1. Financial Engineering: An Islamic Perspective
Sami Al-Suwailem
IRTI, IDB
Financial Engineering

2. 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

3. 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

4. Financial Engineering
Definition
Principles and strategies for developing innovative financial solutions
Financial Engineering

5. 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

6. Financial Engineering
Creativity
Value of innovation
Lateral thinking
Value of constraints
Shariah and creativity
Financial Engineering

7. Financial Engineering
Principles
Objectives
Balance
Integration
Methodology:
Acceptability
Consistency
Financial Engineering

8. 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

9. 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

10. Principle of Acceptability
All economic transactions are acceptable unless otherwise stated
Roots of prohibited dealings: Riba and gharar.
Acceptability and creativity
Financial Engineering

11. Principle of Consistency
Form and substance of Islamic products must be consistent
Evaluation of products:
Evaluate substance
Evaluate form
Financial Engineering

12. Financial Engineering
Product design
Evaluation no
Substance
acceptable?
revise
yes no
Form
acceptable?
yes
Product
acceptable
Financial Engineering

13. Financial Engineering
Examples
Murabaha: objective is a sale
Tawarruq: objective is a loan
Financial Engineering

14. Financial Engineering
Strategies
Where to start?
From conventional products: Imitation
From Islamic products: Mutation
From real needs: Satisfaction
Financial Engineering

15. Financial Engineering
Imitation
Replicate conventional products
Give form priority over substance
Islamic industry becomes a follower
Invite alien problems
Produce inefficient results
Financial Engineering

16. Financial Engineering
Mutation
Start from Islamic products
Genetic Algorithms
Istisna
Lease-to-own
Value-based Salam
Financial Engineering

17. 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

18. Financial Engineering
Conclusion
Thinking out of the box
Preserve the spirit of Islamic finance
Provide solutions to world economy
Financial Engineering