The Role of IT in Islamic Banking

Prepared by: Nasre Nasser Eddien, Business Development Manager

Path Solutions08 June , 2010

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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 world’s 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)

THE GROWTH OF ISLAMIC FINANCING INSTITUTIONS

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145216 248

315

442

600

847

0

100

200

300

400

500

600

700

800

900

US

D B

illio

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2002 2003 2004 2005 2006 2007 2008

Years

IFIs Total Assets

THE GROWTH OF ISLAMIC FINANCING INSTITUTIONS

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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

Example of Growth of Islamic Compliant Instruments

Source: Zawya, IFIS, Central Banks, Bloomberg

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Is Islamic finance simply renaming conventional financial terms?

Islamic finance is different in terms of:

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.

Islamic banking is different from conventional banking

Products: Equity based

Versus Loan based Financing

Islam aims at building a socio-economic order based on justice

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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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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.

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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

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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

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Thank You!

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