Abstract
A body of work has emerged that examines human capital from the perspective of skills to better understand the types of expertise that influence innovation. The relationship between skill and financial innovation, however, is poorly understood in the context of Islamic financial institutions (IFIs). IFIs are distinct from their conventional counterparts by their compliance with Shariah law. Based on a survey of IFIs in Bahrain and Malaysia, this paper examines the effect of different skills on IFI innovation. The findings indicate that while skill in Islamic finance positively influences innovation, skill in Shariah law does not. Cognitive-technical skill is also highly significant, but marketing skill has a negative effect. The results suggest that Islamic financial innovation relies on continuous improvement that sustains markets, product and service innovation. Sustaining innovation lends itself to abilities that are oriented towards problem solving and computation of Shariah and business risks. This favors skills of programming and expertise in Islamic finance over marketing and Shariah legal proficiency.
Highlights
As a set of skills that is embodied in people, human capital contributes to firms’ innovation capability by increasing learning and absorptive capacity [1]
As Islamic financial innovation is still at a relatively early stage of development compared to the conventional sector, it has focused on exploiting and extending prevailing financial products that are readily transformed into Shariah-compliant instruments rather than exploring new market ideas that entail a high level of prohibitive risks
In examining the types of skill that contribute to higher innovation level among Islamic financial firms, the results highlight the following
Summary
As a set of skills that is embodied in people, human capital contributes to firms’ innovation capability by increasing learning and absorptive capacity [1]. Under risk-sharing, Islamic financial activities are regarded as exchanges between buyers and sellers because profits are permissible This contrasts with transactions between borrowers and lenders in conventional banking where debt helps shape the transactions [9]. The central banks of both countries have separate units for conventional and Islamic finance thereby recognizing the role of Shariah in regulating risks. Such regulatory frameworks are still underdeveloped in other Muslim-dominated countries. Pakistan for instance follows the standards issued by AAOIFI and ISFB [12] For this reason, this paper will empirically examine the relationship between Islamic financial innovation and skill based on survey data from Bahrain and Malaysia. Renewal process that lets customers renew their credit card automatically while maintaining card number without any interruptions [25]
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