The Front Office Generates Revenue, the Back Office Creates Value: Operational Excellence is the Key to Unlocking Value in Islamic Finance

Abstract

Form does not trump substance, and outward adherence to religious injunctions does not, without more, equal piety. Rather, piety is measured by deeds motivated by sincere faith, perceptible or imperceptible to others. The significance of this for individual Muslims is clear. And it applies to institutions that hold themselves out to the public as “Islamic”, whether in the form of Islamic banks, Islamic windows of conventional banks, or other providers of Islamic financial products and services, such as takaful and financial advisory. Islamic Financial Institutions (IFIs) must ensure that behind the scenes, in their back offices, their operations are of a quality that ensures that representations about the nature of their business model, products, services, and commercial and legal objectives are true to the religion-derived principles to which they owe their market share. This requires operational excellence in the back offices of IFIs, which must be facilitated and reinforced at the industry level. Operational excellence is the key to unlocking lasting value in Islamic Finance. This note discusses two published court opinions involving IFIs — The Investment Dar v. Blom (“Blom”) and Shamil Bank of Bahrain EC v. Beximco Pharmaceuticals Ltd. (“Shamil”) — and IFI Shari’ah Board Reports and their implications for governance and brand management. In this note, the notions of operational quality and governance are broad, and are used interchangeably.