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

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

There is a general agreement that Islamic banking and finance is concentrated in the Gulf region and that it is not expected to spread beyond to Arab and Islamic countries. It is estimated that 63% of the total assets of Islamic banks and financial institutions are in the Middle East (Khooja 2006). In this area, Islamic banks and financial institutions are considered as an 'alternative' to conventional or orthodox banks and financial institutions and to have a 'natural market' in an area where consumers want to buy and use Islamic products and services. It is an industry which 'fits very well' with the retailing banking and borrowing needs of a growing population eager to rapidly improve its living standards. In Kuwait, the activity of conventional investment companies is heavily concentrated in foreign markets while the core business of Islamic investment companies is domestic. While estimates of its future size vary according to the method used, as shown in this paper, there is agreement that the Islamic finance industry has the potential to gain a larger market share; perhaps by entering new markets such as Iraq, Libya, Morocco. Syria, and Iran. Nevertheless, it is a widely-shared opinion that even in the Gulf Region, Islamic banking, although important, will remain a complement to, not a substitute for, conventional banking in the long run (Al Bahar, 2005)

Islamic financial institutions have been able to enter international markets successfully, currently managing $700 billion in assets. The size of Islamic financial dealings affects local markets in some countries, like Malaysia, Bahrain, and Indonesia. However, its impact on international financial markets can still only be regarded as 'developing' given its current small size (El Qorchi, 2005). In addition to meeting Islamic Code requirements and satisfying the needs of Moslem customers, the expansion of Islamic financial services to customers around the world has been helped by the growth in information technology and by the 'new legislation' passed in many countries, both of which have made the movement of funds more flexible and created a 'window of opportunity' for Islamic banks and financial institutions (Al Muzaini, 2005). Although few in number and slow to develop, there is strong demand for Islamic investment products. However, at the present time even in Moslem countries, there is a 'wide gap' between the number of conventional or traditional institutions and the number of Islamic institutions, especially banks, operating in the various countries. Some of these latter traditional or conventional institutions are more than 200 years old, compared with the oldest Islamic institution in Kuwait which as started only 30 years ago. It is held by the present author that, given current trends and attitudes which signs of increasing not decreasing in strength, this gap will be closed in time, with a relatively larger increase in the number of new Islamic banks and financial institutions than traditional or conventional ones in various countries, not just Moslem countries. In this respect, the number of Islamic banks established has been of the order of 3-4 % annually across the world, most of it in Islamic countries. An increase is projected in the number of alliances developed to establish new Islamic Banks, in the provision of licenses for Moslem-related insurance companies, and in the number of new geographic markets for Islamic banks and financial institutions, such as Malaysia ( CIBAFI, 2006).