The Islamic finance industry's growth has continued to defy global economic malaise in 2012. And, with more government interest, increasingly complex products and a large untapped customer base, future forecasts are no longer concerned with the industry's ability to continue growing but instead are focusing on the more complex issue of how it will evolve.

An old Egyptian proverb comes to mind when reviewing the 2012 figures for the Islamic finance industry: “At the time of a test, a person rises or falls.” This may well be said to reflect a current dilemma – that a bank’s real worth is known only through the trials and tribulations of the global financial crisis.

In The Banker's 2012 survey of sharia-compliant institutions, total assets increased to $1166bn, from $966bn the year before. This is the sixth consecutive year of growth since our survey began, with assets rising from $386bn in 2006 at a compound annual growth rate (CAGR) of 19%.

The 2012 survey identifies that there are 716 institutions registered globally as sharia-compliant organisations in financial services. Of these, 511 are fully compliant, and 205 operate sharia-compliant windows within a conventional institution or are partially separated from their conventional counterpart. Within the universe of organisations offering sharia-compliant products, 457 institutions reported details of their financial activities.

Of those institutions that reported financial activities, 400 documented sharia-compliant activities as totally separate from any conventional activities. This was a marked increase from 2011, when 345 institutions documented such separation. The new figure represents an 80.5% increase since 2007, when only 221 institutions reported totally separate sharia-compliant financial activities.

For the second year in a row, a number of organisations with significant operations – including HSBC Amanah and Standard Chartered – were unable to provide financial figures for their sharia-compliant activities in time for the survey.

One notable change in the 2012 ranking is the exclusion of financial numbers from domestically owned subsidiaries (13 institutions) and foreign-owned subsidiaries (27 institutions) where financial reporting may have been duplicated in past surveys due to the way in which institutions report their activities within domestic regulatory frameworks. This adjustment to the ranking was made in a bid to further increase the quality of the reporting.

Fledgling industry

The growth of the Islamic finance industry can be measured by the rise in assets. In 2012, 72% of Islamic institutions reported an increase in assets and 27% reported a decline. Profitability is another useful indicator of growth. Nearly half, 48%, of reporting institutions showed positive pre-tax profit growth – down from 72% in 2011 – and 20% showed a decline in profits. In the 2012 survey, 217 institutions increased their Tier 1 capital, which was an improvement on 2011, when 152 increased Tier 1 capital.

As all value is relative in the financial industry, however, not all profit means 'profit'. When it comes to the type of 'profit' that one could argue is a more compelling measure of overall value of industry or sector to society, Islamic finance as an industry continues to lag behind conventional banking. What the figures show is that a small number of institutions are increasingly more profitable, while the vast majority are struggling to control their costs. What is becoming evident is that collecting money and acquiring assets has proven to be easier than generating profits through diversified activities.

One could argue that this discrepancy between different types of profits is representative of the fact that Islamic financial services is still a budding industry. Take, for instance, its exposure to the global financial crisis. In the 2012 survey, only the sub-Saharan Africa region showed any type of decline as total assets dropped by a negligible -0.18% from 2011. Sharia-compliant financial institutions came to the realisation that their exposure to the global financial crisis was limited and the associated risk manageable. Bankers realised that difficulties in the financial industries in the US and Europe did not have as significant impact on their domestic operations. Customers became more sophisticated in their banking needs, desiring to spread their exposure across a wider range of geographies. Bankers today are monitoring the impact of changes in global trade volumes and other macroeconomic events to determine how these will alter the financing needs in their domestic markets.

That said, across the industry, the momentum of Islamic finance continues to defy the economic crisis, as all regions have experienced solid double-digit growth in CAGR, as illustrated in the chart.

Question of growth

Government interest in sharia-compliant finance has also moved forward. In September 2012, Jordan’s lower and upper houses of parliament passed legislation that will enable the issuance of sovereign sukuk, which in turn will create new opportunities for banks in the region. In the same month, the government of Turkey issued its first sovereign sukuk, which will be instrumental in aiding and stimulating banking activities, and attracting new regional investment.

One could argue that governments in the western countries of the Middle East are moving to capitalise on the macroeconomic changes that are occurring as trade and investment in the Middle East and north Africa adjusts to the effects of stagnating conditions in the US and Europe. More importantly, new relationships are being forged across the globe. In Asia, HSBC, Standard Chartered and Deutsche Bank are on the shortlist for Indonesia’s global Islamic bond issuance, which is expected to occur in late 2012 or early 2013.

Perhaps the most frequently asked question at sharia-compliant banking conferences and seminars is how long can the growth of the industry continue at this rate? Each year total assets and profits from sharia-compliant institutions continue to grow, seemingly unfettered by declining global financial conditions.

Dissecting the industry data and looking at retail banking, commercial banking, small and medium-sized enterprise (SME) finance, insurance and microfinance, there is a realisation that growth can continue, simply because less than 20% of the world’s Muslim population has access to – or participates in – formal financial systems. Quite simply, millions of Muslim (and non-Muslim) customers have yet to experience sharia-compliant banking and finance, and in many countries the vast majority of the population has not experienced conventional finance either.

It is the belief of many scholars, analysts and practitioners that as Africa, the Middle East and Asia see their middle classes grow, the appetite for Islamic finance will only increase, not as an alternative form of conventional banking but as a form of financial intermediation that best fits with domestic cultural beliefs. Therefore banks need to be vigilant in understanding how their value proposition serves the local community as they are a direct reflection of the promise of Islamic finance and of a more equitable form of financial mechanism and mediation.

Islamic finance reaches critical mass

Division or diversification

As an industry, Islamic banking and sharia-compliant finance is weathering the global financial storm with resounding resolve as institutions strive to further improve the industry while maintaining market growth. Individual institutions on a global basis are engaged in, or at the very least seriously contemplating, transnational, regional or global expansion, especially as they continue to acquire more assets and customers, and form alliances with other banks.

A growing debate among sharia scholars is concerning the interpretations of sharia principles, with the application of Islamic ideals on financial transactions ranging from conservative to liberal. In the view of some industry analysts, this can be seen as a growing division between traditional and non-traditional interpretations of how to apply sharia principles to financial products, which are growing in complexity.

Sharia-compliant products are being developed to meet the changing needs of people, governments and investors across the Muslim world. New thinking on how to create products that no longer mimic conventional banking products presents a challenge to both scholars and bankers.

Bankers in investment banking, retail banking, SME financing and microfinance activities are considering their basic value proposition with an eye to increasing their competitiveness – both to conventional and other Islamic banks – through product innovation. Consequently, many industry analysts see the debate on interpretations as a healthy turn in an industry that has been quick in growing but slow in innovating. The differences in sharia interpretations can be viewed as a strength of the industry, which adapts and changes to meet the rising needs of Muslims under numerous and varied regulatory regimes. 

Regulation and harmonisation

Organisations such as the Islamic Financial Services Board, the Labuan International Business and Financial Centre, the Accounting and Auditing Organisation for Islamic Financial Institutions and the central banks of Bahrain, Malaysia, Qatar and the United Arab Emirates are continuing to increase the quality of the industry by introducing new standards and regulatory structures in an effort to build market confidence as the industry continues to mature.

Standardisation is needed to bring clarity to the industry, but this is difficult given the different interpretations of sharia principles by different scholars. What some industry analysts see as an inconsistency in a rapidly changing industry becomes a point to be addressed by bankers and regulators.

The key issue that scholars are considering is how to maintain the balance between the need for standardisation – which promotes market quality, consistency and a perceived stability – and the need for diversity of interpretations, which will enable the Islamic finance industry to adapt to changing macroeconomic and domestic market conditions. Far from a challenge, this paradox is a strength of sharia-compliant finance.

Therefore, organisations are working towards the increased harmonisation of sharia interpretations. Since there is no hierarchical structure among sharia scholars, harmonisation is intended as a mechanism to increase the awareness of ruling on products and compliance to all scholars, so they have a broader knowledge base from which to provide more comprehensive interpretations.

Future agenda

Two key shortages are impeding even faster growth of the Islamic financial system: sharia scholars and banking talent. Malaysia has been at the vanguard of Islamic finance and continues to break new ground by encouraging women to become sharia scholars. During the past six years, the presence of women in sharia boards in banks in Malaysia has increased, though the issue is still viewed as a contentious one in the country.

Even moving past gender issues, there is still a shortage of scholars and talent. Globally, there are approximately 220 sharia scholars able to address the needs of this rapidly growing industry. A new generation of scholars is undergoing training and is beginning to emerge; however, they lack one final credential: experience. This translates into a continued shortage of sharia scholars for the immediate future, with a new generation waiting in the wings.

The strategy agenda for senior bank executives in sharia-compliant finance in 2013 should focus on the following:

  • managing growth, particularly regional and transnational expansion;
  • building the brand and identifying with emerging Muslim lifestyles;
  • engaging with customers, which means both building closer ties with existing customers and reaching down the economic pyramid to the vast unbanked populations;
  • creating a culture of innovation and looking at how to apply innovation across all aspects of the bank from using technology in distribution to creating new products and improving the quality of service;
  • reducing the cost of sharia-compliance by leveraging corporate knowledge with technology to reduce the reporting requirements and compliance issues;
  • operational streamlining such as using technology to reduce the high cost of distribution in retail banking in emerging economies and compressing business processes to focus on building organisational agility;
  • investing in talent and making significant investments to upgrade the quality of banking professionals at every level in the organisation; and
  • risk management, as expanding across borders and moving into new customer segments demands new thinking on how to manage risk in the organisation.

The Chinese character for crisis is composed of two symbols: fear and opportunity. Fear sits on the left (west) side and opportunity sits on the right (east). This is a good analogy for the current state of global banks. The West is concerned with regulatory problems, market volatility and sluggish economies, while the East is challenged by changes in domestic spending, rising middle classes and a change in trading partners. Between fear and opportunity sits the Islamic finance industry.

As policy-makers view and revise regulatory structures to enable a broader application of sharia-compliant banking and finance to domestic markets, senior bankers are taking a new look at how to expand their operations, reach new customers, reduce their operating costs, and innovate with new products and technologies. Strategies in Islamic banks are changing their focus from a fixation on cost control and compliance to one on how to improve branding, create new products aimed at facilitating a Muslim lifestyle and how to reach more people at every level of the economic pyramid.  

Final thoughts

The Banker’s 2012 survey strives for reporting excellence in the compilation and consolidation of the financial data supplied by banks and central banks; its statistics depend on this. As the industry continues to change and mature, the need for data by financial institutions to drive strategic decision-making becomes more and more crucial in establishing the domestic value proposition for sharia-compliant finance.

Joseph DiVanna is the CEO of Maris Strategies and author of numerous books and articles on banking and finance. His latest book, Weathering the Financial Storm (2012), looks at the impact of the global crisis on banks in the Middle East and north Africa.


Since its inception in 2007, The Banker’s Top Islamic Financial Institutions listing has aimed to take the pulse of global Islamic banking and financial industry. Over the past five years, the ranking has gained an important place for those with a vested interest in Islamic finance and is now regarded as one of the most credible sources for measuring the size and growth rate of the global Islamic finance industry.

The methodology employed in the Top Islamic Financial Institutions strives to adapt to market changes while simultaneously maintaining the fundamental approach that preserves the statistical soundness readers expect from The Banker and Maris Strategies.

Information collation

Institutions offering sharia-compliant financial services are identified from various sources including central banks, government financial supervisory agencies, and other public and private agencies providing accounting and auditing services for Islamic financial institutions. The Banker’s research team contacted these institutions to request their latest audited financial reports.

Once the latest financial data of each Islamic financial institution was received, the data was verified by comparing the information with additional data sets from other statistical sources, including central banks, stock exchanges and regulators. This process was developed to produce the highest quality information from an industry in continual redefinition and growth. 

All financial information used on the ranking is based on publicly available annual data, which is typically verified by independent auditors and sharia supervisory boards before publication. The methodology uses year-end financial data in lieu of quarterly data to provide stability in the rankings and a benchmark for the industry. Audited data enables the comparison of institutions by key indices, such as growth and profitability, on a like-for-like basis.

The primary ranking for Top Islamic Financial Institutions uses sharia-compliant total assets as the main criterion. The Banker acknowledges that using sharia-compliant assets creates a bias toward deposit taking institutions. Furthermore, such a choice does not recognise all of the business activities or overall contributions of institutions such as investment banks, insurance companies or other financial services providers to the global Islamic financial industry. However, for the purposes of depicting the entire industry, The Banker believes that a baseline for comparison was necessary.

Using sharia-compliant assets provided the most convenient mechanism to illustrate the totality and variety of the market. In forthcoming years The Banker intends to work with investment banks and insurance companies to develop a descriptive measure to reflect the role these institutions play and the value they generate in the market.

New aspects

The survey also uses pre-tax profits as a base measure of an institution’s performance. One new aspect of the methodology for the 2012 ranking is the use of net operating income of Islamic windows. Pre-tax profit for windows refers to the parent company, not the window. The definition of net operating income is income after total impairment charges and provisions and before administrative and operating costs, including staff expenses.

Another significant change to the methodology is the use of consolidated figures. If a parent company or holding company issues a consolidated set of figures indicating total sharia-compliant activities, the foreign-owned and domestic subsidiaries are not included separately in the calculation of total global sharia-compliant assets, as they will have been included in the figures of their holding companies. If the parent company does not report sharia-compliant assets, the subsidiaries are included in the ranking individually. That said, the listings by country will continue to include foreign-owned subsidiaries in the countries where they operate.

In order to accurately reflect the structural changes in the industry and to provide a clearer representation of the institutions shaping the direction of Islamic financial activities, institutions that have not reported data since 2009 have been dropped from the ranking. An institution will be reintegrated into future rankings if it begins reporting data that can be used in the ranking. 

To minimise the effect of currency rate fluctuation when comparing the institutions, annualised foreign currency rates from the International Monetary Fund's Government Finance Statistics Yearbook were used when converting local currencies to US dollars. In regard to currency rate fluctuation, The Banker has used its own published figures from the previous year (in this year’s case, 2011) in order to be consistent with the year-on-year principle when calculating percentage change. If an Islamic institution has restated a previous year’s figures due to errors or newly audited calculations, this has been reflected in the revised figures for this year’s ranking.

In these cases, it must be emphasised that reporting institutions are responsible for providing us with accurate financial data, and The Banker works with institutions to reflect the accuracy of data on a continuous basis.

Joseph Divanna is the CEO and managing director of Maris Strategies. Dr Jay Jung is a senior researcher at Maris Strategies, specialising in African and Middle Eastern economics.


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