Innovation in structuring Islamic financial products

Structuring is an art!

Towards the end of the first decade of this century, I developed and initially delivered a one-week workshop on "Structuring Innovative Islamic Financial Products" for Institute of Islamic Banking and Insurance London. The course was delivered at the University of Cambridge for about five years (out of which for the first three years, I was principally responsible for delivering the course). It, unfortunately died down gradually because the Institute of Islamic Banking and Insurance itself faced a crisis-like situation after the death of its founder, Muazzam Ali.

Innovation in Islamic banking and finance witnessed a new trend when the likes of Deutsche Bank, BNP Paribas and other European investment banks started developing state of the art Islamic investment products. I was directly involved in the endeavour by Deutche Bank in this respect.

We developed a double-helix structure based on the concept of Wa'ad, which opened new gates for innovation in Islamic banking and finance. The IIBI's Cambridge experience took advantage of this structure and offered a state of the art training programme to the participants coming from America, Europe, Asia and Africa.

The current wave of technological advancements has opened new avenues for innovation in Islamic banking and finance. Islamic FinTech is now a major focus. There are scores of young entrepreneurs who are trying to develop third generation of Islamic financial products. Not all of them are successful though. One important factor that has contributed to their lack of success is the close-minded approach of most of them, with respect to Shari'a matters. In my view, there is none in the whole Islamic financial services industry world-wide, who has the right kind of Shari'a Mind (a term borrowed from Dr Mohd Daud Bakar ).

There is none in the whole Islamic financial services industry world-wide, who has the right kind of Shari'a Mind

For someone to innovate in Islamic banking and finance, they must be courageous enough to push the boundaries of Shari'a outwards. Not everyone has guts or ability to do so.

Our decision to start Cambridge Islamic Finance Structuring Master Medinah Programme (to be referred as Medinah Programme hereafter) is an attempt to train a new breed of product development and structuring personnel who are not afraid of making mistakes.

We aim to produce 200 innovators in Islamic banking and finance (over a period of five years), who should be endowed with the right talent to get the industry out of the on-going inertia. We must come out of a state where mimicking conventional products by bringing cosmetic changes to the structures is presented as innovation. Innovation is a lot more than that.

We must come out of a state where mimicking conventional products by bringing cosmetic changes to the structures is presented as innovation

For effective Islamic financial innovation, one must have:

• In-depth Shari'a knowledge (mastery of Fiqh al-Mu'amalat al-Maliya)
• Access to cutting-edge financial techniques and technology
• Awareness of market trends and economic needs
• A 360-degree view on commercial viability
• Understanding of regulatory limitations

The above are five main ingredients of Islamic financial innovation. There may be some other dimensions of innovation in Islamic banking and finance, but the above five are a bare minimum.

The Medinah Programme will fill this vacuum. The attendees - to be carefully chosen from Islamic financial institutions from around the world - will learn new techniques to start developing innovative Islamic financial products - from Hajj funds to Islamic hedge funds. There is no limit to thinking. Of course, as the above five points suggest, Shari'a considerations must be paramount in this respect. As the late Sheikh Hussein Hamid Hassan used to say, "If Shari'a closes one door on Muslims it does open hundred others." The job of an Islamic finance structurer should be knocking at such doors to get them opened for the benefit of all.

If Shari'a closes one door on Muslims it does open hundred others. The job of an Islamic finance structurer should be knocking at such doors to get them opened for the benefit of all.

There is an opportunity for Western financial institutions to once again start playing a role in this respect. Their participation in the Medinah Programme will bring a new wave of innovation to Islamic banking and finance.