Core banking again comes under the spotlight in emerging markets as some banks take advantage of tough times and lower costs to enter new markets. Mike Gallagher reports on what lies at the core of IT's silver lining
Times might be tough in the banking business and Islamic finance has not fared much better, but a few far-sighted banks are not sitting out the storm. Some are instead moving ahead with high tech plans and plenty of it involves upgrading or even the complete overhaul of core banking in all its forms.
Eurobank, one of the largest retail banks in Greece (while admittedly not an Islamic bank), is a case in point. While Greece is technically completely broke and is hoping from a bailout from the EU and the IMF (basically Germany and any other countries which can afford to chip in), Eurobank has been deploying a solution that streamlines all of its incoming consumer loans and credit card applications. This probably translates from Greek as, 'A bank has to make save money and make money and using technology to cut costs, is one way.'
The solution that Eurobank is using allows transactional and flow control semantics between the online application website, the back office and the Altamira core banking system. Additionally, applications in need of credit reference checks are transmitted in real time to Tiresias, the Greek inter-bank credit reference authority and results are asynchronously added to the back office.
Some Islamic banks in the Middle East have had the same idea and have been shoring up their core banking foundations. A few are apparently trying to use the economic downturn as an opportunity to upgrade their systems and expand on the cheap, while taking the long-term view. Meanwhile other banks are thinking short-term and are laying off staff and are getting rid of costly legacy systems.
In Saudi Arabia, Al Rajhi Bank said it is determined to expand its network by opening 90 new branches within the next three years.
"This expansion strategy will help one of the largest Islamic banks in the world to maintain its leadership in terms of having the largest network of branches locally and regionally, where the total number of branches only will increase to 546," the bank said.
Saeed Al Ghamdi, the Deputy CEO of Al Rajhi Bank, said the bank will continue to expand and improve all its banking channels to deliver on the promise "to make banking more convenient for our customers through our largest branch network, number of ATMs and state-of-art online banking services. In parallel, we've enhanced our 'systems and transactions' procedures, including our internet banking system in order to meet our customers' needs.
If Al Rajhi is expanding, where will it end up expanding into (Africa? Europe?) and will that expansion include acquisitions?
In January 2009, Bahrain's Al Baraka Banking Group decided to go ahead with its plans to load up on core banking equipment at its Sudanese and Algerian entities by bringing in Path and its iMal solution as the bank continued its advance into Africa. The decision followed an extensive and rigorous evaluation process by Al Baraka management and the involvement of external consultants.
Al Baraka, though, does not have the whole North African country to itself. The country may be a bit of a frontier market in terms of Islamic banking, but it is still attracting attention from Islamic banks from the Gulf which are looking to branch out into untapped and potentially lucrative new territories.
The country, with a population of nearly 34 million, has around 12 billion barrels of proven oil reserves, putting it in 15th place in terms of reserves and 86.5 billion cubic metres of natural gas. The Government has also been working hard to boost investment in its infrastructure and this is another reason that banks, both Islamic and conventional are circling. Just behind them are core banking IT companies.
Algeria Gulf Bank, which is 60 per cent-owned by Kuwait's Burgan Bank, was set up in 2004 (and is working the Islamic commercial bank-end of the market), and was joined in late 2008 by Al Salam Bank - Algeria. It too has been focusing on operating as an Islamic commercial bank as well as offer traditional and modern retail banking services like safe deposit boxes, ATMs (which it says are scattered in "many vital areas"), telephone banking, mobile banking (SMS), online banking and call centres.
"We estimate that Algeria's economy actually registered stronger real growth in 2009 than it did in 2008, which contradicts the global trend. Substantial Government spending, part-funded by deficit spending, but also helped by a strong bounce in energy prices in H109 - has put a floor under construction activity across key infrastructure sectors. According to our estimates, Government capital investment in Algeria rose from $20.5 billion in 2007 to $35.67 billion in 2008 and will rise to $36.89 billion in 2010," said a report by Business Monitor International.
"We predict that Algeria's construction sector will experience real growth of over seven per cent in both 2010 and 2011, before adjusting to a more moderate growth rate in 2012-2014. The country scores well for both the Infrastructure Market and Country Risk variables. For our Project Finance Risk Ratings, the country again does well. Overall, this leaves Algeria at the top of the regional Project Finance Risk Ratings,' the report added.
"Technology is being embraced at a faster pace in emerging markets," said Don Callahan, Citigroup's Chief Administrative Officer to the Wall Street Journal. The newspaper added that the bank "is investing aggressively in its retail-banking branches as part of a wider overhaul. It is transforming itself from a financial supermarket into a leaner company catering to big institutions and affluent individuals, particularly in fast-growing emerging markets."
Both Rafidain Bank and Rasheed Bank in Iraq have hundreds of branches between them (more than 300 by one estimate) and are by far the biggest banks in the country. They, however, are conventional, but the huge country already has a small number of Islamic banks which are located in the capital and in the Kurdistan region.
Cihan Bank is one (Path Solutions got the core banking contract there) and Albilad Islamic Bank which was opened in 2006, is another. The country has a handful of Islamic banks, and apart from Cihan Bank, includes the Tigris and Euphrates Bank, the Islamic National Bank, al-Bilad Islamic Bank, Elaf Islamic Bank, and the Iraqi Islamic Bank), and while none are on the scale of their Gulf or Asian peers, most Islamic finance-watchers, seem to think the country has huge potential, but for now most investors have been scared off by the violence. Security has improved, but political wrangling is making investors wary and a recent spike in attacks has not done much for investor confidence.
The likes of Western Union and Al Ameen Exchange have reinforced their presence in the country (Western Union's deal with Al Ameen Exchange expands its network in Iraq to over 80 locations) and in an important first for the Iraqi market, Asiacell, the only mobile telecommunications company to provide coverage for all of Iraq - recently linked up with Amwal, a consortium of Iraqi banks. Amwal's Point of Sale (PoS) presence in Iraq is quite substantial and it has nearly doubled in a year to almost 300 outlets which include shops, restaurants, filling stations and hotels.
Under the terms of the agreement, Asiacell, part of The Qtel Group of companies, will be the first mobile company to provide the people of Iraq with advanced commercial banking and transaction services that they can access via their mobile phones.
Atheer Al-Qadhi, the Chief Executive of Amwal said, "Banks across the globe are seeking new solutions to reach emerging markets and shift market share from cash to electronic transactions. We believe that prepaid cellular technology's phenomenal success demonstrates its effectiveness as the next step in banking services."
Mobile banking, particularly using Near Field Communications, in emerging markets is really exciting banks. The big attraction is that of cost and the impact it has on core banking operations. More people have mobile phones than bank accounts in some countries (with penetration rates perhaps averaging 150 per cent) and their relative simplicity makes them an ideal tool with which to sell bank products to the un-banked and the under-banked.
Even Iran has been keen to join the 'cellular banking' revolution. The Managing Director of Mobile Communications Company Vahid Sadouqi told Iran News that the speed of General Packet Radio Service (GPRS), he said will increase by three to four times by 2010.
Dr. Peyman Noori, Chairman and Chief Executive Officer of Refah Bank told the March edition of Islamic Business & Finance magazine that, "We do not intend to expand our branch network in the future, since we are serious in developing electronic banking in Refah Bank. Today, establishing physical branches at the micro and macro levels is not economical. Developing POSs and PINPads on a logical, profitable basis is among the bank's priorities for the next year. For the next five to 10 years, developing electronic banking is the key objective for Refah Bank."
In Pakistan, Ali Raza, the President National Bank of Pakistan (NBP) told the Nation newspaper that, "The bank is a market leader in the financial industry but I hope by applying such solutions it would soon become the technology leader in the field of retail and commercial banking." Raza added that the bank is in the process of implementing one of the most advanced state-of-the-art core banking IT systems in the world. "In addition, we are working on the 24 other projects related to e-banking with the consultation of our partners as subsequent of core banking IT system," he said.
Fidelity National Information Services won the contract to provide the core banking solution (aka FIS Profile) for the bank. NBP is Pakistan's largest bank with more than 1200 branches and a customer base of more than 10 million accounts. It is also the country's leading lender with nearly two million customers. NBP said that the Profile core banking suite would initially be installed in 250 NBP domestic branches, followed by installation in the bank's overseas locations.
Meanwhile, in Malaysia, a report says that IT spending there is expected to grow to around $4.5 billion in 2010, from $4.2 billion in 2009 as demand recovers from a difficult economic and political situation.
"Over 2010-2014, the most potential for large projects is likely to be in key sectors such as financial services, oil and gas, telecoms and agriculture. The government has accounted for around 15 per cent of IT spending in recent years. The upgrade of core banking systems will drive bank spending on application services. Meanwhile, the government continues to try and create a more competitive environment in the telecoms sector, pushing newly licensed WiMAX operators to roll out services.
"Key sectors will include government, telecoms and finance, including Islamic banking. The Malaysian IT market is now projected to grow at a compound annual growth rate (CAGR) of 12 per cent over 2010-2014. We expected a market upturn in H209 after the market was affected by the global economic slowdown. Recovery may be boosted by faster distribution of stimulus money and IT-friendly 2010 budget measures, but much will depend on the speed of economic recovery," Mike King at companiesandmarkets and PR-inside.com said.
© Islamic Business and Finance 2010
