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Islamic finance: Strong standards of corporate governance are a 'sine qua non'

Nihat Gumus's picture



Proper corporate governance practices in financial institutions should provide added value by enhancing the protection of depositor and investor rights, facilitating access to finance, reducing the cost of capital, improving operational performance, and increasing institutions’ soundness against external shocks. Ensuring strong corporate governance standards is thus essential to the stability and health of all financial institutions, worldwide.
 
Good governance is an important priority for Islamic finance, an aspect of international finance that has enjoyed a stage of significant growth over the past decade. The volume of financial assets that are managed according to Islamic principles has a value of around $2 trillion, having experienced a cumulative average annual growth rate of about 16 percent since 2009 (Graph 1).

Graph 1: The Size of Islamic Finance Assets (USD Billion)


 
Banking has traditionally been the leading sector in the realm of Islamic finance, but the share of other products and institutions within the total realm of Islamic financial assets has been steadily increasing,  as well (Graph 2). For instance, the Sukuk sector – which focuses on securitized asset-based securities – has seen considerable growth over the past six years and, as of 2014, amounted to more than $300 billion. Similar momentum is driving the growth of the Islamic Funds and Takaful (Islamic insurance) sectors. From 2009 to 2014, the assets under management of Islamic Funds has increased from about $40 billion to about $60 billion, while the amount of total gross contribution to Islamic insurance has surged from $7 billion to more than $14 billion.

Graph 2: The Size of Islamic Finance Assets by Sector 2014 YE (%)


 

Can Islamic Finance spur Inclusive Growth & Sustainable Development?

Abayomi Alawode's picture


Islamic finance can connect millions around the globe to the economy (Credit: The Reboot, Flickr)

In the wake of the global financial and economic crisis, the need for a new development model which is more sustainable and also fosters inclusive growth has become more apparent. Could Islamic finance be the answer? Islamic finance promotes risk-sharing, connection to the real economy and emphasizes financial inclusion and social welfare.  Can these dimensions contribute to inclusive growth and sustainable development?

Islamic finance is based on two intrinsic features: risk-sharing and the link between financial transactions and the real economy. Because all financial contracts are backed by real sector assets and risk-sharing among partners, including financing institutions, Islamic financial instruments have relatively more stability than conventional instruments and tend to be more flexible against unanticipated shocks. This critical link brings prudence to the system, promotes equity relative to debt, broadens financial participation, and minimizes overall vulnerability.