THE CHALLENGES OF ISLAMIC BANKING TECHNOLOGY AND SHARI’AH COMPLIANT SYSTEMS
A major challenge for banks and system suppliers is the fact that there is no single interpretation of Shari’ah law. There are differences across the Shia and Sunni world, in part reflected in country differences, and there is also uncertainty down to the level of an individual organisation. Each bank will have its Shari’ah board which will rule on whether specific products are Shari’ah compliant. It all adds up to a lack of standardisation, which means that vendors trying to develop a compliant version of their solutions can build in the generic areas of support but will still be faced with unknowns ahead of any particular project. For the banks themselves, there is uncertainty over product plans until their boards have ruled on them. No conventional bank has to wait for a decision by a supervisory board before it can launch a product. Bahrain-based Accounting
and Auditing Organisation for
Islamic Financial Institutions (AAOIFI) has sought to improve the standardisation. There are also plenty of other Shari’ah bodies around. Lindsay Baldock, solution manager for Islamic banking at Misys, was one of those to believe that the sector had been ‘constrained by the absence of enforceable standards’. ‘Organisations such as AAOIFI have defined standards but the problem is that these are neither mandatory nor universally accepted,’ he said. ‘We need greater consensus and adherence to standards in the future, which would certainly help reduce the complexity as well as advance the Islamic banking industry in the right direction.’ Haitham Abdou, group director of corporate marketing and global operations for Kuwait-based vendor, ITS, accepted with caution the notion that the likes of AAOFI could make a real difference. With technology vendors wanting clients to believe that their products are Shari’ah-compliant, reference is always made to AAOIFI, IFIS and other standards boards. But, he said, ‘the only issue with this is that compliance with AAOIFI does not ensure Shari’ah compliance for every bank.’
Abdou noted that Malaysian scholars have a different approach from their Middle Eastern or Western European counterparts, for example. And, ‘there could be differences around how the same product is executed between two banks, even in the same country’. He added: ‘Ultimately, Shari’ah compliance comes from the Shari’ah board of the bank and that’s why these differences will always remain.’ The only way to create a genuine industry-wide standard, Abdou believes, is for every Shari’ah scholar in the world to agree for
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every single product how it should be conducted from an accounting point of view, for process workflow and so on. ‘That’s something that I don’t think will happen.’
The Islamic Banking Systems & Suppliers Guide includes a Glossary of Islamic Banking Terms . There is the aforementioned difference between Shia muslim countries (such as Iran and Azerbaijan) and Sunni muslim ones (the majority of the Middle Eastern states, as well as South and South East Asia and Africa). But Omid Torabi, CEO of IDCorp, Malaysia-based subsidiary of Iranian banking sofware vendor, Tosan, felt ‘there isn’t such a huge gap between them’ and that vendors should be able to meet any challenges through system parameterisation. Whilst there are differences, there are also some clear similarities within Islamic finance. Indeed, the key principles of Shari’ah compliance revolve around buying and selling with profit but dealing with the money as an economical tool rather than a commodity. It is, said Ismail Ali, head of Islamic banking at Temenos, ‘about using the tool in the conscience of religious values’. Not surprisingly, the demands are becoming more sophisticated and broader. The type of institution that was looking to offer Islamic financial services was mainly retail until around 2007, after which there was diversification, including the arrival of investment houses and private banks. However, this sector was most affected by the financial meltdown, meaning deals were more likely to be at retail institutions, popping up over an increasingly wide geography. The issue was set out by Oracle’s principal consultant for Islamic banking, Jamil bin Hassan. Most product structures in Islamic banking are more complex than conventional banking products, he felt, even for basic products like housing loans and personal finances. ‘Under Islamic banking there is a tight integration between sources of funds and application of funds, in order to ensure that profits of investors or depositors are distributed.’ This has led to the increasing need for specialised technology. ‘As Islamic financial institutions break out of the alternative banking segment, they need to undertake the standardisation of Shari’ah, leading to innovation, transparency, growth and reduced costs.’ Sriram Padmanabhan, AVP and group manager of client services for Infosys, noted that Islamic banks – often start-ups – do not typically have unlimited IT resources to be able to carry out complex technical projects. ‘As we do more and more, the role of the vendor
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