IBS Journal November 2017
25
Mahal from CBI told us that leading banks maintain and run the Islamic banking business through subsidiaries or a separate banks, which are part of the bigger group, whereas smaller banks run the Islamic business through Islamic windows in their existing conventional distribution channels.
“[Temenos] enables the bank to separate Islamic banking operations and products from conventional ones and makes sure that there are no mixing of funds. We always recommend that banks use one integrated solution, that can truly support both types of banking, as this will reduce their integration risk and gives them better visibility,” commented Fadi Yazbeck, Product Manager at IslamicSuite, Temenos.
Othman Abdullah at Silverlake agrees: “We strongly recommend our clients use a single system for both their conventional and Islamic Banking businesses. This approach makes IT operation management more efficient and cost effective. The same IT infrastructure and skillsets can support both conventional and Islamic businesses.”
Othman Abdullah, CEO in charge of Islamic Banking at Silverlake Group, explained in an interview with IBS Journal: “Islamic lending products have distinct requirements that conventional loan systems do not support. Islamic lending products are Shari’ah contract based. For example, Murabaha financing would need to take care of sale and purchase price, amortization of profit margin, rebate of profit margin for early settlement etc. These are demanding accounting processes that the system needs to take care of for it to be fully automated.
An Islamic window is simply a window within a conventional bank via which customers can conduct business utilizing only Shari’ah compatible instruments. Fadi Yazbeck, Product Manager at IslamicSuite at Temenos commented: “Most of our customers in the GCC and some African countries operate an Islamic window along with their conventional operations. An example would be First Abu Dhabi Bank in UAE using our solution for their Islamic and conventional operations on one integrated platform across multiple countries. This reduces their cost and allows them to consolidate their financials easier.”
Full integration
However, the issue when running these systems lies in the costs of redundancies and keeping up with both systems. Othman Abdullah said that: “It’s definitely more cost effective if banks use a single system for both conventional and Islamic businesses provided that the system is properly architected to handle both business seamlessly. If banks use different systems, they will have to manage two different systems - of software, hardware, and people – which will definitely be more costly.”
“The coexistence of both types of systems within the same bank is a search for balance between the compatibility of both styles of lending in one system, and the regulation and core values that each type of lending demands. Even though Islamic banking regulations only affects the end product, it still requires banks to understand it and work around it. However, frictionless coexistence is very much attainable, to the point that some of the largest banks in the Middle East are using our solution for both conventional and Islamic operations.”
Yazbeck added: “If the same bank is offering Islamic and conventional products, then integration between those two systems is a must. However it must follow the bank’s business model. It depends if this bank wants to have separate tellers and branches for Islamic operations – separate cash accounts and ATMs, and separate customer base and credit limits. In this case, a frictionless system is possible. However this scenario is highly unlikely, because most banks with both types of products want to have one customer base and to see the credit exposure of their customers across Islamic and conventional banks to assess risk. Not to mention sharing the same channels infrastructure.”
The challenges
On top of the costs and intensity of workload that running both systems entails, there are still issues when sharing a database between both banks: “Some regulators allow sharing of databases as long as products and accounting can be logically segregated, but some regulators insist on having a separate database,” said Othman Abdullah.
“The complications come during integration between the systems, as only one system is used to maintain the customer profile (E-CIF) and the GL’s / bank’s ledger is maintained only in one place,” adds Ashish Mahal from CBI.
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