Innovation in Islamic finance: Third phase of development

The real value proposition of IBF so far has been in terms of its emphasis on Shari’a compliance. IBF has emerged as an example of financial innovation whereby Shari’a principles relevant to business are applied to banking and finance to ensure that they conform to Islamic beliefs and teachings. In this respect a primary objective of Islamic financial innovation has so far been:

“Developing new financial products for the Islamic financial services industry, which replicate economic effects of the conventional products in a Shari’a-compliant way”.

Keeping aside the cynical view, there have been three significant innovations in IBF since its inception. These include: Murabaha (1970s), Sukuk (1990s) and Wa’ad (2000s). It is safe to claim that without these three developments, it was perhaps impossible for the Islamic financial services industry to grow so quickly to attain the mark of US$2 trillion under management by the end of 2014.

Figure 1: 3 types of innovation in Islamic Finance (refer to the report).

Three Type of Innovation - Three Phases

As shown in Figure 1, phase 1 of the IBF development involved process innovation (1970s – 2014). In phase 2 (2015 – 2020), Islamic financial institutions must start developing genuinely new financial products, adding a distinct economic value proposition to mere Shari’a compliance of their products offerings. In phase 3 (from 2021 onwards), Islamic financial services industry should aim at developing a financial system that must provide a credible and workable alternative to conventional financial

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