Understanding Islamic Finance - Doha Academy of Tertiary Studies

The Way Forward 477very difficult for IFIs unless they change their strategy and structure. In order to meet thischallenge, IFIs have to make efforts in coordination with the regulators, Sharī´ah scholarsand the customers. Prospering in the competitive environment on a sustainable basis wouldrequire;• conformity of products and transactions with the Sharī´ah principles;• best practice strategy for screening Islamic investments along with taking care of credit,market and other operational risks;• innovative products;• better quality of service to the customers.In a highly competitive environment, IFIs would require some structural adjustmentsenabling them to deal with real sector business, implementation of trading, leasing and realestaterelated contracts using both profit/loss sharing (PLS) and “fixed-rate” Islamic modesof financing. For example, banking laws and regulations in many jurisdictions require thatdeposits be treated as capital guaranteed, while Sharī´ah requires that the same should bebased on profit/loss sharing. This problem could be resolved if IFIs operate in the form ofmutual funds. Such an approach would enable them to earn higher profits, as businessesin the real sector normally earn, and pass on a greater part of the profits so earned to thesavers/investors.Developing BenchmarksIslamic financial institutions require benchmarks for pricing of goods and services andfor determining sharing ratios for distribution of profit among partners of joint ventures.Such benchmarks will be different in different jurisdictions and sectors/subsectors and willrequire deep study, keeping in mind the level of development, the supply and demand ofgoods and services and also the assets and liabilities of the customers. Such studies needto be undertaken at international as well as country levels. One such effort was made byAbbas Mirakhor and Nadeem ul Haque in 1998, focusing on developing some indices forcalculating rates of return on national participation papers (NPP). 12For the time being, conventional benchmarks are being used by IFIs in almost all jurisdictions.Although permissible from a Sharī´ah point of view as a tool and basis for pricingof goods and their usufructs, a benchmark reflective of fictitious assets, as is the case in theconventional framework, will not be helpful in realizing the socio-economic objectives ofIslamic banking and finance. This will require long-term and sustained efforts on the part ofthe economists, bankers, policymakers and the Sharī´ah scholars.Product Development – Financial EngineeringThe need for innovative products for cash management and financing of various sectors,particularly the government or public sector, cannot be overemphasized. It requires mutualefforts by the economists, practitioners, Sharī´ah scholars and the regulators. The majorchallenge in product innovation and designing the investment products is ensuring Sharī´ahcompliance in line with the mainstream theory developed so far. Any resort to Sharī´ah12 Mirakhor and ul Haque, 1998.