‘Islamic finance sector must keep innovating’
KUALA LUMPUR: The advantages that Islamic finance has over the conventional are rapidly wearing out and the industry as a whole must keep innovating to ensure continuous investments and interest, said International Centre for Education in Islamic Finance (INCEIF).
“Malaysia has long been the reigning champion of global Islamic finance but this would not be the case sooner or later if there are no innovation, especially when it comes to the types of instruments that are being offered,” said INCEIF professor of School of Graduate Studies Dr Belal Ehsan Baquie, here, recently.
“Innovation has to come from stakeholders and the financial institutions to governments, as well as academia. That is why events like the Islamic Finance InnoFest (IFInnoFest) 2016 is so important.”
Last week, Belal was chosen as one of three winners at the IFInnoFest, where he highlighted the alternative ways that Islamic finance could help with regards to the current issues and challenges faced by the financial world.
In his winning presentation entitled “Index-Linked Sukuk”, Belal offered a solution for the arrangements and pricing of syariah-compliant bond, the sukuk.
“Most of the papers that are on offer right now in Malaysia are Ijarah-based because that is the safest.
“But that practice needs to change soon because if we were to play it safe, then there will be no innovation.
“What my presentation shows is that there is a different way to structure a sukuk and to participate in the capital markets more effectively without relying on pre-determined information asymmetry,” he said.
One way of removing the information asymmetry, he said, was to have the returns depend on a market-traded index, such as the price of Brent.
“Thus, the quantum of returns, to be paid on preset dates, would depend on the performance of the index — the higher the index the higher the return and vice versa. This instrument is a realisation of the principle of sharing risk and profit, which has the side effect of dampening speculative volatility and protecting both the investor and the entrepreneur.”
Meanwhile, Australia-based Professor of Finance and chair of finance at Deakin University, Dr Paresh Narayan, said more collaborations between industry players and researchers were needed.
His winning entry, the “Price Discovery and Profitable Investment in Islamic Stocks”, calls for the establishment of a discovery model for share prices by gathering new information on impounded asset prices through trading activity across markets.
“So far, academia and industry have been standing apart and this should not have been the case,” he said.
“My presentation shows that information regarding which markets lead price discovery is very important and can be useful in identifying assets and, therefore, for constructing optimal portfolios, maximising profits, minimising loss and/or diversifying risks”
What’s interesting about Paresh’s creation is that though it found its start in Islamic finance, it could also be adapted for conventional markets.
“This is really just the beginning and so far, I have been getting a lot of interest from big corporations about adopting and enhancing this model and this is why events like IFInnoFest is so important as it allows the academia and the corporate world to collaborate,” he said.
IFInnoFest 2016 is among the initiatives by the Malaysian Islamic finance industry to serve as a platform in energising innovative ideas to bring the industry forward.
Making its debut last Thursday, the IFInnoFest 2016 was organised by INCEIF with the support of Bank Negara Malaysia, Association of Islamic Banking Institutions Malaysia and Malaysian Takaful Association.