Hussain Al Qemzi

Innovation in essence, is the ability to renew, excel and compete in markets. Innovation in the financial sector, including Islamic banks, means that banks can meet customers’ demands and the constant changes to these demands, thus enabling banks to preserve their customer base and expand it. In particular, it means that Islamic banks are required to provide an added value to the economy as they are a partner in trade, investment and production, and that they do not merely aim to maximise profits without maximising the production of tangible commodities and services, making the financial sector work in tandem with the overall economic activities.

It is not just creating different products and services compared to those offered by traditional banks, but that these new products should be efficient in achieving the intended goals and comply with Shari’a principals. Shying away from copying traditional products requires enabling Islamic banks to be independent and build their own identity. However, this does not mean a complete abandoning of traditional products — since we can utilise what is useful and viable from these products.

The need for Islamic Finance

Since the first ever financial transactions, human beings have created an enormous number of financial products and services. These innovations have been largely beneficial to the global economy, enabling the financing of complex projects and mitigation of risks that are presented by the workings of the global economic system. However, in the absence of any ethical or moral safeguards, many of these products were then not used for the intention they were created. Unscrupulous financial institutions as well as banks were able to manipulate products, markets and investors, purely in the pursuit of profitability and thereby creating crises in the markets, the last of which we witnessed in 2008 and resulted in the global economy paying a heavy cost. Many instruments created had no bearing on the underlying assets, and carried complicated risks that were impossible for professional investors as well as rating agencies to assess accurately.

Islamic financing and investment instruments are essentially backed by real assets and real economic activity, which prevent underlying negative impacts when they go wrong — which is a big reason for its growing popularity. For example, since they were created in 1977, Islamic Sukuks, which were then known as “Muqarada Bonds”, still enjoy customer’s confidence because they can provide secure financial transactions between banks, businesses, and individuals.

These bonds have become a necessity for many economic institutions and governments that seek to finance their growth with efficient tools — which is proof that innovation is undoubtedly a useful and vital practice. In 1983, the Turkish government used “Participation Certificates” to finance the construction of the second Bosphorus Bridge. Throughout time, the Muqarada Bonds have developed, expanded and become multifunctional — and innovating Sukuk in the Islamic banking and finance sector has been a truly unique step.

Excessive risk taking

It is worth noting that while innovation is important, lack of ethical and moral filters, risk innovation mutating into something that is dangerous. In recent times, we have seen regulators trying to clamp down on this excessive risk taking by the financial sector, but onerous regulation comes with its own risks of stifling innovation and growth. External regulation can probably never be an effective replacement for ethical filters that need to be part of the institution’s DNA.

Ensuring Future Innovation in Islamic Banking

Safe and secure Islamic banking innovations are appropriate for implementation, development and continuation. Taking a secure innovation path in Islamic banking requires a number of steps:

1. Islamic banks need to understand that they need to provide efficient and transparent services to their clients. Just being Sharia compliant, cannot make a product less transparent and more expensive to access.

2. Technology remains an important driver for innovation, Islamic banks that only look at product development and not product delivery or customer acquisition, will risk being left behind.

3. Thirdly, there is a need to continue product development. Over time, Islamic banks need to move away from “me-too” products, i.e. those products that seek to create similar economic outcomes as conventional banking products. There is a need and a demand to create products that change the risk sharing dynamic between fund seekers and financier. Variable return products that are the true essence of Sharia compliant financial activity need to be developed and propagated in the market.

4. We need to refute traditional sayings that Sharia compliance limits innovation. Sharia principles reject prohibited practices but do not reject innovation. Sharia is in essence a call to innovate for the good for humanity, which is clearly mentioned in many fiqh and shari’a texts.

5. Progressive Islamic education is a key area, and we have to develop Islamic banking curricula in universities and institutes so that they combine financial sciences with other economic sciences.

The importance of continued innovation

The essence of the financial industry is innovation and renewal. Innovation has to take market trends and the general policies of the state into consideration. We are now building a national economy that diversifies its income, distributes investments to all critical sectors in a balanced way, focuses on production, trade and industry, and combines all of the above under the umbrella of sustainable development.

This transformational state of the UAE’s economy offers plenty of opportunities and possibilities and is open to innovation in financial products, such as tools to finance development. Whoever is more innovative in creating safe and sustainable instruments will be eligible to have an impactful presence in the future of our economy. Those who confine themselves to current tools will become obsolete. Logic tells us that what is viable today is not necessarily good for tomorrow.



Hussain Al Qemzi, is the CEO of Noor Bank. Views expressed in the column are the writer’s own and do not reflect those of the newspaper.