IFSB: Islamic Financial Services Industry Stability Report - 2017

Transcription

1. ISLAMIC FINANCIAL SERVICES INDUSTRY STABILITY REPORT 2017 ISLAMIC FINANCIAL SERVICES INDUSTRY STABILITY REPORT http ://www.ifsb.org 2017
2. ISLAMIC FINANCIAL SERVICES BOARD ISLAMIC FINANCIAL SERVICES INDUSTRY STABILITY REPORT 2017 May 2017
3. This Report is printed with Technical Assistance Support from the Asian Development Bank Published by Islamic Financial Services Board Level 5 , Sasana Kijang, Bank Negara Malaysia 2, Jalan Dato’ Onn, 50480 Kuala Lumpur, Malaysia Email: ifsb_sec@ifsb.org ISBN 978-967-5687-42-6 All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or stored in any retrieval system of any nature without prior written permission, except for permitted fair dealing under the Copyright, Designs and Patents Act 1988, or in accordance with the terms of a licence issued by the Copyright Licensing Agency in respect of photocopying and/or reprographic reproduction. Application for permission for other use of copyright material, including permission to reproduce extracts in other published works, shall be made to the publisher(s). Full acknowledgement of the author, publisher(s) and source must be given. © 2017 Islamic Financial Services Board
4. ABOUT THE ISLAMIC FINANCIAL SERVICES BOARD (IFSB) The IFSB is an international standard-setting organisation which was officially inaugurated on 3 November 2002 and started operations on 10 March 2003. The organisation promotes and enhances the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles for the industry, broadly defined to include banking, capital markets and insurance sectors. The standards prepared by the IFSB follow a lengthy due process as outlined in its Guidelines and Procedures for the Preparation of Standards/Guidelines, which involve, among others, the issuance of exposure drafts, holding of workshops and, where necessary, public hearings. The IFSB also conducts research and coordinates initiatives on industry-related issues, as well as organises roundtables, seminars and conferences for regulators and industry stakeholders. Towards this end, the IFSB works closely with relevant international, regional and national organisations, research/educational institutions and market players. For more information about the IFSB, please visit www.ifsb.org.
6. TABLE OF CONTENTS LIST OF BOXES , TABLES, CHARTS AND DIAGRAMS LIST OF ABBREVIATIONS GLOSSARY FOREWORD EXECUTIVE SUMMARY 1 3 1.0 7 DEVELOPMENT OF THE ISLAMIC FINANCIAL SERVICES INDUSTRY (IFSI) 1.1 1.2 1.3 1.4 1.5 2.0 3.0 4.0 Size of the Industry and Jurisdictions with Systemically Important IFSI Trends in the Development of Islamic Banking Islamic Capital Markets: Development Review Takāful: Development Review Overall Summary 7 10 15 26 31 ISLAMIC FINANCE AND THE CHANGING GLOBAL FINANCIAL ARCHITECTURE 33 2.1 2.2 33 44 Global Developments and Impact of IFSI Recent Initiatives Undertaken by the IFSB ASSESSMENT OF THE RESILIENCE OF THE ISLAMIC FINANCIAL SYSTEM 63 3.1 3.2 3.3 3.4 3.5 63 63 85 94 98 Introduction Islamic Banking: Assessment of Resilience Islamic Capital Market: Assessment of Resilience Takāful: Assessment of its Resilience Overall Summary EMERGING ISSUES IN ISLAMIC FINANCE 101 4.1 Stress Testing Islamic Banks: Essential Perspectives and Preliminary Empirical Insights 4.2 FinTech in Islamic Finance: Sharīʻah and Regulatory Aspects 101 114 5.0CONCLUSION 133 BIBLIOGRAPHY AND REFERENCES 135 APPENDIX 143
7. LIST OF BOXES , TABLES, CHARTS AND DIAGRAMS 1.1.1 1.3.2.1 1.4.1 2.2.2.1 3.2.3.1 3.2.4.1 3.2.6.1 3.2.6.2 3.3.1.1 3.3.1.2 3.3.1.3 3.3.2.1 4.1.3.1.1 4.1.3.1.2 4.1.3.1.3 4.1.3.1.4 4.1.3.1.5 4.2.3.1 1.2.1 3.2.1 4.1.1 4.1.1 3.4.13 1.1.1 1.1.2 1.1.3 1.14 1.1.5 1.1.6 1.2.1 1.2.2 1.2.3 1.2.4 1.2.5 1.2.6 1.3.1.1 1.3.1.2 1.3.1.3 1.3.1.4 1.3.1.5 1.3.1.6 (a) 1.3.1.6 (b) 1.3.1.7 1.3.1.8 1.3.1.9 1.3.1.10 1.3.2.1 1.3.2.2 1.3.2.3 TABLES Breakdown of IFSI by Sector and by Region (USD billion, 2016*) Total Returns of Dow Jones Global Index versus Dow Jones Islamic Market World Index Foreign Acquisitions in the Insurance and Takāful Industry, Malaysia and Indonesia IFSB Standards Covered in the 2016 Implementation Survey Total Islamic Financing Growth and Islamic Financing Growth to Private Sector by Country (y-o-y) Islamic Banking Sectoral Composition of Financing and NPF by Country Foreign Currency Funding and Financing’s Share of Total Funding and Financing Average Profit-Sharing Investment Accounts Share to Total Deposit by Country Demand Comparison for Selected* Ṣukūk Issued in 2016 Defaulted and Restructured Ṣukūk (1990–2016) Pricing of Selected Sovereign Ṣukūk and Bonds Issued in 2016 (Domestic Market) Price Returns of Dow Jones Emerging and Developed Markets Index – Islamic versus Conventional (2016) Summary Panel Data Statistics and Methodology Determinants of NPFs across the Islamic Banking Industry Determinants of Financing Growth across the Islamic Banking Industry Determinants of Deposit Growth across the Islamic Banking Industry Determinants of Assets’ Growth across the Islamic Banking Industry Alternative Finance in the UK, the EU and North America (NA), 2015 [in million] BOXES Prudential and Structural Islamic Financial Indicators (PSIFIs): Features and Application Methodology to the Stability Report The Development of the Islamic Financial Sector in Indonesia Bank Stress Testing at the IMF: Evolving Practices and Moving Frontiers Financial Inclusion and FinTech DIAGRAMS / FIGURES / EXHIBIT Channels by which Political Instability is Transmitted to Economic Activity CHARTS / GRAPHS Sectoral Composition of the Global IFSI (2016) Islamic Banking Share in Total Banking Assets by Jurisdiction (1H2016) Islamic Banking Assets in Jurisdictions with an Islamic Finance Sector of Systemic Importance (1H2016) Ṣukūk Outstanding in Jurisdictions* with an Islamic Finance Sector of Systemic Importance (2016) Breakdown of IFSI by Region (2016) Shares of Global Islamic Banking Assets* (1H2016) Compound Weighted Average Growth of Key Islamic Banking Statistics (4Q2013–2Q2016)14 Islamic Banking Average Annual Growth Trends (y-o-y) (4Q2014–2Q2016)15 Islamic Banking Average Annual Growth by Country (2015) Islamic Banking Average Annual Growth (y-o-y) by Country (2Q2016) Islamic Banking Assets and Market Share (2Q2016) Islamic Banking Assets (2008–2016F) Global Ṣukūk Outstanding Trend (2003–2016) Global Ṣukūk Issuances – Sovereign and Corporate (2004–2016) Sovereign Ṣukūk Issuances by Jurisdiction* (2016) Global Corporate Ṣukūk Issuances (2004–2016) Corporate Ṣukūk Issuances by Jurisdiction* (2016) Ṣukūk Issuances by Jurisdiction and Share (2016) Ṣukūk Issuances [ex-MDBs and IOs] by Jurisdiction and Share (2016) Ṣukūk Issuances by Sector* (2016) Ṣukūk Maturity Trend of New Issuances (2008–2016) Selected USD Ṣukūk Yields versus US Government Securities Yield (February 2016 – January 2017) Ṣukūk versus Conventional Bond Issuance Sector Allocation (2016) Number of Components (2016) Market Capitalisation (2016) ISLAMIC FINANCIAL SERVICES INDUSTRY STABILITY REPORT 2017
8. LIST OF BOXES , TABLES, CHARTS AND DIAGRAMS 1.3.2.4 1.3.2.5 1.3.2.6 1.3.2.7 1.3.2.8 1.4.1 1.4.2 1.4.3 1.4.4 1.4.5 1.4.6 1.4.7 1.4.8 1.4.9 1.4.10 1.4.11 1.4.12 1.4.13 2.2.2.1 2.2.2.2 2.2.2.3 2.2.2.4 2.2.2.5 2.2.2.6 2.2.2.7 2.2.2.8 2.2.2.9 2.2.2.10 2.2.2.11 3.2.1.1 3.2.1.2 3.2.1.3 3.2.1.4 3.2.1.5 3.2.1.6 3.2.1.7 3.2.2.1 3.2.2.2 3.2.2.3 3.2.3.1 3.2.3.2 3.2.4.1 3.2.4.2 3.2.5.1 3.2.5.2 3.2.5.3 3.2.5.4 3.2.5.5 3.2.6.1 3.2.6.2 CHARTS / GRAPHS 10-Year Historical Performance of Dow Jones Global Index versus Dow Jones Islamic Market World Index (2006–2016) Assets under Management and Number of Islamic Funds (2008-2016) Islamic Fund Assets by Domicile (2016) Islamic Fund Assets by Geographical Focus (2016) Islamic Fund Assets by Asset Class* (2016) Growth Rate of Premiums in Insurance Sector (total, % y-o-y) (2008–2015) Global Real Premium Growth Rates (2015) Growth Rate of Premiums in Takāful and Conventional Insurance Sectors (% y-o-y) (2008–2015) Number of Takāful Operators and Windows Globally (2015)63 Number of Takāful Operators (excluding Windows) by Region (2015) Gross Contributions by Country Groups (2009–2015) Contributions to Total Growth of Takāful Industry (2009–2015) Gross Contributions by Country (2015) Gross Contributions per Takāful Operator (2015) Insurance Penetration Rates in Selected Countries (% GDP) (2015) Share of Takāful Gross Premiums in Total Gross Premiums by Selected Countries (2015) Key Takāful Business Lines in Sample Markets (2015) Share of Family Takāful in Total Gross Takāful Contributions (2009–2015) RSA Overall Implementation Status Consistent RSA Members – Overall Implementation Status RSA Consistent Members and Implementation by “Complete” Status Standards Completed by Timeline Challenges in Implementation Challenges in Implementation (Regional Breakdown of Cumulative Ratings for Two Categories – Extremely Significant and Very Significant) Support in Implementing Standards Support in Implementing Standards – Regional Cluster (Top Two Categories – Extremely Significant and Very Significant) FIS Workshop and Direct TA Standards Priority for Workshop and Direct TA Standards Priority for Workshop and Direct TA Weighted Average ROA and ROE for Stand-alone Islamic Banks112 Average ROA for Stand-alone Islamic Banks by Country Average ROE for Stand-alone Islamic Banks by Country Islamic Banking Average Net Profit Margin116 Islamic Banking Average Cost-to-Income118 Islamic Banking Cost-to-Income by Country Cost to Income (Stand-alone Islamic Banks and Islamic Banking Windows) as at 2Q2016 Islamic Banking Financing-to-Deposit Ratio by Country Islamic Banking Liquid Assets to Short-term Liabilities by Country Islamic Banking Liquid Assets Ratio125 Islamic Banking Sectoral Composition of Financing by Country (2Q2016)127 Average and By-Country Growth in Size of Islamic Financing to Private Sector (y-o-y) Islamic Banking Average Gross Non-Performing Financing to Total Financing Islamic Banking Average Gross Non-Performing Financing to Total Financing by Country Islamic Banking Average Capital Adequacy Ratios139 Islamic Banking Average Capital Adequacy Ratios (ex-Iran) Islamic Banking Average Total Capital Adequacy Ratio by Country Islamic Banking Average Tier-1 Capital Adequacy Ratio by Country Islamic Banking Average Total and Tier-1 Capital Adequacy Ratio by Country (2Q2016) Islamic Banking Average Foreign Currency Funding and Financing to Total Funding and Financing140 Islamic Banking Average Foreign Currency Funding to Total Funding by Country ISLAMIC FINANCIAL SERVICES INDUSTRY STABILITY REPORT 2017
9. LIST OF BOXES , TABLES, CHARTS AND DIAGRAMS 3.2.6.3 3.2.7.1 3.2.7.2 3.3.1.1 3.3.1.2 3.3.1.3 3.3.1.4(a) 3.3.1.4(b) 3.3.1.4(c) 3.3.1.4(d) 3.3.1.5 3.3.2.1 3.3.2.2 3.3.2.3 3.3.2.4 3.3.2.5 3.3.2.6 3.4.1 3.4.2 3.4.3 3.4.4 3.4.5 3.4.6 3.4.7 3.4.8 3.4.9 3.4.10 3.4.11 3.4.12 CHARTS / GRAPHS Islamic Banking Average Net Foreign Exchange Open Position to Capital142 Islamic Banking Average and By-Country Leverage Multiples Islamic Banking Leverage Ratio by Country Top 10 Global Ṣukūk Outstanding Jurisdictions* (2016) Geographical Distribution of Selected Ṣukūk Papers Issued in 2016 Investors’ Breakdown of Selected Ṣukūk Papers Issued in 2016 Ṣukūk and Bond Pricing Comparison in Qatari Secondary Market (2016) Ṣukūk and Bond Pricing Comparison in Pakistani Secondary Market (2016) Ṣukūk and Bond Pricing Comparison in Indonesian Secondary Market (2016) Ṣukūk and Bond Pricing Comparison in Malaysian Secondary Market (2016) Global New Ṣukūk Issuances by Structure (2016) Price Returns of DJIM Developed Markets and DJIM Emerging Markets Indices (2016) Price Returns of DJIM Equity Indices by Region (2016) Returns of Islamic Funds by Asset Type* (2016) Historical Returns of Islamic Funds by Asset Type Returns of Islamic Funds by Geographical Focus (2016) Number of Islamic Funds by Asset Size (2016) Risk Retention Ratios (Family Takāful) (2011–2015) Risk Retention Ratios (General Takāful) (2011–2015) Return on Assets (2011–2015) Return on Equity (2011–2015) Claims Ratio, General Takāful (2011–2015) Claims Ratio, Family Takāful (2011–2015) Expense Ratio (2011–2015) Investment Composition for the Aggregate Shareholders’ Funds (2015)185 Investment Composition for General Takāful Funds (2015)* Evolution of Investment Portfolio of General Takāful Funds in Saudi Arabia (2011–2015)* Evolution of Investment Portfolio of General Takāful Funds in Malaysia (2011–2015)* Evolution of Investment Portfolio of General Takāful Funds in Pakistan (2011–2015)* ISLAMIC FINANCIAL SERVICES INDUSTRY STABILITY REPORT 2017
10. LIST OF ABBREVIATIONS ABBREVIATIONS ADB Asian Development Bank AMA Advanced Measurement Approach AMDB Autoriti Monetari Brunei Darussalam AML Anti-Money Laundering APICORP Arab Petroleum Investments Corporation AuM Assets Under Management BCBS Basel Committee on Banking Supervision BND Brunei dollar CAGR Compound Annual Growth Rate CAR Capital Adequacy Ratio CCA Contingent Claims Analysis CEBS Committee of European Banking Supervisors CIBAFI General Council for Islamic Banks and Financial Institutions CIMDO Consistent Information Multivariate Density Optimizing CIS Collective Investment Schemes D &Y Deibold and Yilmaz DAO Decentralised Autonomous Organisations DCR Displaced Commercial Risk DFSA Dubai Financial Services Authority DJ Global Dow Jones Global Index DJ Islamic Dow Jones Islamic Market World Index DLT Distributed Ledger Technology DSGE Dynamic Stochastic General Equilibrium ECL Expected Credit Losses EU European Union FATF Financial Action Task Force FCA Financial Conduct Authority FDI Foreign Direct Investment FDIC Federal Deposit Insurance Corporation FDR Financing-to-deposits ratio FinTech Financial Technology FMI Financial Market Infrastructure FSAP Financial Sector Assessment Programme FSB Financial Stability Board FSI Financial Soundness Indicators FX Foreign Exchange GAAP Generally Accepted Accounting Principles GARCH Generalised Autoregressive Conditional Heteroscedasticity GCC Gulf Cooperation Council GEM Growth and Emerging Markets GFC Global Financial Crisis GIC Gulf Investment Corporation GIIB Government Islamic Investment Bond GMM Generalised Method of Moments GRE Government Related Entities G-SIBs Global Systemically Important Banks G-SIIs Global Systemically Important Insurers HQLA High Quality Liquid Assets IAH Investment Account Holders IAIG Internationally Active Insurance Group IAIS International Association of Insurance Supervisors ICD Islamic Corporation for the Development of the Private Sector ICIS Islamic Collective Investment Schemes ISLAMIC FINANCIAL SERVICES INDUSTRY STABILITY REPORT 2017
11. LIST OF ABBREVIATIONS ABBREVIATIONS ICM Islamic Capital Market ICS Global Insurance Capital Standard IDB Islamic Development Bank IFC International Finance Corporation IFR Islamic Finance Rules IFSB Islamic Financial Services Board IFSI Islamic Financial Services Industry IIFS Institutions offering Islamic Financial Services IILM International Islamic Liquidity Management Corporation IMF International Monetary Fund IO International Organisations IOSCO International Organisation of Securities Commissions IPO Initial Public Offering IRRBB Interest Rate Risk in the Banking Book JII Jakarta Islamic Index JOD Jordanian Dinar KYC Know Your Customer LCR Liquidity Coverage Ratio M &A Mergers and Acquisitions MAV Market Adjusted Valuation MDB Multilateral Development Banks MENA Middle East and North Africa NFEOPC Net Foreign Exchange Open Position to Capital NPF Non-Performing Financing NPL Non-Performing Loans NSFR Net Stable Funding Ratio OECD Organization for Economic Cooperation and Development OIC Organisation of Islamic Cooperation OJK Otoritas Jasa Keuangan OMR Omani Rial OPEC Organization of the Petroleum Exporting Countries OTC Over the Counter P&L Profit and Loss P2P Peer to Peer PSIA Profit Sharing Investment Accounts PSIFIs Prudential and Structural Islamic Financial Indicators REITs Real Estate Investment Trusts ROA Return on Assets ROE Return on Equity RRF Retakāful Risk Fund RRP Resolution and Recovery Plan RRR Rate of Return Risk RRRBB Rate of Return Risk in the Banking Book RSA Regulatory and Supervisory Authority RTUs Retakāful Undertakings RWA Risk Weighted Assets SAMA Saudi Arabian Monetary Authority SBP State Bank of Pakistan SECP Securities & Exchange Commission of Pakistan SHF Shareholders Fund SMA Standardised Measurement Approach SME Small and Medium Enterprises SNCR Sharīʻah Non-Compliance Risk ISLAMIC FINANCIAL SERVICES INDUSTRY STABILITY REPORT 2017
12. LIST OF ABBREVIATIONS ABBREVIATIONS SPOE Single-Point-Of-Entry SR IFSB IFSI Stability Report SRA Systemic Risk Amplification STC Simple , Transparent and Comparable TA Technical Assistance TLAC Total Loss-Absorbing Capacity TN-2 IFSB Technical Note 2 UAE United Arab Emirates UFA Universal Financial Access USD United States Dollar VaR Value at Risk ISLAMIC FINANCIAL SERVICES INDUSTRY STABILITY REPORT 2017
13. GLOSSARY Commodity Mur ābaḥah A murābaḥah transaction based on the purchase of a commodity from a seller or a broker or Tawarruq and its resale to the customer on the basis of deferred murābaḥah, followed by the sale of the commodity by the customer for a spot price to a third party for the purpose of obtaining liquidity, provided that there are no links between the two contracts. Ijārah A contract made to lease the usufruct of a specified asset for an agreed period against a specified rental. It could be preceded by a unilateral binding promise from one of the contracting parties. The ijārah contract is binding on both contracting parties. Islamic window That part of a conventional financial institution (which may be a branch or a dedicated unit of that institution) that provides both fund management (investment accounts) and financing and investment that are Sharīʻah-compliant, with separate funds. It could also provide takāful or retakāful services. Muḍārabah A partnership contract between the capital provider (rabb al-māl) and an entrepreneur (muḍārib) whereby the capital provider would contribute capital to an enterprise or activity that is to be managed by the entrepreneur. Profits generated by that enterprise or activity are shared in accordance with the percentage specified in the contract, while losses are to be borne solely by the capital provider unless the losses are due to misconduct, negligence or breach of contracted terms. Murābaḥah A sale contract whereby the institution offering Islamic financial services sells to a customer a specified kind of asset that is already in its possession, whereby the selling price is the sum of the original price and an agreed profit margin. Mushārakah (Sharikat al-ʻAqd) A partnership contract in which the partners agree to contribute capital to an enterprise, whether existing or new. Profits generated by that enterprise are shared in accordance with the percentage specified in the mushārakah contract, while losses are shared in proportion to each partner’s share of capital. Qarḍ The payment of money to someone who will benefit from it provided that its equivalent is repaid. The repayment of the money is due at any point in time, even if it is deferred. Salam The sale of a specified commodity that is of a known type, quantity and attributes for a known price paid at the time of signing the contract for its delivery in the future in one or several batches. Sharīʻah The practical divine law deduced from its legitimate sources: the Qurʼān, Sunnah, consensus (ijmāʻ), analogy (qiyās) and other approved sources of the Sharīʻah. Sharīʻah noncompliance risk An operational risk resulting from non-compliance of the institution with the rules and principles of Sharīʻah in its products and services. Ṣukūk Certificates that represent a proportional undivided ownership right in tangible assets, or a pool of tangible assets and other types of assets. These assets could be in a specific project or specific investment activity that is Sharīʻah-compliant. Takāful A mutual guarantee in return for the commitment to donate an amount in the form of a specified contribution to the participants’ risk fund, whereby a group of participants agree among themselves to support one another jointly for the losses arising from specified risks. Wakālah An agency contract where the customer (principal) appoints an institution as agent (Wakīl) to carry out the business on his behalf. The contract can be for a fee or without a fee. Waqf A property that produces income and that may have been deeded to benefit a community. Zakāh A financial obligation that shall be disbursed through specific channels imposed on those whose wealth has reached a certain threshold (niṣāb) one year after it has been acquired. ISLAMIC FINANCIAL SERVICES INDUSTRY STABILITY REPORT 2017
14. 1 FOREWORD The fifth edition of the Islamic Financial Services Board ’s (IFSB) Islamic Financial Services Industry Stability Report takes place against a shifting global economic landscape led by new challenges emerging from a changing political environment, new monetary policy directions from the US, sluggish recovery in oil prices, unresolved geopolitical conflicts and a general uncertainty in economic outlook for 2017. Similarly, the protectionist economic policies announced by the new US administration and the withdrawal of US from the 12-nation Trans-Pacific Partnership has spurred this uncertainty. In Europe, the United Kingdom has formally invoked Article 50 to withdraw from the European Union (EU) while a rising anti-immigration sentiment in Western Europe could also strengthen far right parties leading to protectionist policies. The rise in US interest rates for only the second (December 2016) and third time (March 2017) in nearly a decade since the global financial crisis of 2007-08 also indicates a possible end to unconventional monetary policies that saw a prolonged period of record low/negative interest rates. These increases in US rates have been mirrored by some monetary authorities and central banks in the other parts of the world and may add to economic growth pressure in some of these jurisdictions amid general economic and political challenges and a tightening in financial conditions. These events are also unfolding at a time when gradual implementation of new capital and liquidity regulatory requirements, initiated by the Group of Twenty and the Financial Stability Board post-financial crisis, has begun. The above developments are likely to have important ramifications for the global economy. However, it remains to be ascertained the exact extent of this impact until more clarity emerges on the U.S. policies going forward and also on the future of economic and political ties among nations within the EU - and that of the EU with nations outside, in particular the United Kingdom. Against this backdrop, the IFSI Stability Report 2017 examines the implications on the global Islamic financial services industry (IFSI) of recent economic developments and changes in the global regulatory and supervisory frameworks. For a second year running, the global IFSI has undergone a slowdown in 2016, reversing the remarkable expansion in assets witnessed since the onset of the global financial crisis. The relatively untested resolution, recovery and insolvency structures of the institutions offering Islamic financial services (IIFS) could unearth a new of set of challenges for financial sector stability in at least 12 jurisdictions that are identified in this report as having domestic systemic importance for Islamic banking. The growing market shares and rising domestic systemic importance of Islamic finance underscores the importance of developing strong regulatory frameworks for prudential regulation and supervision in Islamic finance jurisdictions, supported by proactive stress testing and an enhanced set of capabilities for macroprudential surveillance. In line with its mandate, the IFSB has responded on a number of fronts to such international developments with a series of next-generation prudential standards and guiding principles that align global regulatory frameworks with the specificities of Islamic finance. Aside from Standards and Guidance/Technical Notes, the IFSB Work Plan in recent years has also included working papers on diverse topics of emerging issues in Islamic finance including financial safety-nets, consumer protection, Sharīʻah non-compliance risk, resolution and recovery regimes, systemic links and macroprudential issues, and so on. The IFSB’s IFSI Stability Report 2017 seeks to illuminate these issues for the IFSB’s wide membership, as well as for all those who have a substantive interest in the stability and resilience of Islamic finance. Also in this report for the first time, the Islamic banking analysis has been carried out using data from the IFSB’s Prudential and Structural Islamic Financial Indicators (PSIFI) database - this has enabled a wider geographical coverage of 18 jurisdictions (previously 10 jurisdictions) accounting for almost 97% of the industry’s assets. This has also strengthened the Islamic banking analysis in this report as the data is sourced directly from respective regulatory and supervisory authorities. The broad themes and coverage in each of the four chapters of the IFSI Stability Report 2017 are as follows: Chapter 1 provides an overview of the global IFSI as well as updates on trends, growth and developments in the three main sectors of the industry - Islamic banking, Islamic capital market and takāful. Chapter 2 examines the initiatives undertaken by international standard-setting bodies to further ensure the stability of the financial institutions and markets, as well as the implications of such reforms for IIFS. It also reviews the progress of various projects and initiatives undertaken by the IFSB to enhance the supervisory framework so as to ensure stability and soundness of the IFSI. These initiatives include updates on the development of new standards for the IFSI, surveys on existing regulatory and market principles and practices implemented, and also research undertaken for IFSB working paper series. This chapter also provides an update on the implementation progress of the IFSB Standards in 2016 across various member jurisdictions. Chapter 3 assesses the resilience of the Islamic financial system, which includes technical analysis of selected indicators as well as assessment of risks, vulnerabilities and stability issues in the three main sectors of IFSI: Islamic banking, Islamic capital market and takāful. We also include a box article by Bank Indonesia, which examines the development of the Islamic financial sector in the jurisdiction. I am deeply grateful for the inputs provided by Bank Indonesia, which is a member of the IFSB Council. Finally, Chapter 4 addresses emerging issues in Islamic finance and is divided into two sections which include: (i) Stress Testing Islamic Banks: Essential Perspectives and Preliminary Empirical Insights; and (ii) FinTech in Islamic Finance: Sharīʻah and Regulatory Aspects. This chapter also benefits from box article contributions by the International Monetary Fund (IMF), which provides an overview into the evolving stress testing practices at the ISLAMIC FINANCIAL SERVICES INDUSTRY STABILITY REPORT 2017
15. FOREWORD IMF , and by the World Bank, which shares insights on financial inclusion and role of Fintech. We hope that this form of collaboration with other institutions will lead to the development of a global network of expertise that can help to increase awareness and understanding of emerging issues faced by the IFSI. The IFSI Stability Report 2017 was produced by a core team from the Technical and Research Division of the IFSB Secretariat, led by Zahid ur Rehman Khokher, Assistant Secretary-General, and comprising Syed Faiq Najeeb and Tarig Mohamed Taha Abdelgadir, who contributed to the first three chapters of the Report. Aminath Amany Ahmed worked as the Project Coordinator. Other contributions to chapter 2 were made by Kartina Md Ariffin, Ateeq Ali, Md Salim Al Mamun, Dian Dannira and Esam Osama AlAghbari. Syed Faiq Najeeb also authored the section on stress testing Islamic banks for Chapter 4. Overall, the staff of the IFSB were involved in all four chapters of the Report. 2 Finally, much appreciation goes to Mr. Jaseem Ahmed, the former Secretary-General of the IFSB who has recently retired in April 2017. It was due to his forward-looking vision and sincere concern to raise awareness on imminent stability and resilience issues in the Islamic finance industry that the IFSB’s IFSI Stability Report Series was launched with the inaugural issue in 2013. Mr. Ahmed’s unwavering support, guidance and encouragement to the project team throughout the subsequent editions of the Report has substantially helped the IFSB Secretariat in improving the quality of this document. As always, we hope that the IFSI Stability Report 2017 will serve not only as a useful complement to the better understanding of issues by the various stakeholders of the IFSB, but also contribute to a wider cross-border engagement on stability issues in Islamic finance, while helping to strengthen the building blocks needed for greater resilience. Among external contributors, Professor Volker Nienhaus authored the section on FinTech in Chapter 4. All sections of the Report benefited from constructive comments and feedback from Professor Volker Nienhaus and Peter Casey. Siham Ismail, Head, and Rosmawatie Abdul Halim, of the Communications and Awareness Programmes at the IFSB, provided assistance in the formatting and publication of the final document. The IFSB also wishes to gratefully acknowledge financial assistance by the Asian Development Bank (ADB) towards the hard-copy publishing costs of the IFSI Stability Report 2017. Zahid ur Rehman Khokher Acting Secretary-General Islamic Financial Services Board May 2017 ISLAMIC FINANCIAL SERVICES INDUSTRY STABILITY REPORT 2017
16. 3 EXECUTIVE SUMMARY 2016 has been another year of slowdown for the global Islamic Financial Services Industry (IFSI) - in USD terms, the size of the IFSI has not changed much over the last year: The total Islamic banking assets increased from USD 1.4 trillion to USD 1.5 trillion, the volume of ṣukūk outstanding increased (USD 318.5 billion), but Islamic funds’ assets decreased (USD 56 billion); takāful contributions increased slightly (USD 25 billion). However, the dynamics of the IFSI is not visible on the level of global aggregates. Instead, the analysis has to focus into the regional composition of aggregates and into Islamic finance achievements and setbacks in individual jurisdictions. This Report provides analyses on the global, regional and jurisdictional level. Size and Resilience of the IFSI Islamic banking: The development in Islamic banking was more dynamic than the stagnant total assets suggest: The regional composition of the global assets has changed. The assets of MENA excluding GCC – i.e. predominantly Iran – dropped from USD 607 billion to USD 541 billion due to a strong depreciation of the Iranian currency. This was compensated by asset growth in the GCC and Asia (despite currency depreciations). The share in total Islamic financial assets of MENA excluding GCC decreased to 30%, the GCC increased to 42%, and Asia remained at 22%. The majority of jurisdictions where IIFS operate, recorded reasonable levels of growth in assets, financing and deposits of Islamic banks. More importantly, Islamic banks’ market shares increased in 18 and remained constant or decreased only marginally in 13 jurisdictions. This is a strong indication of a growing acceptance of Islamic finance in jurisdictions with dual financial systems. The number of jurisdictions where Islamic finance has achieved domestic systemic importance has expanded to 12. A precondition for the resilience of Islamic banks is sufficient profitability. The average net profit margin declined somewhat to 40%, but the sector has sustained its ROA and ROE in the past two years, albeit on different levels in different jurisdictions. Considerable heterogeneities among jurisdictions suggest that statements about “the” IFSI have to be taken cautiously. This also holds true for the short-term liquidity position of Islamic banks: Lower oil prices and new Basel III / IFSB GN-6 liquidity standards lead to a general tightening of the liquid assets to shortterm liabilities ratio. However, while some markets show indications for a build-up of pressure, others report excess liquidity. The ratio of liquid assets to short-term liabilities varies considerably between jurisdictions from 100% and more to 20% and less. The household sector receives on average 41.7% of the financing of Islamic banks. High exposures to the real estate sector have been reduced for the Islamic banking sector, but it is still more than 25% in some jurisdictions. The NPF ratios of the IFSI globally and for most jurisdictions separately decreased to approx. 5%; an increase was observed in two countries, and high levels (around 12%) persisted in two jurisdictions. On average, total capital and Tier-1 capital adequacy ratios across Islamic banks declined to 12.1% and 9.7% respectively; this was mainly due to a decline of the ratios in Iran. Nevertheless, the ratios are still above the Basel III / IFSB-15 minimum regulatory requirements of 6%. Islamic Capital Market: In summary, the ICM performed better in 2016 than in 2015: Ṣukūk issuances increased and Islamic stocks generated profits. However, there were also some setbacks: 2016 saw the first default of a ṣukūk in 6 years (issued by an oil and gas-based company in Singapore). Expected ṣukūk issuances in non-OIC jurisdictions did not materialise. In contrast to previous years, Sharīʻah-compliant equities generated lower returns than conventional equities. The number of Islamic funds has decreased slightly and nearly 30% of the funds have become inactive. Ṣukūk: The volume of annual ṣukūk issuances reached USD 75 billion in 2016, bringing the volume of outstanding ṣukūk close to USD 320 billion. 79% of the issuances originated from sovereigns, including GREs and multilateral organisations (such as IDB and IILM); only 21% were corporate issuances. The corporate ṣukūk market has continued its downward trend for the fourth consecutive year. This may be partially due to socio-political and macroeconomic challenges, but there is also a widespread sentiment that issuing ṣukūk is (still) too complex, time consuming and costly. For long, ṣukūk have been priced at higher rates of return to investors than bonds as a compensation for the lesser familiarity and liquidity of ṣukūk. For some 2016 issuances, this no longer applies: Ṣukūk were priced at par or even at lower rates of return than comparable bonds. Similarly, no consistent pattern indicates that ṣukūk investors always demand yields higher than those of comparable bonds; some ṣukūk have even traded at lower yields than bonds. Nonetheless, events that impact bond prices and yields also impact prices and yields of ṣukūk. The close link between ṣukūk and bond markets became apparent in November 2016 when investors restructured portfolios by selling-off bonds and buying US equities. This drove up the yields of bonds, and due to the interdependency of fixed income markets, yields of USD ṣukūk experienced an upward spike at the same time. Sharīʿah-compliant Equities: Since Sharīʻah-compliant stocks are a subgroup of all listed stocks, it is not surprising that price movements of Islamic and conventional equities are correlated, but their performance can differ. For a decade, Islamic equity indices had outperformed conventional indices. This changed in 2016. Islamic indices attach a greater weight to healthcare and consumer goods/ services which lagged in performance while conventional indices include more financials, utilities and telecommunications, which had a better performance, particularly towards the end of 2016. Islamic Funds: The equity markets suffered in 2015 and during most of 2016 from volatility-inducing political uncertainties, slow growth, depressed oil prices and volatile commodity prices. However, the unexpected election outcome in the US triggered a stock market rally in November and December, Islamic equity and fixed income funds benefited from the good performance of the Islamic equity indices and the increased ṣukūk yields. Positive results of Islamic commodity funds are mainly due to an increase of the oil price at the end of the year. Although the returns were positive in 2016, the resilience of Islamic funds cannot be taken for granted as most of them lack scale: 73% of the Islamic funds have less than USD 25 million AuM while the average size of conventional funds is USD 394 million AuM. ISLAMIC FINANCIAL SERVICES INDUSTRY STABILITY REPORT 2017
17. EXECUTIVE SUMMARY Tak āful: The global takāful industry recorded a growth in contributions of 12% while conventional insurance premiums only grew by 4%. But despite the high growth rate, takāful is by volume still a small and rather fragmented industry with total contributions of USD 25 billion and 305 takāful and retakāful operators and windows. The GCC accounts for 47% of the contributions and 31% of the takāful operators, followed by MENA excluding GCC (i.e. mainly Iran) with 33% of contributions and 22% of the operators, and Asia with 18% of contributions and 15% of the operators. While declining car sales negatively impacted motor takāful, takāful operators benefited from the introduction of mandatory medical insurance in some countries, especially Saudi Arabia which has the largest market for Islamic insurance (USD 10 billion contributions), followed closely by Iran (USD 8 billion contributions). The dominant business lines in the GCC are medical/health and motor takāful, while family takāful is the main business line in Southeast Asia. The insurance penetration in most OIC countries is rather low. This indicates untapped market potentials, but there is strong competition for market shares. As many takāful undertakings lack scale for efficient operations, it is expected that the consolidation of the industry by M&A activities will continue in Southeast Asia and the GCC. Changes in the Global Financial Architecture International standard setters have issued standards and policy papers to foster the stability of the financial services industry. Their implications for the IFSI will be considered by the IFSB. Financial Stability Board (FSB): Having published “Key Attributes of Effective Resolution Regimes for Financial Institutions” in 2014, the FSB issued “Key Attributes Assessment Methodology for the Banking Sector” in October 2016. An IFSB working paper on “Recovery, Resolution and Insolvency Issues for IIFS” (due in 2017) shall explore how to apply FSB methodology in Islamic finance, i.e. how to incorporate Islamic finance recovery and resolution tools into resolution regimes of dual systems. The FSB published a report on “Elements of Effective Macroprudential Policies – Lessons from International Experience”. Drawing from this report and other research, the IFSB is developing a working paper on ‘Systemic Links and Macroprudential Issues for Islamic Banks’ (due in 2017). The FSB’s second annual report on “Implementation and Effects of the G20 Financial Regulatory Reforms” (August 2016) focussed on market liquidity, reactions of global banks in emerging markets and developing economies, and the openness and integration of the global financial system. The IFSB will follow the implementation of the reforms and assess their effects for the IFSI. Basel Committee on Banking Supervision (BCBS): The BCBS issued three standards and one guidance note in 2016. The IFSB will consider them for the review and revision of IFSB-15 which shall begin in 2018. Disclosure issues could be addressed in the current revision of IFSB-4. In the revised standard on “Minimum Capital Requirements for Market Risk” (January 2016), the BCBS sets out a clearer and more stringent definition of trading books and trading desks and movements of instruments between the banking and the trading book. A standard on “Interest Rate Risk in the Banking Book (IRRBB)” (April 2016), provides ISLAMIC FINANCIAL SERVICES INDUSTRY STABILITY REPORT 2017 4 extensive guidance for banks on the IRRBB management, including the development of stress scenarios and disclosures on risk measurement. The equivalent to the IRRBB is the rate of return risk (RRR) for IIFS. IIFS shall manage this risk in analogy to the IRRBB standard. The standard on “Revisions to the Securitisation Framework” (July 2016) amends the regulatory capital treatment of securitisations with riskier underlying exposures. It also lowers the risk weight for securitisation exposures that meet the BCBS/IOSCO criteria for ‘simple, transparent and comparable’ (STC) securitisations to 10%. The “Guidance on the Application of the Core Principles for Effective Banking Supervision to the Regulation and Supervision of Institutions Relevant to Financial Inclusion” (September 2016) addresses non-member jurisdictions. 19 of the 29 Core Principles are explicated in the note. The IFSB will work on a Technical Note on “Microfinance and Financial Inclusion (Islamic Banking Segment)” in 2017 for which the BCBS guidance will be a key reference document. The BCBS published a number of consultative documents, which the IFSB will consider in the context of the revision of IFSB-15: “Standardised Measurement Approach for Operational Risk” (March 2016), “Pillar 3 Disclosure Requirements – Consolidated and Enhanced Framework” (March 2016), “Revisions to the Basel III Leverage Ratio Framework” (April 2016), “Regulatory Treatment of Accounting Provisions – Interim Approach and Transitional Arrangements” (October 2016), “Revisions to the Annex on Correspondent Banking” (November 2016). International Association of Insurance Supervisors (IAIS): The IAIS develops a risk-based global insurance capital standard (ICS) and issued a consultation document in July 2016. Key topics are ICS valuation approaches, capital resources, capital requirements, and the scope of the group for which the ICS has to be calculated. The IFSB will use results of the IAIS consultations as input for a future revision of IFSB-11 “Standard on Solvency Requirements for takāful (Islamic Insurance) Undertakings”. IAIS issued in June 2016 “Global Systemically Important Insurers: Updated Assessment Methodology”. Although there are currently no global systematically important takāful operators, the IFSB may refer to the updated methodology to assess systemic significance when the market grows and some takāful companies become large, complex and more interconnected. International Organization of Securities Commissions (IOSCO): IOSCO published a report on “Good Practice for Fees and Expenses of Collective Investment Schemes” (August 2016) with a list of disclosure requirements to the benefit of investors. The good practices can directly apply to Islamic CIS. Recent Initiatives of the IFSB New Standards: IFSB-18: Guiding Principles for Retakāful (Islamic Reinsurance): The guiding principles and best practices cover 12 major issues, pertaining to risk transfer versus risk sharing, commission, finite Retakāful, acceptance of non-Sharī‘ah-compliant business, retro takāful, qarḍ, conflict of interest, coinsurance with conventional reinsurers, transparency and disclosure, Sharī‘ah governance, Sharī‘ah justification for the usage of ḍarurah, and retakāful windows.
18. 5 EXECUTIVE SUMMARY TN-2 : Technical Note on Stress Testing for IIFS: TN-2 provides a first benchmark guidance for Islamic banking sector stress testing. Data from the IFSB’s Prudential and Structural Islamic Financial Indicators (PSIFI) database shall facilitate the stress testing for the Islamic banking industry. IFSB-19: Guiding Principles on Disclosure Requirements for Islamic Capital Market Products (Ṣukūk and Islamic Collective Investment Schemes): The standard provides guidance on the disclosure requirements for various types of ṣukūk commonly used in the market and ICIS that invest in transferable securities. The standard covers the main stages of disclosure and complements existing IOSCO standards by dealing with issues specific to ICM products IFSB Implementation Survey: The IFSB conducted its 5th survey on the implementation status of IFSB standards and guidance notes. The implementation rate has increased in all three sectors (banking, ICM, and takāful). In general, recently issued standards are implemented faster than old standards. However, some recent standards in the banking sector have replaced earlier ones (IFSB-15 replaced IFSB2 and IFSB-7, IFSB-16 replaced IFSB-5); RSAs may skip older standards in favour of their replacements. RSAs identified the lack of staff with detailed knowledge of Islamic finance as the major challenge for the implementation of standards. Another challenge is the need to change or adapt existing statutory or legal frameworks outside the competence of the RSA. RSAs also asked for more workshops on standards implementation, more technical notes, and direct technical assistance. Other IFSB Activities: The IFSB and ISRA published a joint working paper on “Sharī‘ah Non-Compliance Risk in the Banking Sector: Impact on Capital Adequacy Framework of Islamic Banks”. The paper specifies the Sharīʻah requirements for valid contracts and uses the disclosed Sharī‘ah non-compliant income as a proxy for the Sharīʻah non-compliance risk (SNCR). From the analysis of a sample of 51 Islamic banks it was concluded that the SNCR is sufficiently covered by the current capital requirements for operational risks, but more detailed disclosure is recommended. The IFSB has started work on a research paper on “Resolution and Recovery Process of Insolvent IIFS”. It aims at a cross-sectoral review of existing regulations and practices in Islamic banking, ICM, and takāful and shall raise awareness on issues specific to IIFS such as Sharī‘ah compliance, the treatment of investment account holders, and the role of Sharīʿah boards. Effective resolution and recovery systems shall ensure the systemic stability of the IFSI. Emerging Issues in Islamic Finance Empirical Study to Support Stress Testing: The IFSB has dealt with conceptual issues of stress testing for IIFS in IFSB-13 and TN-2 and provides the Prudential and Structural Islamic Financial Indicators (PSIFIs) database. This work has now been supplemented by an empirical study on linkages between macroeconomic variables and financial variables of IIFS. A proper calibration of stress tests and an assessment of systemic vulnerabilities requires a quantification of these linkages. For 2008-2015, the study links in an econometric model annual data for eight macroeconomic variables of 10 countries – GDP growth, interest rate, inflation rate, unemployment rate, exchange rate, stock price index, real estate prices, oil price – to four variables collected from 57 full-fledged Islamic banks – nonperforming financing (NPF), total assets, total financing, total deposits (including PSIA). Empirical findings are: Unemployment is the most important macroeconomic shock factor; an increase of 2% in unemployment can lead to an increase of Islamic banking NPF by 9%. Islamic banks are impacted by interest rates; an increase of 2% can lead to a decrease in Islamic banking financing by 12% and in deposits by 11%. An increase of inflation by 2% can lead to a decrease in Islamic banking financing by 4.5%. A 10% decrease in real estate prices can lead to an increase in Islamic banking NPF by 10%. Oil prices do not have a direct impact on Islamic banks; they have an indirect impact on Islamic banks through the co-determination of macroeconomic variables such as unemployment. These results give an idea of plausible quantitative dimensions of the impact of macroeconomic variables on Islamic banking performance variables. However, one has to keep in mind the limitations of the analysis. For example, the study is based on a sample of banks which implies the possibility of a sampling bias. Nevertheless, the study contributes to the development of data-driven models for stress testing of individual Islamic banks, and for stability analyses of the Islamic finance industry in dual financial systems. FinTech: In conventional finance, technology start-ups challenge financial institutions by promising their customers faster, cheaper, more convenient and innovative financial services. A similar challenge can emerge in Islamic finance. Currently only a few start-ups who claim to offer Islamic financial services have become operational, but their number and size is expected to grow. The technology as well as the products of Islamic FinTech pose a large number of legal, regulatory and Sharīʻah issues. Two areas have attracted much attention: the distributed ledger technology, which is at the core of cryptocurrencies (e.g. Bitcoin) and smart contracts, and multi-sided internet platforms, which are the basis of crowdfunding. Issues that have to be addressed by regulators and Sharīʿah authorities include the following: Should cryptocurrencies be allowed, and if so, should they be exchanged according to the Sharī‘ah rules for commodities or for currencies? Do so-called smart contracts violate rules of Islamic contracts if they trigger the unstoppable execution of a series of conditional contracts? Are new types of virtual investment vehicles, without a corporate identity and decision making by majority rule, acceptable forms of partnerships? What are the disclosure requirements for fund seekers and platform operators in crowdfunding schemes? How can platform operators who hold themselves out to be Islamic ensure the Sharīʿah compliance of contracts and projects? Other issues are the enforceability of contracts in courts; taxation; prevention of moral hazard by fundraising parties; audit requirements of fund seeking and funded businesses; Sharīʿah governance, etc. The regulatory environment for FinTech is often still evolving. Several RSAs have created regulatory sandboxes, where they and the FinTech firms jointly learn, in controlled “practice experiments”, what type of regulation would be most appropriate to balance innovation and consumer or investor protection, including the Sharīʻah dimension. ISLAMIC FINANCIAL SERVICES INDUSTRY STABILITY REPORT 2017
20. 7 1 .0 DEVELOPMENT OF THE ISLAMIC FINANCIAL SERVICES INDUSTRY 1.1 SIZE OF THE INDUSTRY AND JURISDICTIONS WITH SYSTEMICALLY IMPORTANT IFSI The global economy underwent another volatile year affected by a series of events ranging from unexpected political developments (e.g. Britain’s vote in favour of Brexit, and the outcome of the US Presidential elections) and geopolitical conflicts, to concerns about the world’s economic growth rate and trade flows, volatility in energy prices, uncertainties in relation to global interest rates (on the back of potential US interest rate increases), and another round of asset sell-offs in emerging markets prompting exchange rate depreciations in a number of affected economies. These and other economic factors continued to influence business confidence measures and investor sentiment across 2016 and had a profound impact on the performance of the financial markets. Another Year of Slowdown in the Global IFSI … The year 2016 marks a second consecutive year of stagnant asset growth of the global Islamic financial services industry – the industry’s total worth1 across its three main sectors (banking, capital markets and takāful) is estimated at USD 1.89 trillion in 20162 [IFSI Stability Report (SR)20163: USD 1.88 trillion; SR2015: USD 1.87 trillion] (see Table 1.1.1). The slowdown largely stemmed from an adjustment in the value of global Islamic banking assets in US Dollar terms on the back of exchange rate depreciations in key Islamic banking markets (e.g. Iran, Malaysia, Turkey, Indonesia). As of 1H2016, global Islamic banking assets are recorded as USD 1.493 trillion [1H2015: USD 1.496 trillion] and the sector continues to dominate the global IFSI, representing 78.9% of the industry’s assets [SR2016: 79.6%] (see Chart 1.1.1). As an indicative comparison and in US Dollar terms, the assets of the top 1,000 global conventional banks4 had declined by 2.6% (between end-2014 and end-2015). Table 1.1.1 Breakdown of IFSI by Sector and by Region (USD billion, 2016*) Region Asia GCC MENA (ex-GCC) Africa (ex-North Africa) Others Total Islamic Banking 218.6 650.8 540.5 26.6 56.9 1,493.40 Ṣukūk Outstanding 182.7 115.2 16.6 1.9 2.1 318.5 Islamic Funds Assets 19.8 23.4 0.2 1.5 11.2 56.1 Takāful Contributions 4.4 11.7 8.4 0.6 -25.1 Total 425.5 801.1 565.7 30.6 70.2 1,893.10 * Data for ṣukūk outstanding and Islamic funds is for full-year 2016; data for Islamic banking is for the six months ended June 2016 (1H2016); data for takāful is as at end-2015. Source: Islamic Financial Services Board (IFSB) Secretariat Workings Note: Data are mostly taken from primary sources (regulatory authorities’ statistical databases, annual reports and financial stability reports, official press releases and speeches, etc. and including the IFSB’s Prudential and Structural Islamic Financial Indicators [PSIFI] database). Where primary data are unavailable, third-party data providers have been used, including Bloomberg and Thomson Reuters. In only a few instances where there were still information gaps, data were estimated based on historical growth trends, news reports and country-specific assumptions. Takāful contributions are used as a basis to reflect the growth in the takāful industry. The breakdown of Islamic funds’ assets is by domicile of the funds, while that for ṣukūk outstanding is by domicile of the obligor. The Islamic funds numbers reported for 2016 may not be directly comparable to previous years, due to a change in external database sources. The ṣukūk market, however, reversed its earlier decline and ṣukūk outstanding expanded by 6.06% to close at USD 318.5 billion as at end-2016 [2015: USD 300.3 billion]. The widening budget deficits in key developing and energyexporting countries encouraged a flurry of fund-raising issuances in 2016 – including debut sovereign ṣukūk issuances by Jordan and Togo – and the sector expanded its overall market share in the IFSI to 16.8% [SR2016: 1 2 5 6 3 4 15.5%]. The gross contributions in the takāful sector have also increased by 13.1% to close at USD 25.1 billion as at end-2015 [2014: USD 22.2 billion] and represented 1.3% of the global IFSI [SR2016: 1.2%]. As an indicative comparison and in US Dollar terms, the international debt securities outstanding in global markets5 increased by 2.65% (between end-2015 and 1H2016); and the premiums in the global insurance industry grew by 3.8% in 20156. The figure quoted here is in fact a composite made up by adding assets in the banking sector and Islamic funds to the value of ṣukūk outstanding and to takāful contributions. The latter is a measure of income, rather than assets. Elsewhere there may be elements of double-counting – for example, if a bank holds ṣukūk. The figure is nevertheless the best measure we can offer in the current state of data availability. Data for Islamic capital markets is for full-year 2016; data for Islamic banking is for the six months ended June 2016 (1H2016); data for takāful is as at end-2015. See Table 1.1.1 and its explanatory notes for more detail. SR2016 = IFSB IFSI Stability Report 2016; SR2015 = IFSB IFSI Stability Report 2015. Based on “Top 1000 World Banks 2016”. Database maintained by The Banker. Based on the Debt Securities Statistics database maintained by the Bank for International Settlements (BIS). Swiss Re (Sigma No. 3/2016), “World insurance in 2015: steady growth amid regional disparities”. ISLAMIC FINANCIAL SERVICES INDUSTRY STABILITY REPORT 2017