxembourg today, for a combined value of US$8 billion.

Turkey

Islamic finance in Turkey, despite the country's majority Muslim population, is a recent phenomenon. Participation banking, a moniker for financial practices structured in accordance with Islamic law, has not traditionally made up a large segment of Turkey's finance sector. The state bureaucracy and military routinely resisted Islamic influence in business and finance. Participation banking has grown in recent years because of more permissive public attitudes, a decreased trust in the conventional banking sector after the financial crises in 2001 and 2008, and the desire to attract capital from the Gulf region.

Turkey is regarded as the most promising market for Islamic finance because of its a young and dynamic population; its qualified labor force; its developed financial markets; the diversity of its financial products, services, and practices; and a strong regulatory framework in its financial sector.

The Istanbul Stock Exchange is expected to emerge as a key regional stock market for listing Islamic securities and is already developing a product to handle the liquidity needs of Islamic funds.

North America

In the United States, the Islamic financial sector has traditionally been involved in financing transactions at the consumer level. The first, and most notable, systematic attempt to bring Islamic finance to the U.S. retail consumer market was made in the mid-1990s, when the Office of the Comptroller of the Currency formally recognized the ijarah and the murabahah models as valid for transactions involving residential property purchases.

There are presently a few Islamic financial institutions in the United States that are able to ensure the proper supervision of the Shari'ah advisors required by the national market and that have established close partnerships with regulators and key financial institutions. These firms are bringing Shari'ah-compliant products into the United States, and Islamic finance is quickly being recognized by mainstream financial institutions as offering a strong niche consumer market.

Islamic finance has grown differently in the United States than it has in other parts of the world, largely because of domestic demand. Home financing products account for most of this demand, with around 10,000 Shari'ah-compliant home purchases having been concluded in the past decade. So far, Islamic financial institutions in the United States have avoided deposit-taking operations because of the regulatory hurdles involved. The relevant regulation on banking is currently similar for all banks wanting to operate in the United States—that is, for both conventional and Islamic banks. Overall, the U.S. Islamic finance industry remains a niche segment in the wider North American financial sector.

The number of Muslim Canadians doubled from 253,300 in 1991 to 579,600 in 2001, the largest population increase among religious groups in Canada during that 10-year period. As of 2001, Muslims constituted 2 percent of Canada's total population. The trends suggest that this number is continuing to rise. In light of such population growth and the rise of Islamic financial services worldwide, the demand for Islamic banking and takaful insurance will no doubt increase in Canada.

Australasia

Islamic finance has considerable potential to become an important element in global financial services in Australia and the surrounding region. It has the potential to facilitate further innovation and competition in the wholesale and retail banking sectors and to support the Australian government's commitment to credit market diversification. This is a result of the continued growth in Australia's Muslim population of 365,000, Australia's political stability and geographic position, and its proximity to the large Muslim populations of the Asia Pacific, where 62 percent, or 972.5 million, of the world's total Muslim population resides. Australia is an important base from which to service this fast-growing sector in the global financial services market.

Australia's attractiveness as a financial center is supported by a sizable domestic economy and financial market. Australia is well-placed to take advantage of the Islamic finance opportunity, with widely recognized strengths in retail and commercial banking and experience in infrastructure, property, resources, and agricultural financing.

New Zealand has a modern, prosperous, and developed market economy, with an estimated GDP at purchasing power parity per capita of roughly US$28,250. As a result of attempts to deregulate and encourage investment into the country, New Zealand has identified Islamic finance as a key area for opportunities for growth. New Zealand is a rural knowledge economy that operates on free-market principles. It has sizable manufacturing and service sectors complementing a highly efficient agricultural sector. The economy has continued on its strong upward course, and living standards have risen steadily in the past decade.

About the Authors

Daud Vicary Abdullah is the President and Chief Executive Officer of INCEIF, the Global University of Islamic Finance. He has been in the finance and consulting industry for over 40 years, with significant experience in Asia, Europe, Latin America, and the Middle East. Since 2002, he has focused exclusively on Islamic finance; he has contributed to a number of books on the subject and has coauthored a book on Islamic finance entitled Islamic Finance: Why It Makes Sense.

Daud is a frequent speaker and commentator on matters relating to Islamic finance. He is a Chartered Islamic Finance Professional, a distinguished fellow of the Islamic Banking and Finance Institute of Malaysia, and a former board member (2003–2007) of the Accounting and Auditing Organization for Islamic Financial Institutions. Before joining INCEIF, he was the global Islamic finance leader at Deloitte. He was also previously the acting CEO of the Asian Finance Bank, an Islamic bank based in Malaysia, and the managing director of Hong Leong Islamic Bank.

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Mohd-Pisal Zainal holds a Ph.D. in economics from Southern Illinois University Carbondale and is currently the Director of Research and Publication at INCEIF, the Global University of Islamic Finance. He joined INCEIF as a lecturer in the banking department on April 1, 2007, and now teaches research methodology, econometrics, and financial econometrics for the Graduate Studies Department. He also teaches Islamic financial markets and institutions, structuring financial requirements, deposits mobilisation, and Islamic capital markets for the Chartered Islamic Finance Professional (CIFP) programme.

Mohd-Pisal has conducted various Islamic finance–related training of trainers programs, presented papers at international conferences, and published papers on financial economics, macroeconometrics, and Islamic finance. His research interests include Islamic financial institutions and markets, Islamic capital markets, financial economics, monetary economics, and macroeconometrics.