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Technology usage in Islamic Banking: a potential approach

M. Ziaullah Khan, SVP & Head of IT, Shahjalal Islami Bank Limited 

Islamic banking industry is growing rapidly. Islamic banking practices and regulations differ by region and country. Hence, flexibility and adaptability are keys in choosing a solution provider for an Islamic Bank. The growth of Islamic banking worldwide has demanded diversified
technology that supports both traditional and Islamic banking on the same platform. By fully utilizing the technological solutions on offer, a bank can react to the demands of the market by introducing new products and reducing the turnaround period required to bring them to market.
Islamic banks look at technology just as their conventional counterparts do, but often end up with the realization that there is a total scarcity of systems catering to the Islamic principles. The
early adopters were forced to patch up together the systems and build the Islamic banking concepts into their processes in a manner that gave basic automation to allow a slow but painful growth path. The bad news is that even the true believer in Islamic banking is doubtful about whether the processes followed are entirely Shariah compliant. The hope for the Islamic products and Islamic banks offering them, therefore, lies in the introduction of highly flexible banking systems that offer a modular and modern architecture that the multinational and conventional local banks are fast moving to arm themselves within the battle for customers and their business.
IT Scenario in Islamic Banks
The once-popular and older tandem-based systems that provided a stable and relatively high uptime fault-tolerant environment are being challenged by the need to upgrade and offer webbased interfaces as also the requirement of additional channels to boost transaction volumes.
While the security and basic network infrastructure are under fire from a slew of external and internal scrutiny checks, the need to move to a more modern infrastructure is constantly being seen as the answer to suppress some of these ongoing challenges.
The old generation monolithic software vendors have conventionally tended to offer their software that would treat a product with some of the Islamic profit calculations in an Islamic
way. While this has been seen as an extremely expensive solution, the banks have worked around the problem by building their own internally developed software that, though considered fairly basic, still managed to solve the immediate problems of being largely compliant. But such effort is a quick fix that tends to live an extended life way beyond what was initially anticipated.

The Evolving IT Application Architecture in Islamic Banking
The banks are looking at state-of-the-art systems to go far beyond automation. They are expecting technology to assist in creating products in a short time, attracting and retaining customers through such tools as CRM-based market feedback, profiles of existing users and data warehouses being created to allow targeted marketing campaigns tailored to the profiles and spending habits of customers. The corporate customers are constantly being encouraged by competitors and in such highly competitive environment often the extra fizz that a bank can offer makes up the winning mix that creates customer stickiness.
Modular architecture is the key approach, 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.
These applications will either be interfaced directly to the host or will establish connectivity through a middleware. The modular components have to take care of products such as:
· Al-Wadiah Current Account
· Mudaraba Savings, Short Notice Deposit, Term Deposit, Scheme Deposit Account
· Islamic Financing [Musharaka, Mudaraba, Muqawala etc.]
· Islamic Financing [Bai-Muajjal, Bai-Murabaha, Bai-Salam, Bai-Istisnaa’ etc.]
· Islamic Financing [Al Ijarah, Hire Purchase Shirkatul Meelk etc.]
· Islamic Trade Financing
· Islamic Treasury
· General Ledger
· Accounts & MIS
· Bills & Remittances
·Customer Profile including KYC & TP
·ADC Banking [Internet Banking, Mobile Banking, Tele banking, Home Banking, ATM, POS, Kiosk etc.]
Islamic Banking in practice
There are a number of Islamic banks being launched while new licenses are being issued for other fully-fledged Islamic institutions. Even existing banks are looking to add Islamic products to their portfolio. But basic to all such plans is the hope that they can start with a modern architecture that will enable them to look at growing the way, which seem to be on a roll, partly due to their advances in technology infrastructure.
To remain competitive, these banks will ultimately need to offer superior private banking services via customer-centric systems architecture to meet the satisfaction levels of the high net worth market. As the sector comes into its own, Islamic banks require advanced, globally recognized systems that encompass conventional private banking best practice expertise.
The additional constraint the crisis is bringing is that modern systems must enable banks not only to increase their efficiency and enhance their customer service, but most important to considerably cut the cost of their operations. A system that can be implemented in a short time span and at a low cost will be sought by Islamic banks under the current market conditions.
Today, Islamic banks expect, as a result of deploying such systems, to streamline their operations, efficiently mitigate their operational risks and above all to have a quick return on their investments from technology.
Technology progression and conventional banks
The Islamic banking industry could definitely look at all the positives that have helped conventional banks to grow to their current position and one of the key factors is the adoption of key technology. Today, conventional banks have adopted cloud computing, a technology ecosystem that allows them and their customers real-time access to banking applications and services over the Internet, much like with email. That is the speed with which they are moving from a technology perspective.
Banks customers have various channels of interaction today automated teller machines (ATMs), the Internet, call centers, branch offices and even mobile phones. A simple text message can effect a financial payment as reliable and secure as with a few mouse clicks on a web portal.
Firstly, this is clearly streamlined customer service and secondly, this is reducing the cost of doing business. For a bank, the cost of processing a check is several-fold over the cost of an electronic fund transfer. The third dimension is risk management. Mobile phone text alerts on credit card transactions have dramatically brought down fraud. On the banking side, analytics available today are capable of preventing even seemingly harmless but fraudulent transactions.

So, conventional banking has come far ahead and is still in the process of making continuous
changes, innovations and upgrades to its technology framework to better serve its customers and at the same time cutting costs.
Challenges of Islamic Banking Software
The challenge is that even the true believers in Islamic banking and finance are doubtful about
whether the processes followed are entirely Shariah compliant. The hope for the Islamic
products and Islamic banks offering them, therefore, lies in the introduction of highly flexible banking systems that offer a modular and modern architecture that the multinational and conventional local banks are fast moving to arm themselves with in the battle for customers and their business.
Shariah is interpreted differently in most countries and across most regions and sometimes even within the country, depending on their individual Shariah advisor and his interpretation of how a banking product can be offered to the consumer. There are activities such as trade, where the Islamic interpretation can vary, depending on the type of transaction that is being entered into.
What often wins the customer is the ability of the bank to appeal to the Islamic beliefs and values of the consumer and the authenticity of the products to be Shariah compliant.
The lack of standards that define a truly compliant Shariah banking system will affect the ability of the banks to implement Islamic products and services. While various bodies are formed to address the creation of a coherent set of Islamic banking standards, the emergence of a clear standard will clearly aid in creating standardized systems that cater to the larger masses of banks and their customers looking for a truly Islamic bank to deal with, free from fear of any intensity of their belief sets.
How technology may benefit Islamic banking
Some might question how technology may benefit Islamic banking services especially since Islamic banking is based upon mutual transactions such as Murabaha [where a financer, such as a bank, buys a commodity and sells it to the client at an agreed higher price] and Ijarah [where banks lease an asset to a client at a certain price and for a fixed period] and these result in ownership and partnership contracts [joint ventures].
The truth is that if we look at the level of online sales in the United States in 2007 that was estimated at US$ 259 billion (according to a report by the National Retail Federation), it found that the use of technology in Islamic banking simply requires foresight and strong will so that ecommerce, after its significant development, can be utilized in completing Islamic banking transactions in terms of funding and investment.
For example, when a customer requires Murabaha financing in order to buy a car, he goes to the
bank and fills in a request form [some banks allow this to be carried out via telephone or online banking]. After this form is approved, the customer visits the bank once again to sign the form and the Murabaha document. The bank then asks the customer to choose the car that he wants by visiting the showroom that the bank deals with. The bank then purchases the car from the showroom and then signs the Murabaha document. The Bank gives the customer permission to take the car from the showroom [some banks carry out the procedure at the showroom itself].
This process, however, sometimes causes error on the part of some employees who aim to facilitate and shorten the procedure for the customer; for example, they may make the customer sign the Murabaha contract before the purchase is processed by the bank and this in turn nullifies the contract and outlaws the entire deal since the bank is trying to sell a product that it does not own.
This process could be carried out through the Internet where the customer would make his
request and then would be notified whether that request has been approved or rejected. If it is approved the customer is to sign the request form and the Murabaha document that is available on the website and accordingly, the customer would be allowed to browse the various cars available at the showroom through databases. When the customer chooses the car, the bank then automatically purchases it from the showroom. This process is governed by a contract between the bank and the showroom explaining the mechanism through which this process is carried out as well as the ensuing legal commitments. The bank then sells the car to the customer on the basis of the Murabaha process via the bank’s website where the customer electronically approves the Murabaha contract and prints the receipt, which outlines the specifications of the car. This is then handed over to the showroom and the customer takes his new car. This series of procedures adheres to Shariah to realize the bank’s ownership of the car avoiding paperwork and human error; this is how technology could be used in the services of Islamic banking.
An important effort towards achieving international consistency was the creation of two multilateral institutions: the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), which issues Internationally recognized Shariah standards on accounting,
auditing, and governance issues; and the Islamic Financial Services Board (IFSB), which issues standards for the effective supervision and regulation of Islamic financial institutions. Presently, around 60 percent of Islamic Institutions are located in the Gulf region, with 20 percent in South Asia, and another 20 percent throughout the rest of the world.
In Bangladesh, Islamic Banks Consultative Forum (IBCF) [a Forum of Full-fledged Islamic Banks and Islamic Branch / Window based banks’ owner & management] has taken an initiative to introduce a Uniform Islamic Business Policy to be followed at all the member banks.
We think there should also be a body that studies, evaluates and standardizes the global Islamic Banking technology framework. We hope an integrated and robust Islamic banking technology solution will catapult the industry to exponential levels in the years to come.
1. Technology with Islamic Banking: UAE Banking Review
2. Technology: A key Enabler For Islamic Finance: by Jamal Hijres, CEO of Capinnova Investment Bank.
3. Article by Lahem Al Nasser, Head of Islamic Solutions Center, Saudia Arabia
4. Islamic Economic Research Bureau, Bangladesh publications.

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