By Ghiath Shabsigh, Ross Leckow, and Zeine Zeidane

Versions in:  ArabicFrenchIndonesian, and Malay

Islamic banking, a small but fast-growing corner of the financial world, is receiving greater attention from regulators and policy makers. The IMF recently adopted a set of proposals on Islamic banking and called for a more comprehensive set of policies to ensure financial stability in countries with Islamic banking and support the sound development of the industry. The IMF is now calling for additional work and cooperation by its staff with other international agencies to improve the adoption of relevant standards for Islamic banking and to address remaining regulatory gaps. 

The industry mushroomed to more than $1.5 trillion in assets last year from about $100 billion in the late 1990s and now has a presence in 60 countries, mostly in the Middle East and South and Southeast Asia, but increasingly in Africa, Central Asia, and Europe. While it represents less than 2 percent of global banking assets, its share is much bigger in many countries and has become systemically important (meaning its assets account for more than 15% of the total) in 14 of them, including Malaysia, Kuwait, and Saudi Arabia.

Islamic banking in numbers

Islamic banking refers to financial services that conform with Islamic finance principles, which bans interest, excessive speculation, gambling and short-sales; requires fair treatment; and institutes sanctity of contracts. Some facts:

  • 60 countries where it is present
  • $1.5 trillion in global assets in 2016
  • 14 countries in the Middle East and Asia with more than 15% of assets in Islamic banking
  • 2010, the year when Sukuks (Islamic bonds) debuted in the New York Stock Exchange. (They are also traded in London, Hong Kong, and Singapore.)

Islamic banking has the potential to make financial services more widely available to people who are currently underserved and to support economic development. What’s more, its guiding principles can promote financial-sector resilience. Yet the industry’s rapid growth and characteristics that distinguish it from conventional banking pose challenges for supervisors and central bankers. As a result, there is broad international recognition of the need for a policy framework and an environment that promotes the financial stability and development of the industry.

International norms

For more than a decade, the Kuala Lumpur-based Islamic Financial Services Board has led efforts to develop regulatory and supervisory standards that complement existing international norms in areas relevant to Islamic banking. This process culminated in 2015 with the development of the “Core Principles for Islamic Finance Regulation” for banking. Now the challenge will be to ensure that these standards are applied broadly and consistently.

A number of other important areas still need to be addressed. These include developing robust resolution regimes (to deal with failing banks) and other financial safety nets and expediting the issuance of high-quality liquid assets such as sovereign Sukuk, a type of government-issued security. Finally, the recent emergence of hybrid financial products that replicate aspects of conventional finance in an Islamic banking context have raised new and complex risks that remain to be addressed by regulators.