This session focused on innovations in product development. In response to a question posed by Abdulkader Thomas on what was driving growth in Islamic finance, Baljeet Kaur Grewal singled out three factors: liquidity within the system (GCC is estimated to have US$1.2 trillion in excess liquidity), the boom of new Islamic banks and the development of the Sukuk market. Product development thus needs to take into account market demand, marketability of the products and regulatory framework that governs the operation of the industry, she suggested.

Humayon Dar said that innovation has always existed in Islamic finance although to some extent this had been growing at a slow pace. The issue with innovation would be acceptability of such innovation.

“Initially, innovative products faced low acceptability. But with the passage of time acceptability has increased. For example, in the 1990s, the hedge fund shorting technique was based on Salam contract to buy and sell stocks on a forward basis. This technique was criticized and alternative techniques were developed, including arboon, Mudarabah and Murabahah shorting techniques,” he noted.

Mohammed Rashdan Yusof then shared the Malaysian view on innovation. “The Ninth Malaysia Plan requires a lot of funding and with the government’s focus on developing Islamic finance, a lot of this funding requirement will be met using Islamic instruments. This will push the boundaries of innovation in Malaysia. For example, for private funding initiative financing, we are seeing the use of Mudarabah funds instead of Ijarah because in the latter, investors own the asset, whereas in all these projects, the government would like to have ownership over the asset. Thus the Mudarabah structure will allow a public-private ownership in a Shariah compliant manner,” he said.

Next, Baljeet highlighted Kuwait Finance House’s philosophy in their quest for innovation. “At KFH, our aim is to provide a Shariah solution instead of merely providing a Shariah compliant product. Shariah solution aims to develop the market as a whole instead of focusing on just selling the product. The Shariah approach also takes into account the social aspect of banking. For example, we are intent on developing the market in countries that we operate in — this is our value proposition and this is the Shariah solution approach that we embark on,” she elaborated.

In responding to Abdulkader’s question on the differences in innovation for retail and higher-end treasury products, Humayon emphasized that the Shariah scholars are not as strict with the high-end product as they are with the retail product requirement.

As for future progress in the realm of product development, Humayon foresees more innovation in the area of social responsibility because if the current Islamic finance product remains as it is, given its similarity to conventional finance, Islamic products may not survive for long.

Megat Hizaini Hassan pointed out that the biggest challenge for the industry is skepticism. “During the initial stage, people were cynical of whether Islamic finance is a viable concept. It has proven itself and has been in existence for quite some time. Now, we are at the second stage and people are skeptical whether Islamic finance could offer the same diversity as conventional finance. This is the challenge that the industry as a whole must look into.”

Shafiq from OSK Holdings then sought the panel’s view on whether innovation would lead to more complication in structuring.

In response, Humayon said, “Innovation need not be complicated. Yes, some innovation measures involve complexity; however, most actually involve simple concepts. For example, the idea behind an Islamic swap is selling oranges for the price of apples. Islamic put options could be achieved with Murabahah, coupled with promises while Islamic futures can be either based on one contract with two promises or based on two arboon contracts,” he explained. With that, the session ended.