ISLAMIC FINANCIAL ENGINEERING
A Critical Investigation into Product Development Process in the Islamic Financial Industry

Abstract

In the wake of the recurring financial crises, it is now evident that financial engineering and product development can play a crucial role in either improving the efficacy of the financial markets or bringing devastating consequences, as was the case in the 2008 financial crisis. Although Islamic financial institutions managed to escape the direct impact of the crisis, the role of product development in Islamic finance can be critical in determining the future of the rapidly growing industry.
The general perception in the market is that current Islamic financial products are mere imitations of their conventional counterparts, and therefore, they have failed, so far, to bring the socio-economic impact expected from implementing the rules of Shari’ah in the financial industry. Hence, there is a real need to create a new generation of Islamic financial products that contributes positively to achieving maqasid al-Shari’ah or ‘the objective of Shari’ah’.
This research, hence, aims at critically exploring the current practices of product development and financial engineering in Islamic financial institutions, and establishing the methodology and principles for engineering efficient and Shari’ah-based financial products. One of the main objectives of this research is to propose a refined product development process that can lead to the creation of a new generation of Islamic financial products that meet not only the form of Shari’ah contracts but also the substance of maqasid al-Shari’ah. This research uses both questionnaire survey technique, as a quantitative method, with a sample of 45 respondents, and semi-structured interviews, as a qualitative method, where 12 interviews were conducted with different stakeholders in the industry.
The main findings of this research indicate that the majority of Islamic financial institutions are committed to create innovative products and adopt a strategy to develop new products, but fail to transform the strategy into operational plans. The results also demonstrate that the main source of ideas for new products is other Islamic financial institutions, which is in contrast to the general belief that conventional financial products are the main source. The analysis of the primary data also shows that the majority of institutions showed commitment to complete the Shari’ah-related stages of the product development process, but they demonstrated lack of discipline in implementing the remaining steps of the process. While compliance with Shari’ah seems to be one of the top priorities in product development, there is very little focus on achieving maqasid al-Shari’ah which might explain why many perceive Islamic financial products to be Shari’ah-compliant rather than Shari’ah-based.
The inferential analysis against the independent variables returned a considerable number of differences in opinions among the respondents, the majority of which were related to the institutions’ age, location and nature of activities. Most of the differences in relation to age, were related to older institutions, while the US and Africa reported most of the differences related to location. On the other hand, takaful companies reported most of the differences related to the nature of activities.