Company insight > Islamic banking

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I n the last five years, the Western world has become more aware of the different approach to banking in Islamic culture, where the fundamental concepts of

Sharia law define the structure of financial products and services. In many ways, these concepts are fundamentally different to the tenets of traditional Western banking, but as banks in Europe and the US have invested in Islamic banking services, they have discovered that the two systems are by no means incompatible.

Interest in Islamic financial services among Western banks including HSBC and Lloyds Banking Group, which are among many that have set up Islamic banking operations, has accelerated since the global financial crisis began in 2008 because Islamic banks have generally weathered the storm better than their Western counterparts. Driven by strong demand among individuals and corporates, the total value of Islamic assets is estimated at around $500 billion, and Islamic banking is the fastest-growing sector in the financial services market.

“There are many key differences between the Islamic core systems and the conventional core systems. One of these differences is the profit calculation and distribution, which is a critical requirement for the Islamic banks. Having a fixed and known interest rate is not allowed in Islamic banks and customer profit depends on the bank’s investment and performance. This requires a specific engine to calculate the profit and to distribute it,” says Haitham Abdou, group director for marketing at International Turnkey Systems (ITS).

“One other key difference is the need for an Islamic instrument engine that allows banks to create and generate new Islamic products that match their Sharia board requirements, which can be different from bank to bank due to the lack of global standards in the Islamic banking industry,” he adds.

Total banking solutionsITS is an integrated IT solutions and software services provider with a long track record of helping financial institutions throughout the Middle East and the GCC region, Africa, Bangladesh, Pakistan and Malaysia keep pace with change through cutting-edge solutions that enable organisations to quickly adopt new technologies that enhance productivity. Its extensive portfolio comprises enterprise integration, facilities management, outsourcing and IT support.

The company’s ETHIX financial solution is used by Islamic financial institutions and traditional banks to minimise operational costs while responding to the increased demand of customers for traditional and Islamic products and services. It is recognised as one of the leading total banking solutions that is fully compliant with Islamic Sharia law’s financial concepts.

“ETHIX is not only for Sharia-compliant financial institutions. It also works for Islamic, conventional and investment banks, too. The Islamic banking industry is growing worldwide and, according to the ETHIX solution’s capabilities and features, it can work as a stand-alone solution for a fully Sharia-compliant financial institution or it can work as an Islamic window for a conventional bank, integrated with its existing solution. This gives us the ability to expand our geographical reach to Africa, the Asia-Pacific region and Europe,” says Abdou.

A subtle shift in thinkingSharia-compliant banking is seen as having some key benefits, particularly at a time when the approach of Western banks to credit and the structuring of financial products is under intense scrutiny, hence the growing desire among CFOs and CEOs in Europe to at least consider partnering with Sharia-compliant banks.

“If you look back to 2008, you will find that Sharia-compliant banks were the least affected by the last financial crisis. This is because of the Sharia rules that forbid the buying and selling of debts. Any financing transactions should be backed by an asset with proper and real collateral that guarantees the transaction. This allows financial institutions to avoid all of the mistakes made by some of the conventional banks that led to this financial crisis,” explains Abdou.

“According to the latest research, we found that the Islamic banking industry is growing in Europe, where the major banks are starting to provide Islamic banking products. We can see this growth in the UK, which is

Islamic banking in the ascendancyHaitham Abdou, group director for marketing at International Turnkey Systems,explains how Western banks are investing more in the provision of fi nancial services compliant with Sharia law, and are seeking out experienced IT vendors with knowledge of Islamic banks in the Middle East and other well-established markets.

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Interest in Islamic financial services among Western banks has accelerated since the global financial crisis began in 2008.

Company insight > Islamic banking

Future Banking | www.banking-gateway.com 95

considered an Islamic banking hub in Europe, though there is also growth in Germany and France.”

For Western banks to cater to their customers’ growing interest in Islamic banking it is simply a question of implementing the right solution. The ETHIX suite, for example, is relatively easy to put in place, even in a world where the vast majority of banks are working on outdated legacy systems, plagued by upgrades and additional plug-ins.

“ETHIX is a modular solution that uses the latest technology and the standards like IFX and AAOIFI. Also, the R&D department periodically adds extra features to the solution so that it matches the new market trends in the financial industry. The ETHIX framework and the technology used in it help banks to maintain and update the solution easily, without interrupting their normal work and with minimum effort,” stresses Abdou.

For implementation, there is no time like the present, particularly if one shares Abdou’s belief that the world’s larger banks will invest more in core transformation in the next few years. With an overhaul of core systems under way, it is relatively simple to make room for more investment in Sharia-compliant technology to stimulate an increase in the provision of Islamic financial services, though such a venture would need a concerted and considered effort led by a dedicated team within a bank, working with an experienced IT vendor.

“Currently there is a lot of competition between financial institutions to increase their market share and this should be achieved by using a flexible solution that provides new products to attract new customers in a very short time. The old legacy systems will not be able to help financial institutions achieve that, so they will need to invest more in core banking transformation in order to have a solution that will help them to focus on their banking business and create new products without worrying about the solution they are using and its capabilities or limitations. The ETHIX solution is built on a framework that uses different engines that enable a financial institution to achieve that easily,” says Abdou.

“ITS has good experience in transforming legacy systems, and this gives us the necessary knowledge and know-how when it comes to transformation. Also, ITS is the only Islamic banking solution vendor that can transform conventional banks to fully Sharia-complaint banking, including transforming their data infrastructure without any data loss. For this kind of project, a dedicated team from the bank should be involved. This gives more focus on behalf of the bank and ITS in order to finalise the project smoothly.”

For a bank looking to begin its journey into Islamic finance, it is possible to begin with a single step rather than sprint to the finish line. One of the attractions of a solution like ETHIX is its scalability. Once the system has proven its worth in a limited application, it is possible to build on a modular basis to expand functionality or to extend its reach into new markets.

“There is a greater demand for scalability, and this demand has increased due to the huge competition within the financial services industry. This leads financial institutions to expand more into new geographical areas or to create new products to attract customers and to have an edge over their competition,” remarks Abdou.

There is no doubt that in the years ahead it will become increasingly important for Western banks to reconsider their policy on Islamic banking. Many more will invest in the solutions and expertise needed to deliver Sharia-compliant products and services, and their success will rest in no small part on their choice of technology partner. Experience counts and ITS is hoping its track record of success with Western and Islamic banks will put it in pole position to help more financial institutions make the most of the financial services sector’s most dynamic market.

Further informationInternational Turnkey Systems (ITS) www.its.ws

ETHIX is a modular solution that uses the latest technology and the standards like IFX and AAOIFI.