Why did I study Islamic Finance for my Masters?
I get this question a lot, especially when people find out that my master’s degree was in Islamic Finance. so, let me try and explain the what’s, the why’s behind my studies.
I’ll reframe the above if you don’t mind, into a slightly different question. So, what have I’ve learnt working in financial services and why did my academic research in Islamic Finance lead me down a rabbit warren when looking for alternative product designs?
I’ve worked in financial services for the majority of my career and it’s been fun however I have seen a lot of changes. Not all those changes are positive, and I wanted to understand the options for an alternative way to approach the product offering question. At the time I was working at Bank of America and I was investigating how we might go about getting up a sharia window as it’s called, and this intrigues me. So, I completed the CIMA certifications in Islamic Finance in order to learn more and then I decided to extend that research and I completed my research masters in 2013.
I found that there was an alternative approach to banking that in theory was more transparent than its conventional counterparts but there were challenges in regulation and compliance reporting due in part by the treatment of investments and loans. On the on versus off the book accounting presented particular challenges which I won’t trouble you with here. This work lead to my textbook on the options to standardise and consolidate approaches where my conclusion was that there will always be conflicts and that ultimately, despite its growth, Islamic Finance was too much of a minority influence to get the desired changes.
I learnt that there were options to increase transparency between the customer and the provider. However, those options presented the existing model with a particular challenge, transparency brings with it scrutiny and ultimately the question over risk—reward and service value. It doesn’t make financial or operational sense to make the changes no matter how equitable the result from the customer perspective.
If we look sideways at the modern Fintech product offering, we can see that it’s a great move toward customer transaction simplification however that offering retains the same flavour as the current model, its more an iterative design than a revolution. There’s simply no desire to bring in a model that reflects transparency despite there being existing product offering examples that could be leveraged within the industry.
Islamic Finance has a lot to offer however it has a negative image for several reasons and yet it has failed to rebadge itself in a manner that broadens its appeal to a wider audience. It retains its original goal of providing shariah compliant products with that message ultimately limiting growth. This then leads to the question of what does this mean for the future?
The conclusion must be, not a lot. There are no doubt opportunities for all to be had however placing the customer and transparency at the centre of the equation is still a long way from becoming a reality.
It can be argued with some value that whether the financial services model needs to change is a subjective question. Whilst the conventional retail banking market is still making a profit there will be little spirit for change or investment in a true alternative for fear of upsetting the status-quo. Islamic Finance as an industry is apparently also reluctant to change and reposition as it wishes to hold onto its badges as an ethical, religiously aligned player.
So, what have I learnt through my studies and work with Islamic and conventional finance?
Only that they shall remain apart for the foreseeable future and that we are not likely to see any substantive changes in the short term. That said, I still hold out the hope that the industry wakes up and sees that there are options for change.