Role of IT in Islamic Banking

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The Role of IT in Islamic Banking
Prepared by Nasre Nasser Eddien, Business
Development Manager Path Solutions08 June , 2010

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THE GROWTH OF ISLAMIC FINANCING INSTITUTIONS

• One of the fastest growing sectors in the global
  financial services
• Started 1963 In Mit Ghamr Egypt
• Now more than 75 countries allow Islamic
  Financial Institutions
• More than 626 Islamic Financial Institutions
  worldwide. (As of October 09)
• Including 435 IFIs, 191 conventional banks with
  Islamic windows
• (source The Banker third annual survey of the
  worlds Top 500 Islamic Financial Institutions)
• More than 50 Islamic Financial Service
  Institutions have been launched within the past 2
  to 3 years
• More than 20 average growth of the Islamic
  Financial Institutions
• More than US 840 billion total volume of
  Sharia-Compliant assets
• The volume of Islamic transactions globally
  reached a total value of US 8 billion
• (as of June 2009) (Source Bloomberg)

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THE GROWTH OF ISLAMIC FINANCING INSTITUTIONS
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Example of Growth of Islamic Compliant Instruments

• Global Sukuk Market
• Global Sukuk Issuance Trend
• 2004 USD7.2 billion, 2005 USD12.1 billion,
  2006 USD26.8bil,
• 2007 USD47.1billion, 2008 USD15.52
  billion, 2009F USD15bln-USD18bln
• 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
• 2008 Sukuk issuances of USD15.52bln, down
  significantly from USD47.1bln in 2007

Source Zawya, IFIS, Central Banks, Bloomberg
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Islamic banking is different from conventional
banking
Is Islamic finance simply renaming conventional
financial terms?
Islamic finance is different in terms of

• Products Equity based
• Versus Loan based Financing
• Islam aims at building a socio-economic order
  based on justice

• Processes Trading Risk-profit participation
  more sophisticated
• Based on the concepts of trading and
  participation in risks and profits
• 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.

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Importance of IT for Islamic banking

• The business is different

• The product is different

• The process is different

• The mechanism is different

• The financial and fiscal implications are
  different

The IT solution should be different
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IT Solutions for Islamic finance

• Capability to accommodate Innovative instruments
  evolving industry
• IFIs searching for dynamic models within the
  Islamic Sharia compliant to the AAOIFI
  Accounting Standards
• Enabling offering a range of products and
  services that meet customers evolving needs
• IFIs streamlining their procedures, improving
  their operations, and enhancing their services

• Accommodate Different Sharia interpretations
• Between regions, sometimes countries
• Depending on IFIs Sharia advisors and Sharia
  board interpretations
• 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.

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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.
These ambitious yet realistic targets can only be
achieved through partnerships with leading
Islamic banking IT solutions providers.
Leading Islamic banking IT solutions providers
should provide modular component based solution.

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
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An IT solution built for Islamic banking
Built on the Shariah 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
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IT Challenges resulting from industrys
globalization
Flexibility to cater for the distinguishing
aspects of a geographical area or specific
country in timely manner quick time-to-market
and ROI
Flexible profit distribution to cover the
different approved policies and procedures by
the Sharia Board
Income tax and VAT computations
Produce consolidated financial statements
compliance to AAOIFI Standards
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 industrys specific
operations
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