it & Islamic FinanceNida Khan

INSIDE01

Innovative Islamic Banking Furqan Ahmad05

13 18

MIT Talks22 Sarah Afker 24

Recent Developments bode wellAun Rizvi

Technology & Soft SkillsFayaz Ahmed Lone

Financial Reporting of Islamic banks

Anas Zarka

This indeed is the focus of this month's issue of IFT where we have two well known pioneers in the industry stressing the need with persuasive arguments. Nida Khan, the developer of the world's first Islamic Finance Education App, in her contribution on Information Technology and Islamic Finance, rightly points out that this is the most opportune time for the industry to take a major leap forward by adopting the latest technology into its core banking practices, to give it the desired competitive edge over conventional players.

Her particular focus is on game-changing disruptive technologies. She's right. In a context where Islamic Bankers have had to survive in a rather uneven playing field dominated by big-time conventional players, it is the adoption of innovative ideas that can tip the balance in our favour. Islamic Banks and Finance Institutions, though based on time-tested Islamic values are relatively new to the global banking landscape and are hence better equipped to adopt innovative practices. Diving into the blue ocean is therefore the natural thing to do.

Her sentiments are echoed by Furqan Ahmad, a well known banker who has been instrumental in setting up Islamic banks in the US and GCC and has spearheaded a number of innovative Islamic Banking Products. His paper on Innovative Islamic Banking proposes a host of innovative ideas Islamic Finance Institutions can adopt to survive and thrive in today's highly competitive environment, among them, getting more immersed in promoting and showcasing the products for which they offer financing, since as he argues, an Islamic Bank must ideally act like a business itself. Among other things he proposes is Self-Service Islamic Banks, Islamic Banking Concept Stores, and not the least, a single online digital portal for Islamic Banks, for which he even proposes a name, Islamic Mint, which could revolutionize the way Islamic Banking is done. Any takers?

Beyond the Horizon

Islamic Finance Today is a monthly magazine exclusively dedicated to Islamic Finance & Banking published by Pioneer Publications (Pvt) Ltd. It contains a variety of interesting articles including exclusive interviews, news and views on various aspects of the industry.

No part of this publication may be reproduced in any form without the prior written permission of the publisher. Views expressed in this publication are not necessarily those of the publisher.

Editor in Chief - Asiff Hussen

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EDITORIAL

Asiff HusseinEditor-in-ChiefIslamic Finance Today

Technological innovations the world over are taking place at such a pace that one simply cannot ignore them, which is all the more so in a dynamic industry such as banking. As such it bodes well for the Islamic Banking & Finance Industry to look beyond the horizon towards the wider blue ocean that is innovation.

Furqan Ahmad

Furqan Ahmad is GM - Head of Product Development & Marketing Communications at TAIB (Perbadanan Tabung Amanah Islam) Brunei. He has been instrumental in establishing Islamic financial institutions in USA and GCC and has developed a number of innovative Islamic Banking products. Ahmad is a well known speaker at international Islamic Banking conferences, published author and certified trainer

Innovation in Islamic Banking can take many shapes and forms. It can be in terms of new product development and structuring, process streamlining and re-engineering, core banking systems implementation and parameterization, channels, or a combination of the above.

The success or failure of innovative Islamic Banking product development is determined by where the rubber meets the road. What's new in terms of pure Sharia basis and standardization? Is there improved performance in service quality, delivery and customer satisfaction? Are we going to be stuck in the red ocean or are we willing to take calculated risks and delve into the blue ocean of creative opportunities?

Is the new product or service creating a new way of buying or selling banking services? A case in point is Mashreq Al Islami, (Mashreq Bank in Dubai's) omni channel approach where customers can walk across several digital and physical channels with a seamless service experience in account opening. It could be a community bank with Facebook presence providing prompt customer service experience with chat customer servicing feature, plus relationship manager with an iPad, for original seen digital signature or a kiosk based video teller to meet a particular country's regulatory requirement.

Real innovative change must be substantive, not just in appearance like introducing just perceptive new features in an old service; rather it must be designed for a blue ocean market which was previously non-existent. That will really be the wow factor in innovative Islamic product development.

Islamic Banking shows the way

New Basel III rules for liquidity and funding will have an impact on several areas of the Islamic banking business. Islamic product innovators must look at key areas within an Islamic bank where Basel III will have big impact and devise strategies, processes, and new products to tackle the challenges.

Innovative Islamic Banking By Furqan Ahmad

IFT 06Islamic Finance Today - October 2015

That is to approach strategic analysis and implementation of business changes in terms of investment and asset products, while complying with liquidity coverage ratios and other requirements in Basel III.

Islamic current accounts pay no interest but there are profit and risk-sharing Mudaraba deposits (investment deposits) where returns depend on results from Sharia compliant financial investments, which are managed by the bank as Mudarib, and where the generated profits are shared between the bank and the depositors. One Turkish bank in Germany has offered something similar to its customers in Germany and Austria. Another bank in the Netherlands is considering the use of Mudaraba type Islamic profit sharing fund structures in the context of Basel III.

Building links between retail (deposit) side and investment products can be effectuated by using Sukuk (Islamic bonds), which may again be distributed to retail clients. Such innovative solutions can help a bank differentiating itself in the funding market and could also improve the bank's ability to self-fund its lending business.

In EU countries where many Muslims live but do not form the majority population, banks' product offerings could be coupled with “ethno” marketing. An example for a pure (non-Islamic) “ethno” bank is Deutsche Bank's subsidiary BankAmiz. Regulators in UK and France are already familiar with Islamic banking products, and countries such as Ireland and Luxembourg are aspiring to become hubs for Islamic finance. Thus there is a trend towards more Islamic Finance in Europe now.

Innovative Self Service Islamic Banking via new technology

A relatively simple-to-implement option to acquire deposits (if not pursued already by an Islamic bank) is to set up a retail direct bank. For example, German bank IKB and the Royal Bank of Scotland have taken this route successfully. The potential for such a strategy is also underscored by the fact that one new direct banking franchise in Germany acquired multi-billion Euros in its first year of operation recently.

In direct banking space, completely new competitors are taking advantage of Blue Ocean strategy in their own businesses. Google has a banking license already. Its former CIO, Douglas Merrill, founded ZestCash and, subsequently, ZestFinance. One of the creators of Twitter, Jack Dorsey, established the mobile payments company Square, and in Fall 2012, Amazon Capital Services started its new program Amazon Lending, which offers loans to its online sellers.

However, future moves beyond payments into banking, in particular direct banking and comparable direct financial services, seem realistic, and such competitors would certainly be very difficult to cope with for retail banks, which typically have a much lower sophistication and degree of maturity in terms of both data science and social media-based customer relationships. Islamic Banks must recognize this reality and partner with leading edge innovative Technology Solutions firms like Indra in Spain, which has offered solutions to various banks and insurance companies.

Innovative vertical and horizontal integrations are creating new paradigm shifts in global banking towards the Islamic Banking model since ideally an Islamic Bank must act like a Business. For example Al Hilal Bank in UAE has its own car showroom inside its Bank Branch, and Auto Finance is arranged under the same roof.

The fastest growing bank in Japan is Rakuten which has created an entirely new business ecosystem by adding financial services to its original e-commerce business, combining travel services, portals, and others.

Such ecosystem expansions may be viewed as game- changing moves, which might also be considered by traditional financial institutions. Rakuten has already been reinforcing its global trading presence buying online retailers in the USA, France, Germany and the UK, and non-banks may consider similar approaches in the future.

A type of finance company has recently emerged, which might threaten traditional banks' core business of lending in a direct way. P2P lending services such as Lending Club and Prosper not only bring private individuals together for consumer loans, but they are also increasingly attracting institutional investors, including hedge funds and wealth management firms, which currently account for about half of the outstanding loans for both of the companies.

Lending Club, for instance, has even created a special subsidiary called LC Advisors, which allows investors to commit capital and then lets them allocate it and re-invest it constantly, providing first-come, first-served liquidity from the cash repayment flows. Such innovations can be incorporated easily in an Islamic Banking model.

Other innovative Islamic Banking ideas

New Islamic Banks can offer information management, money management, or investment tracking tools, which will enable them to become the primary and central contact point for their retail clients. A very successful example for this is US-based Mint, which pulls all financial accounts of its customers (across most US and some Canadian banks) together in one place. One portal for all Islamic Banks would be an excellent idea. Let us call it Islamic-Mint.

While Islamic-Mint may not be a licensed bank, there is an opportunity of taking over the position of being the first direct contact point for customers of many Islamic Banks under a single digital online window.

This innovation might even lead to a situation where banks could merely be “Sharia product manufacturers” working in the background for other firms which manage the relationships with their customers directly.

IFT09 Islamic Finance Today - October 2015

Innovative Self Service Islamic Banks could make greater inroads into retail financings issuance and may increasingly add physical service points in selected locations. They may typically follow a different style and approach than normal branches. One such example is ING Direct U.S.A. that calls its San Francisco location a café, with beanbag chairs, coffee and cakes, and free WLAN access.

Communication with the Islamic Banking customer can be enriched by personal contact via iPad bearing Relationship Managers on the road, when it comes to more complex financial products and services in need of explanation. “Islamic Banking Concept stores” which focus on communication and education about new Islamic Products, rather than being transactions-oriented may also become attractive. Such stores could include integrated electronic media gadgets (next generation of customized Google glass/apple watch) for customer education and fun interaction.

Finally, Islamic Mobile wallets may be the most important innovation to be focused upon by Islamic Banks, especially as more and more non-bank services are now appearing in some African markets where mobile phone penetration is increasingly connecting consumers who do not have access to traditional bank accounts. With mobile phones being linked to a variety of value stores (for example, former Facebook credits and various types of prepaid cards), the battle for retail money deposits and, ultimately, for cost efficient and stable sources of liquidity could become even more challenging for conventional banks, which need to comply with Basel III.

A lot of this will ultimately depend on future regulations and on the business models to be pursued by non-traditional banks entering the market in collaboration with various industries. Given the foregoing developments in consumer tastes and preferences, the Islamic Direct Banking model is very likely going to be the wave of the future.