Warren Edwardes discusses the seven pillars that drive innovation in financial services: competitive innovation, regulatory innovation, accounting innovation, taxation innovation, religious innovation, ignorance innovation, and technological innovation. Religious innovation, in the form of Islamic banking, avoids usury and interest and requires investments to be ethical and avoid industries like alcohol and gambling. Researching Islamic finance requires understanding customer needs, the competitive landscape, and ensuring products meet religious principles.

1. What Drives Innovation?
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Warren Edwardes
What Drives Innovation?
Warren Edwardes,
CEO, Delphi Risk Management Ltd
Governor, Institute of Islamic Banking &
Insurance
• Financial Services Research & Insight Forum
• London, Tuesday 16 January 2007
• Innovation: dc3.co.uk/innovation.htm
• Islamic banking news: dc3.co.uk/ibnews

2. What Drives Innovation?
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Warren Edwardes
Key financial instruments
– This article and speech
is based on chapter 3 &
appendix 4 of the book:
– "Key financial
instruments:
understanding and
innovating in the world
of derivatives"
(Financial Times
Prentice Hall)

3. What Drives Innovation?
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Warren Edwardes
Seven Pillars of Innovation
• Six people seated around the walls of a darkened
room. In the open middle space is a chair.
• Who finds it? Those that sat still and philosophised
about where chairs are usually placed in rooms?
• The innovator who would locate it is the one
who'd get up, walk and stumble until he
discovered it.
• Nobody ever found anything whilst sitting down.
So QED don’t be afraid to stumble. - Charles
Kettering
• Ease of entry / Copyright – new developments

4. What Drives Innovation?
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Warren Edwardes
Seven Pillars of Innovation
1. Competitive Innovation
2. Regulatory Innovation
3. Accounting Innovation
4. Taxation Innovation
5. Religious Innovation –
Islamic Banking and Finance
6. Ignorance Innovation
7. Technological innovation

5. What Drives Innovation?
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Warren Edwardes
Seven Pillars of Innovation 1
• Competitive
Innovation
• Price
• Service

6. What Drives Innovation?
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Warren Edwardes
Seven Pillars of Innovation 2
• Regulatory Innovation
• Basel / Basle II
• Credit derivatives
• Insurance derivatives
• Hybrid securities
– Look like bonds for investors
– and equities for Tier 1 Capital

7. What Drives Innovation?
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Warren Edwardes
Seven Pillars of Innovation 3
• Accounting Innovation
• IASB
• Does Accounting
treatment reflect
value?

8. What Drives Innovation?
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Warren Edwardes
Seven Pillars of Innovation 4
• Taxation Innovation
• Capital Gains Tax –
zero coupons
• Dividends
• Tax Changes
• Retrospective
legislation

9. What Drives Innovation?
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Warren Edwardes
Seven Pillars of Innovation 5
• Religious Innovation
• Ethical Funds
• Usury Laws
• Islamic Banking

10. What Drives Innovation?
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Warren Edwardes
Seven Pillars of Innovation 6
• Ignorance Innovation
• Just cheating
• Bankers Trust /Proctor
and Gamble / Gibson
Greetings
• Structured Financial
Products

11. What Drives Innovation?
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Warren Edwardes
Seven Pillars of Innovation 7
• Technological innovation
• Cash Points
• Computer software for
derivatives
• Credit risk valuation
• Internet
• Visit the Exhibition

12. What Drives Innovation?
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Warren Edwardes
Religious Innovation - Islamic Finance
• Happy the man who far from
schemes of business, like the
early generations of mankind,
ploughs and ploughs again his
ancestral land with oxen of his
own breeding, with no yoke of
usury on his neck.
• Roman philosopher, Horace
• Julius Caesar limited interest to
8 1/3 %

13. What Drives Innovation?
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Warren Edwardes
Neither a borrower nor a lender be; For
loan oft loses both itself and friend
and borrowing dulls the edge of
husbandry.
Shakespeare’s «hamlet», a Danish
father advising his son
UK usury laws on excessive interest
abolished in 1854
South Africa and US (except Virginia and
Delaware) have usury laws
Religious Innovation - Islamic Finance

14. What Drives Innovation?
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Warren Edwardes
Those who devour usury will
not stand except as stands
one whom the evil one by
his touch hath driven to
madness. That is because
they say: "trade is like usury
but Allah hath permitted
trade and forbidden usury.”
The Koran: Surah 2, verse 275
Religious Innovation - Islamic Finance

15. What Drives Innovation?
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Warren Edwardes
Islamic Finance in a slide
• Hallal vs. Haram
– Not just about Hallal mutton curry but also about
a way of life
– This is including finance
• Interest, usury, riba used interchangeably
• Essentially 3 features of Islamic products
– Riba free - Profits and loss sharing PLS
– Riba free - Mark up
– Ethical dimension
• But far from “On the slide”!

16. What Drives Innovation?
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Warren Edwardes
Islamic Finance in a slide - OK 2 slides then
• Interest free
• Trade related and perceived need for
funds
• Pure form of Islamic Banking? - equity
related
• Avoids exploitation - no usury
• Ethical investments
– Alcohol, tobacco, gambling, armaments,
pornography etc

17. What Drives Innovation?
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Warren Edwardes
Research Issues in Islamic Finance
• Who are the customers?
• Where are they located and how can they be
contacted?
• What quantity and quality do they want?
• What is the size of the market?
• What is happening in the market? What are
the trends?
• Is there more demand for one product or
another?

18. What Drives Innovation?
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Warren Edwardes
Research Issues in Islamic Finance
• Who are the competitors?
• How do consumers talk about the products in
the market?
• Which needs are important? Are the needs
being met by current products?
• What are the risks?
• Whether competitive pricing is a key factor
for Islamic finance products?
• Whether customers look for product
branding?
• Market segmentation

19. What Drives Innovation?
19/27
Warren Edwardes
What Drives Innovation?
Warren Edwardes,
CEO, Delphi Risk Management Ltd
Governor, Institute of Islamic Banking &
Insurance
• Financial Services Research & Insight Forum
• London, Tuesday 16 January 2007
• Innovation: dc3.co.uk/innovation.htm
• Islamic banking news: dc3.co.uk/ibnews