Shariah support

Islamic finance requires specific solutions, but Gartner's first study on the sector reveals that vendors may not be meeting that need. Daniel Stanton pays attention.

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By  Administrator Published  September 30, 2006

It may be based on principles that are centuries old, but Islamic finance requires the latest technology to come to market.

At an event held in Dubai last month, market analyst Gartner explained the findings of its recent study of the way IT is used to enable Islamic banking.

The market for Islamic finance is estimated to be worth more than US$250 billion, and operated by over 280 financial services institutions worldwide, although 35% of assets are held in the Middle East.

Vittorio D'Orazio, senior research analyst at Gartner, found that there were no traditional IT services providers for the sector, and that all Islamic banking technology providers were suppliers of core banking systems. Of these, 46% were international providers, with the remainder local brands.

"Of the major international solution providers, none has an Islamic solution," he said. "If you're looking for a big provider like Accenture and IBM, they do not do it. You need to go directly to core banking system providers or you will get an interim system at best."

At present, there are no solutions designed specifically for Islamic banks, but D'Orazio said that this was not necessarily a problem. "Islamic banking solutions provided by core banking solutions are not tailored purely for the Islamic market," he said. "They try to adjust their solution, and, more or less, they deliver. At the same time, there might be a race in the future for more solutions specifically for Islamic banking. But those solutions are working fine."

Gartner found that 47% of Islamic banking solutions used by respondents were compatible with their existing core banking systems. 27% reported some degree of compatibility, while 26% said that the two systems were not compatible at all.

"If you're looking for a system that delivers Islamic banking, look for one with a lot of parameters so it's not set in stone," D'Orazio said. His research suggested that banks needed to adjust an average 13% of the content of a standard Islamic banking solution to meet their particular requirements.

The ability to customise different elements is also essential in light of the fact that there are no fixed standards in place for Islamic finance products, meaning that they can differ slightly from one bank to the next, and from country to country. "You have different regulations set out at country level but they are not enough to standardise it," said D'Orazio. "Maybe you might have some branches abroad and the product you deliver in Dubai you may not be able to sell in Saudi Arabia."

Gartner's research, the first it has done on the Islamic banking sector, also suggested that half of banks implement a complete solution, covering all aspects of finance, rather than starting small and adding modules piece by piece.

"If you're not able to provide end-to-end solutions you might have a lot of problems because you might have to partner with someone else and integrate with other solutions. Nearly 50% of banks tend to purchase the whole range of products altogether," said D'Orazio. "It's telling you that you need to establish a clear Islamic strategy."

He advised the CIOs present that the research suggested the best approach was to offer either full Islamic banking services or none at all, rather than a limited selection.

"It will be painful in the future because you will have a lot of problems if you want to expand. If you decide to do Islamic banking, do it completely, don't do just a few spots because that doesn't make any sense. It doesn't resolve your problem of being in the Islamic banking sector because a customer might ask for leasing and then they ask for a mortgage and discover that you don't have it. Then he will become unhappy and you will have a customer relationship problem. If you really want to be Islamic, be Islamic," he said.

D'Orazio also found that Islamic banks were not doing all they could to concentrate on their core competencies. "The result of my survey is that there is no kind of BPO (business process outsourcing) in Islamic banking," he said.

A major concern for banks that offer both Islamic finance and conventional banking products is keeping both sets of assets separate and providing evidence that they are doing so. A bank offering both kinds of products must maintain two separate treasuries in order to be considered Shariah-compliant.

Sue Evans, head of IS&T, National Bank of Dubai, says: "The challenge is to be able to prove that degree of separation, while you may have some customers that want to deal in conventional products. An added difficulty is to bridge the two while having different kinds of reporting."

D'Orazio said that the study suggested it would be much more cost-effective and easier to manage if banks ran separate systems for their different styles of banking. "It's much easier to get approval at that point because the Shariah board will see very clearly how the processes are moving, how the money is moving," he said. "Also, several vendors have said so because from their perspective it's much easier to do that instead of managing and handling the existing systems and trying to deal with all the compliance with the Shariah board, and so on. So the vendors are definitely pushing for that. The deal size might be more expensive but at the end of the day it pays back."

With the Islamic banking sector expected to be the focus of consolidation in coming years, it may be tough for bank CIOs to plan a strategy for their systems when they may later have to accommodate those in place at another institution. "Definitely, mergers and acquisitions will happen worldwide - they are already happening. Nevertheless, a bank must have a short-term strategy anyway.

"When you consolidate two banks you have a problem in integration and you definitely need due diligence," he said.

The audience also raised the prickly subject of standardising Shariah banking requirements in the region, and suggested there was a need for a top-level approval board to ensure consistency. D'Orazio agreed that requirements differed and said that the requirements already in place were not enough to create industry-wide standards.

"This is not black and white. The scholars discuss with the Shariah board, and the vendor on the other side. The solution provider may suggest something easier and simpler. This is making the process much more lengthy and time-consuming," he concluded.

“If you're looking for a system that delivers Islamic banking, look for one with a lot of parameters so it's not set in stone.”

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