islamic financial services industry stability report 2015
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ISLAMIC FINANCIALSERVICES INDUSTRY
ISLAMIC FINANCIAL SERVICES BOARD
ISLAMIC FINANCIAL SERVICES INDUSTRY
Published in 2015 by
Islamic Financial Services BoardLevel 5, Sasana Kijang, Bank Negara Malaysia
2, Jalan Dato Onn, 50480 Kuala Lumpur, Malaysia
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Islamic Financial Services Board
ABOUT THE ISLAMIC FINANCIAL SERVICES BOARD (IFSB)
The IFSB is an international standard-setting organisation which was officially inaugurated on 3 November 2002 and started operations on 10 March 2003. The organisation promotes and enhances the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles for the industry, broadly defined to include banking, capital markets and insurance sectors. The standards prepared by the IFSB follow a lengthy due process as outlined in its Guidelines and Procedures for the Preparation of Standards/Guidelines, which involves, among others, the issuance of exposure drafts, holding of workshops and, where necessary, public hearings. The IFSB also conducts research and coordinates initiatives on industry-related issues, as well as organises roundtables, seminars and conferences for regulators and industry stakeholders. Towards this end, the IFSB works closely with relevant international, regional and national organisations, research/educational institutions and market players.
For more information about the IFSB, please visit www.ifsb.org.
TABLE OF CONTENTS
LIST OF BOXES, TABLES, CHARTS, AND DIAGRAMS vii
LIST OF ABBREVIATIONS xi
EXECUTIVE SUMMARY 3
1.0 DEVELOPMENT AND ASSESSMENT OF THE RESILIENCE OF THE ISLAMIC FINANCIAL SERVICES INDUSTRY 71.1 Development of the Islamic Financial Services Industry 7 1.1.1 Size of the Industry and Systemically Important Jurisdictions 7 1.1.2 Islamic Banking: Development Review 9 1.1.3 Islamic Capital Markets: Development Review 17 1.1.4 Development Trends in Takful 241.2 Assessment of the Resilience of the Islamic Financial System 26 1.2.1 Overview of the Global Economic and Financial Challenges 26 1.2.2 Islamic Banking: Assessment of the Resilience 28 1.2.3 Takful 44 1.2.4 Islamic Capital Market 481.3. Overall Summary 56
2.0 ISLAMIC FINANCE AND THE CHANGING GLOBAL FINANCIAL ARCHITECTURE 572.1 Global Initiatives to Promote Financial Stability 57 2.1.1 Financial Stability Board 57 2.1.2 Basel Committee on Banking Supervision 59 2.1.3 International Organisation of Securities Commissions 64 2.1.4 International Association of Insurance Supervisors 652.2 Recent Initiatives Undertaken by the IFSB 66 2.2.1 Development of New Standards 66 2.2.2 IFSB Surveys 69 2.2.3 Other Initiatives 76
3.0 CORE PRINCIPLES FOR ISLAMIC FINANCE REGULATION: BUILDING A SURVEILLANCE FRAMEWORK FOR THE ISLAMIC FINANCIAL SYSTEM 81
3.1 Surveillance Framework for the Global Financial System 81 3.1.1 Hierarchy of Financial Sector Surveillance Framework 82 3.1.2 Applicability of Proportionality Principle 823.2 Global Monitoring Framework for Core Principles and Prudential Standards 83 3.2.1 Role of Financial Stability Board and Other Standard-Setters in Monitoring Adherence to Core Principles and Other Standards 833.3 Major Operational Mechanisms to Track the Implementation of Core Principles 84 3.3.1 Self-Assessment by Supervisors 84 3.3.2 Peer Reviews 85 3.3.3 Financial Sector Assessment Programme 853.4 The Need for Core Principles for Islamic Finance Regulation 87 3.4.1 Use of Conventional Core Principles in FSAP 87 3.4.2 Challenges in Regulation of the Islamic Financial Services Industry and Role of the Core Principles 883.5 Studies on the Application of Conventional Core Principles on Islamic Finance 89 3.5.1 Studies by the Conventional Standard-Setting Bodies 89 3.5.2 Working Paper on the Evaluation of Core Principles 903.6 IFSB Core Principles on Islamic Finance Regulation for the Banking Sector 91 3.6.1 The Objectives and General Approach of CPIFR 91 3.6.2 New Core Principles Introduced in CPIFR 93 3.6.3 Preconditions for Effective Supervision 933.7 Conclusion and Going Forward 94
TABLE OF CONTENTS
4.0 EMERGING ISSUES IN ISLAMIC FINANCE 954.1 Financial Consumer Protection in Islamic Finance 95 4.1.1 The Global Compass: G-20 Financial Consumer Protection 95 4.1.2 Instruments of Financial Consumer Protection 96 4.1.3 Regulation in an Islamic Perspective 101 4.1.4 Concluding Remark 1074.2 Towards a Global Islamic Finance Database for Financial Stability 108 4.2.1 Recent Global Financial Crisis and Data Gaps 108 4.2.2 IMFs Financial Soundness Indicators and Data Gap Initiatives 108 4.2.3 Collaboration among International Institutions and Data Gaps Initiatives 112 4.2.4 Islamic Financial Services Industry and Data Gap 113 4.2.5 Initiatives for Islamic Finance Statistics 113 4.2.6 IFSBs Efforts to Establish an Islamic Finance Database 115 4.2.7 Compilation Guide on PSIFIs 116 4.2.8 Pilot Study on PSIFIs 116 4.2.9 Phase III on PSIFIs 116 4.2.10 PSIFIs: A Global Islamic Finance Database and Its Implications 117
5.0 CONCLUDING REMARKS 121
APPENDICES 123Appendix 1: Sample Methodology 123Appendix 2: Selected Features of Sharah-Compliant Deposit Insurance Schemes 125
BOXES1.1 Modernisation of Legal and Regulatory Framework in Malaysias Islamic Finance Industry1.2 Financial Stability and Islamic Banking in the Kingdom of Bahrain4.1 The IMFs Financial Soundness Indicators Initiative: An Overview4.2 Strengthening the Statistical Infrastructure of the Islamic Banking and Financial Services
TABLES22.214.171.124 Breakdown of Islamic Finance Segments by Region (USD billion, 2014 YTD)126.96.36.199 Insurance Penetration Rates as a % of GDP in Selected Asian and GCC Countries (2012)188.8.131.52 Average Tier 1 Capital Adequacy Ratios (2013)184.108.40.206 Average Bank Balance Sheet Leverage Multiples (2013)220.127.116.11 Demand Comparison for Selected Sukk Issued in 2018.104.22.168 Defaulted and Restructured Sukk (1990 to November 2014)22.214.171.124 Yield Movements on Selected US Dollar Bond and Sukk (June 2014)1.3.1 Average Size of Banking Group126.96.36.199 BCGs Selected Key Recommendations to EMDEs and Small Economies188.8.131.52 Good Practice Principles for Supervisory Colleges184.108.40.206 BI and GI Decomposed by Macro-components220.127.116.11 IFSB-15: Measurement of Capital to Cater for Operational Risk in IIFS18.104.22.168 Principles Regarding the Custody of Collective Investment Scheme Assets22.214.171.124 Summary of Implementation of IFSB Standards by the Respondent RSAs126.96.36.199 Rank of Challenges in Implementing the IFSB Standards188.8.131.52 Mapping the BCPs and CPIFR184.108.40.206 Comparison of PSIFIs and FSIs
CHARTS220.127.116.11 Islamic Banking Assets in Jurisdictions with an Islamic Finance Sector of Systemic Importance (1H2014)18.104.22.168 Sukk Outstanding in Jurisdictions with an Islamic Finance Sector of Systemic Importance (3Q2014)22.214.171.124 Islamic Banking Share in Total Banking Assets by Jurisdiction (1H2014)126.96.36.199 Shares of Global Islamic Banking Assets (1H2014)188.8.131.52 Islamic Banking Assets Growth Trend (20082014F)184.108.40.206 Islamic Banking Assets and Market Share (1H2014)220.127.116.11 Compound Annual Growth of Key Islamic Banking Statistics18.104.22.168 Islamic Banking Global Average Annual Growth Trends22.214.171.124 Financing Growth Trend by Country126.96.36.199 Deposit Growth Trend by Country188.8.131.52 Sukk Outstanding Trend184.108.40.206 Sukk Issuance Trend220.127.116.11 Corporate Sukk Issuance Trend18.104.22.168 Sukk Issuances by Domicile and Share (10M2014)22.214.171.124 Sukk Issuances by Sector (10M2014)126.96.36.199 Sukk Maturity Trend of New Issuances188.8.131.52 Selected USD Sukk Yields vs. Five-year US Government Securities Yield184.108.40.206 Historical Performance of Selected Global Conventional and Islamic Equity Indices220.127.116.11 Number of Components18.104.22.168 Market Capitalisation22.214.171.124 Sector Allocation (10M2014)126.96.36.199 Regional Allocation (10M2014)188.8.131.52 Growth in Assets under Management and Number of Islamic Funds184.108.40.206 Islamic Fund Assets by Domicile (3Q2014)220.127.116.11 Islamic Fund Assets by Geographical Focus (3Q2014)18.104.22.168 Islamic Fund Assets by Asset Class (3Q2014)22.214.171.124 Global Takful Gross Contribution Trend126.96.36.199 Number of Takful Operators (2013)188.8.131.52 Global Year-to-year Takful Contribution Growth184.108.40.206 Key Takful Business Lines in Major Markets (2013)220.127.116.11 Probability of Recession, Q3-2014 to Q2-2018.104.22.168 Brent Crude Oil (2013 December 2014)22.214.171.124 US Unemployment Rate Seasonally Adjusted126.96.36.199 MSCI Emerging Market Index188.8.131.52 Trade-weighted US Dollar Index: Major Currencies184.108.40.206 Islamic Banking Average Return on Assets and Equity220.127.116.11 Islamic Banking Average Return on Assets by Country18.104.22.168 Islamic Banking Average Net Profit Margin22.214.171.124 Islamic Banking Average Cost to Income
LIST OF BOXES, TABLES, CHARTS, AND DIAGRAMS
LIST OF BOXES, TABLES, CHARTS, AND DIAGRAMS
126.96.36.199 Islamic Banking Average Total Financing to Deposits188.8.131.52 Islamic Ba