Is Inceif the answer to the Islamic finance industry's headaches?

Swift growth in financial markets can often be accompanied by growing pains. The Islamic finance industry has been no exception to this rule, as it struggles to overcome various challenges relating to regulatory harmonisation, the development of professional standards, liquidity management and a human capital shortfall. To date, efforts to address these issues have largely stemmed from Malaysia, the industry’s recognised global hub.

Malaysia’s central bank, Bank Negara Malaysia, established the International Centre for Education in Islamic Finance (Inceif) in 2006 to meet the pressing need to nurture a new generation of Islamic finance specialists. More commonly known as the Global University of Islamic Finance, the university was created with the same commitment to long-term growth that has characterised much of Malaysia’s contribution to sharia-compliant finance, globally.

Over the past seven years, Inceif has graduated a combined 830 masters and PhD students from 78 countries. It is now on track to achieve accreditation from the Association to Advance Collegiate Schools of Business in the coming years, aligning the university’s standards with leading business schools around the world.

A centre of excellence 

“Inceif’s success has shown that if you take a medium- to long-term view of the Islamic finance industry’s growth, you can start to tackle some of the structural problems, including human capital development, that have been holding it back,” says Daud Vicary Abdullah, president and chief executive of the university.

Inceif is quickly establishing a reputation for research excellence in an industry that is badly in need of product development. In some markets, a lack of sharia-compliant financial products means that Islamic financing options generally lose out to their conventional equivalents based on cost, availability and sophistication. To address this challenge, much of Inceif’s research is committed to practical and applicable solutions for the sector.

“We have raised more than $1m from the Islamic finance industry to conduct research into sharia-compliant financial products. This money comes our way because the majority of our research is industry driven,” says Mr Abdullah.

Old money

Yet, the nature of Islamic finance, and the jurisprudence which underpins it, means that innovations are typically based on some kind of historical precedent rather than a unique proposition. As such, product development typically borrows from older sharia-compliant financial mechanisms.

“I think it’s extremely unlikely that anybody anywhere will sit down and invent a new product from scratch. What does happen is that people take a look at what occurred in the past and whether history can teach us something. Invariably it does,” says Mr Abdullah.

Here, Inceif has used its resources and expertises to delve into the history of sharia-compliant finance to find workable solutions to the challenges facing the industry today.

“One of our professors was searching through the Ottoman archives and discovered a concept called 'esham' which was used to pay war reparations to the Russian empire. This was effectively a multiple mudarabah construct and it was in perpetuity and guaranteed by the state. It is very similar to a treasury consol. It may turn out to be very useful for the industry’s short-term liquidity management today,” says Mr Abdullah.

Beyond this commitment to research, the university is devoting significant attention to outreach initiatives. This approach is not only helping to expand the borders of Islamic finance, but in doing so is to some extent aligning the industry under a single framework of education and implementation. Over the longer term, this could provide significant benefits through greater industry harmonisation, particularly in less mature markets.

“Inceif has worked hard to develop its global outreach initiatives. In particular, we have seen our work expand considerably across Africa in recent years. We now have a partnership with the Kenyan School of Monetary Studies, which is part of the Kenyan central bank, where we have already delivered one programme covering the essential pillars of Islamic finance. Regulators and bankers from Uganda and Tanzania will be joining this programme in 2015,” says Mr Abdullah.

While the university has seen growing interest in its research and educational outreach, globally this interest from sub-Saharan Africa is seen as a promising next step in the industry’s development.

“I see both west and east Africa as excellent long-term prospects for the Islamic finance industry. This isn’t going to happen overnight. It’s going to be a case of steady engagement and commitment,” says Mr Abdullah.