Financial innovation intra Muslim capital markets and inter global counterparts: implications of differences

Abstract

Purpose

This study aims to investigate the implications for financial innovation and product development of differences between schools of jurisprudence (fiqh) pertaining across regional Muslim markets, and the consequences for global financial institutions.

Design/methodology/approach

The methodology is qualitative, drawing upon several sources. Firstly, differences in interpretation regarding the economic and moral responsibilities of financial institutions in Islamic and secular contexts. Secondly, contrasting tenets of schools of Islamic jurisprudence regarding the permissibility of products traded intra Muslim markets. Thirdly, characteristics of complex financial instruments traded in global secular markets prior to the credit crisis of 2007–2008.

Findings

Differences between Islamic and global secular interpretations regarding responsibilities of financial institutions militate against integrated markets across which products can be seamlessly traded. Global financial institutions should recognise that different Islamic schools of jurisprudence prioritise either legal form or substance of financial products, but not both simultaneously. This should be considered when designing new products for regional Muslim markets.

Practical implications

Global financial institutions which focus upon the legal (micro) form of new Islamic products should relate in investor prospectuses and marketing materials the extent to which these accommodate Islamic jurisprudence’s equal (macro) concern for public interest or maslahah. This may comprise the reallocation of risk from those unable to bear it to those willing to assume it for a price, reinforcing rather than compromising economic stability.

Originality/value

This study evaluates implications for product development and marketing for global financial institutions active in regional Muslim markets across which different Islamic schools of jurisprudence apply.