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CO-EXISTING ISLAMIC AND CONVENTIONAL SYSTEMS
Making the right choice
Chetan Parekh, a Partner at Cedar Management Consulting International, looks at the case for co-existing conventional and Islamic systems
up Islamic businesses and need to make technology applications and infrastructure choices carefully. Most Islamic organisations require a separate business division with dedicated Shariah boards and products and policies/procedures compliant to their board’s operating guidelines. Banks are also required to maintain a separate general ledger from accounting, reporting and to ensure it is fully compliant to Sharia principles. From a technology standpoint, there are two types of co-existence systems, which are discussed here. Typically, these best-of-breed systems are called Product Processors.
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Conventional banking systems include: Customer – Master records; Accounts – CASA and time deposit accounts; Deposits – Term & investment deposits; Limits & Loans - Retail and Corporate Lending; Trade Finance – LC & LG issuance and settlement; GL modules with strong capability around accounting, interest accruals and applications, fees & chargers. At the other end, Islamic banking systems include: Islamic Deposit; Islamic Lending; Asset Management; Profit Distribution; GL modules.
Given regulatory and policy considerations, is there a business case for co-existence or should banks invest in dedicated technology applications? Central Bank Qatar, for example, announced the need for separation of Islamic systems from conventional systems. Conventional FIs had to therefore run down or sell their portfolios to Islamic banks. Oman has restricted its banks and no co- existence of systems is allowed.
As customers are more ‘Value Centric’, the choice of products is made based on perceived value. Conventional customers are increasingly adopting Islamic products for
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anks have multiple options while setting
Deposits (Risk & rewards sharing), Loans (Murabaha), Rent to Own Mortgages (Ijara) & Musharaka (risk sharing based lending). This has resulted in the need for banks to provide seamless product and channel experiences through either single banking systems or multiple best- of-breed product processor options. There are typically two co-existence scenarios:
1. Single back office systems: Select a common Universal Banking System (UBS) to enable both conventional and Islamic businesses to co-exist from a single technology platform. A case in point is Kingdom of Saudi Arabia (KSA), one of the matured markets for Shariah compliant banking, where 8 out of 12 banks use common UBS for conventional and Islamic banking products. This model is normally preferred in situations where banks have already invested in UBS or are planning an investment. It has its advantages in lower acquisition costs of system and simpler architecture. However, there may be limitations in terms of functionality when compared to best-of-breed systems.
2. Multiple system best-in-class product processors: Banks with best-of-breed architecture capabilities prefer a separate conventional and Islamic banking system. Integration is achieved at the customer level with common Master Data Management or Enterprise Services Bus.
In the second case, co-existence requires unique architectural layer transformations and hence is considered to be more complex. However, this provides better functional capability.
Typical considerations that go in the finalisation of the above co-existence model would include:
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