Shariah-Compliant Financial Assets Have Been Growing Strongly

Global Shariah-compliant financial assets have increased significantly over the past three decades, reaching about US$1 trillion in 2010 (figure 1), up from about US$5 billion in the late 1980s. Banking assets account for the bulk of this increase, complemented by Sukuk and assets under management (AUM). Banking assets have been growing rapidly for several decades and rose from about US$386 billion in 2006 to US$939 billion in 2010 (figure 1). Preliminary estimates suggest that they climbed further to about US$1.1 trillion in 2011. In recent years, growth in Islamic financial assets has generally outperformed conventional financial instruments, particularly following the onset of the financial crisis that has been gripping the world since 2008.

Figure 1. Global Shariah-Compliant Financial Assets


The global market in Sukuk has expanded rapidly during this period. Sukuk, or Islamic bonds, are certificates of ownership that are based on the concept of joint ownership of an asset by several financiers, giving it features more like securitized equity-type financing. After dipping with the start of the global financial crisis in 2008, the total volume of issuances more than doubled to reach roughly the equivalent of US$48 billion in 2010 (figure 2). Markets absorbed an average of 800 new issuances a year during 2009 and 2010, driven by a heightened demand for asset-backed instruments. In the first 10 months of 2011, the total volume of Sukuk issuances rose further to about US$50 billion. Although the Sukuk market is small compared to conventional fixed-income or securitized products, the weaker performance of conventional instruments during the crisis is combining with a greater recognition by issuers that Sukuk are a feasible alternative to boost market appetite.

Figure 2. Global Sukuk Issuances


Malaysia is the global market leader for Sukuk issuance, accounting for 63 percent of cumulative Sukuk issuances between 1996 and 2010 (figure 3). Malaysia issues long-term, local currency Sukuk to fund infrastructure projects and contribute to financial stability. The countries of the Gulf Co-operation Council (GCC) hold almost 31 percent of global market share in Sukuk, and several large transactions, like Dubai's issuance of a US$3.5 billion Sukuk in 2006 and Qatar's issuance of a US$9.1 billion Sukuk in 2011, are demonstrating the large potential of Sukuk as a viable way to finance large projects. Saudi Arabia is also considering expanding Sukuk as a vehicle to fund its future infrastructure investments.

Figure 3. Cumulative Sukuk Issuances (1996–2010)



Islamic financial instruments are currently available in at least 70 countries, with widely varying shares of banking services compared to conventional equivalents. The recent financial crisis affected the asset quality of conventional banks adversely. In contrast, as shown in recent research, Islamic banks had higher asset quality, were better capitalized, and more likely to continue their financial intermediation role during the crisis than their conventional counterparts.

The growth of Islamic banks has been significant during the past five years. For example in Qatar, the assets of Islamic banks expanded by 43 percent during 2006-10, substantially faster than the growth in assets of conventional banks, and constituted around 23 percent of the country's total banking assets in 2010. Turkey's Islamic banking sector also grew rapidly compared to conventional counterparts (figure 4).


Figure 4. Growth of Islamic Banking and Conventional Banking Assets in Selected Countries (2006–10)


Islamic mutual funds come in different flavors, dominated by equity, leasing, and commodity funds. The growth of such AUM has slowed since 2008, after expanding by more than 20 percent a year in the first half of the decade. The sector remains dynamic, however, with the number of Islamic funds reaching 699 in mid-2011, compared with 608 in 2009.

In addition to banking, AUM, and capital markets, there is a very vibrant industry of Shariah-compliant financing in other asset classes such as venture capital, private equity, and project finance. Several major infrastructure projects are being financed through Shariah-compliant modes of financing.

It is worth noting that the World Bank Group has sought to support Islamic finance through a variety of initiatives, ranging from academic research to execution of transactions. Engagement on technical assistance, advice, and outreach has centered on collaboration with standard-setting institutions like the Accounting and Auditing Organization for Islamic Financial Institutions (AAIOFI) and the Islamic Financial Services Board (IFSB), as well as work at the country level. The World Bank Group has also tapped Islamic financial markets. The Multilateral Investment Guarantee Agency completed a transaction in Indonesia in FY11, using a murabaha instrument involving exposure of some US$450 million to improve the quality of the mobile network and increase population coverage. The International Bank for Reconstruction and Development launched a five-year RM760 million Islamic bond in 2005, using the well-tested format of bai bithaman ajil, which had previously been used successfully by the International Finance Corporation (IFC), also in the Malaysian market. Recently, IFC also issued Sukuk against a portfolio of leases, which was well received in the market.