The director of the Islamic Finance Knowledge Center for Deloitte in the Middle East, Dr. Hatim El Tahir, wrote an article for their "A Middle East Point of View" called "Thought Leadership in Islamic Finance" (pdf) (ht Islamic Finance Resources blog). I don't know whether it is the brevity or the jargon that I don't understand, but the article left me scratching my head a bit. He identifies six areas--Shari'ah governance, liquidity management instruments, corporate governance, risk management, investment and capital markets strategy and financial reporting procedures--as "broad areas of thought leadership proposals for benchmarking research, assessment and improvement of practices".
Despite my head-scratching about the paper, I do agree that these are areas that the industry as a whole needs to work on and that they are largely areas where no one institution can make a significant change to the industry's operations. Dr. El Tahir proposes "develop[ing] a specialist think-tank to provide innovative intellectual programs in Islamic finance practice and foster[ing] authentic practice synergy through knowledge transfer across industry stakeholders globally". Are we on the same page now?
I'm not there yet. However, the paper begins with a more understandable summary of the problem facing the industry (posed as a question): "Have Islamic financial institutions around the world, including the Gulf region, been so busy structuring products and services that they have overlooked the importance of communicating the essence of Islamic finance?"
That is a question that fits in better with the six areas of focus for industry-wide work. There has been a significant deficiency in communicating with practitioners, consumers and those sitting on the sidelines of "what it all means" for the Islamic finance industry.
Back when things were running smoothly pre-financial crisis when the Islamic financial institutions were all making money, property markets were rising and all the focus was on the next "innovative product", there wasn't much demand for public introspection. But now that the wheels have fallen off the bus for many institutions and the property markets in several countries, other questions have come to the fore and there are (legitimate) questions about what the industry is really doing to improve on conventional finance.
Now, where does that leave an industry-wide think tank that is proposed? Honestly, while some coordinated voice for the industry would be helpful, there are other institutions that are working on more than an institution-by-institution basis like AAOIFI and IIFM and IILM and IFSB and others. They have taken the lead in different areas. IIFM has worked to standardize contracts (including for liquidity management), IILM is working on better multi-lateral ways to provide liquidity management separated from the counterparty risks of inter-bank lending. IFSB and AAOIFI are working on the financial reporting and to some degree also Shari'ah and corporate governance standards. The remaining items--investment and capital markets strategy and risk management--are not as prominent in current developments.
Everyone knows that sukuk secondary markets are illiquid and each country's exchange is trying to facilitate more trading. The London Stock Exchange may be best positioned to make something happen on secondary market liquidity because of the requirement of their Alternative Finance Investment Bond legislation that the sukuk be listed on the LSE. However, it covers only a portion of the sukuk issued and, without market makers, is no guarantee of liquidity.
Risk management is more of an institution-specific basis, along with the global Basel standards. On this issue, I risk speaking beyond my knowledge, particularly as the Basel 2 standards blend into the planning for implementation of Basel 3.
However, after running through the institutions that are already in existence and working, there are a few things missing that all boil down to one issue. Who speaks for Islamic finance and who explains how all of these different things work together? For the most part, it is spread around the world. Perhaps the most comprehensive source of information of the "higher level" discussions are coming out of ISRA in Malaysia. They put out a regular journal and also have other industry information, although when I went to their website, they were still promoting the latest issue from December 2010.
As much as they provide information about the industry as a whole, it is still largely academic and thus not always relevant to enough people. It may be of interest to academics and I may find articles interesting, but it doesn't do much for the CEO of an Islamic bank or for the general public trying to find a source that "communicat[es] the essence of Islamic finance".
I am not sure exactly what type of organization could provide that. A trade group or self-regulatory organization could help institutions take the existing standards from other bodies and develop a "best practice", but that type of institution would probably do a poor job at communicating the "essence of Islamic finance". Or there could be an organization that focuses on explaining how everything fits together in Islamic finance, but it would probably end up becoming similar to the trade groups in the West that spend more time cheerleading and too little time addressing the concerns people have about how Islamic finance works today.
As far as what comes next, maybe I haven't illuminated anything about what should be created, but I hope that I have perhaps raised some awareness of what I think is definitely not needed. Creating organizations that don't meet a need or are duplicative of existing organizations will serve as a distraction to the process of development within the industry as it continues the recovery from the financial crisis.