Islamic finance initially started
with simply structured products
but developed – as of recently – towards sophisticated and multifaceted facilities as financial engineering and product development became a necessity in an environment that grows more and more competitive.
In the aftermath of the global financial crisis almost a decade ago, more complicated structures replaced formerly straightforward solutions and enhanced the manoeuvring room for Islamic finance towards fields which were formerly exclusively covered by conventional finance, namely derivatives, structured products, hedge funds and the like, and the market saw facilities such hybrid sukuk, Shariah-compliant liquidity tools, Islamic real estate investment trusts and more and is, as of late, also embracing financial technology-based innovation, or fintech.
Among the innovations is tawarruq, an Islamic financial product best described as reverse murabaha, which allows clients to raise money quickly and easily without breaking the Muslim ban on interest. A customer buys an easily saleable asset from an Islamic bank at a marked-up price, to be paid at a later date, and quickly sells the asset to raise cash for the purpose of obtaining liquidity.
Tawarruq has become quite popular in the Malaysian Islamic banking system where it is used to create new sophisticated Islamic financial products including tailored deposit and financing facilities, and also liquidity management and debt restructuring instruments. It is also used for new sukuk structures, for risk management and hedging instruments as it is designed to provide cash with predetermined fixed income.
The tool has two forms: tawarruq munazzam (organised tawarruq), in which the client simply seeks credit and has no interest in the original asset for sale, as well as tawarruq al asli, which the client uses to buy goods on credit and then sells them to get cash.
Other new concepts in Islamic finance were newly structured sukuk such as hybrid sukuk, as well as new Shariah-compliant liquidity tools like the on the Bank of England is currently developing. They are examples that the Islamic finance institutions are working hard on shaping the industry by either “Islamicising” conventional banking products or create new Shariah-compliant innovative products.
And the next step is fintech, a trend seen to change, if not disrupt, the entire financial services landscape, be it conventional or Islamic.
“There are tremendous opportunities for fintech within Islamic finance,” says Jaseem Ahmed, former secretary general of Malaysia’s Islamic Financial Services Board, one of the main standard-setting bodies for Islamic finance, who just retired on April 17.
“Especially in the aftermath of the global financial crisis, which caused a loss of confidence, the finance industry is looking for improvements and alternatives,” he notes, saying that fintech could touch all sectors from product development to services and regulatory issues.
One area certainly of interest for the Islamic finance industry is robo advisory. Due to growing number and complexity of products, clients are now seeking more advice services from banks, and this is where automation and robotics can step in as cost- and time-effective solutions.
Such robo advisory could, for example, include Shariah-compliant portfolio management based on fully-automated real-time software that analyses global securities and sorts out those with the highest growth potential, while assuring that the securities are non-haram. This technology is also a viable tool to create vehicles not just for Islamic finance, but also ethical finance.
Other applications for fintech are micro-lending and micro-takaful which are high in demand in many underdeveloped Muslim countries and which can be automated through easy-to-use mobile applications. The same is true for social financial solutions such as peer-to-peer lending. It can also revolutionise money transfer processes by using blockchain technology in Islamic finance.
Although, like in conventional finance, especially larger Islamic finance institutions are slow in embracing what they perceive as disruptive new financial technology, there is simply no way around it, particularly given the speed at which fintech is developing and the fact that it can easily and productively be embedded into Islamic finance.