The Size and Scope of the Islamic Finance Industry: An Analysis

Al-Salem, Faoud, International Journal of Management

The few previous attempts to estimate the size and scope of the Islamic finance industry have been
imprecise or incomplete. To fill this gap in knowledge, the present study summarizes estimations of
the size and scope of the industry by its own practitioners in Kuwait and the Gulf Region. The study
results show that over 60 per cent of the industry's assets are in Middle East countries, that the
average growth in the industry, measured by total assets controlled, is estimated to have been 25
per cent over the past five years. More data is needed to improve our understanding of what is a
relatively new force in world banking.

Introduction

Financial markets and the financial industry are seeing the growth of Islamic banking and finance.
Islamic finance forbids dealing in interest as a cost or return on funds, a basic difference with
traditional finance. Islamic banks and financial institutions are ones that operate within this
prohibition, typically have their headquarters in Islamic countries and are geared to the needs and
customs of companies and businesses run and owned by Islamic businesspersons. While it is
relatively easy to identify Islamic banks and financial institutions, no research has specifically
addressed the question how efficient and effective such organizations are in the countries in which
they operate most heavily, such as in the Middle East countries. Several related questions need to be
examined in this respect, such as: How well do Islamic financial institutions actually perform
compared to their Non-Islamic or Western counterparts? What is the current size and scope of the
Islamic finance industry? What is the market for the Islamic banking and financial industry in Moslem
and and Non-Moslem countries. What kinds of services are provided by the Islamic finance industry?

The history of Islamic banking dates back to 1975, with the establishment of Bank Faisal. This bank
experienced strong growth from its inception due to the strong demand for Islamic banking services
in the countries in which it operated. Since then many international banks have established Islamic
banking 'units' or 'windows' to provide financial services and products that are in compliance with
Sharia-The Islamic Legal Code which expressly forbids dealing in interest as a cost or return on funds.

The growth, in both size and in diversity in the Islamic finance industry has been especially strong
over the past few years. Islamic financing has expanded from being an investment vehicle for
individuals in retail banking to a diversified sector in its own right to an extent that covers so-called
'sovereign' issues as well as the and the financing of a variety of infrastructure projects. The diversity
in that sector is evidenced by the large number of corporate investors who are playing a more
significant role in raising financing based on Islamic principles (Devaux, 2005).
Size of the Industry

The statistics on the Islamic finance industry show a growth in the number of institutions, in the size
of their operations, and in the diversity of products and services provided. The size of the Islamic
finance industry can be estimated in a number of different ways, a problem because this can lead to
different estimates of its size and scope, something that is clearly evidenced by Table I. As this table
makes clear, there are several ways in the actual size of the industry can and has been estimated.

The first way of estimating the future size of the industry concerns its 'potential' expressed in the
form of estimates of likely growth and development, refers to the potential of the Islamic finance
industry, without specifying figures. Such admittedly subjective estimates from experts with
experience of the industry suggest that Islamic banking services are attracting a 'very large' market
and are becoming increasingly 'popular' in the countries in which they are mainly concentrated. This
estimation is supported by the fact that there has been a significant growth in the number of Islamic
banks and institutions and in their assets, with estimates of growth in its 'banking activity as being at
an annual rate of 15% , a figure that some regard as constituting adequate proof of its importance
and attractiveness (Jafri, 2006). …