4.

Towards improving Islamic finance products

Because customer needs and desires, as well as competitive offerings, are constantly
changing, institutions face an innovation imperative: the need to innovate continually just to stay
even with competition, or even to remain viable. There is a need to develop a method for
developing products and services in the industry since the basis of the Islamic finance industry is
characterized by an investment nature, and not on providing credit facilities, or loans, and the
existence of a strong connection between rates of return with the production cycle in the
economy. A major characteristic of that industry is the connection and matching Islamic
financial product innovation between sources and uses of funds, and the expanding scope of new
services. The company that fails to innovate quickly falls behind. The development of new
products and processes is increasingly a focal point of competition. New insurance and financial
products provide additional diversification opportunities to individual investors. Firms that get to
market faster and more efficiently with products that are well matched to the needs and
expectations of target customers create significant competitive advantage. However, firms that
are slow to market, with products that match neither customer expectations nor the products of
their rivals, are destined to see their market position erode and financial performance falter.
Speed, efficiency, and quality are three imperatives in the development of new products.
Also, the products and processes that a firm introduces must also meet the demand in the market
for value, reliability, and distinctive performance. Financial innovation is an important
phenomenon in any sector of a modern economy, raises the efficiency of financial intermediation
and will lead to higher levels of competitive ability. There is a need to improve the efficiency
and effectiveness of operations, through the better utilization of resources and increasing the size
of investments. Changing regulatory requirements or social pressures create the opportunity to
satisfy some unmet or latent customer need. New product development is a necessity because
companies grow by creating new growth platforms on which they could build families of
products, services, and businesses. Islamic institutions, particularly in Bahrain, Malaysia, and
Sudan, have been gearing up for further expansion by continuing to develop, refine and market
innovative financial instruments, on both the asset and liabilities sides. In recent years, many
new Islamic financial products have been developed and are increasingly used in financial
market activities, including equity and bond trading and investment Islamic insurance and
reinsurance (Takaful ), Islamic syndicated lending, and investment in Islamic collective
investment schemes and other wealth and asset management products.
New products are being introduced across the industry as banks and financial services
providers that are eager to connect with their customers continue to experiment with packaging
sharia-compliant offerings. Concepts such as wakala, which has been seen as a viable form of
deposit for retail and wholesale customers, offers an approach whereby the institution agrees to
manage funds on an individual basis at an expected rate of return. Banks such as Abu Dhabi
Islamic Bank offer a wakala deposit account, managing depositors' funds individually, not
pooled with funds from other investors. There must be a ‘substance over form’ approach when
applying Shari’ah principles for various products and services, as Shari’ah principles by
themselves cannot determine the substance of a transaction. Industry practitioners should find
ways and means to serve the needs of their customers in a Shari’ah-compliant way, while the
regulators should provide enabling frameworks for meeting the needs of customers. He said that
difference in Shari’ah scholars’ opinions is allowed and, in fact, is a blessing from God.
5. Conclusion
Malaysia is playing a key role in the growth of both the local and the international
markets. He pointed out that we should not place too much emphasis on development of the
Islamic global market but should focus instead on the growth of the local market. When there is
sufficient critical mass in the local market, it will grow naturally into the international market.
Meanwhile, there must be respect for each jurisdiction active in promoting Shari’ah-compliant
finance business, as each jurisdiction has its own customs, which may not be applicable in other
jurisdictions. The growth of Islamic finance in the emerging global economy depends on the
industry's ability to innovate new financial instruments. Bank senior executives often equate
innovation with technology, yet technology only plays a small part in what is truly innovative.
Banks worldwide - Islamic banks being no exception - frequently assume that implementing a
new technology is the sole basis of innovation.
Technology belongs in the realm of inventions, not innovation. Innovation is the
application of technology to a specific problem, opportunity or circumstance. Numerous failed
information technology (IT) projects stand as testament to banks' failures to understand this
fundamental difference. Innovation is about creating sustainable value with Muslim (and non-
Muslim) customers. This value in turn will be the key market differentiator for institutions
offering sharia-compliant services. As the composition of the competitive market changes with
new banks and non-banks, financial services organisations offering sharia-compliant products
will change the focus of existing institutions toward innovation rather than technology. Banking
technology is highly commoditised and is readily available to even the smallest of institutions.
Because each one can offer almost every product, what will enable a bank to stand out from the
pack will be how it applies the technology, packages the offering and demonstrates value to
customers.
The regulatory structure of a nation combined with the knowledge of sharia scholars
determines the level of innovation that any market can absorb. Regulators in Bahrain, Kuwait,
Malaysia, Qatar, Saudi Arabia, United Arab Emirates and the UK are eager to set a solid
foundation for robust growth in the industry and to date have been increasingly open minded in
changing regulations to promote industry growth. The effective management of a developing
financial industry is critical to ensure its future survival and profitability. Increasing competition
in the product markets, is becoming the norm for the Islamic banking and finance industry. There
is a need to innovate and practice new ideas based on Islamic foundations, and at the same time,
that are in harmony with the demands of modern markets. The need to further develop financial
products and services in compliance with Islamic Sharia is essential to the survival and growth of
the Islamic finance industry. To compete, Islamic banks and financial institutions must
continually improve their performance by innovating products and processes, and improve
quality. There are certain issues that require further study.