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Unique IT Services in Islamic Finance and Key Players

In the last 25 year, Islamic banking practice has progressed tremendously. The past two and a half decades, serious research done, has established that Islamic banking is a viable and efficient way of financial intermediation. Several Islamic banks have been established during this period under mixed, social and economic settings. Recently, many conventional banks, including some major multinational Western banks, have also started using Islamic banking techniques. All this is encouraging.

Banks moving into Islamic banking require compliance with Sharia’a principles. This compliance has significant effect on bank products, processes and technology systems.

As a result a healthy sub-sector of information technology (IT) services being catered to the Islamic Finance institutions is emerging. The technology implications vary considerably depending on delivery structure, such as through standalone Islamic operation or ‘Islamic windows’, and type of Islamic products offered. This impacts both banks and core system providers, with market likely to present diverse opportunities for different vendor types.

Unique Islamic Finance related attributes of IT services

Moreover, Islamic law does not permit the use of funds in activities it deems impermissible (Haram), such as alcohol or gambling. Sharia'a interpretations can also vary by region and country due to different interpretations by different school of thoughts. Sharia’a boards addition, also introduces a new body in the organizational structure of any bank endeavoring to offer Islamic banking. Their primary role is to assure the Islamic bank transactions are compliant with Sharia’a and they help as well in designing Sharia'a-compliant bank products and processes.

Islamic banking systems today are still falling short of customer expectations because of the following reasons:

• Islamic banking technology systems are still far from the sophistication and quality of conventional systems.
• With existing products, there is limited flexibility to customize / alter the products according to the Sharia’a board of the bank.
• Systems lack some of the critical requirements like Zakat calculation and holiday treatment as per Lunar calendar which are mandatory as per Islamic principles
• Obtaining top level view of customer relationship is extremely difficult and even more difficult in case of Islamic banks with conventional sister concerns
• Client References of Islamic banking technology providers are few and assessing a vendor by reference is extremely difficult
• Islamic Bank implementation team members feel they end up in providing the vendors with more Islamic knowledge instead of vendors providing the banks with IF specific expertise
  

A list of features that will set any Islamic banking system vendor at an advantage is presented below:

• Provide an efficient front end system so that the front end activities are also integrated to the core activities
• Provide a strong workflow to enable the bank to redefine or copy and customize the existing products/ processes and aid in new product launches
• Provide flexibility to ensure that the new product is set up within a short period
• Provide less dependency on the IT team and more flexibility to business users
• Comply with Industry Standards and Regulations (AAOIFI, IFSB, IFRS, IAS, etc.)
• Support the basic functionalities of Islamic products like Murabaha, Musharaka, Mudarabah, Istisna, Ijarah, etc.
• Support different profit allocation methods for accounting purposes
• Capable of integrating with conventional core banking systems
• Provide or customize reports which aid Sharia’a scholars during their routine audit (e.g. discrepancy report for the sequence of contracts execution in a Murabaha deal)

Banks in the retail and corporate business, always want to be proactive in product management. The Islamic banking system is expected to be extremely fast in setting and taking product live with minimal help from IT team in the bank. The Islamic Banking system vendors though focus on the ease of product set up, leave a large gap in the way the dependency on specialized resources.

Given this gap, Islamic banking systems should be capable of being parameterized to cater to specific requirements of each Islamic bank. Islamic banks today are looking for a single system to handle their entire lifecycle i.e. from sales to operations and collections. Very few of the Islamic banking systems currently have the capability to handle the entire lifecycle.

Key players and their current areas/ geography of focus

Core banking IT vendors have realized the potential of this growing market. The main reason is the way Islamic Banking has transformed with new products and services, which are constantly upgraded for better customer service and complying with the Sharia’a guidelines.

Islamic Banking Solution Providers - Georgraphic Location Compiled by Author

Islamic banks today directly compete with the conventional banks and thus have realized the need for investing in better and state-of-the art IT systems to provide best offerings. Looking at the current vendors and the systems, the search for “The Best” Islamic Banking system is still a long way to go.

Islamic banking system vendors are typically categorized in to two segments. First are the conventional vendors who have transformed/customized their existing products, and second are the vendors who only offer Islamic systems. Most of the conventional core banking vendors (Temenos, Misys, Infosys, Tata Consultancy and Oracle FS) has developed Islamic systems to cater to the market.

Large banking software vendors have successfully created Islamic banking software based on their conventional platform to fit the Islamic banking requirements. However their initial customers still feel that they ended up being midwifes because of the poor understanding of vendors requirements. Small IT companies that anticipated the growing Islamic banking market and managed to be the early entrants do face a situation whether to invest in further R&D or to wait for a potential client before committing any more funds.

The other segment is mainly compromised of vendors who have traditionally been Islamic banking vendors. These vendors have only Islamic banking products and operate mostly in gulf region and East Asia. The disadvantage of these vendors is that they are small and their capability to execute big projects is always a doubt.

Many Islamic Banks have ended up with vendors widely varying in their offerings and capabilities when following a standard approach for selecting a core system. The top 5 list has almost become predictable in conventional banking systems. This difference is not because of the technology or features as in conventional banking but because of the interpretation of Islamic Banking products and services.

For that purpose, we have surveyed the market news from beginning of 2008 till today from a vendor and client perspective to pinpoint in random order the currently competing regional and global companies in providing Islamic banking solutions.

Conclusion

Demand for banking products compliant with Islamic law, or Sharia'a, continues to grow throughout the world. The Islamic assets growth is estimated at 15% annually.

This growth in turn drives the creation of more Islamic banks and the addition of Sharia'a-compliant products at conventional banks. Banks, working with Islamic scholars, have been able to create a set of profitable banking products that meet the financial needs of their customer base while insuring adherence to the principles of Sharia'a.

The market’s share will always be inclined towards the core systems vendors whose system will provide flexibility, scalability, and is more customer centric. A vendor that provides an Islamic bank model, which can also be easily modified through parameterization will maintain high ranking in vendors’ evaluation. Islamic banks will seek vendors that maintain skilled Islamic banking experts. Those that have been involved in several implementations, in either introducing Islamic banking products or shaping the bank’s processes, will gain the big market momentum.

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About the author:

Ezzeddine Jradi is an independent consultant in the Islamic finance field. He has more than eight years’ specialized experience in the field of information and communication technology (ICT), including ICT consulting with Path Solutions and managing successful ICT projects within the MENA region. He holds a bachelor’s of Engineering in Communications and Electronics. He is currently pursuing an executive master’s in Islamic Finance Management.

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