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THE IMF AND ISLAMIC FINANCE

EAG Members

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Islamic Finance and the Role of the IMF

March 2015

Islamic Finance Factsheet

Events
High Level Forum on Strengthening
Islamic banking regulation and
supervision in the Arab region; May 22
23, 2016, Dubai, United Arab Emirates
Islamic Finance Conference: Meeting
Global Aspirations; November 11, 2015,
Kuwait City
SEMINAR: Islamic Finance: Unlocking its
Potential and Supporting Stability, April
16, 2015
IMF's Middle East CEF and the METAC
conclude Workshop on Risk-Based
Supervision in Institutions Offering
Islamic Financial Services, Feb. 2015
The IMF Launches Consultations with its
External Advisory Group on Islamic
Finance, Oct. 2014

Resources on Islamic
Finance
Monetary Policy in the Presence of
Islamic Banking
Resolution Frameworks for Islamic
Banks
Monetary Operations and Islamic
Banking in the GCC : Challenges and
Options

Islamic finance has grown rapidly, even though it is still a small share of the global financial market.
The Islamic banking segment has increased its penetration in many International Monetary Fund (IMF)
member countries. It has become systemically important in Asia and the Middle East, while the global
issuance of Sukuk - the Islamic equivalent of bonds - is expanding with remarkable international reach
of issuers and investors. This trend is expected to continue, driven, in particular, by strong economic
growth in countries with large, and relatively unbanked, Muslim populations.
Reflecting the importance of Islamic finance for many of its members, the IMF has had a longstanding interest in its implications for macroeconomic and financial stability, and played a key role in
the establishment of the Islamic Financial Services Board (IFSB). The IMF has also engaged its members
on the implications of Islamic finance, in the context of its policy advice and capacity development
efforts, notably in the areas of regulation and supervision of Islamic banks, and development of
domestic Sukuk markets.
This recent growth of Islamic finance has led to increased demand on the IMF. To foster its
preparedness, the IMF has formed an Interdepartmental Working Group with the objectives to develop
an institutional view on the industry, build in-house expertise and better coordinate with different
stakeholders. This working group has stepped up the analytical work on Islamic finance in key areas,
including Islamic banking regulation and supervision, macro-prudential policy, safety nets, resolution,
financial inclusion, consumer protection, monetary policy, Sukuk markets, public financial
management, and tax policy. The IMF established an External Advisory Group, comprised of standardsetters for Islamic finance and leading international experts, to assist in identifying policy issues and to
enhance coordination with different stakeholders interested in Islamic Finance.

Islamic Finance Factsheet

WHAT IS ISLAMIC FINANCE?

RECENT DEVELOPMENTS

What Is Islamic Finance?

ISLAMIC BANKING

SUKUK

BACK TO TOP

Islamic Finance refers to the provision of financial services in accordance with Shariah Islamic law, principles
and rules. Shariah does not permit receipt and payment of "riba" (interest), "gharar" (excessive uncertainty),
"maysir" (gambling), short sales or financing activities that it considers harmful to society. Instead, the parties
must share the risks and rewards of a business transaction and the transaction should have a real economic
purpose without undue speculation, and not involve any exploitation of either party.

An Overview of Islamic Finance

Is Islamic Banking Good for Growth?

Recent Developments

Islamic Finance, Consumer Protection,

and Financial Stability
MORE RESOURCES

Recent Developments

BACK TO TOP

Islamic finance currently encompasses banking, leasing, Sukuk (securities) and equity markets, investment
funds, insurance ("Takaful") and micro finance, but the banking and Sukuk assets represent about 95 percent of
total Islamic finance assets.
Islamic finance assets grew at double-digit rates during the past decade, from about US$200 billion in 2003 to
an estimated US$1.8 trillion at the end of 2013. However, despite its growing spread, Islamic finance assets are
still concentrated in the Gulf Cooperation Council (GCC) countries, Iran and Malaysia, and represent less than
one percent of global financial assets.

Videos

For instance, Islamic banking outperformed conventional banking over the past decade, increasing its
penetration rate above 15 percent in a dozen countries in the Middle East and Asia. Over the same period,
Sukuk issuance increased twenty-fold to reach US$120 billion in 2013, and its issuer base is broadening with
new issuances in Africa, East Asia and Europe.

BACK TO TOP

Four Things You Need to Know about

Islamic Finance

Islamic Banking

Getting Islamic Finance to Fulfill its

Promise, May 20, 2015

Islamic banking differs from conventional banking in several ways. Unlike conventional banks that operate on
the basis of borrowing and lending with pre-specified interest rates, Islamic banks are funded by current
accounts that do not attract interest or by profit-sharing investment accounts (PSIA) where the account holder
receives a return that is determined ex-post by the profitability of the banks. On the asset side, Islamic banks
use a number of contracts such as sales at a profit margin (Murabahah), lease (Ijarah), profit-sharing
(Musharakah and Muarabah), and fee based services (e.g., Wakalah). All banking business based on sale or
lease must have an underlying asset. This is in contrast to conventional banking where the asset's importance
lies only in terms of collateral security but the asset is not necessarily part of the loan transaction.

The Promise of Islamic Finance: Further

Inclusion with Stability, April 6, 2015

The operations of Islamic banks give rise to a unique set of risks, in addition to the standard risks associated
with banking activities such as credit, market, liquidity, operational and legal risks. These unique risks include:

News & Blogs

Did Islamic Banks in the Gulf Do Better

Than Conventional Ones in the Crisis?,
October 14, 2009

Shariah compliance risk which arises from the fact that the products offered to customers may, expost , not be certified to be compliant with Shariah principles;
Displaced commercial risk which arises from the fact that while the returns to Profit Sharing Investment
Account (PSIA) holders are supposed to depend on the profitability of their investments, PSIA holders
would expect similar returns to those offered by conventional banks, and therefore shareholders may
have to forego part of their profits;
Equity investment risk which emanates from profit-sharing financing instruments that are unique to
Islamic banking.

Podcasts
The Rise of Islamic Finance and Its
Potential for Africa
March 03, 2011

See Also
The Accounting and Auditing
Organization for Islamic Financial
Institutions (AAOIFI)
The Arab Monetary Fund (AMF)

The industry also faces additional risks related to the business model and the nascent nature of the industry.
For instance, managing liquidity risk is more difficult for Islamic banks when there are limited or no Shariah
compliant financial markets and Lender of Last Resort facility. The requirement that transactions have to be
underpinned by assets has resulted in complex transactions as well as corporate structures that include nonfinancial corporations in the groups.
These differences raise specific policy issues in terms of regulation and supervision, consumer protection,
monetary policy and liquidity management, and tax policy. To deal with some of these issues, jurisdictions
have cooperated to put in place specialized institutions to develop regulation standards (IFSB), governance,
auditing and accounting standards (Accounting and Auditing Organization for Islamic Financial Institutions),
financial markets instruments (International Islamic Financial Markets) and short-term liquidity infrastructure
(International Islamic Liquidity Management Corporation).

The Islamic Development Bank (IDB)

The Islamic Financial Services Board
(IFSB)
The International Islamic Financial
Market (IIFM)
The International Islamic Liquidity
Management Corporation (IILM)

Sukuk

BACK TO TOP

Sukuk, the Islamic equivalent of bonds, are similar to asset backed securities and differ from conventional
bonds in a number of ways. Whereas a conventional bond is a promise to repay a debt with a specified interest
rate, Sukuk have to be structured in a manner that ensures that there is an underlying asset, the principal
amount is not guaranteed and the return to investors is linked to the performance of the underlying assets.
Sukuk assume a variety of structures. They can be issued as asset backed where investors have a claim on the
underlying asset or asset based where the claim is on the originator and not the underlying assets. Since Sukuk
issuance began to accelerate, a number of different structures have developed, including partial ownership in
receivables, lease-based and profit and loss sharing partnerships as well as convertible and exchangeable
trusts.

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Sukuk could be well suited for infrastructure financing, but there are also important implications for financial
stability as well as specific issues in terms of consumer protection that deserve attention. Sukuk resemble
Public Private Partnership financing whereby investors finance the assets, and then own them which leads to
real securitization and, finally, transfer them at maturity to the government.

BACK TO TOP

Islamic Finance: Unlocking its Potential and Supporting

Stability

Write to Us
For more about the IMF's environmental
work please contact Ian Parry at
iparry@imf.org

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Overview Though still a small share of global finance, Islamic finance is growing rapidly and has enormous
potential for further growth. The Islamic banking sector is now systemically important in several member
countries and the internationalization of the Sukuk market has increased cross-border financial flows and
linkages. Islamic banking also has the potential to foster greater financial intermediation and inclusion,
especially among Muslim populations that may be underserved by conventional banks, and to facilitate
lending in support for small- and medium-sized enterprises, while Sukuk can facilitate investment in public
infrastructure projects. However, for this potential to be realized and to allow this industry to develop in a safe
and sound manner, it will be important, among other measures, that countries adapt their regulatory,
supervisory, and consumer protection frameworks to address the unique risks in Islamic finance, take further
steps to develop Shari`ah-compliant financial markets and monetary instruments, and strengthen the
international architecture for the growing cross-border operations.
The event is jointly organized by the Group of Twenty (G-20) and the IMF.
For more information and details visit the Joint Spring
Meetings website
IMF and the Group of Twenty

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