The International Islamic Financial Market


The International Islamic Financial Market

Moving from niche market to a mainstream market


Modern day Islamic finance emerged in the 1960s with the establishment of the first Islamic bank in Egypt by Ahmad El Najjar and the set up of Lembaga Tabung Haji in Malaysia.

Until the 1970s, Islamic banking was mostly focused on the retail market. The rise of Islamic finance in the late 1970s coincided with the oil crises of that decade, which created an immense amount of wealth by bringing a large amount of capital to oil producing countries. The emergence of wholesale banking and the associated product innovation is however a more recent development.

In recent years, Islamic finance has attracted a number of western multinational financial institutions, which started offering Islamic financial products in the International Islamic financial market and to a lesser extent in the western world. Intensive efforts have also been made to harmonise Islamic financial practices, from creating accounting standards for Islamic financial products (through the Accounting and Auditing Organisation for Islamic Financial Institutions, AAOIFI), to integration of those standards with global corporate and risk management standards (i.e., Basel Accords I, II and III) through the Islamic Financial Services Board (IFSB). Islamic finance also falls within the scope of the IMF and of the World Bank.

Today, Islamic finance represents a small but growing segment of the global finance industry estimated at 1% to 2% of the global financial assets worldwide. 

The market size of Islamic finance

The market size of assets held under Islamic finance is estimated at US$1.7 trillion suggesting an annual growth of 17.6% over the last four years. Besides, Islamic finance also represents:

  • More than 300 Islamic banks & windows that are present in at least 60 countries
  • More than 750 Islamic funds worldwide with assets under management of more than US$60 billion.

The growth of index funds has been underpinned by the launch of several Islamic indexes by prominent providers over the past few years. The first was the Dow Jones Islamic Market Index, launched in 1999, followed by the FTSE Global Islamic Index Series the same year and in 2006 by the Standard & Poor’s Sharia'a indices.

The future of Islamic finance

Islamic finance is set for more growth as the widespread socio-economic development in the MENASA region is expected to continue. The growth is driven by multiple factors such as:

  • A growing Muslim population standing at around 1.7 billion, out of which 50 million in Europe are looking at investment products catered to their needs
  • The search for ethical investments by Muslim and non-Muslim investors
  • The need of investment products where to invest oil revenue surpluses
  • The need for Islamic project financing for the infrastructure projects in the region
  • A growing number of Islamic and conventional financial institutions entering the space
  • A rise in sophistication through greater fundamentals in the contracts allowed under Sharia'a law and their appropriate utilisation in the development of modern financial instruments

By 2018, it is estimated that Islamic banking assets could reach up to US$3.4 trillion.

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