Why the Islamic Finance Industry is Failing to Evolve

By Harris Irfan | December 08, 2015


Yangon, Myanmar - Islamic finance expanding into non-OIC countries. Image courtesy of Shutterstock.

If anyone attended the recent Deloitte-IRTI/IDB workshop, I owe you an apology. I know, I was ranting. I’m slightly concerned it’s kind of my thing nowadays. I think the angry young man is still somewhere within, even if disguised by middle age. Is this what I am reduced to in the late ‘asr of my career? The only madman in the room. A repetitive impotent diatribe against the hijackers of an industry I care deeply about.


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Maybe you care. In fact, it’s more than likely that you do otherwise you wouldn’t be subscribed to this website and reading this. You recognise the elegance of the Islamic economic model. For you it has the power to change the world for the better. Not just the Islamic world. You know that its values are universal and have a benefit for all of humanity, irrespective of their creed. You may not even refer to the model as Islamic – it’s just common sense. You know that it doesn’t recognise money as a commodity to be traded. You know the importance of the 1:1 connection between the real economy and the financial economy. You know that transparency, fairness, justice and certainty are the backbone of a Shari’a compliant transaction. But do senior managers and board directors of Islamic institutions know this? Are these (predominantly) conventionally trained bankers the sort of people who actively seek out this kind of knowledge?

At the workshop I bemoaned the disconnect between the ethics and principles of Islamic finance and the actual practices of Islamic finance institutions. Sorry I continue to bore you on this subject, but I continue to see a distinct lack of passion from the Islamic bankers for the core ethical principles of their profession, for the Maqasid al Shari’a, the objectives of Shari’a. For those trained in conventional banking, Shari’a compliance is a series of inconvenient negative screens with an outcome that should differ little in substance from the comforting familiarity of money-as-a-commodity banking. Some of my counterparties don’t even bother to run their docs past their Shari’a departments: take a standard commodity murabaha as a proxy for loan financing, sprinkle with standard LMA clauses and execute.

And even for those who recognise the importance of the structuring and compliance process, there’s very little incentive in the industry to innovate and drive change through R&D. Where ten years ago the industry grappled with intellectual quantum leaps like exchangeable and convertible sukuk, or hedging platforms, or structured pay-offs, or multi-tranche buy-outs, now it is merely content to finance real estate and arrange vanilla sovereign sukuk. It doesn’t surprise me that the Islamic finance industry is worth a trifling $2 trillion whilst the ‘conventional’ ethical industry – typically defined as ESG (environmental, social and governance) assets - is worth $59 trillion.

I often get accused of pessimism. I worry that we’re stagnating and we seem not to care. That’s partly because I consistently note that acquiescence is a key success factor for a career in Islamic finance which is one of the primary reasons why the industry progresses glacially. What do I mean by that? I mean that turning down a deal that feels wrong – ethically and Islamically – is not going to do your career any favours. Here’s a nice graphic representation that has been used by some commentators about the conventional finance industry, but we can analogise to Islamic finance as well:

It’s a widely held belief that if more women ran Wall Street and the City of London that there might have been fewer bank failures during the crisis. I certainly believe that. Not just because having more women in senior roles might have diluted the testosterone of a psychopathic risk taking culture, but perhaps more importantly because an organisation that truly recognises diversity is one that benefits from a healthy tension of ideas, generated by people of different backgrounds and ways of thinking.

The Islamic finance industry suffers much the same problem. As long as the boards and C-suites of Islamic banks remain an old boys’ club - hiring in their own image - we continue to stagnate. As long as weak-minded incumbents continue to fear smarter younger entrants – the “other” that defines diversity – Islamic finance will be doomed to remain a curiosity on the world stage.

The ones who really care about the Islamic economic model - the ones for whom social justice and the real economy should be fundamental attributes of the industry - are currently excluded. The ones studying for Islamic finance qualifications are not getting the jobs. The buyers of the product are not the sellers. Instead they wait on the sidelines hoping to get spotted, attending career fairs and IF conferences whilst their conventional colleagues are courted by employers.

I recently interviewed a 20-something white non-Muslim male who works in a front office position at an Islamic bank and was dismayed by what I found. He had absolutely no real interest in understanding what was fundamentally different about his chosen profession. Consequently the structures and the legal constructs were an annoying distraction to him and he will no doubt infect his firm with the same apathy as he climbs the pay scales. As he becomes more and more senior, he will hire more and more clones of himself. Additionally he is unlikely to embrace the disruptive tech that Islamic finance has so far studiously avoided because his dinosaur-like brain can only comprehend traditional banking products. So he will not be the driver of real change. He will, of course, never read this article as he does not subscribe to a website about Islamic finance but he will probably have a long and successful career despite (or perhaps because of) his mediocrity. Depressing, isn’t it?

Well, it might be, except that I was recently encouraged by the news of an Islamic financing in a non-OIC country. The Malaysian telecoms group Axiata recently issued a $500 million wakala sukuk to finance an investment into telecom towers in Myanmar. Why is this cause for celebration? Because unlike corporates in the UK, the US and Europe (with one notable exception), in Southeast Asia Islamic finance is making inroads outside its traditional markets. A top-down approach from Malaysian authorities may be the driving force behind this. Senior management at Malaysian Islamic banks seem to get it – they recognise the potential for IF outside Malaysia and they’re acting on it. They’re demonstrating vision, ambition and technical ability. In contrast Europe has only one rated corporate sukuk: German insurance company FWU continues to blaze a trail with its sukuk issuance programme but despite embarking on this programme two years ago has yet to be joined by others. And despite both the UK and Luxembourg issuing sovereign sukuk, there has been no corporate follow up.

Gulf investors love solid, rated, fixed income investments. That’s why they buy ‘big box’ real estate in the UK’s Golden Triangle. Rated corporate issues from developed markets would be a perfect buy for their risk appetite. With directionless markets for the last few years, a Darwinian year for hedge funds and a 16 year low for average commodities prices, surely it is time for the managers of Islamic finance firms to step up and be the future rather than just react to change?

11 Comments

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simon o neill 1 year ago

Harris, good post and thought provoking hopefully. The question is how to drive the product innovation and ethics you identify as lacking through standardisation with existing bodies to support adherence to core principles or are you suggesting a new approach needs to be adopted? A conversation I'd like to have at some point (edited)


Managing Director, Cordoba Capital

I don't believe standardisation - by which I mean creating repeatable template documents for certain types of transactions like hedging instruments- will have much bearing on the way people do business.

The first step is to get shareholders and boards to recognise the mono-dimensional culture they encourage by choosing managers who only pretend to care. Steve Jobs, Bill Gates, Soichiro Honda and Thomas Edison were not bean counters. They passionately believed in the product they themselves created. I see little of that visionary passion in my industry. (edited)


Waheed Qaiser 1 year ago
President , MaximLLP

Hi Harris, I agree with your views and there are very few in IB who have the courage to speak their mind and highlight the challenges that IB is facing today. I cant see it going anywhere unless some more prudent people come to the floor to its rescue (edited)


Bank Examiner, central bank of Nigeria

Hit the nail on the head. I live in Nigeria where the potential of IF in financial inclusion is huge, with government support and all. IIFS here could take tap into the incentives and engage in real equity-based financing. Sadly, they are all busy doing murabaha and ijara(constituting over 80% of their financing portfolios). Like you rightly said, it is sad (edited)


Saftar Sarwar 1 year ago
Partner, Kingdom Capital Partners LLP

Great post Harris. Credit for speaking out consistently on this. I agree, there is too much consensus in the IF industry and not enough disruption. (edited)


Razali Ahmed 1 year ago

This is a thought provoking write up of yours, Harith and it comes from a young professional of IBF proponent. In my more than 30 years of conventional banking experience in Malaysia and with the IBF qualification that I have acquired, I tend to agree so much with the depth of your worldview that IBF is currently undergoing.
Still, in Malaysia the debt-equity based IBF products are some kinds of 'copy and paste' technology. Yes, we are lacking the dynamic approaches due to the under-utilisation of dynamism in the views and motivation to try 'breaking the barriers' in translating what IBF the way forward is. Perhaps, the IBF industry is full of contented resources that still strongly believe in changes may be too costly and risky without due consideration to GRC mechanism. The industry needs more like-minded IBF-trained like you to continuously 'harassing' the barriers to build a new set of workforces that are willing to offer rewarding alternative to the conventional way of thinking that has already been proven to be very successful, however some areas do lacking in subscribing to the principles of equitable justice that equal treatmentd to unequals are injustice in the views of IBF's banking and financing approaches. Thank you. Have a nice day to all! (edited)


Razali Ahmed 1 year ago

*So sorry, I mean Harris Irfan. Thanks (edited)


Ahmed Badreldin 1 year ago
University of Marburg, Germany

Dear Harris,

Well in my purely academic opinion, I find the major manifestation of the problem in the models being used. Islamic banking and finance should be "Islamic"-proof, meaning that it doesn't require a passionate manager to implement it, rather it should be possible for everyone to identify with its goals. The problem in my opinion is that even the passionate ones cannot get around what I call the "comparison effect", namely that we keep using conventional models to price or model our Islamic products/cash flows. When we sometimes get over that, we come up with pure Islamic models that are either too ideological (assume the world is only Islamic, failing to recognize the diversity once more) or they are too "adapting" to the conventional rates by using LIBOR or other - as you put it - "financial" economy indicators rather than more product specific ones. I don't want to be the type who mentions a problem (which probably everyone recognizes) and not propose solutions. An actual solution is what I am currently working on, which is a valuation model that does in fact take into consideration that our markets are *as a matter of fact* made up of Islamic AND conventional investors i.e. those who follow Shariah and those who don't (regardless of their religion). The work is currently in its finalizing stages but for anyone who is interested, I would be more than willing to share the most recent drafts. Away from the advertising, I believe this is the missing key, once we can correctly model our products (which are in fact different than the conventional products, but nevertheless modeled by all, passionate or otherwise, exactly as conventional ones), then it will be a simple task: Use the correct models! Whether it is the interviewee who you met or anyone else, they will serve the passionate purpose by using the correct tools. (edited)


Managing Director, Cordoba Capital

I would be very interested to hear more about your valuation model. (edited)


Robert Hannah 1 year ago

I have been reading Harris Irfan’s articles – this one and “Could Islamic Finance Save Capitalism” (Islamic Banker, February 2015), along with Taqi Usmani’s Davos 2010 paper, At the outset I will disclose my skepticism about Islamic finance. Mr Irfan makes the same criticism of Islamic finance as it is currently practiced as Mahmood El-Gamal (Rice University) – that it has lost its ethical content and is focused on creating more expensive Sharia compliant copies of conventional financial instruments.

Islamic finance does have something to say about issues such as excessive financial leverage, the capitalization of banks, risk management, and financial market ethics. However, instead of erecting a parallel financial system, Muslims’ energies would be better directed towards engaging with regulators and legislators to communicate their views on these issues. While proponents of Islamic finance make vague statements about equity and social justice, secular regulators have done the tough work to improve fairness in financial markets through such policies as competition and disclosure, implementation of truth in lending, client priority rules in trading, and fee disclosure in funds management.

The original source material concerning the prohibition of riba (Koran sura 2:275-79 for example) is in a context of discussion of charity and exploitation – exploitation presumably by unscrupulous unregulated moneylenders. We are left with some uncertainty (at least on the part of Hazrat Umar, a companion of the prophet) about the meaning of riba. Why such references require the erection of a parallel financial system with the excess baggage of sharia boards – which after all just pronounce the opinions of men) is puzzling to a non-Muslim.

The promoter of the largest Islamic finance institution here in Canada (Omar Kalair, UM Financial) was charged last year with a $4.3 million fraud case by the national police (RCMP). His religious adviser and others appear to be complicit. Scoundrels can be found in any religion.

Robert Hannah
Gatineau (edited)


Managing Director, Cordoba Capital

Thanks for your comment. You are right about engaging with regulators and policy makers. That process has been very effective in the UK, for example. However, my concern is even when we engage effetively with policy makers, if the shareholders and boards themselves appoint the wrong people (neither with the right technical skills nor with the right attitude) then the views of the general public become almost irrelevant. The only thing currently keeping a check on the people who run our industry are the Shari'a boards. It behoves us to support those scholars to ensure we meet at least some basic minimum of standards.

If I can gently pull you up on one point in your post, there is no uncertainty about the definition of riba. (edited)