258 AN INTRODUCTION TO ISLAMIC FINANCE
scholar. Therefore, it is essential that serious research efforts be made col-
lectively to address the theoretical foundation of the system upon which a
more sophisticated set of instruments can be built. This requires that all
stakeholders who are interested in the further growth of the industry —
primarily banks and governments — allocate the necessary resources.
Investment in Infrastructure
Financial engineering and the development of new products are resource -
intensive activities. All major conventional banks have dedicated depart-
ments to conduct background market research, product development, and
analytical modeling. These activities require signifi cant investments of fi nan-
cial and human resources. Conventional fi nancial institutions can justify
this because they are able to recover costs, in most cases, from the volume of
business generated by their innovative products. The costs associated with
the development of new products are further increasing as a result of the
growing complexity of a business environment in which stiffer regulatory,
accounting and reporting standards make greater demands.
Islamic fi nancial institutions are generally small and thus unable to reap
the benefi ts of the economies of scale. Alone, they cannot afford to invest
substantial funds in research and development. However, given the impor-
tance of the subject, they should give serious consideration to making joint
efforts to develop the basic infrastructure for introducing new products.
Although collaboration is almost counterintuitive in a fi eld where innovation
often leads to a competitive edge, conducting basic research and develop-
ment collectively may save some of the costs required to build this infrastruc-
ture individually. They could, for example, sponsor research into developing
analytical models, computer systems and tools to analyze the risk and return
on different Shari’ah - compatible instruments.
Collaboration and Cooperation
Financial engineering is an area where IFIs can benefi t from the greater
experience of their Western counterparts. Conventional investment banks,
which have already made heavy investments in the infrastructure for devel-
oping new products, can work for, or with, Islamic institutions to develop
products geared specifi cally to the IFIs’ requirements. The IFIs may fi nd it
benefi cial to outsource the development aspects to conventional institutions
and keep the marketing of the new products for themselves.
Cross - training
Shari’ah scholars play a critical role in approving new fi nancial products.
While they may be masters in Shari’ah matters, their knowledge of busi-
ness practices, economics and fi nance may be limited. Today’s fi nancial
institutions work in a complex business environment, which puts the onus
upon the Shari’ah scholars to be more vigilant and sympathetic to the needs