Mandelbrot set image very small
Serious writing for
serious readers
Follow @Mohammed_Amin
Join my
email list

Search this site

Custom Search
Mohammed Amin's website
Serious writing
for serious readers
Tap here for MENU

Islamic finance needs more rapid innovation

Islamic finance still cannot satisfy many of the financial needs that conventional finance does. Innovation is happening, but much more is needed.

Posted 6 February 2021

Sometimes I know several weeks in advance what I want to write in my monthly column in the magazine "Islamic Finance News." On other occasions, I don't know what I am going to write until the imminence of the deadline sparks creativity!

My January 2021 column fell in the latter category. Inspired by the turn of the year, and by some of the major changes the world was seeing including the impending inauguration of President Joe Biden, I found myself thinking about where Islamic finance needs to go.

You can read my article below.

My new year perspective on the future of Islamic finance

With the start of 2021 (Happy New Year) I have been thinking about how Islamic finance has developed, and where it is going.

When lecturing, I often stress that, speaking mathematically, Islamic finance is a strict [or proper] subset of conventional finance. What that means is:

Who should decide what financial arrangements are religiously permissible for Muslims?

Where individual action is concerned, it must be the person themselves, since each of us is individually answerable to God on the Day of Judgment. While some countries legally prohibit conventional finance transactions, I regard that as an unwarranted infringement of religious freedom.

Where collective action is concerned, there is an obvious need for a religious opinion that will command wide acceptance. There is no point in starting an Islamic bank if almost all potential customers might refuse to accept that it is actually Islamic. Hence the need for Supervisory Boards of Shariah Scholars, whose views will command broad (even if not universal) acceptance amongst Muslims. Indeed, some countries specify legislative requirements for Shariah Supervisory Boards.

In the earliest days of Islamic finance finding people who had a deep education in the study of Quran, Hadith, and fiqh (Islamic jurisprudence), and who also understood banking and finance was essentially impossible. The two are very different intellectual disciplines, and there had historically been zero need for religious scholars to study banking!

Over the intervening decades, a growing number of religious scholars have gained an understanding of banking and finance, initially by simple exposure to the subject and later by formal study. Today many who understand both subjects are referred to as Shariah Scholars. (The more exact name of Religious Scholars Who Also Understand Finance would be far too long to find acceptance!)

As a consequence, from a very narrow start, banks simply taking deposits and making loans (to use the conventional finance terminology for precision and conciseness), Islamic finance has expanded to the much wider range of financial products such as sukuk and takaful available today. This represents genuine innovation, where contractual structures were invented for Islamic finance which did not previously exist.

All such advances require Shariah Scholars to interpret the original sources of the Quran and Hadith to decide how historic rules apply to new situations that simply did not exist at the time of the Prophet (peace be upon him.)

For example, in IFN Volume 13 Issue 28, [my page "The introduction of standardised Islamic foreign exchange forwards"] I discussed the International Swaps and Derivatives Association and the International Islamic Financial Market publishing innovative template documentation for Islamic foreign exchange forwards. There were no foreign exchange forward transactions when Islam arose. Creating this documentation required original thinking about how old rules apply in new situations.

My key question is whether Islamic finance is innovating rapidly enough. At present, there are still important gaps in Islamic finance, where conventional finance has products that meet real human needs, and Islamic finance does not.

Mohammed Amin is an Islamic finance consultant and former tax partner at PwC in the UK.


The Disqus comments facility below allows you to comment on this page. Please respect others when commenting.
You can login using any of your Twitter, Facebook, Google+ or Disqus identities.
Even if you are not registered on any of these, you can still post a comment.

comments powered by Disqus


Follow @Mohammed_Amin

Tap for top of page