The Industry

The Islamic banking industry today stands at several hundred billion dollars (estimates vary), and consists of more than 300 financial institutio ns in and o utside the Muslim world. It is the product of the collective effort of bankers, economists, and Islamic legal scholars over the past several decades to develop financial solutions that meet the religious requirements of Moslem.

It is a young industry and a growing industry, and continues to evolve and expand both financially and geographically. It is indigenous and community-focused: it caters to devout Moslem in indigenous Muslim societies as well as in Muslim minorities of non-Muslim countries. Furthermore, it is an inclusive paradigm: non-Muslim individuals and communities that seek ethical financial solutions have also been attracted to Islamic banking.

The first modern Islamic financial institutions emerged in the 1960s and 1970s. Since then, Islamic banking has spread to a large number of Muslim countries, including the GCC and the Arab world at large, South and Southeast Asia, and even Muslim communities in the West. Bahrain is considered a hub for Islamic banking, with significant activity also taking place in Kuala Lumpur and London.

This is an industry that has gone from commercial banking to syndicated transactions and equities, and more recently, into debt issuance and structured products. Its sophistication and product offering have developed along with this change. At an earlier stage, industry growth was in part a reflection of economic growth in the Islamic world, fuelled primarily by oil wealth. This created a growing middle-wealth segment and hence made banking a necessary service to the larger segment of the population. In the past several years, increased awareness about Islamic banking has led to conversion from conventional banking and continued high growth (15-20% in key markets).

In Indonesia, the growth of Shariah banking has been phenomenal with a consistent above 48% asset growth annually since 2001 (since 2003, the growth rate has been above 94%). In 1997, the country had only one Shariah commercial bank. As of June 2005, there are now 3 Shariah banks and 20 Shariah Banking Units (these are conventional banks which have been granted Shariah banking licenses). This is expected to continue and to accelerate in the future as existing Shariah banks are expanding both their branch networks and their balance sheet.