The challenge of writing a monthly column for the magazine "Islamic Finance News" is coming up with something to write about every single month.
While sometimes it can be difficult, finding the topic for my March column was easy. The reason is that during February I spent some time talking online with someone from a Shariah compliant investment management firm.
The conversation reminded me how much Islamic finance innovation is taking place in non-OIC (Organisation of Islamic Cooperation) countries, so I decided to share my thoughts on this.
My article was published in the 3 March 2021 issue. You can read it below.
I recently had a long conversation in which a senior executive of a Shariah compliant investment management firm briefed me about the firm and its product offerings. In exchange, I suggested some additional products that I consider the Islamic finance market needs, even if customers were not actively asking for them!
I never promote individual businesses, so his firm will remain nameless. However, their main operations are in North America and the UK.
While I don’t claim universal knowledge, my perception is that while Islamic finance was originally developed in Muslim majority countries such as Egypt, with the main centres being the Gulf states and Malaysia, as time has gone on an increasing share of innovation has come from the UK and North America. I appreciate that some will find that statement controversial!
Stepping back, assuming I am right, the obvious question is why? When there are so many more Muslim Islamic finance customers in OIC countries, why should the pace of innovation be greater outside the OIC where there are far fewer customers?
In my opinion, there are a number of factors.
Firstly, Non-OIC countries have been in a “catch up” situation. Initially, Islamic finance developed within the OIC countries mentioned above, while there were no offerings, certainly at a retail level, in countries like the UK until the mid-2000’s. Accordingly, significant innovation was needed simply to make Islamic finance products feasible in the complex regulatory and tax environment of the UK and North America.
Secondly, although the regulatory environment in the UK and North America is more complex than within the OIC generally, it is typically also easier to “do business.” I have never forgotten the experience of a client about 14 years ago who was seeking to register a simple company in Bahrain. After about six months the client abandoned Bahrain as a location, and was able to incorporate within one day in the UK.
OIC environments that make it hard to do business generally are obviously not conducive to innovation. With regard to Islamic finance, this may be even more significant.
Many OIC countries have State Shariah Boards which specify what is Shariah compliant in their territory. This would obviously make it more challenging to obtain approval for new and innovative Shariah compliant products.
Conversely, in the UK and North America the government has no wish to say what is Shariah compliant. An innovator simply needs to ensure that their Shariah Supervisory Board approves the new product, and that their SSB has credibility with potential Muslim customers.
Finally, and most controversially, in my view the mental skills and habits required for innovation are not evenly distributed.
While OIC countries have enormous populations, and therefore produce vary large numbers of new graduates each year, I am sceptical about the quality of their education. In particular, in my opinion, education in OIC countries puts great emphasis on rote learning, respect for the opinions of the teacher, respect for the rules of the government, and negligible emphasis on critical thinking and challenging what one is being taught. None of these is consistent with developing the ability to innovate.
In contrast, the entire educational model of the UK and North America is to develop individuals who can think independently and who will challenge received wisdom.
Mohammed Amin is an Islamic finance consultant and former tax partner at PwC in the UK.