IFE Lab Breaks New Ground in Islamic Finance

15 Jan, 2020

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When the journey began to establish the first-of-its-kind research laboratory in Islamic financial engineering in 2013, little did the laboratory’s founders know that this was going to be a remarkable success story. That year, with the aim to bring together modern technology and the principles of Islamic Economics and Finance, a project was founded with the title “the Islamic Financial Engineering (IFE) Lab”. The Lab provided a platform for PhD scholars to build models of innovative financial instruments and contribute publishable works that identify challenges of the Islamic financial industry and proffer practical solutions.

As a joint initiative of the Islamic Development Bank (IsDB) and Mohammed V University, Rabat, Morocco, the IFE Lab’s aims are to prepare students to develop state-of-the-art Agent-based Simulation (ABS) programs; conduct research to create and test new Islamic financial instruments; and identify how these instruments can assist the economic development of IsDB member countries. The Lab is located at the Research Laboratory for Applied Mathematics (LERMA) at Mohammed V University’s Mohammadia School of Engineering in Rabat. At the IsDB level, following the initial foundational work, the implementation of the IFE Lab program came under the purview of the IsDB’s Islamic Development Bank Institute (IsDBI).

Seven years down the line, the Lab has proved to be a huge success. It started operating in early 2014 and focused on achieving the IsDB’s objective of developing a dynamic and sustainable Islamic financial industry worldwide. Scholars at the IFE Lab use a computer laboratory to develop their own Agent-based Simulation (ABS) programs for their PhD projects. These simulations improve the understanding and analysis of various aspects of Islamic Finance, such as microfinance, cooperatives, Takaful, and other areas. The Lab, therefore, is of great significance to the member countries of the Organization of Islamic Cooperation (OIC) in particular but also to the global Islamic financial industry in general.

Based on solving real-life issues facing Islamic Finance, the Lab helped to build generations of financial engineers and product developers with specialized skills to design and structure new Islamic financial products, by enhancing their capabilities using frontier technologies, specifically Agent-based Simulation (ABS) and modelling techniques. The Lab delivered courses and seminars, as well as assisted the students to publish papers and reports about their research in various outlets. The success of the Lab can be seen in the completion of 11 PhD theses and publication of 45 articles in indexed journals to date, and the formation of a communication group by the members of the Lab for the young researchers.

Dr. Sami Al-Suwailem, the Acting Director General of IsDBI, led the project to establish the Lab. He said, “When the project was initiated, my team and I were concerned about the risks associated with this program. Such risks include whether or not the Lab will really deliver its objectives and ensure that the main vision of the program is achieved. However, after several productive meetings, we decided to take the risk. We were confident in our colleagues at LERMA, Dr. Rajae Aboulaich and Dr. Mohamed Tkiouat, to make it happen. And this gave birth to the IFE Lab. This program is devised to offer something unique in the area of Islamic financial education.”

One of the critical factors in the success of the Lab is the focus on practical experience, rather than pure theoretical research. The IFE Lab team, consisting of students and professors with experience in mathematical and computer modeling, worked hard to develop complex systems and generate models that can simulate products and markets based on the principles of Islamic Economics. Another success factor is that the project came at the time when Islamic Finance was taking roots in Morocco. Moroccan banks were just starting to provide Islamic financial services and therefore there was a growing need for compliant financial instruments and models in the country.

Even though the Lab took off successfully, there were difficult challenges to surmount. One of the major challenges was convincing the scientific and academic community that engineers and mathematicians can contribute to the development of Islamic Finance through a purely “engineering” or “modeling and simulation” component. Many professionals believed that this area of research is just for the economists and Islamic scholars. However, as Dr. Al-Suwailem explains, with commitment, dedication and focus by the IFE Lab founders and team, the program put these challenges behind. The work carried out by the engineers, computer scientists and mathematicians in IFE Lab demonstrated that these experts can easily collaborate with economists and scholars to develop Islamic financial products for the benefit of all.

Dr. Rajae Aboulaich, Director of the IFE Lab, explains further: “In the beginning, the concept of financial engineering was successfully initiated, in collaboration with other international organizations interested in applied mathematics. Our laboratory for research and study was part of two international laboratories that collaborated with several international conventions for several years. But later on, with the mutual trust and teamwork from the IsDB and the Institute, we planned to group together a new generation of people on a bigger platform to be supervised under experienced professors as well as experts from IsDB or from other organizations from all over the world in applying modern techniques to implement the objectives of the Islamic Economics in financial innovative instruments.”

Beyond the successful work at the Lab itself, the IFE Lab also made an immense contribution towards encouraging research innovation in the area of Islamic financial engineering worldwide. Traditionally, research in Islamic Finance focuses on what is religiously permissible. But with the financial industry growing, attention is shifting towards including practical matters such as how investors and fund-raising institutions make decisions, and how to design economically viable new products. Hence, the shift comes as Islamic banks try to expand beyond a relatively small client base that focuses on shari’ah compliance, to a much larger one whose financial decisions are based on a wide range of factors such as pricing and service quality.

In this regard, to promote innovation in the Islamic finance industry, the IFE Lab along with the IsDB and SABIC Chair of Islamic Financial Markets Studies, joined hands to institute a competition to award the Best Application of Agent-based Simulation in Islamic Finance. The competition is aimed to reach out to the graduate students worldwide who are eager to learn new techniques and encourage them to contribute to the advancement of Islamic Finance and Economics. The award offers cash prizes to the best three submissions, where the first place gets USD8,000, second place USD6,000 and the third place USD4,000. The applicants need to submit the computer models employing ABS to various aspects of Islamic Finance and Economics. ABS is a valuable tool for studying complex phenomena and developing practical solutions.

The award has helped to improve the understanding of Muslim economic behavior and has provided an opportunity to understand how various agents in Islamic Finance, such as customers, banks and regulators, respond to each other. In addition, the award has encouraged students to learn and apply these new tools in the field. Also, such efforts greatly expanded the scope of research in this area, and, more importantly, encouraged a more systematic approach to Islamic financial engineering and product innovation.

The IFE Lab’s success has been well acknowledged. Following the issuance of the Lab’s research publications, a symposium was organized to present and recognize the best works. In the symposium, experts such as Professor Francisco Doria and Professor Cars Hommes, commended the work done thus far by the Lab. Furthermore, the IsDB President, Dr. Bandar Hajjar, visited the Lab in 2019 where he similarly praised the researchers and administrators for the success of the Lab.

During his visit, Dr. Hajjar, held a meeting with officials of the Mohammadia School of Engineering and the IFE Lab. Dr. Hajjar expressed delight at the progress recorded by the Lab, and assured of IsDB’s commitment to the partnership in the project. Also speaking during the Dr. Hajjar’s visit, director of the engineering school, Mr. Larbi El Abidi, said several executives have been trained by the IFE Lab over the years in the field of financial engineering. The director of the IFE Laboratory, Rajae Aboulaich, said the meeting with Dr. Hajjar reviewed the activities carried out by the Lab and financed by the IsDB, in particular the granting of scholarships and the contribution to the training of students.

After completing the first three years of operations in 2017, the IFE Lab went through a rigorous evaluation by IsDB’s Group Operations Evaluation Department. The evaluation found that the IFE Lab was crucially ‘building new capacities’ and ‘raising awareness’ in Islamic financial engineering among practitioners in financial institutions, governments and researchers. It also found the FE Lab to be ‘highly relevant’ to the host country Morocco as well as to IsDB Group. Based on this, IsDBG’s support to the IFE Lab was renewed for another three years with a mandate to maintain the highest quality research and continue to provide international exposure for the PhD scholars.

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