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Why Islamic finance is insufficiently innovative

Islamic finance's relatively small size is part of the explanation. However I believe that religious conservatism is another important explanation.


Posted 24 June 2017

On several occasions the topic for my monthly column in "Islamic Finance News" has come from a reader.

Earlier this year, I received the message below via LinkedIn from someone working in e-commerce at a major international bank.

Assalam Alaikum Mr. Amin, its a great pleasure to connect with scholars like you. Thanks to Allah and social media.

These days the alternate finance and fintech startups are disrupting the financial services market and even the big names in the industry are partnering with fintechs.

Why is this revolution not happening in the islamic finance world? Is it because of the regulations or less awareness? I strongly believe there is a huge market. Can you pls share your thoughts? Thank you very much for your time.

I addressed this question in my June 2017 column which is reproduced below.

Letter from Amin June 2017 — Does Islamic finance have an innovation deficit?

I recently received a reader’s enquiry via my website. In conventional finance, he saw the disruption from alternative companies and “fintech” outfits, with major conventional finance incumbents sometimes partnering with start-ups. He asked why this is not happening within Islamic finance.

The easy answer is to say that it is. Indeed Islamic Finance News now has a monthly newsletter, “IFN Fintech” and the Islamic Finance News website has many articles on current fintech developments in the Islamic finance industry.

However, the fact that the question was asked suggests that innovation might well be slower in Islamic finance than in the conventional finance industry. If that is indeed true, and I do not have hard data either way, three possible explanations suggest themselves immediately. These are the size of the industry, cultural factors and religious conservatism.

As many Islamic finance practitioners are all too well aware, the industry is tiny compared with conventional finance.

Every few years I compare worldwide aggregate Islamic finance assets with global conventional finance assets. The proportion has been rising over the years but remains tiny.

For example, S&P Global Ratings “Islamic Finance Outlook 2017 Edition” estimated global Islamic finance assets of $2.1 trillion at the end of 2016. Compare this with BNY Mellon Investment Management’s “The History and Future of Global Capital Markets June 2016” which estimated global cash (non-derivative) financial assets in May 2016 as being $195 trillion.

This means Islamic finance assets are only 1.07% of total financial assets. This is the first time I have ever computed the ratio as being over 1%.

With the relative sizes of the markets, it would be no surprise to find most budding fintech entrepreneurs focusing on conventional finance rather than Islamic finance.

Culturally, Muslim majority countries such as the Gulf states, Pakistan, Malaysia and Indonesia display much more respect for age and seniority than do locations such as Silicon Valley in California or the fintech hub in London. As a general point, respect for age, seniority and current practice is somewhat inconsistent with the pioneering of disruptive technologies aimed at overturning the current way of doing business.

However, this point should not be overemphasised. For example, Japan has long been a pioneer in electronics and robotics despite being a society that also puts great weight on age, seniority and deference to authority.

Finally, there is the question of religious conservatism. The rules of traditional Islamic law (“fiqh” in Arabic) have always been derived by Islamic scholars from the original sources of Quran and hadith, and from past judicial rulings, using the methodology explained by Mohammad Hashim Kamali in his magnum opus “Principles of Islamic Jurisprudence.

An almost inevitable consequence of requiring all legal developments be based on prior sources is that it limits the scope for innovation.

As a specific illustration, although traditional Islamic law contains many rules about partnerships, it never developed the concept of a corporation which has legal personality and a perpetual life independent of the identities of its shareholders from time to time. However, despite having been created in Christian Europe, and having no basis in traditional Islamic law, the concept of a corporation is of such immense utility that it has been adopted by every Muslim majority country I am aware of.

In my opinion fintech can only transform Islamic finance if Shariah scholars are sufficiently agile in developing traditional Islamic law to accommodate the disruptive commercial and legal innovations that fintech is likely to stimulate.

Supplemental comments

The word "innovation" has a dubious reputation in Islam, as it is often associated with the Arabic word "bid'ah" which Islamic scholars frown upon when it occurs in matters of religion.

In my August 2010 review on this website of the book "Islamic Banking and Finance: What It Is and What It Could Be" edited by Tarek El Diwany I covered this issue in some detail.

In the section "Attempts to shoehorn new contractual arrangements into the limited number of contracts found in the traditional Shariah law books" I challenged the book's attempt to fit concepts such as the corporation into traditional Islamic law, when it clearly does not fit.


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