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Islamic Finance

Thoughtleadership:the neglectedessence ofIslamic Finance

Have Islamic Financial Institutions(IFIs) around the world, including theGulf region, been so busy structuringproducts and services that they haveoverlooked the importance ofcommunicating the essence of IslamicFinance? This brief analysis suggeststhat investing in thought leadershipprograms, a hitherto neglected assetclass, is an essential tool for thecontinuity, practice synergy andimproved business performance of IFIs.However, past experience of IFI practicedifferences, regulatory discrepanciesand market divergences show thatpractice harmonisation has achallenging path ahead.

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Regulatory inconsistencies within some practice areas ofIslamic finance has inhibited industry growth andcreated performance gaps. More importantly, they haveslowed its expansion and integration into the worldfinancial market. It is evident that IFIs, largely driven bycommercial goals, have not done enough to conversethe fundamental nature of educating andcommunicating Islamic Finance’s social and economicvalue propositions.

This is an issue that is high on the agenda of several GulfIFIs (GIFI) and comes at a critical time of their history forthree reasons: since the early twenty first century, GIFIshave expanded by leaps and bounds both in marketcapitalization and cross-border investments. Secondly,they have developed important institutional regulatoryand industry frameworks designed to improve servicesand standardize practice. Thirdly, concerns about theirstructures, operations and practices pose specialchallenges for long-term sustainability.

Leverage on practice synergiesUndoubtedly, thought leadership in Islamic Finance isplaying an increasingly important role in many individualorganizations. What is missing is a more holistic andstrategic approach to identify and align industry leadersto develop, adapt and enforce a harmonized andstandardized set of best practices. The commonattributes for such an approach include developing acoherent code of practice that addresses the differentfinancial and Sharia governance and applicationmethods within the industry worldwide. Hence, athought leadership initiative becomes the lead advocate for this task, which will be aimed at measuring,

improving and adapting a Unified Code of Practice(UCOP) in Islamic Finance.

The process of aligning industry stakeholder practicesand the more ambitious goal of developing a unifiedcode of practice are of paramount importance.Nevertheless, the success of a thought leadershipinitiative relies on developing a workable, yet efficient,model to energize thought leadership programs in theindustry and benefit from the experience of differentpractices across the world.

Strategic benchmarking in practiceA thought leadership initiative in Islamic Finance requiresthe collective efforts and support of its industrystakeholders. The factors underpinning its effectivenesslie in creating a sense of urgency and unified responsesto the challenges that impede its growth and prosperity.This can be achieved through a strategic benchmarkingprocess to identify best practices within the industry, forexample, the products and services created, offered anddelivered by GIFIs. The main objective of this process isto understand, evaluate and improve performance gapsand differences in practice. This is especially relevant forIFIs within the GCC countries, let alone practices in otherjurisdictions such as Malaysia or Europe.

There are five broad areas of thought leadershipproposals for benchmarking research, assessment andimprovement of practices. These are:• Shari’a Governance and Compliance• Liquidity Management Instruments• Risk Management and Development of Risk

Mitigating Tools (RMTs)• Investment and Capital Market Strategies • Financial Reporting Procedures• Corporate Governance Frameworks

The opposite chart draws the features of an IslamicFinance thought leadership initiative. It highlights theimportance of a strategic practice benchmarkingapproach. The process can be used to identifyperformance gaps within the industry practices indifferent aspects of organizations and operations. Thecrux of this process is the ongoing performanceimprovement to sustain best practices in Islamic Finance.

For this approach to work, industry stakeholders have toendorse, support and commit to the strategic long-termdevelopment of thought leadership initiatives. Thefollowing factors are largely desirable for a meaningful thought leadership initiative:• Identify thought leadership objectives and

strategic direction.

Thought leadership in IslamicFinance is playing an increasinglyimportant role in many individualorganizations. What is missing isa more holistic and strategicapproach to identify and alignindustry leaders to develop, adaptand enforce a harmonized andstandardized set of best practices.

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• Communicate objectives to stakeholders and solicit management and board support.

• Engage cross-border expertise support.• Fund the publication and dissemination of

thought leadership activities.• Nurture thought leadership programs.• Measure long-term success.• Review and improve strategy planning and

implementation.

Conclusion Successful thought leadership initiatives should undertaketo address the issues discussed in this analysis. Theapproach suggested should help GIFIs maintainauthenticity in their services and business performance,which they require to grow and integrate into themainstream global financial market. For this to happen,GIFIs need to reach out to industry stakeholders andpush the “start button” for practice synergies. GIFIs canbenefit from the expertise of Islamic Finance thoughtleaders to drive an industry-wide strategicbenchmarking process, implying the consideration ofhigh-level aspects of core competitive advantages,developing new products and services and improvingcapabilities for dealing with challenges. GIFIs shouldtherefore invest in the neglected asset class that isthought leadership and demonstrate efficiency andcommitment to its long-term development.

Islamic Finance

by Dr. Hatim El Tahir, director of the Islamic FinanceKnowledge Center (IFKC), Deloitte in the Middle East

IdentifyingPerformance

Gaps

Risk Management

Financial Reporting

Shari’aGovernance

Corporate Governance

Investment Strategies

On-going PerformanceImprovement

Islamic Finance thought leadership initiatives

Practice benchmarking process

What constitutes thought leadership in Islamic Finance?

There are several definitions andinterpretations as to what forms thoughtleadership in general and no knowndefinition for its merit in Islamic Finance.Yet, a general consensus on the definitionand its traits is required in the interest of allparties involved i.e. the industrystakeholders. Hypothetically, we maydefine thought leadership in IslamicFinance as:

“Develop a specialist think-tank to provideinnovative intellectual programs in IslamicFinance practice and foster authenticpractice synergy through knowledgetransfer across industry stakeholdersglobally.”

Key industry stakeholders in Islamic Finance

• Islamic Financial Institutions (IFIs)• Investors and issuers (clients)• Regulators and Self-Regulating

Organizations (SROs)• Professional service providers• Community or society at large