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Innovation in products and services is the engine of financial services. The Islamic banking sector is no exception. But given its relatively short contemporary history, product development and innovation is at best piecemeal. This is partly because research and development (R&D) is only emerging in the sector.
The mainstay of the Islamic financial products suite has been the vanilla offerings of Murabaha, Ijarah, Istisna, Al Bai Bithaman Ajil, Instalment Sale, and to a lesser extent Musharaka and Mudaraba.
More recently, Sukuk and securitization have started to proliferate with structures such as Bai-Salam Sukuk, Sukuk Al-Ijarah; Musharaka Sukuk; Sukuk Al-Mudaraba, Sukuk Al-Intifaa, Murabaha Sukuk, Islamic Private Debt Securities, Islamic MTNs etc.
Another area of product innovations has been Takaful (Islamic insurance) based on the Mudaraba, Wakala and Tabarru concepts. Similarly, the Islamic mutual funds industry has grown since the launch of the pioneer ones in the l?te 1980s and early 1990s, but the volume of funds under management remain modest compared to the conventional fund industry.
After three decades of Islamic finance development, investors and customers have now become much more sophisticated and demanding. Some continue to seek value-added returns especially in riskier asset classes such as derivatives, fixed-income, capital markets and private equity products.
On the other hand, vanilla offerings but refined to suit specific market requirements especially in consumer financing and trade finance will continue to prevail. Islamic home financing already is carving an attractive niche in the UK, South Africa, Canada and the US.
Product development especially in the more exotic areas relating to options, repos, hedge funds, swaps etc, will be dictated by the quality of Shariah research and advisory, and the demand dynamics of investors and institutions.
In the Sukuk and securitization sector, innovation will centre on the complexity of the structures and the type of asset pools to be securitized. Already the SEC and SABIC issuances are setting the pace here. In the case of SEC it is the rights and obligations to a pool of electricity metres and their reading, maintenance and billing; in the case of SABIC it is the rights and obligations to the marketing of petrochemical products. In the area of Takaful and Retakaful, there needs to be more R&D and consensus on the most suitable Islamic products and structures to allow life insurance, pensions, health insurance etc.
Product innovation, like in the conventional sector, is fast becoming the driver of the Islamic finance sector. A seminar focusing on future trends in this direction would be very opportune!
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