The Iranian Association of Islamic Finance held an international webinar on “The Effectiveness of Designing New Islamic Financial Instruments and Products in Line with Production Leap” on the 18th of August, 2024 at 2:00PM Iran Standard Time.

Speaker: Dr. Alija Avdukic, Deputy Director of PhD. Programs in Islamic Finance, Dundee University, Business School, Scotland

“The Effectiveness of Designing New Islamic Financial Instruments and Products in Line with Production Leap” explores the importance of integrating Islamic finance principles with innovative financial product development. The foundation is laid by New Institutional Economics (NIE), which provides a comprehensive framework for understanding economies by analysing them at four levels: culture, institutions, organizations, and markets/transactions.

Cultural aspects are critical, as they encompass the ideology, beliefs, values, and norms that shape economic behaviour. This includes how Islamic principles can influence financial practices, ensuring they align with Shariah objectives, which emphasize justice and societal welfare.

Institutions, both formal and informal, play a pivotal role in defining the rules and regulations that guide financial markets. In the context of Islamic finance, institutions must ensure that products are Shariah-compliant, balancing regulatory requirements with commercial viability.

Organizations such as Islamic banks and non-bank financial institutions are central to the implementation of these products. The structure and governance of these organizations must be designed to minimize transaction costs and maximize efficiency while adhering to Islamic principles.

The markets and transactions level focuses on the actual exchange of goods, services, and financial contracts. Islamic financial products, such as Sukuk and Mudaraba, must be designed not only to meet market demands but also to achieve Maqasid al-Shariah - objectives that promote societal welfare.

Innovation in Islamic finance is particularly challenging due to the need for Shariah compliance, but it is essential for developing products that fulfil client needs while staying true to Islamic principles. The development process should incorporate stages like idea generation, screening, design, and Shariah audit, ensuring the products contribute positively to both the financial institution and society.

The presentation also highlights that the success of new Islamic financial products hinges on their ability to fulfill Maqasid al-Shariah, which are the overarching objectives of Islamic law. These include promoting justice, equality, and the overall well-being of society. For a product to be truly effective, it must align with these principles while also meeting the commercial and regulatory demands of the market.

The process of product development in Islamic finance involves several critical steps:

1. Idea Generation: New product ideas must be rooted in the essential objectives of Maqasid al-Shariah. The goal is to ensure that these products contribute to societal welfare and do not contradict Islamic values.
2. Idea Screening: This step involves evaluating the potential benefits of the product for both customers and society, beyond just the financial institution’s interests. The focus is on selecting concepts that will genuinely add value.

1. Product Design: The design phase must carefully consider how the product will be used, ensuring it serves both the essential and desirable Maqasid. The structure and features of the product are critical in determining its effectiveness in fulfilling Islamic objectives.
2. Legal Agreements: Contracts should be fair and unbiased, protecting all parties involved. Shariah advisors play a crucial role in ensuring that legal frameworks do not compromise the product's alignment with Islamic principles.
3. Shariah Audit: Beyond compliance, the Shariah audit assesses whether the product is being used in ways that fulfill its intended purposes, contributing to Maqasid al-Shariah.

By following these steps, Islamic financial institutions can develop products that are not only Shariah-compliant but also innovative, competitive, and beneficial to society as a whole.

 Click here to download the presentation file.