Iran and Saudi Arabia the world's largest Islamic finance markets

01 December 2023 5 min. read

The Gulf Cooperation Council nations play a significant role in Islamic financing. These countries, along with others in the MENA region, contribute to over 70% of the global assets in the Islamic finance industry.

In recent decades, Islamic finance has evolved into a framework for financial services, products, and financing concepts that align with the rules of Islamic law regarding the distribution and utilization of funds.

Initially coined in the 1960s, Islamic finance complies with the ideology of the Islamic financial system, offering products and services in forms including Sukuk, Ijarah, Mushrakah, Wadiah, and more.

Top countries by Islamic finance assets ($ billion)

Iran and Saudi Arabia the world's largest Islamic finance markets

In terms of asset base, Iran, Saudi Arabia, Malaysia, South Africa, and Qatar are the five nations with the highest share of assets in Islamic finance, according to a research report from Red Mad Robot. Notably, Iran and Saudi Arabia collectively control 59% of the total assets, with Iran holding 37% and Saudi Arabia 22%.

The amount of financial assets in the Islamic banking industry is growing substantially, and the industry is anticipated to see more growth.

Total assets in Islamic banking increased by more than 55% during a four-year period, from $1.8 trillion to $2.8 trillion. According to projections, the worldwide Islamic banking market is expected to exceed $4 trillion by 2026, demonstrating the importance and ongoing growth of Islamic finance in the world of financial services.

Islamic finance is the largest sector of the Islamic financial industry, accounting for 70% of its assets.

Global Islamic banking assets, 2015-2021 ($ billion)

Iran and Saudi Arabia the world's largest Islamic finance markets

Similar to mainstreams trends in the financial services industry, digitization is picking up rapidly in Islamic finance. New players such as fintech’s are flocking into the market, with the growth of this segment expected to hit 18% per annum over the coming period. By 2026, the worldwide Islamic fintech industry is projected to reach around $179 billion.

Promising avenues for the digital transformation of Islamic banking include crowdfunding, investment platform, payment services, digital banks, blockchain, cryptocurrencies, smart contracts, information security in the financial industry, and insurtech.

From conventional finance to Islamic finance

In Islamic banking, financial intermediation by credit institutions is replaced by personal participation of institutions in trading operations, profit, and loss distributions, direct financing of transactions, and equity partnership, using financial tools based on sale, lease, trust management, and equity participation agreements, with investment accounts replacing fixed deposits and generating returns through distributed dividends:

This is a trade agreement wherein a bank buys an asset (raw materials or goods) and then marks it up to a customer, who is aware of the original cost upfront. The main usage of murabaha is personal financing. It is an installment-payment transaction involving the sale of a tangible asset.

Islamic leasing is a type of financing or operating leasing. In Islamic finance, operating leasing is the most prevalent. Similar to leasing, this product is primarily meant for corporate and SME/business companies.

Islamic finance for equities. In this instance, the transaction is financed by an Islamic bank, which takes a stake in the joint venture’s authorized capital formation. The bank's profitability is contingent upon the success of this enterprise. The bank takes a cut of both gains and losses.

Islamic asset administration. The bank will then make a fixed-term loan with specific terms and conditions to the client management. The target market for this product also includes corporate, SME, and company entities. It does not suggest that a financial institution is involved in running the fund's operations.

Islamic bond. This financial product stands out due to the requirement that its issuance be backed by real assets. In contrast, conventional bonds are more flexible when it comes to the presence of real collateral. One of the main instruments used in Islamic banking for government and corporate finance is the issuing of sukuk.

Islamic savings account. The customer has the option to grant the bank discretionary authority to invest funds held in safe custody. Wadiah is characterized by its non-fixed term nature, and the bank ensures the guaranteed repayment of the principal portion of the deposit.

Tawarruq refers to a commodity sale and purchase transaction designed to secure available cash within the framework of a Murabaha contract. This particular transaction, commonly known in the realm of Islamic finance as ‘Commodity Murabaha’, involves the acquisition of funds through the buying and selling of commodities.

In Islamic banking, another integral aspect involves the obligation for Muslims to contribute to charity through the payment of zakat. As per the Holy Scriptures, every Muslim is required to fulfill this duty. Zakat is traditionally set at 2.5% of the total wealth a Muslim possesses over the course of a year.

The funds collected through zakat are utilized to support individuals in need, emphasizing the principle of charitable giving within the Islamic financial framework.