products The Islamic financial system is equity-based whereas the conventional banking system is loan-based. Islam is not against the earning of money. However, Islam prohibits earning of money through unfair trading practices and other activities that are socially harmful in one way or another. Since, Islam aims at building a socio-economic order based on justice and considers economic activity as a means to an end and not an end in itself, the primary function of Islam is to guide human development on correct lines and in the right direction. Processes Having said so, Islamic Banking is based on the concepts of trading and participation in risks and profits. This in turn makes the Islamic Bank a partner in his financed deals and a trader of assets. Consequently the transactions and operations of the Islamic Bank are more sophisticated and denser than the conventional one. Thus, the need of effective and efficient management system is becoming a necessity to Islamic Banking in order to handle huge transactions volumes and to provide instant and wide availability of information. Fiscal implications and documentations In modern financial institutions that offer Sharia-compliant products, recognized experts are brought together in a Sharia board where they decide which products are compliant and which are not. A more accurate understanding of the product, the process, the financial implications and the documentation of such progression in the new economy form a major part of the distinguishing features Distinguishing Aspects Share in Risk/Share in Profits Pooling of funds and investments Bulk of investments equity and financing More Short to Medium Term, Low risk products/High Liquidity Sukuk (debt Financing is new to the market) Sources of Income Mudareb Profit on URIA & RIA Profit Share where Syndication is made with Clients’ RIAs and Other Banks as contributors Charges and Fees
<Read At the End> The IT solution to be adopted by Islamic Banks should not be a modified conventional banking solution as it will prove its limitation over time. More important the IT solution for processing of transactions and deals encountered should be Halal and not just re-naming of usury transactions into Islamic Instruments Since the Islamic Bank is a partner with his clients in financed projects and deals under various Islamic instruments, the profit is not calculated based on pre-set interest rate but rather on the actual profit of the investment. The need for computer systems to manage profit calculations and distribute the profits among the shareholders and depositors is a key success to Islamic banks. Especially as the profit is dynamic and keeps changing with the changes in the market and investment atmosphere. Therefore and in order to reinforce financial soundness, only highly flexible Sharia-compliant banking systems that offer a modular and modern architecture should be considered. The bad news is that even the true believer in Islamic banking is skeptical about whether the processes followed are entirely Sharia compliant. The hope for the Islamic products and Islamic banks offering them, therefore, lies in the introduction of highly flexible banking systems that offer a modular and modern architecture that the multinational and conventional local banks are fast moving to arm themselves within the battle for customers and their business.
High growth The resurgence of Islamic Banking and Finance is a relatively new phenomenon, it started in 1963, in Egypt, town of Mit Ghamr . However, in this short period of time, this industry has expanded to cater over 200 billion US$ in Nov 07 and has become a world wide financial player and expanded beyond the Islamic world to be implemented in 66 countries; currently (Nov 08) there were 414 Islamic banking institutions (banks, investment houses and takaful companies) Innovative instruments and Evolving industry Islamic Finance is not static, instruments are changing and the implications of the instruments are changing as well. Financial institutions are searching for dynamic models within the Islamic code that will enable them to offer a range of products and services that meet the evolving needs of customers.
<Read At the End> Modular architecture is the key - a building block approach is what suits most established as well as new banks. The ability to plug and play will surely emerge as the key. In this task, acquisition of ready-made modern pluggable components that can integrate smoothly will be an important consideration.
The regulations and rules on which Islamic finance is based and which govern its operations are significantly different from those for conventional finance. The absence of interest is the most important differentiating aspect; this makes the structuring of Islamic financial products a complex task. As a result, Islamic banks need to rely on efficient IT systems in order to handle their significant transaction nature and volumes, and to make available necessary information for the bank’s management on an accurate and timely basis. This can only be achieved through advanced IT solutions that allow streamlining procedures, consolidating operations, efficiently processing its transactions, and providing proper risk management tools. 1-The first essential characteristic in the software is that it must be built on the Shari’ah rules and regulations and have imbedded the related information capturing features. The captured information must fully cater for the type of the Islamic product; i.e. in order to fully cover recording of a commodity Murabaha transaction, the details to be captured must relate to the details of the bought and sold products, and cover details related to the suppliers and made down payments. 2-For Islamic banks to operate efficiently, the system must facilitate the set-up and ease of tracking RIAs and URIAs across the system and getting the information on a timely basis The system must allow the tracking of the financing transactions, the contributors in these transactions, and computations of profit to be received from funded (or partnership parties) and computation of the profit shares to be distributed to the contributors based on each client’s invested amount. This is important for the restricted investment account holders. 3-Since Islamic banking is based on shared profits and risks, the operations, simply put, cover pooling of clients’ funds and then distributing the profits based on revenues generated from this pool, and after applying certain criteria that are pertinent to Islamic banking. In light of these transactions, the software must support proper recording and tracking and management of the pools of funds . Each pool must be easily tracked and computations must be made on an efficient timely basis and be able to produce reports detailing the results of the computations. As such, the system must also support the complex profit computation method for the unrestricted investment accounts and distribution of the computed profits to each account holder. 4- Since Islamic banks are to abide by Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) standards, the system must produce the standard accounting entries and booking methods of the transactions and bank profits and investments according to those standards . 5- Legal documents and confirmations are an essential part of Islamic banking. As such, the IT solution to be utilized must allow standardization and printing of the details pertaining to Islamic banking and financing transactions, the related confirmation and the related legal documents and contracts. Each type of Islamic financing product has its own legal documents, and the system must be able to support it. This applies to all transactions of the bank. 6- The logging of dates and times of a transaction is also an essential factor, as is being able to keep the signed contracts in their related transaction record, particularly since the Shariah audit will be looking at those details . The possibility of being able to keep a copy of the signed contracts as scanned document or another medium in the system would also be an important feature... 7- In the era of banking operations where customer service management concepts are becoming more and more essential for competitive advantage, “customer centricity” is extremely important. Banks need to know, from a single screen or at the click of the mouse, the total balance and number of transactions done by a client. This is important for customer service, sales management, risk management and exposure analysis. The IT software to be utilized should be fully customer-centric in order to give a bank the competitive advantage in obtaining such information on an accurate and timely basis. 8- The system must also easily integrate with other applications for data mining and in order for the bank to obtain its needed reports to support its operations. 9- The software must also allow the bank to comply with Basel 2 requirements , identify the approaches to be followed and produce the needed risk management reports on timely manner. The system must provide efficient “decision support” features such as dashboards and various data analysis presentations (such as spider-web and correlation analysis). 10- Multiple delivery channels (internet, mobile banking, phone banking)
IT technology to be also flexible to cater for the distinguishing aspects of a geographical area or specific country in timely manner in a way to guarantee quick time-to-market and return on investment for the bank with very efficient preparation and strong basis of operation that is using the software. 2- While most, if not all, GCC countries do not have income tax and value-added tax (VAT), these are a given in some other geographic areas such as Europe. On the other hand, GCC countries do have the zakat requirement that must be paid. The IT solution to support the global Islamic banking industry must be able to cater for both areas (taxes, non-tax and zakat) in a timely manner as well as facilitate the automation and related computations and accounting related reporting. 3- At some point, a bank operating on a global level (such as having operations in both the UK and Kuwait) will need to develop consolidated financial statements for its global operations; a task that is expected to be made efficiently using the IT system in place. 1-While the basic operations of Islamic financing products are the same across all banks, banks operating in a certain geographic area may have different policies and procedures (that have been approved by the Shariah boards) than their counterparts elsewhere. Policies with respect to profit structures and repayment terms are examples. For example, Malysia, Jordan and the GCC countries differ in their policies of profit distribution on unrestricted investment accounts. 4- With the globalization of the industry, more sophisticated Shariah compliant products may be set up (hybrid/mixed products). This presents another challenge for the IT system supporting the industry’s globalization drive. 5- In addition, regulatory reporting requirements differ between countries in the same geographical area, and the channel is bigger when the IT system is utilized across continents; the system should facilitate the extraction of the regulatory reporting requirements. 6-The system should have open architecture that allows interfacing with local central banks or regulatory institutions where required and applicable. An example is the real-time gross settlements systems available in KSA (SADAD) and RENTAS (in Malaysia). 7- And last but not least, with the globalization of the Islamic Banking industry, and since new countries will be working on new areas of operations, the IT related companies may be required to engage Islamic Banking subject-matter experts with strong and deep industry knowledge and enough exposure to the industry’s specific operations, in addition to the technical staff. The globalization of Islamic financial services with its opportunities and challenges naturally lead to potential returns to innovation and specialized technology.
Role it in islamic banking mr. nasree
The Role of IT in Islamic Banking Prepared by: Nasre Nasser Eddien, Business Development Manager Path Solutions 08 June , 2010
<ul><li>One of the fastest growing sectors in the global financial services </li></ul><ul><ul><li>Started 1963 In Mit Ghamr; Egypt </li></ul></ul><ul><ul><li>Now more than 75 countries allow Islamic Financial Institutions </li></ul></ul><ul><ul><li>More than 626 Islamic Financial Institutions worldwide. (As of October 09) </li></ul></ul><ul><ul><li>Including 435 IFIs, 191 conventional banks with Islamic windows </li></ul></ul><ul><ul><li>(source: The Banker third annual survey of the world’s Top 500 Islamic Financial Institutions) </li></ul></ul><ul><ul><li>More than 50 Islamic Financial Service Institutions have been launched within the past 2 to 3 years </li></ul></ul><ul><ul><li>More than 20% average growth of the Islamic Financial Institutions </li></ul></ul><ul><ul><li>More than US$ 840 billion total volume of Sharia-Compliant assets </li></ul></ul><ul><ul><li>The volume of Islamic transactions globally reached a total value of US$ 8 billion </li></ul></ul><ul><ul><li>(as of June 2009) (Source : Bloomberg) </li></ul></ul>THE GROWTH OF ISLAMIC FINANCING INSTITUTIONS
<ul><li>Global Sukuk Market </li></ul><ul><ul><li>Global Sukuk Issuance Trend – </li></ul></ul><ul><ul><li>2004 : USD7.2 billion, 2005 : USD12.1 billion, 2006 : USD26.8bil, </li></ul></ul><ul><ul><li>2007 : USD47.1billion, 2008 : USD15.52 billion, 2009F : USD15bln-USD18bln </li></ul></ul><ul><ul><li>2008 local & USD-denominated Sukuk issuances were dominated by Malaysia 40.7%, UAE 34.2%, Saudi Arabia 12.1%, Indonesia 4.3% and Pakistan 3.2% </li></ul></ul><ul><ul><li>2008 Sukuk issuances of USD15.52bln, down significantly from USD47.1bln in 2007 </li></ul></ul>Example of Growth of Islamic Compliant Instruments Source: Zawya, IFIS, Central Banks, Bloomberg
Is Islamic finance simply renaming conventional financial terms? Islamic finance is different in terms of: <ul><li>Processes: Trading & Risk-profit participation: more sophisticated </li></ul><ul><ul><li>Based on the concepts of trading and participation in risks and profits </li></ul></ul><ul><ul><li>Need of effective and efficient management system is becoming a necessity to Islamic Banking in order to handle huge transactions volumes and to provide instant and wide availability of information. </li></ul></ul>Islamic banking is different from conventional banking <ul><li>Products: Equity based </li></ul><ul><ul><li>Versus Loan based Financing </li></ul></ul><ul><ul><li>Islam aims at building a socio-economic order based on justice </li></ul></ul>
Importance of IT for Islamic banking <ul><li>The business is different </li></ul><ul><li>The product is different </li></ul><ul><li>The process is different </li></ul><ul><li>The mechanism is different </li></ul><ul><li>The financial and fiscal implications are different </li></ul>The IT solution should be different
IT Solutions for Islamic finance <ul><li>Capability to accommodate Innovative instruments & evolving industry </li></ul><ul><ul><li>IFIs searching for dynamic models within the Islamic Sharia & compliant to the AAOIFI Accounting Standards </li></ul></ul><ul><ul><li>Enabling offering a range of products and services that meet customers’ evolving needs </li></ul></ul><ul><ul><li>IFIs streamlining their procedures, improving their operations, and enhancing their services </li></ul></ul><ul><li>Accommodate Different Sharia interpretations </li></ul><ul><ul><li>Between regions, sometimes countries </li></ul></ul><ul><ul><li>Depending on IFIs Sharia advisors and Sharia board interpretations </li></ul></ul><ul><ul><li>Ability of the bank to abide by to the Islamic beliefs and values and the authenticity of the products to be Sharia-compliant wins customers. </li></ul></ul>
These ambitious yet realistic targets can only be achieved through partnerships with leading Islamic banking IT solutions providers. IT solution built for Islamic banking Currently Islamic banks are taking giant strides in technology, attempting to equal and surpass the IT based customer services offered by conventional banks. Modular architecture is the key – Building Blocks approach is what suits most established as well as new banks. The ability to plug and play will surely emerge as the key. In this task, acquisition of ready-made modern pluggable components that can integrate smoothly will be an important consideration Leading Islamic banking IT solutions providers should provide modular component based solution.
An IT solution built for Islamic banking Built on the Shari’ah rules & regulations (imbedded the related information capturing features) Facilitate the set-up & ease of tracking RIAs across the system & provide information on timely basis Support proper recording, tracking & management of URIAs, the pools of funds; & compute Profit in efficient timely manner Produce the industry related standard accounting entries & allow the related booking methods of the transactions Allow producing legal documents & confirmations according to the industry standards & the Sharia Rules and regulations; matching with the transaction type Support Sharia Audit procedures (transaction processing log and maintenance of legal documentation) Support customer centricity & CRM & Zakat computation Easily integrate with other applications for data mining Support regulations and Risk Management procedures Support multiple delivery channels
IT Challenges resulting from industry’s globalization Flexibility to cater for the distinguishing aspects of a geographical area or specific country in timely manner: quick time-to-market and ROI Income tax and VAT computations Produce consolidated financial statements & compliance to AAOIFI Standards Flexible profit distribution to cover the different approved policies and procedures by the Sharia Board Cover regulatory reporting requirements by country Open architecture that allows interfacing with local central banks or regulatory institutions Engage Islamic Banking subject-matter experts with strong and deep industry knowledge and enough exposure to the industry’s specific operations
Thank You CENTER OF ISLAMIC BANKING & ECNOMICS Head Office: 192- Ahmad Block, New Garden Town , Lahore, Pakistan Ph: +92-42-35913096-8, 35858990, 38407850 Fax: +92 -42-35913056 E-mail : [email_address] Web: http://www.alhudacibe.com