Size and Scope of the Islamic Finance Industry: An Analysis, The

International Journal of Management,  Mar 2008  by Al-Salem, Faoud

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The few previous attempts to estimate the size and scope of the Islamic finance industry have been imprecise or incomplete. To fill this gap in knowledge, the present study summarizes estimations of the size and scope of the industry by its own practitioners in Kuwait and the Gulf Region. The study results show that over 60 per cent of the industry's assets are in Middle East countries, that the average growth in the industry, measured by total assets controlled, is estimated to have been 25 per cent over the past five years. More data is needed to improve our understanding of what is a relatively new force in world banking.

Introduction

Financial markets and the financial industry are seeing the growth of Islamic banking and finance. Islamic finance forbids dealing in interest as a cost or return on funds, a basic difference with traditional finance. Islamic banks and financial institutions are ones that operate within this prohibition, typically have their headquarters in Islamic countries and are geared to the needs and customs of companies and businesses run and owned by Islamic businesspersons. While it is relatively easy to identify Islamic banks and financial institutions, no research has specifically addressed the question how efficient and effective such organizations are in the countries in which they operate most heavily, such as in the Middle East countries. Several related questions need to be examined in this respect, such as: How well do Islamic financial institutions actually perform compared to their Non-Islamic or Western counterparts? What is the current size and scope of the Islamic finance industry? What is the market for the Islamic banking and financial industry in Moslem and and Non-Moslem countries. What kinds of services are provided by the Islamic finance industry?

The history of Islamic banking dates back to 1975, with the establishment of Bank Faisal. This bank experienced strong growth from its inception due to the strong demand for Islamic banking services in the countries in which it operated. Since then many international banks have established Islamic banking 'units' or 'windows' to provide financial services and products that are in compliance with Sharia-The Islamic Legal Code which expressly forbids dealing in interest as a cost or return on funds.

The growth, in both size and in diversity in the Islamic finance industry has been especially strong over the past few years. Islamic financing has expanded from being an investment vehicle for individuals in retail banking to a diversified sector in its own right to an extent that covers so-called 'sovereign' issues as well as the and the financing of a variety of infrastructure projects. The diversity in that sector is evidenced by the large number of corporate investors who are playing a more significant role in raising financing based on Islamic principles (Devaux, 2005).

Size of the Industry

The statistics on the Islamic finance industry show a growth in the number of institutions, in the size of their operations, and in the diversity of products and services provided. The size of the Islamic finance industry can be estimated in a number of different ways, a problem because this can lead to different estimates of its size and scope, something that is clearly evidenced by Table I. As this table makes clear, there are several ways in the actual size of the industry can and has been estimated.

The first way of estimating the future size of the industry concerns its 'potential' expressed in the form of estimates of likely growth and development, refers to the potential of the Islamic finance industry, without specifying figures. Such admittedly subjective estimates from experts with experience of the industry suggest that Islamic banking services are attracting a 'very large' market and are becoming increasingly 'popular' in the countries in which they are mainly concentrated. This estimation is supported by the fact that there has been a significant growth in the number of Islamic banks and institutions and in their assets, with estimates of growth in its 'banking activity as being at an annual rate of 15% , a figure that some regard as constituting adequate proof of its importance and attractiveness (Jafri, 2006).

The second way of estimating the future size of the Islamic banking industry is by means of or through the percentage of the Islamic world's savings that the Islamic finance industry is likely to expected to 'acquire' over a period of time. Bearing in mind the subjectivity involved in the making of such estimates it is expected that over the next ten years the Islamic finance industry will acquire 40 to 50 per cent of the savings of Moslems in the next ten years (Aayan Report, 2005).

A third way of estimating the future size of the Islamic Finance Industry is by examining the extent to which indicators of its size are likely to grow over the next period. For instance, the assets of Islamic banks are expected to grow at a rate of 24% per annum to $ 1.85 trillion by 2013, without including the so-called Islamic 'windows' and Islamic 'branches' of conventional banks, and excluding growth in investment in the Moslemrelated Insurance industry. Taking the overall growth rate into account including assets controlled, the annual growth rate of the Islamic finance industry has averaged 23% since 1994.