Exploring Innovations in Islamic Finance: A Path Towards Sustainable Development

March 28, 2024

On 21 February 2024, UNDP in partnership with Islamic Development Bank (IsDB) presented the jointly produced report titled ‘Case Studies on Innovations in Islamic Finance’, as part of the 15th International Conference on Islamic Economics and Finance (ICIEF) in Kuala Lumpur.

UNDP and IsDB have a longstanding partnership which has evolved and strengthened over the years, building upon the shared commitment in areas such as crisis response and recovery, poverty reduction, private sector development, capacity-building, and knowledge-sharing.

Mr. Samer Elesawi, Head of IsDB Centre of Excellence Kuala Lumpur, attended to provide the opening remarks at the presentation, alongside Mr. Niloy Banerjee, Resident Representative of UNDP Malaysia, Singapore and Brunei Darussalam.

UNDP in Malaysia, Singapore and Brunei Darussalam's Resident Representative, Mr. Niloy Banerjee, giving his opening remarks at the 15th ICEIEF

UNDP Malaysia
Focus not only on technology innovation, but also trust-building

During the panel discussion that followed the presentation, takeaways from the development of Islamic finance were discussed, highlighting the strategic role of social finance and the concept of blended financing for sustainable development. Moderated by Puan Siti Rosina Attaullah, Deputy Director of the Islamic Finance Department at Bank Negara Malaysia, the questions were met by insightful responses from distinguished experts in the field.

The conversation commenced with an exploration of how Islamic finance is adapting to technological advancements. Prof. Dato’ Dr. Mustafa Mohd Hanefah, Professor of Shariah Governance and Shariah Audit of Universiti Sains Islam Malaysia, highlighted how innovation in Islamic finance, particularly in Takaful, is consumer-driven.

“While online banking and fintech took time to gain momentum, advancements like blockchain raise concerns about cybercrime. However, developments in virtual banking, Artificial Intelligence (AI), and quantum computing show promise for enhanced security,” he shared, highlighting the need for further innovation in this segment.

Professor Dr. Mustafa Mohd Hanefah presenting the joint report of UNDP-IsDB featuring study cases from Malaysia and Indonesia

Blended social finance, Value-based Intermediation (VBI) can support sustainability

The discussion then delved into areas deserving more attention within Islamic finance innovation: Dr. Khairunnisa Musari, Assistant Professor of Islamic Economics and Business, Kiai Haji Achmad Siddiq State Islamic University, highlighted the increased focus on Islamic finance, especially in government funding, to reconcile economic challenges. She also shared how attention is particularly needed in ministerial affairs, study programs, and zakat management.

On the same thread, Dr. Hylmun Izhar, Senior Research Economist of IsDB Institute, stressed the importance of understanding Islamic banking's nature and engaging with diverse communities. According to him, blending finance for sustainable development and establishing Islamic banks in various regions have proven to be areas of interest.

“Innovation in Islamic banking has been significant globally, especially with the introduction of MSJ (Syariah). The essence of this innovation lies in our departure from traditional banking structures. It's important to note that human error, not inherent flaws in Islamic banking, often leads to financial issues. We must acknowledge the current state of affairs and the need for continual improvement,” shared Dr. Hylmun.

In addressing a question from the floor on how financial institutions and corporations can contribute to helping society, Prof. Mustafa stressed how the impact of Value-Based Intermediation (VBI) is pivotal in addressing these gaps. According to him, “VBI plays a vital role in sustainable development and inclusive growth, and has been adopted by many Muslim countries, impacting sectors like palm oil and manufacturing.” He also shared how his work is currently exploring sector reports and fostering collaborations, particularly with banks associated with IIUM, prioritizing societal benefit over profits.

A panel discussion on the development of Islamic finance, strategic role of finance and concept of finance blending in sustainable development

UNDP Malaysia
Better collaboration to bridge academia and practitioners

As the dialogue unfolded, the panelists assessed the adequacy of ongoing innovation endeavors within Islamic finance. Dr. Hylmun urged a shift towards innovations that prioritize uplifting the underprivileged and fostering social finance solutions. In a complementary stance, Prof. Mustafa stressed the indispensability of integrating zakat and Takaful management principles into the fabric of ongoing innovation initiatives.

Challenges facing Islamic finance innovation were also discussed, such as the need for deeper program development, collaborative financing, and resistance to change. The panel agreed that a call for action would involve university-industry-government collaboration and tailored financing solutions for different segments like SMEs and women.

Focus on human should be at the core of innovation

In conclusion, the wishlist for innovation and environmental sustainability in 2030 emphasizes placing humans at the forefront of our endeavors. By prioritizing human-centric approaches, we can develop solutions that are both fundamental and beneficial to society. The panelists highlight the importance of drawing from Islamic history to inform contemporary innovations in Islamic finance.

Meanwhile, we should underscore the potential for innovative ideas such as combining wakaf and takaful and enhancing product offerings like ASNB, aligning with semi-compliance standards. This collaborative mindset and recognition of historical precedents will be vital in shaping a future where innovation and environmental consciousness thrive hand in hand.

About the Report

The UNDP-IsDB joint report, “Case Studies: Innovations in Islamic Finance”, is an example of this long-established collaboration between the two organisations. It showcases innovative solutions in Islamic Finance where Malaysia and Indonesia can offer their expertise and experiences to support other countries in their own development quest. Read the report here.