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IT boom expected in GCC Islamic finance sector

IDC report predicts infrastructure, ERP, CRM as areas for growth

IT boom expected in GCC Islamic finance sector
Major technology investment areas for Islamic banks will centre around the drive to optimise current infrastructure.

IT spending across the Islamic banking sector in select GCC countries (Bahrain, Qatar, UAE, Kuwait, and KSA) totalled $400m in 2011 and is set to grow considerably over the coming years, according to a report from IDC Financial Insights titled “The Impact of Technology on Islamic Banking in the Middle East and Africa”.

Islamic banking services have gained in popularity and are now distributed across both Muslim and non-Muslim countries, with many conventional banks actively offering Islamic banking products to their customers.

Following the global financial crisis in 2008, the number of Islamic banks operating across the Middle East and Africa (MEA) declined. This was not only due to the pressures stemming from the financial crisis, but also because of the considerable consolidation that took place within the industry, whereby Islamic banks either merged with one another or were acquired by other Islamic banks. However, when compared to their conventional banking counterparts, Islamic banks have remained on a positive financial footing during the post-crisis period, having maintained strong capitalisation and deposit levels. Within the wider MEA region, Islamic banking is seeing stronger traction in the Middle East and North Africa than in Sub-Saharan Africa, where adoption rates have been slower.

While Islamic banks have managed to maintain good revenue levels over recent years, mostly due to a strong focus on retail banking, they have struggled with profitability due to rising costs and operational inefficiencies. As such, the quest for operational efficiency and cost reduction will become a key focal point for Islamic banks in the region over the coming months. Indeed, in line with the trend IDC has reported in the MEA's conventional banking sector, the major technology investment areas for Islamic banks will centre around the drive to optimise current infrastructure through the implementation and adoption of cutting-edge software and IT services.

"Enterprise resource planning (ERP) solutions and customer relationship management (CRM) applications will prove particularly popular," says Bijen Ramdas, a senior research analyst for IDC Financial Insights. "Looking forward, Islamic banks should be focused on driving customer centricity to attract new customers and retain existing ones, leveraging operational efficiencies to improve business agility, capitalising on technology innovations to remain competitive, and ensuring proper risk management and compliance."

The integration of Islamic banking products into national economies in the MEA region and the increased demand for Islamic banking products are contributing factors to the growth seen in Islamic assets, deposits, and liabilities. Furthermore, the perceived successful track record of Islamic banks during the 2008 financial crisis, tighter industry regulations, and increased political support in favor of Islamic finance have also driven the demand for Islamic banking services across the MEA region, with Saudi Arabia, Kuwait, and the UAE standing out as the powerhouses of this sector.

Islamic banking will accelerate its upward trend in the coming years for multiple reasons, according to Ramdas. "Banks can expect their customer bases to swell, due to increasing numbers of non-Muslim customers as financial institutions seek to expand into locations across the region. A healthy increase in the affluent population across Arab countries and the inclusion of Islamic banking in local economies will likely drive demand for Islamic banking services. All these industry developments will certainly increase the penetration of Islamic banking services across the region and will concurrently place a strain on IT infrastructure, this driving further investment in technology."

Looking beyond the Middle East, several African countries have introduced plans to include Islamic banking products in their development plans. All the major conventional banks in South Africa are already offering Islamic banking services, while Kenya is emerging as an Islamic finance gateway to East Africa, and Egypt's National Bank for Development has launched a five-year sukuk with funds invested according to wakalah contracts. There have also been efforts in Libya to make the banking industry Shariah-compliant, and Tunisia's central bank is currently reviewing its own Islamic banking regulations. Meanwhile, the sector could see respectable growth in Turkey over the coming years, supported by the presence of a strong Muslim population and ongoing developments in the Islamic finance industry.

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