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Making Things Simple
Ensuring Technology and Financial Instruments Complement Each Other
Islamic Finance Intelligence Summit, London
November 6th, 2008
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Discussion Topics
 Shariah’s Principles in Islamic Finance
 Islamic Finance Organizations
 Technology Footprint for Islamic Finance
 Making Things Simple
 Architecture
 Technology Suppliers
 Conclusion
SHARIAH’S PRINCIPLES IN ISLAMIC FINANCE
No
Shariah’s Principle
#1
Prohibition of Riba (Interest)
#2
Application of al-bay’ (trade & commerce)
#3
Avoidance of Gharar (Ambiguities)
#4
Prohibition of Maisir (Gambling)
#5
Disengagement from production of prohibited commodities –
pork, liquor
Islamic Banking
Takaful
Islamic Money
Market
Islamic Capital
Market
1.Al-Bay’
RISK
2.Ijarah
3.Salam
(Ghurm)
4.Istisna’
Principle #2:
Application of Al-bay’ (Trade &
Commerce)
5.Mudarabah
6. Musyarakah
PROFIT
‘IWAD
=
(Equivalent countervalue)
WORK &
EFFORT
(Ikhtiyar)
TWO PRINCIPLES OF SALES
“Al-Gharm bil Ghanm”
Source: Prof Saiful Azhar, INCIEF
“Al-Kharaj Bil Dhoman”
LIABILITY
“No Reward Without Risk”
(Dhoman)
“With Profit comes Responsibility”
Source: Assoc. Prof Dr Engku Rabiah Adawiah,
International Islamic Univ, Malaysia
Most sukuk 'not Islamic', body claims
About 85% of Gulf Islamic bonds do not really comply with
Islamic law, a body which sets standards across the Middle
East has said.
Scholars at the Accounting and Auditing Organisation for
Islamic Financial Institutions (AAOIFI) said the body could
review rules for the industry, which could be worth as much
as $50 billion next year.
AAOIFI said it could tighten rules to discourage borrowers
signing repurchase agreements that underpin most Islamic
bonds, which have drawn investors from Asia to the United
States looking for exposure to booming Gulf economies.
Source: Reuters, 27th Nov 2007
BBA judgement by Malaysia’s Justice Wahab Patail
The High Court recently ruled that
the application of the Al-Bai'
Bithaman Ajil (BBA), a hugely
popular Islamic home loan financing
contract in Malaysia for the last two
decades but much criticised abroad,
is contrary to Malaysia's Islamic
Banking Act 1983.
In what is set to be another widely
discussed judgment, High Court
Judge Datuk Abdul Wahab
Patail ruled that the sale element in
the BBA is "not a bona fide sale". He
also brought into question the profit
portion of the facility.
The written judgment, dated July 18
but made available to lawyers
involved in the case late last month,
may force Islamic banks and
financial institutions to re-examine
their legal documentations.
Source: Malaysian Reserve, 7th Sept, 2008
Discussion Topics
 Shariah’s Principles in Islamic Finance
 Islamic Finance Organizations
 Technology Footprint for Islamic Finance
 Making Things Simple
 Architecture
 Technology Suppliers
 Conclusion
Islamic Finance Organizations (IFOs)
Customers
Dedicated Customers (15%)
Independents (70%)
Non Believers (15%)
Products
Rapid Evolution
Multiple Contracts
Debt & Equity & Fee
IFO
 Established within the last 5 years
 Less than 1m customer accounts
 Less than 50 branches
 Asset Size of USD5b or less
 Limited budget on Technology
 Inadequate IT Expertise
Competitors
Islamic Banks
Conventional Banks
Compliance
1. Audit
2. Central Bank
3. Risk Mgmt
4. Shariah Audit
5. Shariah Council
6. AAOIFI
7. IFSB
Discussion Topics
 Shariah’s Principles in Islamic Finance
 Islamic Finance Organizations
 Technology Footprint for Islamic Finance
 Making Things Simple
 Architecture
 Technology Suppliers
 Conclusion
Source: Assoc. Prof Dr Engku Rabiah Adawiah,
International Islamic Univ, Malaysia
Profit Distribution – Tight linkages between Assets
and Liabilities
Deposit Class
Murabahah
(eg. Weekly)
Investments
Subscriptions
Ijara
Deposit Class
(eg. Monthly)
Musharaka
Fund
Deposit Class
Sukuk
(eg. Quarterly)
Deposit 1
Deposit n
Deposit 1
Deposit n
Deposit 1
Deposit n
Mudaraba
Deposit Class
Deposit 1
(eg. Tenor x)
Fixed Assets
Deposit n
Profits
Reserves
Returns
Bank’s Share
Assets
Mudharabah Fund –
Investment Acct Holders
The Reality on Technology Implementation
for Islamic Banking
• Decision making has been too quick without proper vendor assessment. Many
banks are paying today for making the wrong choices through extended timelines for
implementations
• Banks have been under-budgeting for Islamic banking systems. Although
they spend in the millions for conventional systems, they tend to budget less than $500,000
for Islamic banking systems. This leads to:
– Tweaking of existing systems to cater to the requirement
– Shoddy implementation and ill-conceived products
• Lack of knowledge amongst vendors often leads to ‘tweaked’ products
being delivered. Often, banks end up doing the work themselves as the system is unable to
meet the short time-to-market requirement for Islamic banks
• Vendor misleading the customer into believing that their Islamic banking offering is a
simple solution
• Varied interpretations of the Shari' a across geographies and banks operating in
similar markets
IBS Guide on Islamic Banking - 2007
Technology for Islamic Banking System–
An Observation
Key Areas
Islamic Banking
Conventional Banking
1-3 days
2 weeks – 1 month
4-6 months
6 months – 15 months
User and IT Participation
Minimal, mostly those
directly reporting to CEO
Significant, especially
middle mgmt, IT &
functional experts
Modules to be
implemented
All key modules in one go
– Investment, Financing,
Ijarah, Treasury
Staggered in Phases
Minimal
Significant
Proof of Concept,
Demonstration
Implementation Period
Use of External
Consultants
Discussion Topics
 Shariah’s Principles in Islamic Finance
 Islamic Finance Organizations
 Technology Footprint for Islamic Finance
 Making Things Simple
 Architecture
 Technology Suppliers
 Conclusion
Making Things Simple - Architecture
 Adopt similar architecture (blueprint) used by leading
international banks – core banking, channels,
interfaces etc
 Choose a core banking solution that can closely
match this architecture
 Insist all subsequent vendors to comply to this
architecture
 Benefits
 Clarity of thoughts to support business directions
 Similarities lead to lower cost of acquisition, training,
operation, support and enhancements
 Easier for Internal or Outsourced Parties to Manage/Take
Over
Making Things Simple – Technology Suppliers
 Maintain the number of suppliers as small as possible
 Stick to other modules provided by your core banking/
takaful supplier if possible
 Choose suppliers that:
 Adopt similar architecture as your core banking/takaful
provider
 Have the broadest product offerings in Banking/Takaful
 Are committed to Islamic Finance market
 Are financially strong and able to survive for the next 5 years
 Make use of mainstream technologies
 Are compatible to your working culture
Conclusion
• IFOs have limited IT budget and IT expertise in
servicing their customers and in fending off
competitors
• Banking Technology footprint is generally complex
and expensive. IFOs are subjected to the same cost
and complexity.
• Keeping things simple via judicious adherence to a
good IT architecture and minimizing the number of
technology suppliers will:
– Lower overall costs, including transaction costs
– Contain complex technology to a manageable level
– Sustain agility of IFOs to compete in the market place
– Simplify adherence to Shariah’s requirements
Thank You
Jamil Hassan
Principal Consultant, Islamic Banking
[email protected]