I feel that one of the key areas that will see changes is mutual funds. They will be replaced by ETF’s which are fast catching up.
ALI SHERVANI
To look forward we also have to look back. The reality is there has been little change in Islamic financial product offerings during the last five years. Although the future can never be accurately predicted, it is unlikely that there will be another major financial crisis in the next five years. But it is notable that the last did not affect the product mix. Of greater significance is the re-evaluation of some products from a Shariah perspective. Tawarruq, for example, has been prohibited by the OIC Fiqh Academy and may no longer exist in five years. It won’t be missed. The questioning of Mudarabah and Musharakah Sukuk structures has resulted in few new issuances of this type, but they have a future if the Shariah issues on repayment guarantees can be resolved. Hopefully in five years better product structures will be used for Shariah compliant private equity and Islamic microfinance. There are promising applications of Musharakah to these types of financing, but few examples of their use. Expect to see increased Shariah innovation, with more stress on product fundamentals rather than complex structures. Financial engineering has been discredited by the crisis, and should be treated warily by the Islamic finance industry. PROFESSOR RODNEY WILSON Faculty of Islamic Studies, Qatar Foundation
The Islamic financial industry is still growing and instruments are continuously subject to review and amendments. Improvements in Shariah compliance and standardization, and potentially a shift away from commodity Murabahah are all likely to occur. To what extent we might regret seeing these changes will be dependent on the industry’s and the individual players’ attitude to change as much as anything else. DR NATALIE SCHOON Head of product research, Bank of London and the Middle East
As the near default of the Nakheel Sukuk and the Sukuk defaults have shown, the problem lies not with the structure of a product, but with its application. Largely, the surprise at the default of several Sukuk should not have happened. Islamic financial products — like conventional products — are dependent on the economy and the specific financial situation of the individual or financial company receiving the financing. In the future, the greatest risk lies not in a product, but in the risk and liquidity management of Islamic financial institutions. There will be new products that will offer a way for institutions to manage short-term liquidity instead of holding large reserves in cash. Because these products will be on the cutting edge — they will be hailed as an innovation–there is a potential for them to become overused without their risks fully analyzed. The next time there is a liquidity crisis or crisis of confidence in counterparties in the financial markets, these products could unravel and threaten the solvency of a larger number of Islamic financial institutions. BLAKE GOUD Principal, SharingRisk.org
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