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ISLAMIC FINANCE
The costs that need to be paid for introducing Islamic finance
Including an Islamic system bring great benefits for a bank looking to attract Islamic customers, but there are also major cost implications to consider
Junior Reporter Henry Vilar
T
he inclusion of an Islamic system alongside a conventional one, or viceversa, helps a bank expand the range of customers that they can onboard. However, there are a series of expenses that come with that transformation – logistics, regulation, integration.
Ashish Mashal, Digital Transformation Strategist at Commercial International Bank (CBI),says: “Cost implications are indeed quite high because banks have to maintain and pay out AMC for both core systems (conventional and Islamic) – examples being RAKBANK which uses Finacle for conventional banking and Flexcube for Islamic – whereas if we have a single consolidated system, it helps bring cost efficiencies. Another example is CBI which uses SIBS (Silverlake) for both conventional and Islamic.”
While countries like Iran and Sudan have already established a full Islamisation of the financial systems, which mainly comes from the intertwining of policy-makers and religion, some others like Bahrain and Malaysia have benefited immensely from the coexistence of both systems.
Islamic lending
The basics of Islamic banking is the Quran disapproval of riba (interest), gharar and maisir (contractual uncertainty and gambling), and haram industries (prohibited industries such as those related to pork products, pornography, or alcoholic beverages).
In order for banks to onboard Islamic systems, they have to familiarise themselves with the types of demands that the religion sets, and comply with them with the help of the Shar’iaha board or counselor. This person, or group, would advise the bank on Shar’iah jurisprudence or rulings, known as fatwa. This is the first additional cost they will face.
Both regulators and Shar’iah boards of foreign supervisor agencies must be consistent across the spectrum in regards to its rulings and decisions. To supervise this internal consistency, two multilateral institutions were created: the Accounting and Auditing Organization for Islamic Financial Institutions
(AAOIFI), which issues internationally recognized Shari’ah standards on accounting, auditing, and governance issues; and the Islamic Financial Services Board (IFSB), which issues standards for the effective supervision and regulation of Islamic financial institutions.
The regulator will have to undertake similar supervisory and regulatory functions regarding Islamic institutions as the one already performed with conventional institutions. It is a somewhat common misunderstanding that, since Islamic banking is largely based on profit-and-loss sharing agreements, Islamic institutions do not need to be supervised at the same level as conventional banks.
Keep them apart, but together
An important principle behind Islamic finance is the desire to maintain the moral purity of all transactions. The funds intended for Shari’ah-compatible investments should therefore not be mixed with those of non-Islamic investments.
Therefore, in order to ensure compliance with Islamic principles, conventional banks wishing to offer Islamic products must guarantee that the funds devoted to conventional activities will not be mixed (commingled) with those destined for Islamic activities. In operational terms, this requires that banks establish different capital funds, accounts, and reporting systems for each type of activity.
Consumers should be duly informed of all the risks they run when entering into new contracts, as the public will have a better understanding of conventional deposits than of Islamic deposits (such as mudarabah, safe-keeping, etc.) Often, a bank will dedicate a part of its activities to implementing Islamic tools, as
effective if banks use a single system for both conventional and Islamic businesses
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www.ibsintelligence.com | © IBS Intelligence 2017 It’s definitely more cost
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