KembaraXtra – Islamic Banking – Introduction-Summary of the Major Factors in the Development of Islamic Financial Institutions (IFIs)


In summary, several key factors have contributed to the growth and development of Islamic financial institutions. Islamic economic thought played a foundational role by creating demand for financial institutions that could address both the social welfare needs and religious obligations of Muslims, whether at the individual or corporate level.


Another important factor was the cross-border and international initiatives led by the Organisation of Islamic Cooperation (OIC), which aimed to support the economic development of member countries through the use of Islamic financial instruments. In addition, the oil boom of the 1970s significantly increased liquidity in Muslim-majority, oil-producing economies, providing the financial resources necessary for the expansion of Islamic finance.


The formal application of Shari’ah principles to financial activities also played a crucial role. This led to the establishment of both single and dual Islamic banking systems, supported by either exclusive or parallel legislative frameworks, depending on national circumstances. The rapid growth of the Islamic financial services (IFS) industry further encouraged the development of innovative Shari’ah-compliant financial products and instruments.


Equally important was the contribution of Shari’ah-based expertise, which guided product development, ensured compliance, and enhanced stakeholder confidence. Over time, comprehensive Shari’ah governance, regulatory structures, and institutional frameworks were established to promote harmonisation, transparency, and adherence to best practices. The increasing participation of global financial institutions has also strengthened the industry and facilitated its integration into the wider international financial system.


As a result of these combined factors, the Islamic financial services industry has experienced strong and sustained global growth, estimated at approximately 15% to 20% annually. An examination of these influences allows the development of IFIs to be categorised into five distinct phases, as illustrated in the table below.