For many Muslims, dealing with banks poses several problems. Their Islamic beliefs prevent them from dealings that involve interest (riba). Yet Muslims need banking services as much as anyone else, and banking services are essential for national development and keeping Islamic countries competitive with their Western and Far Eastern counterparts.
The best-known feature of Islamic banking is the perceived prohibition on interest. The issues any Islamic bank will need to address include:
- Any predetermined payment over and above the actual amount of principal appears to be prohibited.
- The lender must share in the profits or losses arising out of the enterprise for which the money was lent.
- Making money from money may not be acceptable.
- Gharar (uncertainty, risk or speculation) is prohibited.
- Investments should only support practices or products that are not forbidden (haram).
- Different interpretations of Islamic law apply in different regions, and also change over time.
- Long delays can arise during implementation while waiting for local Islamic scholars to decide on issues of compliance.
Despite these impediments, Islamic banking is a growing force in world finance and is widely regarded as the fastest-growing sector in the Middle Eastern financial services market.
Classification of Islamic Banks
Some observers have classified Islamic banks into three categories. First are the relative newcomers, who came into existence as dedicated Islamic banks. Whereas these have been most common in the Gulf region, they are appearing worldwide, and the Islamic Bank of Britain has attracted much attention. The second category embodies traditional banks that have added an Islamic banking capability along with the conventional kind. This category is widespread geographically. A third category is now beginning to emerge, one in which traditional banks have converted over to being full Islamic banks, phasing out their traditional offerings.
The Nuts and Bolts
Despite the differences between Islamic and conventional banks, all banks are hugely dependent on effective and reliable core processing systems. Islamic banking systems were largely manual in the early days and the volumes low, and hence the banks' product offerings were of the simple variety. Much of the subsequent systems' functionality came by way of customized development. We believe that much of this customized software is still in operation, opening a promising market for providers of packaged Islamic banking software.
Islamic Banking Software Products
Islamic banking products today have come from three primary sources.
1. Customized software, developed by outside software companies, has gone on to form the basis of some of the products on the market today.
2. Another source lies with the adaptation of traditional banking packages to cater for Islamic functionality. However, there is much dispute as to the validity of this functionality, with some customers claiming it to be superficial.
3. A third category of package covers those that were developed specifically as Islamic banking packages. The companies supplying these packages are small and localized in virtually every case.
Evolution of Islamic Banking Software Development
Initially, Islamic banking operations were still novice, which created a golden opportunity for existing medium software houses. New startups were introduced in the market and they quickly catered for such specific needs. At that time, Islamic banking transactions were carried out using these customized models and a form of consolidation was done using the other systems available at the mother bank. It wasn't yet a choice to invest in a complex system used in a traditional bank. That basically led to redundancy of work, lack of data integrity and delay of operations, increasing the cost.
Islamic windows favored software houses that were responsive to their continuous requested customizations and were able to deliver on time for a good price. The dependency on those few software boutiques kept increasing until the middle of this decade, but it did not continue to grow. Fully-fledged Islamic banks started opening at a quick pace, and the Islamic window model was being extended to several geographic locations. Software needs started exceeding the capabilities of the medium software boutiques.
What kept pushing things as well was the continuous migration of human resources from traditional to Islamic banking. That influenced the decisions made during software selection for the simple reason of familiarity. New offerings started emerging in the market and the competition started taking a new shape.
Traditional banking software companies that were already positioned in the market had an advantage. Banks were already familiar with their licensing, support and implementation methodologies. It was time now for traditional banking software vendors to share the load, despite being stained as developers of interest-based solutions.
What is worth mentioning here is that up until today, we have not seen a true case of any merger or acquisition between traditional and Islamic banking software houses, even though that would be a valid business case and a true strategy for bullish market positioning.
Challenges
It is vital to examine the issues surrounding Islamic banking software from both the bank's as well as the software company's perspective.
It is not fair when considering the banks' side to ignore its mode of operation, whether it is a window or fully-fledged Islamic institution. For a fully-fledged Islamic bank, the prime problem would be the cost of the software application being purchased as compared to functionality. The IT budget isn't usually lucrative, so the banks tend to raise the floor for issues related to software functionality, knowing that following stages should benefit from the already established ones.
When it comes to the window model, caution should be exercised at several levels. In my experience, problems usually stem from lack of skilled Islamic banking human resources, lack of early IT department involvement and the fact that an Islamic window is never a separate entity, especially when it comes to software operation.
When it comes to software companies, size (human resources, capital), as well the company's market offerings, play a role in defining the challenges.
Going back to customization, I've seen companies that became vigorously involved to an extent which affected the stability of their system; at the time, they thought that it would enrich their software functionality. It remains debatable whether it is good to have access to what other banks have requested within the core functionality of the software or just settle down to a common standard level.
In some cases, we've seen that implementation life cycle becomes a critical factor in software selection; in other words, speed. Market study indicates a lack of balanced offerings for Islamic banking software, which usually results in selection delays by banks. This imposes a constraint on startups that are mandated to be operational in a specified short period of time for the purpose of attaining the central bank's license, especially in the Gulf.
Still Early in the Game
The Islamic banking software industry is still testing the waters and it is still early to judge what could be good criteria for selection. Is it functionality, reliability, technology used, customization, integration capabilities, expertise in Islamic banking, Shari'ah compliance, Islamic banking standards used, implementation methodologies, customer support or is just the cost? It is worth mentioning here that the concept of "developed from scratch to suit Islamic banks" has won some software companies an edge in the market, but those companies still struggle to position themselves as "one size fits alls" in terms of market offering.
Meanwhile, an important lesson should be derived from traditional banks and what several software companies went through to reach their current maturity level. Islamic banking's nature is truly diversified and shall require software that can be easily and continuously customized and integrated with other systems. These must be systems that are truly service oriented.
Ezzeddine Jradi is an independent consultant in Islamic finance field. He has more than eight years' specialized experience in the field of information and communication technology (ICT), including ICT consulting with Path Solutions and managing successful ICT projects within the MENA region at a number of key banks and financial institutions such as ARCAPITA, KAMCO, KFH, FCB, Amana, Al Khaliji and the Bank Muscat. He holds a Bachelor's of Engineering in Communications and Electronics and a number of professional certifications, namely CISA, CLP and MCSE. He is currently pursing an Executive Master's in Islamic Finance Management.
By Ezzeddine Jradi
© Zawya Select 2009
