Embed Size (px)
Citation preview
<Insert Picture Here>
Islamic Finance Intelligence Summit, LondonNovember 6th, 2008
Making Things SimpleEnsuring Technology and Financial Instruments Complement Each Other
Safe Harbor Statement
Due care has been taken to make this Presentation as accurate as possible. Certain statements madein this presentation may not be based on historical information or facts and may be “forward lookingstatements” and may be subject to risks and uncertainties that could cause actual results to differmaterially and adversely from those that may be projected by such forward looking statements.
These risks and uncertainties and other factors that could affect, including but not limited to,competition, acquisitions, economic conditions, ability to retain highly skilled employees,technology, law and regulatory policies, managing risks associated with its business.
i-flex makes no representation or warranties with respect to the contents hereof and shall not beresponsible for any loss or damage caused to the user by the direct or indirect use of thisPresentation. i-flex may alter, modify or otherwise change in any manner the content hereof,without obligation to notify any person of such revision or changes.
All company and product names are trademarks of the respective companies with which they areassociated.
i-flex® and FLEXCUBE® are registered trademarks of i-flex solutions. Reveleus™, Daybreak™,Equinox™, Mantas and PrimeSourcing™ are trademarks of i-flex solutions and are registered in severalcountries.
All company and product names are trademarks of the respective companies with which they areassociated.
COPYRIGHT © 2008 i-flex solutions limited.
All rights reserved.
2
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
‘IWAD(Equivalent countervalue)
RISK(Ghurm)
WORK &EFFORT(Ikhtiyar)
LIABILITY(Dhoman)
PROFIT =
1.Al-Bay’2.Ijarah3.Salam4.Istisna’
5.Mudarabah6. Musyarakah
TWO PRINCIPLES OF SALES“Al-Gharm bil Ghanm”“Al-Kharaj Bil Dhoman”
“No Reward Without Risk”“With Profit comes Responsibility”
Principle #2: Application of Al-bay’ (Trade & Commerce)
Source: Prof Saiful Azhar, INCIEF
Source: Assoc. Prof Dr Engku Rabiah Adawiah, International Islamic Univ, Malaysia
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.
Most sukuk 'not Islamic', body claims
Source: Reuters, 27th Nov 2007
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 WahabPatail 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.
BBA judgement by Malaysia’s Justice Wahab Patail
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)
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
Compliance1. Audit
2. Central Bank
3. Risk Mgmt
4. Shariah Audit
5. Shariah Council
6. AAOIFI
7. IFSB
CompetitorsIslamic Banks
Conventional Banks
CustomersDedicated Customers (15%)
Independents (70%)
Non Believers (15%)
ProductsRapid Evolution
Multiple Contracts
Debt & Equity & Fee
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 – Technology Footprint
1212
Source: Assoc. Prof Dr Engku Rabiah Adawiah, International Islamic Univ, Malaysia
Profit Distribution – Tight linkages between Assets and Liabilities
Fund
Deposit Class
(eg. Weekly)Deposit n
Deposit Class
(eg. Monthly)
Deposit Class
(eg. Quarterly)
Deposit 1
Deposit 1
Deposit n
Deposit 1
Deposit n
Deposit Class
(eg. Tenor x)
Subscriptions
Murabahah
Ijara
Musharaka
Sukuk
Mudaraba
Fixed Assets
Investments
ReturnsB
ank’s Share
ProfitsR
eserves
Deposit n
Deposit 1
Mudharabah Fund –Investment Acct Holders
Assets
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’ productsbeing 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
Proof of Concept, Demonstration
1-3 days 2 weeks – 1 month
Implementation Period 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
Use of External Consultants
Minimal Significant
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 - ArchitectureAdopt similar architecture (blueprint) used by leading
international banks – core banking, channels, interfaces etcChoose a core banking solution that can closely
match this architectureInsist all subsequent vendors to comply to this
architectureBenefits 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 possibleStick to other modules provided by your core
banking/takaful supplier if possibleChoose 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
