g
environment? •
Does the system have functionality to support multiple clients investing in (multiple) collective funds and sharing the gains (or losses) of those investments, as required in mudaraba and musharaka processing?
•
Does the system allow the user to have complete control of the accounting entries that are generated at each stage of every transaction, so ensuring that accounting follows Islamic conventions and standards?
•
Is there workflow to ensure that each transaction is processed in the same way each time it is executed, so can be performed according to the bank’s Shari’ah supervisory board’s approved method of processing?
• • •
Is the general ledger fully definable and can a unique chart of accounts be created for each entity to ensure Islamic treatment?
Can it be stipulated that interest accrual programs (used in conventional banking) need not be run at all, or even installed, rather than merely setting interest rates to zero?
In terms of the types of products that should be supported, this will vary from institution to institution and there may be some, in an area such as trade finance and syndications, which are little different in a Shari’ah banking world to a conventional one.
Common products might include: Current accounts and basic savings accounts under the al wadiah (safekeeping) principle. These types of accounts are similar to conventional current accounts and savings accounts with the principal guaranteed by the bank and are carried as such in the bank’s liabilities section of the general ledger. No interest is payable to the client or the bank under al wadiah on any of these accounts. However, service charges can be applied as well as transaction fees for bank specified services. Murabaha transactions, either as bank financing to clients, or as client deposits to the bank. The holding of sukuk certificates by clients and processing by the issuer. Mudaraba transactions. These embrace the concept of profit- and-loss sharing investments but there are different tiers. Classic mudaraba is where the bank makes an investment directly into a business and shares in the profits and losses of that business. Musharaka transactions, whereby a number of investors take a share in an asset, whose value changes over time, and subsequently share in that change of value of the asset. There may also be a requirement for diminishing musharaka, where the bank’s investment is reduced
over time. Ijara leasing and potentially Ijara wa iqtina where the lessee (person granted the lease) commits to buying the leased item at the end of the lease term. Salam, where payment is made for future delivery of an asset. Istisn’a, which is a contract of acquisition of goods by specification or order, where the price is fixed in advance.
If a conventional system can do all of the above, is there an issue? One prime challenge for the selection is working out whether this is actually the case or not. Again, this is not much different from standard selections. If an RFP asks, do you support mudaraba, all suppliers might answer in the affirmative. However, if it is likely that different tiered mudaraba is needed, then this should be a second level of detail. The best approach might be to give the precise definition and expected process steps so that there is less scope for misunderstanding. Then in a workshop/proof of concept, the supplier should be able to actually demonstrate that support. Over-reliance on RFP responses in any form of banking can lead to inappropriate selections and unwelcome surprises later on. As well as buying a specifically tailored system, there is also an option to surround a conventional one with a separate layer to handle the Shari’ah requirements, perhaps with postings then sent to the general ledger. Some banks have built such layers, while ITS has developed an equivalent commercial offering. It is not dissimilar to what some suppliers have done to protect international systems from the vagaries of Russian accounting standards. Is it incorrect to exclude suppliers from selections if they do not have Shari’ah banking clients at present? Well, all of the suppliers had to start somewhere and there are certainly other suppliers that would like to gain first takers. The extent to which a bank might go with an unproven solution (which might have commercial benefits, of course) would come down to the appetite that user had for risk and whether this was felt to be outweighed by other attractions of the system. Pioneers with banking applications do not tend to have a happy time in any sphere, and Islamic banking has been no exception. So, many of the challenges facing a bank seeking a Shari’ah compliant system are common ones, that apply equally to conventional banking, but there is more limited choice and a number of complexities that are specific to this form of banking.
Islamic Report
www.ibsintelligence.com
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