Can Islamic Finance Innovate for Sustainability & Growth?

Post By Michael Damian Billy

The Next Generation of Islamic Finance Asset/Cash Management:
Who will provide the dynamics for an “idea system” that creates and innovates the processes in 2011 and Beyond?


While there has been formal discussions held within the Islamic Finance community over the past year, regarding product development; acceptable investment practices and execution applications, several key issues remain primary topics for exploration. The most critical is who will take on the leadership role and for what purpose.

One prominent international Shariah advisor to the Islamic finance industry that is providing a catalytic perspective is      Muhammed Elgari of Saudi Arabia.

Excepted from a recent article, Elgari is the first prominent scholar to emphatically call for a scientific approach to Shariah compliance. This follows a similar call by another prominent Shariah scholar; Sheikh Esam Ishaq of Bahrain, those Shariah advisories serving the Islamic finance industry should be regulated.

He advises fellow Shariah advisories to adopt a scientific method in reaching their deliberations on Islamic finance. “To be respected,” said Elgari, “Shariah scholars should follow scientific methods to reach their conclusions. We have seen many mistakes where declarations have been issued. Only the correct resolutions will prevail. Shariah is not a group of infallible people. It is a science. It requires methodology, and resolutions require peer review and market consultation.”

Of equal importance regarding momentum and innovation is what component, or participant of Islamic Finance, will build upon his foundational guidance to create an “idea system” to exist and flourish?

As a prolusion, I want to refer to a quote made by John Cleese, the well-known English actor, film producer, comedian and writer who is now Provost’s Visiting Professor at Cornell University.

He stated “we all operate in two contrasting modes, which might be called open and closed. The open mode is more relaxed, more receptive, more exploratory, more democratic, more playful and more humorous. The closed mode is the tighter, more rigid, more hierarchical, more tunnel-visioned.”

Most people unfortunately spend most of their time in the closed mode.

Cleese further states “we must return to the “open” mode, because in that mode we are the most aware, most receptive, most creative, and therefore at our most intelligent level.”

His perspective is aligned with the task before every conventional, investment and development bank. The “idea system” is also integral to serving the progressive goals and objectives of holding and takaful companies. Inclusive are all of the various tangential participants, factions and governance authorities.

No matter what global culture or facet is involved, creativity and innovation are crucial to business sustainability and growth. And therefore supports and nourishes modern civilizations.

Where does the momentum come from and who takes the lead?

At the crossroads, Islamic Finance asset/cash managers must decide on whether existing rules and financial oversight allow it to enter the new decade with a progressive perspective.

Simply stated, Shariah law compliance and its role within the IF banking industry has become generationally rooted.

When managed by the present generation, priorities focus on creating and innovating current products, service, processes and paradigms. When companies become preoccupied with their present business, they diminish the contributions from those who look to the future.

The next generation understands that its current portfolio of products, services and processes will eventually mature and decline due to client/customer dissatisfaction linked to benefits or rewards.

Asset/cash managers need to start seeding and feeding ideas into the governing authority process, whereby their contributions that can be monetized and tied to newer and greater asset class diversification. Hence, a new revenue stream is borne that has greater profit potential and a wider acceptance.

If the goal of Islamic Finance is growth over the next decades, a full pipeline of ideas must be present and be encouraged. To sustain the momentum, replenishment must outpace products that become less attractive due to a lack of originality; market responsiveness and client reward.

Excerpted from an article written by Clifford Chance in Euromoney’s ‘Islamic Finance Review 2009–2010’, “Shariah scholars are increasingly taking the view that as Islamic finance is getting more sophisticated, investors should be able to enter into hedging arrangements. “

For a long time, the lack of acceptability was due to fact that speculation was a broad brush categorization. Interest rate swaps, Murabaha-based products as well as Wa’ad-structured products, such as currency swaps or FX options, all form part of the Islamic financial landscape. Those types of innovative Islamic financial risk management products represent Islamic Finance’s entrée in 2011 and growth beyond.

At the core of implementation should be the crystallization of principles and scope. Who better to foster this evolution than the asset managers who have the daily responsibility for undertaking the enlightened process?

Why Islamic Golden Age sciences need to be embedded into the “idea system”?

The Islamic Golden Age, or as it is often referred to as The Islamic (Abbasid) Caliphate, is traditionally dated from 622 to 1600 A.D. During this period, artists, engineers, scholars, poets, philosophers, geographers and traders in the Islamic world contributed to agriculture, the arts, economics, industry, law, literature, navigation, philosophy, sciences, sociology, and technology, both by preserving earlier traditions and by adding inventions and innovations of their own.

The works of Aristotle, Archimedes, Galen, Ptolemy, Euclid, and others were the wellspring of science during the Medieval Period. Islamic scholars translated them into Arabic, the lingua franca of this period.

Islamic scholarship also inherited Aristotelian physics from the Greeks and during the Islamic Golden Age developed it further, especially placing emphasis on observation and a priori reasoning, formulating crude forms of the scientific method.

It is unfortunate and defeating that advances in statistics, physics and other forms of mathematics are not being utilized in todays Islamic Finance banking environment. Refined, they can comply with non-riba transaction and non-speculative execution standards. Why these methodologies are not being used to thwart a myriad of risks is another question that remains unanswered.

Setting those financial and beneficial advancements aside, international, regional and secular banks cannot ignore the fact they an escalating inflation environment will challenge all product purveyors. The foremost challenge is to design offerings that combat interest rate risk.

A global issue confronting all countries, banks must counter its negative economic impact.

For Western banks, the assets float with income assets, whereby the liabilities are fixed income liabilities. The risk comes from lower rates. Conversely, Islamic banks have fixed income assets whereby the liabilities are profit-sharing liabilities (not fixed.) Therefore, risk comes from higher rates.

Asset managers need to remain steadfast to the principles of product creation, i.e. creating a value proposition. Bells and whistles not required, but liquidity, interest rate and event-risk safeguards are mandatory.

What is the intent behind the tasking – symbolic or meaningful?

According to Harvard Business School Professor Teresa Amabile in ‘How to Kill Creativity’ (1998), she affirms that “In business, originality isn’t enough. To be creative, an idea must also be appropriate – useful and actionable. It must somehow influence the way business gets done – by improving a product, for instance, or by opening up a new way to approach a process.

No matter how minimal or massive the undertaking, the same principle applies, it has to equate to a value. While individuals can affiliate with symbolism, they nonetheless live in the real world. If no value is perceived, they will seek it out through alternative channels.

If economic principles are applicable to each component and contributor, why are Islamic Finance banks reticent to apply complimentary analysis that are derived from the Islamic Golden Age, when mathematics, physics and other sciences were integral for Islamic Finance to evolve its competencies?

Economic models could be greatly aided by quantitative risk management techniques. Their integration can redefine risk vs. profit opportunities that serve both the institutional and consumer markets. Profit and loss events becomes a more exacting outcome when the model allows for a higher level of scientific contribution that was acceptable during the Islamic Golden Age which is traditionally dated from the mid-7th century to the 13th century AD.

With optimism, the second generation of scholars and contributors to the “idea system” will accept the responsibility for allowing quantitative-orientated analysis and application to be utilized for the creation of a myriad of diversified asset class opportunities.

For those desiring to plant seeds and ideas that advance IF asset and cash management, I encourage each one of you to pursue an attempt wherein cultural, economic and social benefits are escalated. Likewise, all contributions should embrace the adaptation of advanced technology to produce an elevated product emergence that will generate a more widespread client appreciation and participation.


M. Damian Billy is the founder and Managing Director of Econophy Capital Advisors, a U.S-based asset manager that specializes in forward observation risk analytics focused on delivering global macro absolute return outcomes. To contact, please email .


The above article was published in Islamic Finance News 2 Feb 2011 issue and reproduced here with permission.