New product development (NPD) process in Islamic banks: the role of Shariah Supervisory Boards (SSBs)

Abstract

The combined environmental effects of technological change, growing competition, and increasingly demanding consumers have created pressure within the Islamic financial services industry for change. One outcome has been a proliferation of new products in the marketplace. This research explores new product development in Islamic banks in order to investigate the strengths and weaknesses of the tasks and activities of the new product development (NPD) process and what improvements are needed. Further, the role of the Shariah Supervisory Boards (SSBs) during the process of NPD is investigated.

The thesis combines new product development literature, Islamic finance and banking literature, and Shariah governance literature, to study empirically the development practices in Islamic banks. A multiple-case study was conducted drawing on empirical evidence from the NPD process in four Islamic banks in Saudi Arabia. Forty-seven in-depth interviews were conducted with business managers and marketing managers involved in the NPD process, SSB members and Shariah Group (SG) managers.

The research found that the NPD process in Islamic banks differs from the NPD process in conventional financial institutions. Beside the main stages of NPD process conducted by the Islamic banks in this research, three main new stages within the NPD process have been carried out by Islamic banks, which are: pre-Shariah approval, Shariah approval and Shariah audit. In addition, it is found that there is a gap between the ‘desired’ and the ‘actual’ practice of SSB functions and roles in the Islamic banks.

The research contributes both academically and practically. From a theoretical perspective, the research enhances the NPD literature through investigating the NPD process in the Islamic banking context and determining whether the findings regarding the NPD process in the financial services sector are applicable to the Islamic banking industry. Furthermore, the impact of certain religious regulations, and governance, particularly, Shariah governance, and SSBs on NPD are examined. Islamic finance/ banking literature is enhanced by conducting empirical research in the NPD process and addressing the lack of research in this topic. Meanwhile, this study adds to the Shariah governance literature by examining the role of SSBs in the new product development process within Islamic banks. The current research assists by exploring the gap between the ‘desired’ and the ‘actual’ practice of SSB functions and roles in Islamic banks. From a practical angle, the research investigates the strengths and weaknesses of the tasks and activities of the NPD process and what improvements are needed. Accordingly, recommendations are made in the light of the research findings for Islamic bank managers. This research sheds light upon the governance issues related to SSBs and Shariah compliance during the process of NPD in Islamic banks and contributes to presenting Islamic Financial Institutions (IFIs), practitioners and regulators with insights into the challenges of managing the industry in accordance with Shariah governance.