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New Strategic Alliances between Islamic Financial Institutions, International University

Students and Entrepreneurs to Implement Musharakah Financing to Meet the Challenges ofthe 21st CenturyAuthor(s): Saad Al-HarranSource: Arab Law Quarterly, Vol. 14, No. 3 (1999), pp. 268-281Published by: BRILLStable URL: http://www.jstor.org/stable/3382084

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NEW STRATEGIC ALLIANCES BETWEENISLAMIC FINANCIAL INSTITUTIONS,INTERNATIONAL UNIVERSITY STUDENTS ANDENTREPRENEURS TO IMPLEMENTMUSHARAKAH FINANCING TO MEET THECHALLENGES OF THE 21ST CENTURYSaad Al-Harran*

The end of the cold war era hasmade us (individualsandinstitutions) hink andactgloballyandstrategically.A newdimensionhasbeenintroduced,hisbeingthefact that the role of the markethas gaineddominanceover the role of the state.Competition, efficiency(in terms of performanceand service to clients), andstrategicalliancesare the languageof the worldtoday.These rapidchanges n theworldeconomicscenariowill force us to makechanges n our behaviourand tostrategisewith others n orderto meet thechallengesof thetwenty-first entury oimplement he musharakah ethodof finance.This article sets out to analysethe conceptof strategicalliancesand why it isimportant o the new proposed triangular elationshipbetweenIslamic financialinstitutions (IFIs), small and medium industry entrepreneurs SMIEs) andinternational niversity tudents(IUS). This article ntendsto assessthe currentpracticesof Islamic financial nstitutions n order to establishwhether hereis aneed to take a shift in their paradigm.The problemsthat face the SMIEs inMalaysiaand the new role of the business universitystudents are evaluated.Finally, the challenges o implementthe strategicalliance are examinedand aconclusionconsistingof recommendationss formed.

WHY STRATEGIC ALLIANCES?"Strategicalliances"(SA) are agreementsfor co-operationbetween firms orinstitutions hatgo beyondnormalcompanydealingsbutthatfallshortof mergersor full partnerships.An alliance can involve joint researchefforts, technologysharing, ointuse of production acilities,marketing f oneanother'sproducts,or

* International Business Consultant in Islamic Finance and Managing Director of Global HorizonLimited, New Zealand.Arab Law Quarterly, [1999] 268-281? 1999 Kluwer Law International. Printed in the Netherlands.

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MUSHARAKAH FINANCING IN THE 21ST CENTURY 269

the joining of forces to manufacture components or assemble finished products.'This article focuses on the importance of SA in terms of marketing research andthe marketability of Islamic products at the global level.There are three strategic reasons why companies enter into alliances. Firstly togain economies of scale in production and/or marketing. The second is to fill gapsin their technical and manufacturing expertise, and thirdly to acquire marketaccess. Allies learn much from one another in performing joint research andsharing technological know-how. It can also be used to share distribution facilitiesand dealer networks, thus mutually strengthening access to buyers. Allies mayhave to overcome language and cultural barriers as well. What can be said aboutstrategic alliances between companies can also be applied to individuals (such asSMIEs and international university students) and institutions. The fundamentalquestion arises, can we activate the new proposed triangular relationship betweenthe three parties in order to produce a new breed of entrepreneurs and venturecapital industrialists and agriculturalists so that socio-economic changes in theeconomies where the Islamic banks operate will take place?

THE CURRENT PRACTICES OF ISLAMIC FINANCIALINSTITUTIONS

According to a recent study published in the Islamic Economics Magazine, inJanuary 1996 Dubai, United Arab Emirates, although the funds of IslamicFinancial Institutions at the global level amount to US$153 billion in 180 banks notangible results have been made.2 There are many reasons for this, most of theseinstitutions tend to finance an easy method of operation such as murabahahfinancing (trade financing) which have made them not different from conventionalbanks except that the interest rates have been replaced by service charges.mudarabahand musharakah inancing (partnership) which are the main methods offinancing (which makes them different from others) have been reduced in theiroperations. The experience of Bank Islam Malaysia (and many others) supportedthe argument that mudarabahfinancing represents less than one per cent and 1.2per cent throughout the 1988-1995 period with only once at 1.73 per cent in 1994.Similarly, musharakahfinancing was at 1.8 per cent in 1988 to 0.8 per cent in1995.3 The same trends could also be applied to the current practices of thisinstitution.From the Islamic jurists point of view, the murabahacontract instrument (which

1 Theompson, A. A. and Stirckland, A.J., Strategic Management,Conceptand Cases, 8th edn, Irwin,USA, 1995, pp. 155-167.2 Al-Nasir, A., "Review of Dubai Islamic Bank For the Last 20 years", Islamic Economics, Dubai,January 1996, p. 9.3 Al- Harran, Saad, "Musharakah Financing As an Integrated Marketing Model For The MalaysianFishing Industry", a paper presented at the First International Workshop on Musharakah FinancingConcept and Case Studies, Malaysia, April 23-25 1996, p. 3.


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270 ARAB LAW QUARTERLYis dominating the current practices of all Islamic financial institutions today withthe exception of the Sudanese Islamic Bank and some other banks in Iran) shouldbe restricted only to those cases where the mudarabahor musharakahare notpractical.4By adoption of such an approach by these institutions, (of short ratherthan long term strategy) many people, especially those in the rural areas, will notknow how Islamic banks operate and what kind of benefits musharakah inancingcan generate for them once this method of finance is properly implemented.5Therefore the wealth generated by these institutions is not the fruit of superiorentrepreneurial performance but the result of trade privileges.6 Ultimately, theoutcome of such strategyis the problem of surplus funds which faces some of theseinstitutions. This problem, amongst others, has developed due to the conservativeapproach rather than an entrepreneurial one adopted for the proper utilisation ofthese resources.One can argue that the lack of expertise in project financing and entrepreneurialdevelopment are one of the main causes why these institutions have adopted theshort-term strategy of financing.Adding to that the collapse of the International Institute of Islamic Banking andEconomics which was established in 1982 in the Turkish Republic of NorthCyprus (by the International Association of Islamic Banks in Egypt) to providetraining courses for different categories of personnel, have resulted in adisadvantage for these institutions compared with the conventional banks.7Indeed, these setbacks have hampered the development of these institutions inbeing entrepreneurial entities so that the public can appreciate their role in theeconomic development where they operate. We are of the opinion that remedialmeasures need to be taken by these policymakers (of Islamic banks), who want tosee Islamic finance at par with the conventional banks in terms of providingefficient services as well as reasonable profit to their customers. This requires aneed to establish an Islamic consultancy house to identify viable and profitableprojects and to train entrepreneurs in project financing.Therefore, Islamic finance needs a paradigm shift in terms of the method offinancing (such as mudarabah and musharakah) and effective utilisation of thehuman resources in the universities and elsewhere. By adopting this approach,these institutions will produce a new breed of competent professionals in order toimprove the bankingservices provided to the customers and declaringa reasonableprofit to their clients. Competition will undoubtedly intensify due to the

4 Usmani, Muhammad Taqi, Musharakahand Mudarabahand TheirApplicationas Islamic ModesofFinancing, Pakistan, 1993.5 Al-Harran, Saad, "Many Muslims Still Unaware How Islamic Banking Works", Saturday Form,New Straits Times,February11, 1995, p. 9, Malaysia. See also J. R. Presley on the "Attitudes to IslamicFinance", a paper presented at the International Workshop on Islamic Political Economy in CapitalistGlobalisation: An Agenda for Changes, Universiti Sains Malaysia, Malaysia, 12-14 December 1994.6 Nienhaus, V., "Searching For Alternative Paths to Development: Islamic Economic Theory",ThoughtsonEconomics, slamic Economic Research Bureau, Bangladesh,vol. 5, nos. 1 &2January,June1995.7 Ali, M., "Training and Orientation For Islamic Banking" in Journal of Islamic Banking andFinance, vol. 1, no. 2, Pakistan, Spring 1984, p. 92.


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internationalisation of Islamic finance. A number of UK fund managers are nowinterested in emerging markets in the Muslim world, as well as the screening ofWestern portfolio investment from the Islamic perspective.Robert Fleming merchant banks in London have started offering equityinvestment funds to international clients mainly from the Middle East to cater forthe increasingdemands from Muslims all over the world.8Such an event is indeed animportant step in the right direction in the journey that Islamic banking and financeis taking. It proves without any doubt that Islamic finance has been recognisedinternationally,and now has strength not only in the Middle East and Malaysia, butalso in Europe and the United States. Harvard University in the US received fundsfrom one Islamic financial institution in the Gulf to undertakea researchprogrammeon Islamic financial instruments in order to commercialise some of them.

There are many questions to be asked as to why British banks are interested inIslamic finance. The answer is simple, that they are interested in the market shareand they need to utilise some of the surplus funds of Islamic banks. The key issuesin the eyes of the customers is the quality of services provided by the Islamicfinancial institutions and their profitability. If the current institutions cannotimprove the quality of their services and provide better returns on investment, acapital flight will take place sooner rather than later.

THE PROBLEMS OF THE SMIESIt is sensible to question why SMIEs in Malaysia have not been as successful asexpected before any practical solution is suggested. There is no doubt that thereare many problems confronting the Bumiputra entrepreneurs in the business withthe main ones listed below.FinanceIn Malaysia, surveys of industry were conducted in 1975 which complained ofinadequate finance and lack of access to commercial bank credit. Three mainreasons were given for the lack of working capital: the problem in obtaining loansand other types of credit facilities from commercial banks; the problem ofcollecting trade debts; and the shortage of internal funds arising from a low level ofprofit.9 It is possible that chronic shortages of working capital may be symptomaticof poor production planning or other serious management deficiencies. Whatevermay be the case, a number of small firms complain that they do not have enoughcash to buy raw materials or to pay wage bills until they have sold their existingstocks. Since most SMIEs have to raise their initial capital on their own, theamount which they could raise is quite limited. Consequently, they generally did

8 Al-Harran, Saad, "Quality Service the Key Issue", New Straits Times, 8 March 1996, Malaysia.9 C. P. Lim, Small Industry in Malaysia, Berita Publishing, Malaysia, 1986, p. 39.


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272 ARAB LAW QUARTERLYnot haveenough capital o startwith. Thereis difficulty n getting oansfromthecommercialbanksdueto the needfor collateral,guarantors, r the preparationffinancial tatements.From the aboveanalyses, t cannotbe deniedthat SMIEs werepreviously eftbehind when the governmentand financial nstitutionsonly extendedcredit tolargebusinessesdue to theircreditworthiness.But since the late 1980s,afterthegovernmentntroduced he privatisationprogramme,he emphasishas changed.Nowadays, SMIEs are receiving continual financial assistancefrom variousgovernment gencies.But theBumiputera ntrepreneurstill havealongwayto gobefore heycan manoeuvrehemselvesntoa positionof greater ompetitivenessnthe market-place.10I am of theopinion hattheproblem acingSMIEs in Malaysias not oneof lackof fundsbut rathera surplusof funds. This scenariomay varyfrom the rural ourban areas. For the former,it is indeed the lack of funds which has hamperedmanyyouthsstarting heir ownbusinesses,but it is not thecasefor the latter.Therealchallenge acingSMIEsin the urbanareas s not themobilisation f resourcesbut their utilisation.Skilled labourThereis a seriousshortage f skilled abour,especially killedmetal radesmen ndmaintenance tradesmen.The problem affects small industries very severelybecausesmall firms are often unable to competewith theirlargecounterpartsorskilled labour. The problem arises because governmentsponsored trainingschemesareinadequateo meet the demand or skilledworkers.Manyestablish-ments, especially he largerones, have their own apprenticeshiprainingcoursesbut three factorsappear o limit their usefulness:"

(1) the limited timegivento trainapprentices;(2) the lack of experiencedtrainingstaff and the problemsassociatedwithdiverting rainedworkersawayfromproduction ines;and(3) the lackof formaleducationamongmanyof the trainees.I am of the opinion,when discussingthe issue of skilled labourshortages, hat afew factors should be considered.First, the problemof skills shortagealmostalwaysgoesbeyond heissue of the narrow echnical killsthatworkersmust have.More often, the real issue is the shortage of workers with "appropriateexperience".These area few skillson whichthe vitalityandcompetitiveness f the industrydepend. These skills includestrong entrepreneurial,managerial nd marketingabilities,particularlyn internationalmarkets.Thereis alwaysa greatdemand orthese skills which cannot easily be developed in the classroom or formal training

10 R. Ali, "Enter a New Breed of Bumi Traders", New Straits Times,Malaysia, 27 November 1993.11 Al-Harran, Saad, "PartnershipFinancing: Helping the Poor to Help Themselves", The BankersJournal, Malaysia, October 1993.


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MUSHARAKAH FINANCING IN THE 21ST CENTURY 273institutions.This is notwithstanding he fact that the provisionof adequateandrelevant rainingby both the public andindustrycouldgo a long wayin reducingproblemsarisingfromskills shortageof labour.CultureThe cultureand traditionof a societyoften directly nfluencesan entrepreneurnhis dailywork.The cultureof avoidingbusinessventuresdue to the fear of failureneeds to be addressedand changed.This cultureclasheswith the principlesthatIslam requiresus to uphold principles which also encouragean individual toactivelyparticipate n a business ratherthan avoidingit for fear of failure. It istherefore mportant o introducethe conceptof projectfinancingto the businessculture of the societyand it is in this area that the BusinessUniversityStudents(BUS) can play an importantrole in the Bumiputera it is the native people ofMalaysia)culture. Through proper identificationand selection of the project(amongstotherfactors),projectsare more likelyto succeed,especially f they arecarefullymonitoredby both the BUS and entrepreneurs.Allahsays:"Never willAllahchangethe conditionof a peopleuntil they changewhat is in themselves".1'2Islamencouragesus to go into businessand it is normally he casethat nine outof ten of one's rizak (wealth) is derived from business transactions.On manyoccasions,Allah demandedthat once prayersare finished,man may proceedtodisperse hroughout he landandgo abouthis business.Andthosewho seek of thebounty of Allah, and rememberHim frequently,are the ones who will prosper.Indeed, it is time to makechanges in the Bumiputeraculture,and I am of theopinionthatthe BUS can be agentsof changein theirsociety.Lack of ideasThe currentBumiputeraentrepreneursare lackingin creativityand innovativebusinessideasbecauseof variousfactors,mainlythe lackof propereducationandexposureto other people. Lack of exposurein a manufacturing nvironment smore of a detrimental actorthan a lack of capital.One must knowthe industrywell, theproduction echniques,andthe natureof the marketbeforeventuring ntothe manufacturingector.Due to these factors,manyBumiputerasend to followothersrather han to lead fromthefront. This kind of attitudehas left them behindothersin termsof projectdevelopmentand improvement.Other problemsOtherproblems acingSMIEs arerelated o marketing, ompetition,managementandtechnology.Marketingproblemsincludethe seasonalityof demand,customer

12 Surat Al-Rad (10-11). The Holy Quran: English translation of the meanings and Commentary bythe Presidency of Islamic Researcher, IFTA, Call and Guidance, Al-Madinah, Saudi Arabia, 1410H.


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274 ARAB LAW QUARTERLYproblems,delivery,andthe keennessof competition.A numberof small irmshaveproblemsmarketingheirproductsbecauseof factorswhich nclude:poorproductdesignwhich s bothinefficientandunartistic; oorqualityof the finishedproductdue to the use of low qualityrawmaterialsandinadequatequalitycontrol;andalack of properaftersales serviceandprecisiondue to inadequate quipmentandshortageof skilledpersonnel.For example,Malaysianbatikclothproducersneedto improve the quality of their products, especially in the areas of dying andprinting. Such improvements are vital if Malaysian batik is to marketed overseas.A Japan Export Trade Organisation (JETRO) report on the marketability ofMalaysian batik showed that the variety of batik cloth was limited, patterns weretoo local, printing was neither elaborate nor precise and dying was uneven.13Other small firms lack knowledge of market opportunities, both local andforeign, and of modern marketing techniques. Small industry also complains ofunfair competition from their large-scale rivals. Unfair competition may arise fromcertain government policies which tend to favour large rather than small firms.Such problems may also arise from volume discounting, horizontal market power,mass advertising, control of supplies and prices, discriminatory pricing and theoverwhelming resources of large firms who are able to attain economies of scale.Management problems arise mainly because many SMIE firms have a relativelylow level of formal education amongst staff with limited training or professionalqualifications. Thus they have a limited exposure to modern managementprinciples and practices.14The technology used by SMIE firms is often outdated.Some of them do not trust modern technology while others are unable to afford it.Thus many of them rely on traditional technology which in many cases isinsufficient.

THE NEW ROLE OF BUSINESS UNIVERSITY STUDENTSTo enable us to bring changes due to the current problems that face theBumiputera entrepreneurs, others (the policy makers and corporate leaders)should realise that we are living in a world of rapid change due to technologicaladvancement (such as the internet and information highways) and globalisation. IfSMIEs (and Malaysia as a whole) want to survive in this competitive world thenthey should ask themselves questions such as those listed below:

(1) How far have SMIEs succeeded in penetrating the world market?(2) Have they really undertaken any marketing research to understand the realneeds of their local consumers?'5(3) What kind of marketing strategies have they made so far, if any?13 A JapanExport Trade Organisation Report, New Straits Times,Kuala Lumpur, March 23, 1984.14 C. P. Lim, supra, n. 9, pp. 47-48.is Al-Harran, Saad, "Islamic Consultancy House: Missions and Objectives", Malaysia, December1993, Unpublished paper.


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Theoretical courses Practical experience Back to the(24 months) with the SMI entrepreneur campus7-(12 months) (12 months)

1. Marketing2. Management Identification of potential3. Research methodology SMI entrepreneur Business student4. Financial accounting assignment5. Project financing 1. Case study6. Islamic banking Selection of SMI 2. Practical seminar7. Corporate financing entrepreneur 3. Workshop

Identification of Memorandum of Understandingpotential student to be signed between universityauthority and entrepreneurSelectionof the Undertakescreative and applied marketing researchinnovative student

Figure 1 New curricula for business university student (4 years)(4) Why have the local entrepreneurs failed to compete against each other in the

country rather than on a global basis?These challenging questions have indeed revealed some of the grass root problemsfacing the SMIEs today and in the future. We feel that serious efforts need to bemade to change our educational curriculum in business and economic courses sothat they are more suited to the corporate sector needs in helping to realise nationalobjectives. An Islamic jurist has recently expressed his views about the currenteducational curriculum in the Muslim world. He feels that a major change in thecurriculum needs to be made due to its present ineffectiveness in terms ofproducing entrepreneurs.16Students, being the main assets in society who make changes for development,should have exposure to the society rather than be alienated from it. Therefore,they should be exposed to real life experiences first by spending 24 months in thecampus learning the theoretical foundations of some important subjects, such asmarketing, management, research methodology, business ethics, financial account-ing, project financing, Islamic banking and corporate finance. Upon completion,the relevant professor (specifically assigned to this responsibility) will identify andselect some potential students based on various criteria.Some of these criteria should be based on business ideas, innovation andcreativity of the student (Figure 1).

16 AI-Qaradawi, Y., "Why we are backward" an interview with him prepared by Al-Nazir, A, forIslamic EconomicsMagazine, Dubai, February 1996, p. 63.


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276 ARAB LAW QUARTERLYThe relevant professor should have an open dialogue with selected entrepre-neurs, especially those who wish to improve their firms by being more competitive

in the market. The open-minded entrepreneurs are more likely to accept the inputof others, even if those "others" happen to be students who will be their futurepartners in the business once they have completed their studies at university. Anagreement should be reached between the relevant professorand the entrepreneursfor 12 months' practical training Of the students, with their durtiesand rightsclearly stated in an agreement which will be signed by their professor and therespective managing director of the SMIE firm. Such an agreement or amemorandum of understanding (MOU) is indeed vital to protect the rights ofstudents now and in the future when at a later stage they become partners in thosefirms. The MOU should clearly stipulate the following terms of reference betweenthe two parties (the students and the SMIE firms):

(1) The students should spend 12 months in practical training with reputableSMIE firms.(2) The students have to be closely monitored by the two parties (the respectivenew employers and their professors as well) about the conduct of their workduring the practical training.(3) Confidential reports must be submitted every quarterly by the managingdirectors to the professors about the performance of the students.(4) The MOU should clearly state that if a student's performanceduring the 12months is outstanding, he would be considered for partnership in that firmonce he completes his studies successfully.

Undoubtedly, once a student realises that he may become a partnerat the firm thathe is currently helping out,7 he will commit himself to the firm's success, therebygiving the firm greater confidence in its newly acquired staff at a later stage. Thestudents are the new blood and should be considered as assets in the organisationalset-up both at present and in the future. They will make sure that they give theright advice to their counterparts. The managing directors of the SMIE firmsshould take their newly acquired partners' comments and suggestions seriously.Profit motivation is a factor that should ensure a commitment to hard work. Oncethe students have completed their practical training and gained real-lifeexperiences, they have become valuable assets not only to the SMIEs but also tothe academic institutions.The BUS should then return to their academic studies on campus and completetheir final or fourth year of study at which point they should be given theopportunities and responsibilitiesto make some presentationsabout their 12 monthpracticalexperiences.Their respective professorsshould give them the responsibilityto conduct case studies, practical workshops, and seminars under his supervision.Responsibilityof this magnitudeis something new for students and awe-inspiring,so

17 Al-Harran, Saad, IslamicFinance: PartnershipFinancing, Pelanduk Publications, Malaysia, 1993,p. 337.


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they would need encouragement to help them embrace it. This means that theirrespective professors would be indirectly moulding them as future corporate leaderswhich is what the Malaysian market is looking for. This moulding is exemplified bythe second companion of the Prophet Mohammad (pbuh), Umar bin Al-Khattab,who developed and implemented the concept of "Leader among the Leaders". Thiskind of practical input from university business students is urgently needed. Theirinput after 12 months of practicaltraining and experiencewill have importantpolicyimplications,not only to the higher learning institutions, but the whole nation, whosemain aim is to be fully industrialised.The question should be askedas to how far thecurrent educationalsystem is relevant to the corporatesector's needs, and whether itis right to make some changes and modifications.

THE CHALLENGE TO IMPLEMENT STRATEGIC ALLIANCESIt is being said that the total assets of all Islamic financial institutions at the globallevel amount to $US153 billion. I am of the opinion that a small portion of thisamount needs to be channelled to higher learning institutions, such as theInternational Islamic University, Malaysia (IIUM), for entrepreneurial activitieslike the musharakah inancing venture capital project (MFVCP). According to theadmission and records of IIUM, the registered international student population(undergraduate) during the second semester, in 1995/1996 was 1,068, spanning 72nationalities.'8 These human assets (international students) when properly utilisedand motivated by the Islamic financial institutions (and Malaysian entrepreneurswho are looking for new markets), can play an important role not only in marketingIslamic products internationally, but also in promoting trade relationships betweennations in order to generate greater business opportunities.The main objective of MFVCP is to produce a new breed of entrepreneurs whoare equipped professionally and mentally to go for business and manage risksuccessfully. Although venture capital project is a new phenomenon in Islamicfinance, it needs to be planted in the heart of each Islamic financial institution inorder to bring hopes and incentives not only to the students who are considered tobe future leaders, but also to the young who are trying to achieve entrepreneurship(especially those in the rural areas), by working hard and getting on to expand anddevelop their businesses. MFVCP must be seen as a means to enhancingentrepreneurship, generating employment and tax revenues, and also a means forassisting in the introduction of high level technology.'9 In the case of students, thismethod of finance can help in the funding of new venture ideas, helping them tobecome better and successful entrepreneurs, capable of managing their academiclife against that of the practical businesses off-campus.

18 Admission and Records, International Islamic University Malaysia, 13 February 1996.19 Cizakca, M., "Venture Capital" in Encyclopaedia of Islamic Banking and Insurance of IslamicBanking and Insurance, London, 1995, p. 151.


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278 ARAB LAW QUARTERLYThe concept of MFVCP will be based on the profit and loss sharing system(musharakah),and students will be held accountable to produce results in terms of

profitability. This exercise would be part of university evaluation. A laundry shop,photocopy services, selling hamburgers and any scientific ideas (which can becommercialised) are considered to be entrepreneurial activities and need to befinanced as shown in Figure 2. Such activities will also build confidence in theminds bf the students to achieve financial independence not only from thegovernment but also from their parents.In the West, the culture of venture capital has already affected some of theleading UK universities such as Manchester and Liverpool due to businesspressure and an increased culture of co-operation between universities and non-academic organisations. New links have been established between higher learninginstitutions and the corporate sector in order to achieve greater financialindependence for these institutions from government aid. The former undertakeapplied research while the latter support the development and promotion of suchwork. Durham University Business School (DUBS) is a pioneer in terms ofbuilding close relationships with the corporate sector in the North East ofEngland, by instigating applied research and training programmesto cater for theneeds of the corporate sector. In doing so, DUBS has succeeded in having anindependent budget from the main university and most of the lecturers andprofessors have as a result become consultants to the corporate sector.

Supplying ff u n d s

M a r k e t in gr e s e a r c h

S m a l l I n t e r n a t i o n a lm e d i u m u n i v e r s i t y

e n t r e p r e n e u r s s t u d e n t s

* Campus musharakah* Identifying financingnew (venture capital)markets * Agent for* Marketing marketabilityofof products Islamic products(unit rust)Close monitoring and follow up

Figure 2 Strategic alliances between Islamic financial institutions, internationaluniversitystudentsand entrepreneurs


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It is also important that proper screening of the students needs be made in orderto ensure successful implementation of the programme. Therefore, the universityauthoritiesneed to create a conducive environment for such a programmeto operateeffectively and efficiently. This can be achieved through the provision of moral andmaterial support to this programme, not only to the relevantprofessor(s) but also tothe students. The student who is selected for such work has to be innovative andcreative in terms of thinking and initiate new ideas. Study tasks need to be assignedby academics who have the relevant practical and academic experience rather thanthose with an entirely theoretical grounding in the areaof study. Naturally it is thecreative people who initiate new ideas, pursue innovation and seek new concepts.Not all their ideas may be of practical value but the emphasis is on the pursuit ofdeveloping an innovative approach. The much larger potential of the human mindhas not been realised in most of the universities of the developing world due to anacademic culture that restricts student's creativity by a greateremphasis on keepingstrictly to core study in order to pass exams.20Once the selection criteria has been made by relevant academics, theinternational university students will be classified into four groups:

(1) Group One: those who are interested in musharakah financing venturecapital projects.(2) Group Two: those who are interested in marketing Islamic products (suchas unit trusts) internationally.(3) Group Three: those who are interested in undertaking market research forsmall medium enterprising firms in order to create a market niche.(4) Group Four: those who are interested in identifying new markets in thecountry as these develop.

The second group of students will be selected to be agents for the Islamic financialinstitutions (IFIs) for marketing their products. Unfortunately, most IFIs haveunderestimated the importance of marketing their product range at a global level.There are even those organisations who have sought to only provide products at alocal level and are therefore completely at a loss as to how these would be marketedfurther afield.Students need to be equipped to play an active role in marketing Islamic financialproducts if they are to take their place with IFIs. Additionally, Islamic banks mustpay their extrabonuses once they declare their annual dividends and not before. Thescheme is intended to make the students more committed and responsible towardsthe institution, actively feeling the commitment to ensure a good projection of thebanks products for greater profitability. Becoming an active agent will add greaterresponsibility to the students. They will be financially independent and be able tolearn aspects of entrepreneurship when they are in a position to have accumulatedsufficient funds, through selling the Islamic financial products and start their own

20 Abisheganadan, F., "Creative is vital to a company", New Straits Times,Malaysia, 16 March 1996,p. 1.


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280 ARAB LAW QUARTERLYbusinesses hroughself-financing.21t will make them self-reliant s theywill nothaveto go to commercial anks orcredit.Veryoften a goodproposalor a projectdiesbecause he studentsdo not haveanycollateralo provide orloans.The studentsin this groupwill be classified nto two sub-groups.Firstly, thelocal (at IIUM) studentswill sell unit trusts to the general public with moreemphasison the ruralpopulation,andbearing n mind thatmost studentsoriginatefrom the rural p6pulation themselves they are directly contributingto themobilisationof resources n the rural areas. International tudentswill sell theunits in theircountriesof originor elsewhere.Forthe thirdandfourthgroup, he international usiness tudentswillundertakemarketingresearch or small and medium firms. As mentionedabove, the keyproblem acing he SMIEsin Malaysia, mongstothers, s theproblem fmarketingproducts ocallyandinternationally.Marketing esearch s vitalto SMIEsin orderto establishwhether heirproductshavea marketat the localor internationalevel.It dealswith allphasesof themarketing f theirgoodsandservices. t involves heapplication f researchechniques o solvingof marketing roblems f anykind,betheyconcernplanning,problem-solving,r control ssues.22The fundamentalrequirementis that the internationalbusiness studentscontribute o marketresearch n order to identifynew marketsas well as playingtheir role in marketing he productsof SMIEs in the countrywherethey comefrom.By doingso, thestudentswill be a greatasset to the SMIEs who arekeentoidentify new marketsfor their productsand willing to take new partnerstopromotethese products.The international tudentscould be potentialpartnersbecausethey will assist the local SIMEs not only in promotionbut also withcultureand languagebarriers.In return SMIEs must pay the studentsfinancialrewardsplus extra bonuses because of their valuable contribution,and therelationshipbetweenthe two partiesneeds to be regulated hrougha contract.Ifthe entrepreneurs happy with the new partnerin terms of generatinggoodbusinesshe will naturallybe moreinclinedto give furtheroptionsto the studentsto be takenon by the companyaftergraduationrom the university.For any innovativeand creativeprogrammeo be successfully mplementedaproper procedureof monitoringand feedback must be made by the relevantacademic taffwhoshouldhave a wide andpractical xperience f this.Monitoringandfollow-upis basicallya tool of projectmanagementor effective mplementa-tionandbetterplanningand it is vital to the settingup of suchprogrammes.Theprimary oles of monitoring re: o keeptrackof theprogressof theprogramme;oprovidefeedbackon the programmemanagement; nd to help preventor solveproblemsencounteredduringthe programmemplementation.23I am of the opinion that for such a programme to be successful, strategic

21 Al-Harran, Saad, "Promote ASN Scheme in Universities", New Straits Times, 7 August 1993,Malaysia.22 Churchill, G., Marketing Research Methodological Foundations, 6th edn, The Dryden Press,Orlando, Malaysia, 1993, pp. 10-11.23 Al-Harran, Saad, supra,n. 11, p. 47.


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alliances between the three parties are essential in order to face the challenges ofthe twenty-first century. With regard to the students, I believe that most of them(especially those the author of this article has taught during his lectureship at theFaculty of Economics and Management at IIUM for four years), want to beentrepreneurs after graduation so as to achieve financial independence rather thanworking in governmental posts.

CONCLUSION AND RECOMMENDATIONSUnfortunately, the current practices of most Islamic financial institutions are notinnovative nor creative. We believe that entrepreneurs are the agents of change andsince they characteristically dispute the status quo, they are likely to implementchanges in these institutions. The changes should not only be at the operationallevel (which are criticised by many professionals) but also at managerial level.These changes need to be made to enable Islamic financial institutions to be moreeffective in a modern world. The century of information technology, the internetand the communication highways has made the world a much smaller place. Thekey concepts in the modern world markets are competition, efficiency inperformance and customer satisfaction. If Islamic finance is to be successful, itmust take the shape of an entrepreneurial institute where musharakahfinancingventure capital projects finance at the grass roots level need to be introduced. Byadopting this new approach, these institutions will play a vital role (which makethem different from others) in the economic development where they operate andreduce the gap between the haves and have nots.If students are given the incentive, motivation and proper applied training, theycan play an important role in bringing about a culture of entrepreneurship toIslamic finance. Therefore, entrepreneurship and education programmes need tobe introduced at the higher learning institutions in order to build self-confidenceand self-esteem in the minds of students as well as a spirit of adventure andwillingness to take initiatives and risks.24 Such a programme should be morepractical and be supervised by professor academics who have rich experience inthis field. Case studies, workshops, and seminars need to be introduced in order toprovide a forum for both academics and students to mutually increase theirknowledge of this subject area. By doing so, I am of the opinion that the gapbetween the corporate sector and the higher learning institutions will be narrowedand the benefits of the enterprising business will be made available throughout thesociety where Islamic finance operates.

24 Rabbior, G., "Elements of a Successful Entreprenurship/Economics/Education Programme",EntrepreneurshipEducation,CurrentDevelopment,Future Directors,edited by Calvin A. Kent, QuorumBooks, USA, 1990, p. 54.

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