207CHAPTER
10Non - bank Financial Intermediation
T
he fundamental tenets of Islamic fi nance advocate economic development
through risk sharing and entrepreneurship, by way of generating linkages
between the real and fi nancial sectors. In this respect, the role of non - bank
fi nancial institutions (NBFI) is arguably more critical in an Islamic economy
than in a debt - based, conventional fi nancial system. While Islamic NBFIs
are experiencing rapid growth, much needs to be done to make this growth
sustainable. Policymakers must create a level playing fi eld for Islamic NBFIs
by standardizing contracts and creating a regulatory space for them to oper-
ate in. For profi t/loss-sharing transactions, regulators must ensure vigilant
monitoring of business performance. Finally, the growth and development
of Islamic NBFIs should be promoted to their full potential, in order to
foster equitable economic growth, enhance general access to fi nance, and
expand consumers’ options for Shari’ah - compliant fi nancing.
A role and scope of non - bank fi nancial intermediation in modern econ-
omies is not formally defi ned in the fi nancial literature. Broadly speaking,
NBFIs mediate the transfer of funds between capital-surplus and capital-
defi cit economic agents, with their delivery channels ranging from informal
money lenders to investment banking fi rms. While NBFIs perform many of
the same functions as commercial banks — such as lending, resource mobili-
zation, asset management, and fi nancial advice — their distinguishing charac-
teristic is that they do not accept or maintain deposit accounts. Thus, NBFIs
include private - equity and venture - capital fi rms, leasing and factoring com-
panies, sector - specifi c fi nanciers, cooperatives, credit unions, microfi nance
institutions, and development - focused lending institutions.
There is strong evidence that such institutions are vital for an economy’s
growth and prosperous development. NBFIs complement traditional banking
services by offering multiple and diversifi ed services to mobilize capital. The
growth of NBFIs such as mutual funds increases product options available
for portfolio management, which enhances diversifi cation and ensures effi -
cient risk allocation in the economy. Additionally, these NBFIs provide con-
sumers with longer - term investment opportunities than commercial bank
deposits, thereby mobilizing the funds requisite for the development of
An Introduction to Islamic Finance: Theory and Practice, Second Edition
by Zamir Iqbal and Abbas Mirakhor
Copyright © 2011 John Wiley & Sons (Asia) Pte. Ltd.