Financial Engineering: An Islamic Perspective Sami Al-Suwailem IRTI, IDB 1427 -- 2006 Financial Engineering
Financial Engineering Concept Finnerty (1988): Design, development and implementation of innovative financial instruments and processes, and the formulation of creative solutions to problems in finance Financial Engineering
Financial Engineering State of F.E. Miller: Regulatory arbitrage Drucker: Lack of “true” innovation Risk management: reductionism Derivatives: gambling tools The need for a new approach Financial Engineering
Financial Engineering Definition Principles and strategies for developing innovative financial solutions Financial Engineering
Financial Engineering Characteristics Principles: Goals and rules for economic transactions Strategies: methods and techniques Innovative: New and novel Solutions: Satisfy real needs and create added value Financial Engineering
Financial Engineering Creativity Value of innovation Lateral thinking Value of constraints Shariah and creativity Financial Engineering
Financial Engineering Principles Objectives Balance Integration Methodology: Acceptability Consistency Financial Engineering
Financial Engineering Principle of Balance Balance for-profit and non-profit activities Capitalism: market-based solutions Communism: voluntary-based solutions Islamic Economics: balanced solutions Forbearance for unable debtors Mutual insurance Financial Engineering
Principle of Integration Integration of financial for-profit activities with real business Riba: Separates finance from business Gharar: Separates risk from business Murabaha: Could be applied to both Financial Engineering
Principle of Acceptability All economic transactions are acceptable unless otherwise stated Roots of prohibited dealings: Riba and gharar. Acceptability and creativity Financial Engineering
Principle of Consistency Form and substance of Islamic products must be consistent Evaluation of products: Evaluate substance Evaluate form Financial Engineering
Financial Engineering Product design Evaluation no Substance acceptable? revise yes no Form acceptable? yes Product acceptable Financial Engineering
Financial Engineering Examples Murabaha: objective is a sale Tawarruq: objective is a loan Financial Engineering
Financial Engineering Strategies Where to start? From conventional products: Imitation From Islamic products: Mutation From real needs: Satisfaction Financial Engineering
Financial Engineering Imitation Replicate conventional products Give form priority over substance Islamic industry becomes a follower Invite alien problems Produce inefficient results Financial Engineering
Financial Engineering Mutation Start from Islamic products Genetic Algorithms Istisna Lease-to-own Value-based Salam Financial Engineering
Financial Engineering Satisfaction Start from real needs What does the borrower need? Cash is 10% of money Most transactions are electronic Money is a means Efficiency of Islamic finance Financial Engineering
Financial Engineering Conclusion Thinking out of the box Preserve the spirit of Islamic finance Provide solutions to world economy Financial Engineering