Along with a renewed focus on core banking comes new challenges for core banking solutions and particularly the Islamic variety. In the first of a series of articles, Mike Gallagher takes a look how Islamic core banking solutions are coping with a changing environment
If ever there was a time to be concentrating on core banking, then the worst recession since the 1930s must be it. All banking big shots are being wheeled out to declare their intentions to be faithful to the tenets of core banking, which by the way stands for Centralised Online Real-time Exchange (CORE). Tough times require tough decisions and inevitably, as with virtually every recession, cost cutting becomes a necessary, if painful requirement and organic expansion becomes the subject du jour. The big question is how to make the most from the minimum.
Banks that previously ignored the bottom line have been focusing on turning around their core banking businesses, given the dearth of profitable business avenues out there. The retail customer has, after the booming years, again become king and with it, a renewed focus on technology. Islamic finance, which has thus far suffered somewhat less from the crisis, is no exception and some are looking at new core banking solutions. On the other hand, CFOs, which may feel it is easier to reduce headcount and increase efficiency, may also be loath to spend money they don't have on technology.
Citi managed to cut $1.42 billion worth of overheads from its balance sheet by getting rid of inefficient or redundant equipment and at the same time has been integrating under-used processes. It also cut back on communications costs and legacy software (some of which came in the form of acquisitions) and is aiming for total cost savings of at least $3 billion. It is simultaneously overhauling its storage networks and looking again at server networks and mainframe set ups.
Citi's Chief Administrative Officer Don Callahan told Computerworld UK that efficiency in operations and technology (O&T) was now "critical" to "the company's efforts to get fit," and the bank admitted that its systems were anyway overly complex. The technology targets, according to the magazine, represent around a fifth of overall cost cutting at the bank.
All this explains why the term 'Core Banking Solutions' is being bandied around with every announcement of quarterly results as Chief Financial Officers worry about the shrinking amounts of zeros on the balance sheet. IT departmental heads are being asked if flesh and bone can be replaced with new plastic and metal solutions that are more efficient (and work around the clock-not from nine to five) and ultimately, are more cost effective in the long term than humans. But getting the right product at the right time is challenging, especially given the explosive growth of Islamic finance.
"The importance of the Islamic unit comes from the importance of the customers who want to deal under Shari'ah principles. As bankers we must be prepared to give customers the services that they need. We established a fully Islamic financial institution, Al Wifaq. We also applied to the Central Bank and received an Islamic banking licence to start an Islamic banking group within the bank," Abu Dhabi-based Union National Bank's (UNB) Chief Executive Officer, Mohammad Nasr Abdeen said.
"The Islamic finance company is not allowed to deal with individual accounts according to its license regulations but the Islamic banking group is; so if you have the finance company and the Islamic banking group you have a full Islamic bank to give this market segment all the facilities it requires. Further, the Islamic banking group is supported by UNB's full capital and can therefore pursue bigger deals. The Islamic finance company has shareholder's equity (approx. AED 700 million [$190.7 million]) and can only deal with small- and medium-sized customers.
Tweaked
"Most banks today deploy core banking systems to support their business processes and increase operational efficiencies. This requires enterprise-wide planning, commitment and resources. This is more complex in the case of Islamic windows where conventional core banking systems are tweaked to support Islamic banking activities," noted Charlie Hamdan, the Director of Product Management at Tata Consultancy services.
"In these cases, the banks are required to maintain separate entity books for customers and reporting. Islamic banks are always seeking to innovate and come up with new products and services in personal finance, wealth management, cards, insurance and corporate financing. This requires core banking solutions that allow banks to build new products rapidly and well ahead of their competition."
South East Asian banks have been upgrading their trade processing capabilities (for example) and seem to have been less affected by the economic downturn than their counterparts in other regions and have been expanding their branch networks at a much faster rate. Kuwait Finance House (KFH) in Malaysia recently opened its seventh branch in Malaysia and its eleventh in Bahrain.
"KFH is....developing an array of services and products in order to cater to the changing requirements of the diverse segments of clients and solicit new clients, improving the quality level of the existing services and upgrading the performance level of employees to the highest standards, maintaining effective communication with society, and increasing expenditure on technological infrastructure," Bader Abdul Muhsen Al-Mukhaizeem, KFH's Chairman and Managing Director explained.
"KFH developed its IT systems and platforms and innovated new systems to keep pace with the technological updates in order to enhance efficiencies and cut down expenditures in the long run. To this effect, KFH is in the process of bringing two new systems into service at the Credit Department and the Local Real Estate Department, and is performing the final commissioning of the automated solutions at the Commercial Sector. To facilitate customer services throughout KFH, we developed a new electronic archiving system, which can accommodate 20 million documents with a data retrieval rate not exceeding 30 seconds. Furthermore, the remote operation of branches was brought into service in order to enable direct selling by the Banking and Commercial Sector employees," he said.
KFH-Bahrain has been using International Turnkey Systems (ITS) to provide an integrated "Ethical Banking" solution to support the bank's expansion plans. The ITS contract includes upgrading the bank's core banking system, integrating the branch automation system, trade finance, Islamic finance, internet banking, in addition to technical services related to human resources and treasury. Both KFH and ITS said the combined solutions would benefit the customer by providing "greatly enhanced services from the bank."
Seventy five per cent of respondents in research by the Asian Banker magazine said that a dedicated Islamic core banking system will be the key enabler of more tailored, sophisticated and innovative offerings. The study found that with a new Islamic core banking system, respondents will most urgently focus new product development for their trade finance, corporate lending and consumer lending businesses.
Islamic finance companies, whether they are banks, Takaful houses or investment companies are attempting to make headway in the industry by using adaptable, multilayered systems to increase their global reach and help them overcome the regulatory pitfalls which are being exacerbated by the lack of a single, global Shari'ah standard.
hybrid approach
"The effort required to incorporate Islamic banking support in conventional core banking systems is significant. Vendors must overcome the following issues when developing support for Shari'ah-compliant products," said Robert Hunt, the Research Director, Retail Banking in a TowerGroup Research Note.
The need for interpretation of Islamic laws relating to banking;
Requirements in some countries to support the Hijri (the lunar Islamic calendar);
Inconsistencies in allowable products between countries and regions;
Inconsistencies in the Arabic language and different languages among Muslim-populated countries;
Demand for new product capabilities as banks define new Shari'ah-compliant services;
Detailed accounting entries required by the purchase and sale elements of Islamic financing to reflect the ownership of property.
"Vendors, such as Path {Solutions}, have built core banking systems specifically for use by Islamic banks, while others have developed systems that support both conventional and Islamic products. Kuwait-based International Turnkey Systems employs a hybrid approach to provide Islamic banking support: The vendor combines its front-end system with US-based Harland Financial Solutions' Phoenix system," Hunt said.
In late 2009 Cihan Bank signed an agreement under which Path Solutions would be executing the complete IT project for Cihan, the first privately owned bank in Kurdistan, Iraq. Path Solutions will deploy several modules of the iMAL banking suite that will run on IBM (Xeon) servers. The modules include, among others, Customer Service Management, Islamic Invest, Islamic Treasury, Islamic Profit Calculation, Trade Finance, Financial Template Reports and SWIFT.
An integration nightmare
Some bank IT bosses might be wondering if they would be better off spending more on equipment and less on expensive high profile Shari'ah scholars. A single, easily upgradeable platform that works across several different regions and with different Shari'ah standards might over the long term be far more cost efficient than having a Shari'ah scholar in every region.
"We are not looking for more Shari'ah scholars. The industry needs more people in actuarial, finance, information technology and operations," Syarikat Takaful Malaysia Group Managing Director Datuk Hassan Kamil told The Star Online in Malaysia.
"No business can grow without a clear understanding of its IT needs and addressing them properly. Getting the right technology support was vital for our expansion plans not only in Egypt but elsewhere too. We have acquired T24 from Temenos for Islamic banking. Phase one implementation is already completed. Phase two will be completed either by the end of this year or the end of the first quarter of 2011," UNB's Chief Executive added.
Technology integration problems, particularly costs, have also been one of the biggest stumbling blocks for banks as economic difficulties create merger situations or (as is more likely in the ever-expanding world of Islamic finance) they acquire new entities in an effort to increase their reach. Some banks are entering new territories and are acquiring conventional banks, taking their licences and are then converting them into fully fledged Islamic banks, or at the very least are adding Islamic windows, assuming local licensing laws do not allow full conversion. Many mergers have taken years to 'consummate' due to unforeseen problems with incompatible platforms.
Microsoft India's product Marketing Manager, Tarun Malik, described a situation where host applications run independently in a bank, but fail to talk to each other as "an integration nightmare."
Different definitions
"You get a call from a bank offering a credit card, when it has already issued you one. In some instances, the bank offers a customer a huge loan, when he has defaulted on some other payments like a card outstanding," a speaker said at a 'Technology For Financial Services' seminar in India in a report by The Financial Express. Banks around the world spent fortunes on all sorts of fancy systems during the boom time which failed to pay for themselves when the credit crunch came around and were ultimately incompatible with larger systems.
"The first question I hear from clients is about the type of technology they need for successful data management when the truth is the systems have been available for years, but not the business focus on the process and measurement of their data," said Jane Griffin, a Principal at Deloitte Consulting. "Everyone also has different definitions for data management. Companies need to collectively build their own internal group to help set local, regional and global standards and monitoring data. The goal should be to centralise the process in and have a federated approach with a governing body which can then address specific topics one at a time."
"In a carve-out environment where the seller relies on transitional services from a third party, there is additional pressure to integrate fast, so that the newly merged entity can minimise the risks of SLA (Service Level Agreement) deterioration and cash outflow," Frances Yu, a Senior Manager of Strategy & Operations at Deloitte Consulting added.
Slow R&D
"On the other hand, integration of R&D (Research and Development) and engineering talent and knowledge takes a delicate touch. Many R&D assets are tied to set technology roadmaps and portfolio decisions. While the two companies can make portfolio integration decisions in a clean room environment prior to the deal closing, they may take up to 18 months post the deal to execute their decisions. Constraints such as commitments to existing accounts, long sales cycles, large deals or the need to preserve the talent pool also argue in favour of a slow
R&D integration."
"Another cornerstone of global banking - financial risk management - is under-developed in Islamic banks since many conventional risk management instruments are unacceptable under Shari'ah. This could force Islamic banks to either opt for riskier portfolios or accept lower returns for reduced risk," Rajashekara V Maiya and Basudev Banerjee at Infosys Technologies wrote in a paper called Banking on Faith: Islamic Banking in the Middle East.
"The sector also faces IT-related challenges - in part due to the systemic complexities of this market - because core banking solutions are not perfectly tailored for the Islamic market. Without fixed standards for Islamic financial products, customisation becomes crucial."
© Islamic Business and Finance 2010
