According to the Economist Intelligence Unit (EIU), by 2050 the population of Africa and Asia alone will comprise 7.7 billion of a forecast global 9.7 billion. Today, Muslims comprise large and rapidly growing segments of the world population, including 93 per cent in the Middle East & North Africa (MENA), 30 per cent in sub-Saharan Africa and 24 per cent in Asia-Pacific. Broadly speaking, in so far as Islamic finance promotes beneficial financial activities to society, and restricts harmful ones, through its ethical principles and focus on tangible assets, there is reason to believe that non-Muslims would also be inclined to adopt Islamic financial products.
When I think about what innovation means to me, the word ‘creativity’ resonates stronger than the word ‘adaptation’. Applying this thinking to product development, what is needed is a creative solution, as opposed to an adapted one, to solve an unmet market need. For Islamic finance to flourish, time would be more valuably spent creating new financial products that are Shari'ah-based rather than adapting existing conventional products to become Shari'ah-compliant. The innovative magic is in the roots, not the branches.
The root of Islamic finance is Shari'ah, which is underpinned by the Holy Qur'an and teachings of the Prophet Mohammed (peace be upon him). So what exactly is the difference between Shari'ah-compliant and Shari'ah-based financial products? An Islamic financial product that is developed using the Shari'ah-compliant approach has its origins in conventional banking and aims to make the product compliant by omitting features or components that contradict Shari'ah principles and replacing them with those that do not. With this approach, an Islamic product is structured using an existing conventional product as a reference. We are trimming a tree to fit a mould rather than planting a new one organically to yield the results we want.
One example of Shari'ah compliance is Ijarah, an adaptation of a conventional lease. There are many similarities and a few differences between the two, across multiple dimensions such as ownership, risk, timing, profits and penalties. Taking risk as an illustration, a conventional lease is structured so that the lessor assumes and manages all the risks of the leased asset. With ‘Ijarah’, all ownership-related rights and liabilities lie with the lessor whereas all usage-related rights and liabilities lie with the lessee. Any damage or lost caused beyond the lessee’s control is borne by the lessor.
An Islamic financial product that is developed using a Shari'ah-based approach does not involve a conventional product as a benchmark. It is a newly developed product based on Shari'ah principles and is therefore intrinsically compliant. For example, a Mudharaba venture capital partnership model takes a Shari'ah-based approach. Here, a financing partner provides capital towards investment in a commercial enterprise to be managed by an entrepreneurial partner. The proportionate share in profit is determined by mutual agreement but the loss, if any, is borne only by the owner of the capital, in which case the entrepreneur gets nothing for his labour. Although a simple example, this Shari'ah-based model does not aim to replicate a conventional VC model, despite their similarities, but rather, creates an organic Islamic financial product directly from Shari'ah principles.
This is where the real innovation of Islamic finance is. The more the industry adopts this approach, the more growth it can expect. At DIFC, we have created a dynamic ecosystem of 1,750 companies—many of which are Islamic Finance institutions or offer Islamic solutions. We are also driving the future of finance with a number of initiatives that support innovative thinking in the industry.
On 14 November 2017, the Dubai International Financial Centre (DIFC) will be hosting the Global Financial Forum (GFF) which will convene a remarkable group of leaders from across the world of finance to share their knowledge on Islamic Finance, FinTech and the future of finance, as it relates to the Middle East, Africa and South East Asia (MEASA) region. These industry experts are set to provide valuable insights on the progression of the fast-growing Islamic Finance sector and I look forward to exploring how we, as a global community, can innovate from the roots and take the Islamic Finance industry to the next level.
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