Islamic Finance Country Index 2012

The Islamic Finance Country Index(IFCI) is an attempt to compare and contrast Islamic financial activity between countries. First introduced in the Global Islamic Financial Report 2011, the IFCI is a testament to the global reach of Islamic finance. Rizwan Malik provides a summary of the index and latest changes to the ranking.

The Islamic banking and finance industry is at present valued at USD1.357 trillion according to Global Islamic Finance Report 2012 (GIFR 2012) published by Edbiz Consulting. In GIFR 2011, Edbiz Consulting introduced the Islamic Finance Country Index (IFCI), which ranks countries according to their prominence and involvement in Islamic finance. The index is based on a multivariate analysis of a number of variables that contribute to the growth and development of the Islamic banking industry in the country. This means that the rankings are not based on any individual variable. The latest information available on these 8 variables was collected and weights were ascribed for these variables using multivariate analysis. The data was tested to see if it contained any meaningful information to draw conclusions from and in making sure it is presented in an objective manner.

The variables introduced in the Islamic Finance Country index are shown to the right. These variables remain the same for IFCI 2012.

According to the rankings of IFCI 2011, Iran ranked number one. This is the same for IFCI 2012. Although Iran is not one of the major global players in the Islamic banking and finance industry, the local Iranian banking industry follows the precept of Islamic law. The banks in Iran are thus considered Shari’a compliant by default. Iran currently has $330bn assets under management (AUM) increasing from $160bn in 2006 with an annualized growth of 25 percent. Iran is one of the two countries that converted their economy to conform to the Shari’a. It is also currently home to the world’s largest Islamic bank, Bank Melli, which has over $60bn AUM. The Iranian government is keen to encourage the Sukuk issuance for infrastructure development in the country. Previously, Iran issued musharaka sukuk but they are keen to diversify.

The country ranked second according to IFCI 2012 is Malaysia with over $100bn AUM, approximately 22 percent of total assets of the country. Malaysia is a stalwart for the Islamic banking and finance industry: an innovator, pioneer and promoter. It has been at the forefront of product development, sukuk issuances, regulatory change, building a comprehensive financial infrastructure, and adopting best legal practices. Malaysia has done much in terms of the development of human talent, which is key to capacity building in the industry. The foundation to Malaysia’s success has been government support and investment. The government has been proactive in pushing Islamic finance forward. Malaysia is also home to Islamic Financial Services Board (IFSB), one of the two regulators in the global Islamic banking and finance industry. During 2011, Malaysia accounted for 60% of the total sukuk issuance of the world and it appears that this trend is continuing in the first quarter of 2012.

Saudi  Arabia was ranked  3rd according to the IFCI. Its Islamic banking and finance assets accounted for approximately $140bn in AUM. Figures from the banking and finance industry show that there is in- creasing demand for Shari’a-compliant products in the Kingdom with 57% of the assets being Shari’a-compliant (as reported by the Saudi Arabian Monetary Authority (SAMA)). The takaful industry is the fastest-growing Islamic financial segment in Saudi Arabia with assets expected to reach $7bn in 2012. The remainder of the top ten includes Kuwait, UAE, Bahrain, Indonesia, Pakistan, Qatar and Sudan.

The IFCI gives a comparative overview of the state of Islamic banking Industry. The ranking is a composite statistic which accounts for the variables listed above. These rankings will change on an annual basis based on the latest information available about the country and the developments in the country for that period. Comparing the ranking of the IFCI 2011 and IFCI 2012, we have seen changes in the ranking. Countries like Kuwait which was ranked as number six has moved number to number four this year while other countries, such as Indonesia, has moved three places down the ranking from number four to number seven. In the last year, Bahrain has experienced much social and political turmoil, but according to the IFCI this has not had an effect on the Islamic banking and finance industry. The overall ranking has improved from number eight to six. Other countries such as Qatar, United Kingdom, Brunei Darussalam, Jordan, and Kenya have also improved in their ranking compared to IFCI 2011. However, countries like Pakistan, Bangladesh have moved down the rankings.

The uniqueness of the IFCI is that it does not rank countries according to one particular variable. It is based on different variables that are assigned weights according to a multivariate analysis. Such information is vital to the growth of the global Islamic banking and finance industry. Through the IFCI, stakeholders and potential investors will be provided an instant summary of the state of the industry in various countries. However, the IFCI is in its gestation period. For more robust analysis, variables will need to be increased along with a more efficient gathering of data. The IFCI is dependent on the available information and relies upon the availability and authenticity of data. If this is missing, there is an effect on the IFCI.

Currently, the IFCI does not reflect how big or small the industry is when compared to conventional finance. However, going forward, IFCI will adopt a more comparative approach.