Geographical Expansion of Islamic Finance

 Modern Islamic finance has existed since the 1970s. Traditionally concentrated in Muslim majority countries in the Middle East and Asia, in recent years, Islamic finance has expanded to other countries with smaller Muslim populations. The geographical expansion of Islamic finance can be attributed to a number of factors. Muslims represent about a quarter of the world’s population, and there is greater awareness of and demand for Islamic-based financial products by Muslim consumers. Among non-Muslim businesses and investors, there also is growing interest in Islamic finance. Some consider the principles of Islamic finance to be prudent and risk-mitigating, while others are looking to diversify their portfolios or to raise new sources of capital. In the traditional centers of Islamic finance in the Middle East and Asia, Islamic finance activities may be accelerating due to growing oil liquidity and the need for investment in development projects. Countries without large Muslim populations also may be interested in Islamic finance in order to attract new sources of capital or to facilitate trade and investment with Muslim-majority countries.

The Middle East continues to be the primary geographic center for shariah-compliant financing. By some estimates, Iran accounts for about 40% of total global assets in Islamic finance. However, according to some analysts, the reach of Iran’s Islamic finance market may be limited because of international sanctions. Elsewhere in the Middle East, major Islamic finance markets are Bahrain, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates (UAE). More recently, Asia has emerged as the second-largest hub for Islamic finance. Malaysia, a regional leader in Islamic finance, boasts more than half of the global share of Islamic capital market securities. In recent years, Islamic finance has become an increasingly visible form of banking in other parts of the world. Outside of the Middle East and Asia, the United Kingdom, which has a sizeable

Muslim population, often is viewed as the largest Islamic financial center. In August 2004, the United Kingdom’s Financial Services Authority (FSA) approved a banking license for the Islamic Bank of Britain (IBB), the country’s first Islamic bank to serve the consumer market with shariah-compliant products. In March 2006, the FSA licensed the European Islamic Investment

Bank as the United Kingdom’s first independent bank for shariah-compliant investments. Other countries that have made inroads into Islamic finance in recent years include sub-Saharan African countries, Indonesia, and Thailand.

A number of countries are revising their tax, legal, and regulatory frameworks to attract Islamic finance. For example, several countries that want to foster an Islamic financial market are working to address issues in the taxation of Islamic products. The goal is “to create a level playing field with the tax treatment of equivalent conventional products.” European countries working to amend their laws to allow or attract Islamic finance include France and Ireland.

Countries in Asia that are doing so include Japan, South Korea, Hong Kong, Singapore, and Thailand. Australia also is engaged in such efforts.

From a few Islamic financial institutions and banks in the mid-1970s, there are now hundreds operating in over 40 countries around the world. In some countries, such as Iran and Pakistan, Islamic banks are the only mainstream financial institutions. In others, SCF exists alongside conventional banking. Several international banks that offer conventional financial products, such as HSBC, Deutsche Bank, JPMorgan, and Standard Chartered Bank, have opened “Islamic windows” through which they offer shariah-compliant financial products as well.