The IFSB Launches the Sixth Edition of its Flagship Islamic Financial Services Industry Stability Report 2018

8 June 2018, Kuala Lumpur – The Islamic Financial Services Board (IFSB) has released today the sixth edition of its annual Islamic Financial Services Industry Stability Report. The 2018 Report highlights key developments in the growth and stability of the Islamic financial services industry (IFSI) as well as other global developments and emerging issues relevant to the industry.

The Report finds the Islamic financial services industry (IFSI) – primarily the Islamic banking, Islamic capital market and takāful sectors – has returned to a robust growth of 8.3%, after two years of only marginal increases, with its total worth now surpassing the USD 2 trillion mark. The growth was actively driven by all three sectors of the IFSI, but with a marked contribution by the strong performance of the Islamic capital markets boosted by ṣukūk issuances from sovereign and multilateral institutions. In a relatively positive year for global economic recovery, the global IFSI has also continued to sustain its resilience in 2017 with most of its indicators in compliance with minimum international regulatory requirements and comparable benchmarks from the conventional markets.

Commenting on the release of the IFSI Stability Report 2018, the Secretary-General of the IFSB, Dr. Bello Lawal Danbatta, stated that “the issuance of the Islamic Financial Services Industry Stability Report 2018 comes at a time of better-than-expected global economic performance in 2017, marking its most promising sign of recovery since the global financial crisis of 2007-08, broadly led by a notable rebound in global trade as well as investment recovery in advanced economies. The Islamic Financial Services Industry has demonstrated robust growth and resilience fundamentals in 2017, with the growing market share and rising domestic systemic importance in many jurisdictions. This highlights the importance of developing strong regulatory frameworks for prudential regulation and supervision in Islamic finance jurisdictions, supported by proactive stress testing and enhanced capabilities for macroprudential surveillance.”

The IFSI Stability Report 2018 covers a number of areas including:

1. An overview of the IFSI, providing updates on trends and developments in the three main sectors of the Islamic financial services industry – the Islamic banking, Islamic capital market and takāful sectors. The Report utilises data from the IFSB’s Prudential and Structural Islamic Financial Indicators (PSIFIs) database for the Report’s Islamic banking sector analysis.
2. An overview of the initiatives undertaken by international standard-setting bodies and outcomes of work programmes undertaken by standard setters in the past year, as well as the implications of such reforms on the Islamic finance sector. It also reviews the progress of Prudential Standards, Working Papers, the Standards Implementation Survey 2017 and other initiatives undertaken by the IFSB to enhance the supervisory framework in facilitating the stability and soundness of the IFSI.
3. An assessment of the resilience of the Islamic financial system, provides a technical analysis of selected soundness indicators for the three sectors. It identifies the main risk factors and vulnerabilities facing the IFSI in the context of current global economic conditions, and highlights the relevant issues for policy planning and remedial initiatives by the industry stakeholders. In this respect, the report highlighted the improvement seen in profitability and asset quality, for the global Islamic banking sector, with ROA and ROE at their best levels in the last five years and the broader industry non-performing financing continuing to improve. However, liquidity conditions have continued to deteriorate, although there is heterogeneity between countries. While the Islamic capital markets marked a strong performance in 2017 on the back of sovereign ṣukūk issuance, some underlying weaknesses have persisted from the previous year, including those in the corporate ṣukūk market. An apparent squeezing of premiums payable between financial risk-identical ṣukūk and bond instruments at the point of issuance was also observed. The takāful sector, given its nascent size, continues to face challenges in the operating environment on account of stiff competition from larger and more established insurance companies. Overall, the Report highlights that the global IFSI needs to build long-term resilience, albeit showing strong performances in 2017.
4. Highlight of emerging issues in Islamic finance, providing a comprehensive analysis of the diversity of the legal infrastructure and Sharīʿah governance frameworks as applied in various jurisdictions.
5. The report also features box articles contributed by (a) the Central Bank of Oman, on the development of its Islamic banking sector; (b) the Autoriti Monetari Brunei Darussalam, on the development of Islamic finance in Brunei Darussalam; and (c) the International Islamic Liquidity Management Corporation (IILM), on regulators’ response towards specific market enhancement: A case study of the IILM.

Notably, the International Monetary Fund (IMF) Executive Board on 24 May 2018 endorsed the IFSB “Core Principles for Islamic Finance Regulation” (CPIFR) for the banking sector as a benchmark for the purpose of undertaking financial sector assessments and preparing Reports on the Observance of Standards and Codes (ROSCs) from January 2019. The Executive Board also notes that the financial sector assessments will use the threshold adopted by the IFSB for determining countries where Islamic banking is significant (a market share threshold of 15 percent). The IFSB’s IFSI Stability Report annually publishes a list of countries that have reached systemic significance based on this threshold. This year, some updates have been made to this criteria which looks beyond the banking sector market share, and considers the overall importance of various Islamic finance sectors in the jurisdiction as a whole.

The IFSB’s IFSI Stability Report series, which was first launched in 2013, has become an important benchmark publication, providing an assessment of the growth, development and stability of the IFSI. The objectives of this flagship Report is anchored in the IFSB’s mandate to promote the development of a prudent and transparent Islamic financial services industry.

An official public launch of the IFSI Stability Report 2018 will also be held at the Astana Islamic Economic Forum in Astana, Kazakhstan on 4 July 2018.