Innovation in Islamic finance has been driven by the need to ensure that Shariah compliant products are available as alternatives across as much of the spectrum as possible of conventional product offerings. There was therefore much ground to cover as the new Islamic finance industry had to compress into three decades product development that had taken over two centuries for conventional finance. Furthermore, for the first two decades of Islamic banking, only a very restricted product range was offered, so the real explosion of innovation has been in the last decade. Having “caught up” with conventional finance in terms of product development, the future pace of innovation will be slower and largely determined by product development in conventional finance. In mature markets this will be limited, but the scope for new product applications in emerging markets, including those of many Muslim countries, is greater. Therefore I would expect to see further conventional innovations in Asian markets, including the west Asian Gulf economies, with knock-on effects for Shariah compliant product development. New products become standardized over time, but the commoditization of Shariah compliant products inevitably reduces margins for Islamic banks. Innovators who introduce differentiated products will always command premium prices until they are competed away. Islamic banking is subject to the same economic forces as conventional banks, so expect to see more product offerings. The predictable is seldom very profitable.
PROFESSOR RODNEY WILSON
We are currently suffering from a surfeit of innovation in the search to create Islamic financial products which replicate western products. Neither financial intermediaries nor the professionals who serve them have any interest in the simple, and entirely generic partnership-based tools now available to create an “enterprise model” – or legal and financial structure – which allows concepts such as Musharakah and Takaful to be legally encapsulated simply but elegantly. The reason is that these structures lack the principal outcome – “gearing” or “leverage” – which we have come to take for granted in the west, and by which Muslim investors are being seduced. Unless and until the industry is forced to recognize that no truly Islamic product can be “deficit-based” (e.g. fractional reserve banking, margined futures and options contracts) and therefore give rise to gearing, we are doomed to ever more ingenious products and ever more sophistry from Shariah scholars capable of swallowing their disbelief. CHRIS COOK Principal, Partnerships Consulting
I’d suggest that “innovation” has devolved into jargon. Our business has yet to see the development of a full spectrum of core banking and asset management products. Simply speaking, we’re at a phase in the business cycle in which the industry is progressing largely by adapting and modifying known structures. Once this effort is exhausted, only then will true “innovation” emerge and be a driver for growth. Meanwhile, competition and technology suggest that Islamic finance has the ability to short-circuit the decades-long evolution that it took to yield today’s array of conventional products. DOUGLAS CLARK JOHNSON Chief Executive Officer, Calyx Financial
IInnovation is the word. Both using the generally accepted finance techniques and contract forms, and using new ways and new, innovative, compliant contracts and structures. Governance, transparency and competent market structuring have to assist such growth and guide the probing of the boundaries. Innovation and creativity are the engine and propeller of all activity and successful innovations ultimately lead to a follow-up with “predictable” product offerings. A developed market will have a large “predictable” basis and a smaller “innovative” top. A developing market will attract attention, interest and knowledge with a bigger innovative product offering and a smaller (but steadily growing) predictable basis. PAUL WOUTERS BENER
Itend to disagree with that because the innovation of Islamic products is what makes them different from conventional products. Due to the fact that Islamic finance covers a wide range of aspects of the economy and finance, banks and financial institutions have a wide and flexible role to play in developing the products, as opposed to conventional financing, which is rather predictable due to the straightforward lending nature of its products. MOHAMED RIDZA Managing Partner, Ridza Law (Mohamed Ridza & Co)
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