islamic financial services industry stability report 2015

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  • STABILITY REPORT

    ISLAMIC FINANCIALSERVICES INDUSTRY

    2015

  • ISLAMIC FINANCIAL SERVICES BOARD

    ISLAMIC FINANCIAL SERVICES INDUSTRY

    STABILITY REPORT

    2015

    May 2015

  • Published in 2015 by

    Islamic Financial Services BoardLevel 5, Sasana Kijang, Bank Negara Malaysia

    2, Jalan Dato Onn, 50480 Kuala Lumpur, Malaysia

    ISBN 978-967-5687-42-6

    All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or stored in any retrieval system of any nature without prior written permission, except for permitted fair dealing under the Copyright, Designs and Patents Act 1988, or in accordance with the terms of a license issued by the Copyright, Designs and Patents Act 1988, or in accordance with the terms of a license issued by the Copyright Licensing Agency in respect of photocopying and/or reprographic reproduction.

    Application for permission for other use of copyright material, including permission to reproduce extracts in other published works, shall be made to the publisher(s). Full acknowledgement of the author, publisher(s) and source must be given.

    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

    v

    LIST OF BOXES, TABLES, CHARTS, AND DIAGRAMS vii

    GLOSSARY ix

    LIST OF ABBREVIATIONS xi

    FOREWORD 1

    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

    vi

    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

    REFERENCES 127

  • vii

    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

    TABLES1.1.1.1 Breakdown of Islamic Finance Segments by Region (USD billion, 2014 YTD)1.1.4.1 Insurance Penetration Rates as a % of GDP in Selected Asian and GCC Countries (2012)1.2.2.1 Average Tier 1 Capital Adequacy Ratios (2013)1.2.2.2 Average Bank Balance Sheet Leverage Multiples (2013)1.2.4.1 Demand Comparison for Selected Sukk Issued in 20141.2.4.2 Defaulted and Restructured Sukk (1990 to November 2014)1.2.4.3 Yield Movements on Selected US Dollar Bond and Sukk (June 2014)1.3.1 Average Size of Banking Group2.1.1.1 BCGs Selected Key Recommendations to EMDEs and Small Economies2.1.2.1 Good Practice Principles for Supervisory Colleges2.1.2.2 BI and GI Decomposed by Macro-components2.1.2.3 IFSB-15: Measurement of Capital to Cater for Operational Risk in IIFS2.1.3.1 Principles Regarding the Custody of Collective Investment Scheme Assets2.2.2.1 Summary of Implementation of IFSB Standards by the Respondent RSAs2.2.2.2 Rank of Challenges in Implementing the IFSB Standards3.6.1.1 Mapping the BCPs and CPIFR4.2.10.1 Comparison of PSIFIs and FSIs

    CHARTS1.1.1.1 Islamic Banking Assets in Jurisdictions with an Islamic Finance Sector of Systemic Importance (1H2014)1.1.1.2 Sukk Outstanding in Jurisdictions with an Islamic Finance Sector of Systemic Importance (3Q2014)1.1.1.3 Islamic Banking Share in Total Banking Assets by Jurisdiction (1H2014)1.1.1.4 Shares of Global Islamic Banking Assets (1H2014)1.1.2.1 Islamic Banking Assets Growth Trend (20082014F)1.1.2.2 Islamic Banking Assets and Market Share (1H2014)1.1.2.3 Compound Annual Growth of Key Islamic Banking Statistics1.1.2.4 Islamic Banking Global Average Annual Growth Trends1.1.2.5 Financing Growth Trend by Country1.1.2.6 Deposit Growth Trend by Country1.1.3.1 Sukk Outstanding Trend1.1.3.2 Sukk Issuance Trend1.1.3.3 Corporate Sukk Issuance Trend1.1.3.4 Sukk Issuances by Domicile and Share (10M2014)1.1.3.5 Sukk Issuances by Sector (10M2014)1.1.3.6 Sukk Maturity Trend of New Issuances1.1.3.7 Selected USD Sukk Yields vs. Five-year US Government Securities Yield1.1.3.8 Historical Performance of Selected Global Conventional and Islamic Equity Indices1.1.3.9 Number of Components1.1.3.10 Market Capitalisation1.1.3.11 Sector Allocation (10M2014)1.1.3.12 Regional Allocation (10M2014)1.1.3.13 Growth in Assets under Management and Number of Islamic Funds1.1.3.14 Islamic Fund Assets by Domicile (3Q2014)1.1.3.15 Islamic Fund Assets by Geographical Focus (3Q2014)1.1.3.16 Islamic Fund Assets by Asset Class (3Q2014)1.1.4.1 Global Takful Gross Contribution Trend1.1.4.2 Number of Takful Operators (2013)1.1.4.3 Global Year-to-year Takful Contribution Growth1.1.4.4 Key Takful Business Lines in Major Markets (2013)1.2.1.1 Probability of Recession, Q3-2014 to Q2-20151.2.1.2 Brent Crude Oil (2013 December 2014)1.2.1.3 US Unemployment Rate Seasonally Adjusted1.2.1.4 MSCI Emerging Market Index1.2.1.5 Trade-weighted US Dollar Index: Major Currencies1.2.2.1 Islamic Banking Average Return on Assets and Equity1.2.2.2 Islamic Banking Average Return on Assets by Country1.2.2.3 Islamic Banking Average Net Profit Margin1.2.2.4 Islamic Banking Average Cost to Income

    LIST OF BOXES, TABLES, CHARTS, AND DIAGRAMS

  • viii

    LIST OF BOXES, TABLES, CHARTS, AND DIAGRAMS

    1.2.2.5 Islamic Banking Average Total Financing to Deposits1.2.2.6 Islamic Ba

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