EXPLORING PRODUCT DEVELOPMENT PROCESS IN ISLAMIC BANKS WITH SPECIAL REFERENCE TO ISLAMIC TRADE FINANCING

Abstract

Islamic banking (IB) is a rapidly growing sector within the global financial system with annual growth of nearly 15%. IB or Shari’ah banking as an alternative mode of banking to the conventional banking is not only restricted to Muslim societies. In particular, after the financial crisis during 2008-2009 when Shari’ah compliant assets passed the resilience test, the operations of IB has increased and geographically expanded to many countries. Today more than 500 institutions spread over globally are practicing Islamic banking and finance.
Nevertheless, Islamic banking (IB) is still rather a smaller player compared to the conventional banking. One of the limitations is that IB product range is small compared to conventional banking, because IB products are restricted to remain within the tenets of Shari’ah and must follow the maqasid al- Shari'ah or the objectives of Shari’ah.
Development of new products in IB hence is essential for the growth and sustenance of the sector. Therefore, conducting an in-depth study on the product development processes (PDP) in Islamic banks is a matter of academic interest with practical and professional implications. This research, hence, is a product of such motivational factors, which aimed at exploring the PDP through the opinions of participants working in relevant departments of full-fledged Islamic banks and Islamic windows in a number of countries through a questionnaire survey.
By aiming that, this research surveyed 22 banks from 8 countries in South East Asia and GCC which are the main hubs of IB today. The survey was conducted through a structured questionnaire, which covered main pillars of PDP including strategy, resources, processes and Shari’ah approval processes. A special focus was given to trade financing products to have a product level deeper understanding.
The research findings enabled a deeper understanding of the product development processes among Islamic banks. First, the broad finding indicated that though most of the banks' overall strategy and mission-vision statements talked about innovation at high level, but at the implementation level the focus were diluted. As per the findings 95% of the banks overall strategy agreed for innovation but only 50% banks allocated budget and 63% of banks put target for number of new products to be developed. Hence, as indicated by this study, the Islamic banks were in general slow on giving priority towards the development of new products. Second, the deeper findings of the study revealed that the strategies of product development are not standard among the Islamic banks, as various factors influence the product development. First geographical location is an important factor that influences the PDP. Second the nature of IB business (full-fledged or Islamic window) plays a role. Similarly the age, size and ownership structure of the Islamic bank are also important factors of influence in PDP. As examples, the strategies and product development processes in Malaysia vary with Bangladesh and that in GCC; the Islamic windows of conventional banks show significantly different results in developing new Islamic products compared to full-fledged Islamic banks.
By emphasizing that larger product range is a critical success factor of growth for IB, this research provides a valuable contribution to the deeper understanding of PDP in Islamic banks.