By Dr Mohamed Ghiyath Sheikhah
One of the major challenges of Islamic Finance is to create new products and services for its clients. Product innovation and enhancement is an important aspect for the development and growth of Islamic Finance.
It is estimated that 50% of the customers in GCC have a preference for Islamic banking products as long as they offered equal value and are competitively priced. Majority of GCC citizens are estimated to belong to the 50% segment.
To create products or services in Islamic finance, one should understand that there are two common ways — Shariah-based products, or Shariah-compliant products.
Shariah-based products are those that have been produced by Shariah on the basis of concepts and rules based on the Holy Qur’an and Sunnah and other sources of Islamic commercial law such as Mudarabah, Musharaka, Salam, etc.
Shariah-compliant products are those that have been imported from conventional finance and converted into Islamic products such as credit card, forward currency, derivatives products, etc.
In order to have a proper product development, following parameters should be observed,
- Identifying Islamic commercial contracts: To understand and comprehend the underlying contract that governs that product.
- Understanding the rules governing the contract: When all parties in the contract are defined and the nature of the contract recognized, that will help the Shariah scholars to have a proper understanding of the product and design the right structure for that product.
- Applying and maintaining Islamic rules for the new product, so that the product will take Islamic taste and flavour.
Many Islamic banks in GCC have used Shariah-compliant products. Many of them have failed to convince their clients to market the newly developed products, because they miss to satisfy all the Islamic rules. One of the problems that I observed in the new product development in Islamic banks are:
- The process flow of product is not defined and the parties involved in the product are not clearly identified.
- Many of the new products have no clarity on how profit is generated and calculated, and how the flow of funds is traced between the lender and the borrower.
- Some of the new products have not specified the nature of the transactions that will take place and whether they fall under investment, financing or deposit.
- Many of the new products’ development starts by searching for a niche product that exists in a niche market and adapting this product by eliminating prohibited elements in Shariah. However, by using this method, sometime the developers fail to recognise the risk exposure of the product. There is no valid reason to expend financial engineering effort on a product that has a high risk level, and do not attract the banks’ customers.
- Some of the product developers have no knowledge on Islamic Fiqh and rules, and they don’t know the framework of the Islamic contracts.
The product development process should be governed by very prominent parameters, standards and framework to ensure that a proper product is introduced in the market. In order to best meet the needs of this particular market segment, Islamic financial institutions need to fully understand the importance of product development.
Needless to say, Islamic banking products are constantly being compared to interest-based products in terms of cost and return without any regard for the unique product rules of Shariah.
* Dr Mohamed Ghiyath Sheikhah is head of Local & International Investments (Treasury & Investments) at International Islamic. The views expressed are his own.
