Jun 26

More often than not innovation is driven by small companies. They are less set in their ways than big ones and don’t have elaborate processes in place that stall their pace. The most important driver for innovation remains an ability to think outside of that much mentioned box. Not in consultant speak, but for real.

Micro finance was not invented by large financial institutions, and for a long time it was not embraced by them either. Just the thought of getting all these peasants coming into their immaculately marbled banking halls was enough to make them run a mile. Product innovation within agricultural finance is experiencing the same. Farmers coming into the bank? ‘No thanks’.

To be fair to the banks, they are required to operate within the confines of the local laws and regulations, and product innovation is often a long and cumbersome process. The Islamic financial industry is no different there either and they generally have a tendency to invest in the same type of transactions and sectors over and over again.

The banks desperately want to show they can play a role in the international financial industry and keep on placing money with other financial institutions using commodity murabaha which is by far the most popular instrument and not only for interbank placements. Investing in and lending to local enterprises is often dismissed as risky, but let’s not forget that one of the more important reasons often is that it’s just not as snazzy. It’s not glamorous, does not show global reach, and generally is not really something to brag about. But it does benefit the local economy, allow for diversification an innovation, and has a strong potential to reduce risks.

Just a thought.

Dr Natalie Schoon, CFA

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