208 AN INTRODUCTION TO ISLAMIC FINANCE
equity and corporate capital markets, mortgage - backed securities markets,
leasing and factoring, and venture capital. NBFIs such as microfi nance insti-
tutions expand access to fi nance for consumers who are either considered
non - bankable, or pose risks that traditional banks are unable or unprepared
to bear.
In a Shari’ah - based fi nancial system, deposit taking on the basis of a
predetermined rate of return is prohibited. Rather, bank - based fi nancial
intermediation is based on a principal – agent contract whereby the client
becomes a partner of the bank, and shares in its profi ts and losses. If one
were to defi ne a non - bank fi nancial institution as one that does not accept
deposits, it could be argued that all forms of Shari’ah - based fi nancial inter-
mediation are “non - banking.” However, for this discussion, we will con-
sider Islamic commercial and investment banks — although based on profi t /
loss sharing — as banking institutions, and consider the fi nancial institutions
described above as non - bank.
Moreover, for the purposes of this chapter, we will narrow the defi ni-
tion of NBFIs to exclude infrastructure and supporting institutions such
as brokerage fi rms, and include institutions which either accept investors’
funds on the liabilities side, or perform investment or lending on the assets
side. In adopting this focused defi nition, it is possible to identify four classes
of NBFIs as operating in the Islamic fi nancial industry today. These com-
prise institutions engaged in (i) asset and fund management (for example,
mutual, commodity, and leasing funds — discussed earlier); (ii) specialized
sector fi nance companies (for example, mortgage, leasing, and mudarabah
companies); (iii) development institutions (for example, multilateral and
microfi nance institutions); and (iv) takaful (Islamic insurance). Although,
data on NBFIs is sparse, Table 10.1 shows the number of institutions and
estimated assets under management as compiled from several sources.
TABLE 10.1 Size of NBFI industry as of 2010
Institution Type
No. of
InstitutionsAssets Under Management
(US$ billion)Islamic Funds* 698 82.6
Mudarabah Companies (Pakistan) 40 0.4
Mortgage Companies** 10 2.5
Microfi nance Institutions*** 126 0.197
IFIS
Data based on mortgage companies in the US and UK as of 2008. Size is
determined from informal sources.
As of 2008. Karim, Tarazi and Reille (2008)