A look at the Islamic banking system

With the Western banking model looking pretty rough after a year of collapses and crises, even Pope Benedict XVI recently urged financiers to look at the Islamic system, where bankers are automatically more risk averse because they share the risks with the customer.

With the Western banking model looking pretty rough after a year of collapses and crises, even Pope Benedict XVI recently urged financiers to look at the Islamic system, where bankers are automatically more risk averse because they share the risks with the customer. Haitham Abdou, director of marketing and product strategy for the ITS Group, the biggest supplier of Islamic banking solutions in the world, confessed he was shocked to read Pope Benedict praising Islam’s bankers in the pages of the official Vatican newspaper. However, Abdou said, the article convinced him that Islamic banking is now ready for a rebranding as ethical banking, a system that could find new customers in the western world and elsewhere, as well as its traditional home in the Islamic world. “Pope Benedict urged the western community to look at the Islamic banking model because of its ethical principles, to restore confidence amongst their clients at a time of global economic crisis,” Abdou said. “It was really quite shocking to me to read such a thing coming from the Pope, but that’s what led me to believe that Islamic banking is crossing the religious boundaries and being seen as an ethical business model.” The new focus on Islamic banking in the west comes just as ITS prepares for a global roll-out of its latest suite of banking solutions, called, but no coincidence, Ethix. The name is not just a reminder of the ethical basis of Islamic banking principles, with their refusal to allow “usury”, the charging of interest, but a hint, although Abdou is too polite to say so, that western banking has not necessarily been that ethical recently.

Top tier
ITS was established back in 1981, in Kuwait, where it was (and still is, mainly) owned by the Kuwait Finance years and there are five or six opened there now. France has issued licenses for the establishment of Islamic financial organisations. In my discussions with US regulators, they are looking into the legality and regulations of the Islamic model, and I have started to see many conferences being held in North America. There’s a global trend in the industry.” ITS picks the best of other suppliers’ products when it doesn’t need to “reinvent the wheel” for particular parts of its banking solutions offer, Abdou says, but “when it comes to the Islamic front end side of things, that’s where we’ve developed our own products. Our development centre is in Cairo, we have about 1,400 software engineers there. We’re the only CMM level five software organisation in this part of the world, which shows our quality. What we’ve done is put all of these products together whether they’re ours or third-party, to pre-package them as one solution, which we call Ethix Financial Solutions, and that’s really the whole focus, on ethical banking, which is the new term, really, beginning to be used for Islamic banking. This way it can cross the borders of the Western community.” “The main principle behind Islamic banking is, ‘no interest’. Nothing else is as highlighted. That’s why at every Islamic bank there’s a Sharia board. That board decides what is acceptable as a product, what the workflow for financing should be in the branches, what contracts need to be assigned by a customer, how the accounting should work. That means that every bank may have a different approach for the same type of product. What we’ve realised is that it’s impossible for one IT vendor to accommodate all the variations.”

Unique Sharia compliance
The nature of Islamic banking means that every bank interprets what rules there ought to be, Abdou says. The problem that causes is that it makes July-August 2009 www.worldfinance.com Islamic Finance House. “So because of their needs, our main focus from the beginning was supplying solutions for Islamic banking,” Abdou says. He himself joined the company 13 years ago, and swiftly rose up from being a programmer, analyst, designer, project management, product strategist/ architect. Three years ago he moved into the commercial side and is now director. “We supply more than 85 banks in our part of the world. In the past couple of years we’ve started to grow into Africa, and into the Far East from Malaysia to the Philippines. Our core expertise is in Islamic banking, but we also supply into the conventional banking industry as well. We have a lot of the Tier One banks as customers, we supply conventional banks in Africa, in Nigeria and South Africa. “Conventional Western banks are looking to open up Islamic ‘windows’, especially with the global banking crisis. Islamic banking saw a boom starting a couple of years ago and we feel it’s been growing at about 15 to 20 percent here and globally and we don’t see that slowing down.” Islamic banking started in the Middle East “probably because of the religious side of things,” Abdou says, and then as western countries started to see the business model of Islamic banking they started to realise the attraction of sharing the risk with the consumer, so banks get more involved. We’re in a transitional period now, where we’re dropping the boundaries of religion and being perceived as an alternative finance model rather than just targeting the Muslim community specifically.

Pope Benedict urged the western community to look at the Islamic banking model because of its ethical principles, to restore confidence amongst their clients at a time of global economic crisis. “We’ve seen some of the Tier One banks such as HSB C, Citibank, Citibank, ABN Amro, all established Islamic windows in their operations. We’ve seen in London, for example, official regulations covering Islamic banks have been brought in by the Financial Services agency in the past few building a rigid IT platform to administer all the different versions very difficult. Abdou, however, says ITS welcomes diversity: “We don’t believe there will ever be a standard, and I believe that if there was one it would defy the whole point of an Islamic bank. I don’t think you could come up with a standard, for example, of how Murabaha [a type of sale compliant with Sharia, involving a declaration of the seller’s fixed costs, to be added to the price] is defined. The main challenge for the banks is when they look at an IT system and the vendor claims it’s Sharia compliant. The first question the IT person at the bank has to ask is: ‘According to whom?’ It can be implemented at X bank, or Y bank, but it depends on what that bank’s Sharia board will accept. “This is good: it creates a more diverse arena, it means more competition. And you’d never find at an Islamic bank the kinds of activities such as the derivatives trading that helped damage the western banking system, which is good for society in general. The bank shares the risk with the client, they’re a partner in the business. Once that happens, transparency will be there. The bank takes much greater care before giving credit to someone than a western bank might, because they’re directly involved. The consumer takes the risk with the bank. There’s no guaranteed return to the bank, as there is in the western system, because there’s no interest charge. But the bank shares in the profits.” What ITS has done, Abdou says, is create an Islamic platform keeping simply to the underlying principles of Sharia. This then allows the client bank to define its own products from the ground up, from an accounting point of view, a product point of view, a line of business point of view, how the particular bank’s Sharia board wants to see it done, and define the workflow completely from scratch.

If I go to the US, or anywhere else in the world, depending on how they would look at it, I don’t have to modify my product, and by allowing the client to specify things from the “ground up”, they don’t always have to keep referring back to the IT vendor

“That was the only way we felt we could go to a bank and say: ‘This is 100 percent Sharia
compliant, because we don’t define that, you do,” Abdou says. “It takes the headache away from our guys in trying to accommodate all of the different interpretations by different Sharia boards. If I go to Malaysia, for example, and they look at Islamic banking completely differently from the Middle East, the same product would still fit from Day One. If I go to the US , or anywhere else in the world, depending on how they would look at it, I don’t have to modify my product, and by allowing the client to specify things from the ground up, they don’t always have to keep referring back to the IT vendor to see what new products they’re rolling out in the next few months, which would have to be tested and so on, and which can get quite costly.” Ethix Finance has now received several awards worldwide, as institutions recognise it as an innovative Islamic product. ITS is preparing to take it global, soon. “We tried to look at what would benefit the customer and us as well. If you have to design bespoke systems for every client, it becomes very difficult to maintain a different line of code per customer as time goes on,” Abdou says. The suite of products took about two years to develop, bringing on different sections in locations around he globe. It has been rolled out to customers in different parts of the world, running live and “very robust”, Abdou says: “That’s why we’re ready to launch officially in the next few months, under the new name Ethix, to emphasise the link with ethical banking.” There was, he says, no problem getting the name registered around the world as a trademark: “We really felt it had the meaning we needed for a banking solution for an Islamic bank or a conventional bank. Even conventional banks need to be more ethical. We have all the components that fall under the Ethix brand, such as Ethix – finance, Ethix – Branch, Ethix – invest, Ethix – Ledger: overall there might be 25 different products under that banner. “The good thing is, you don’t have to purchase all of that, they’re all components in the suite. If a customer is happy with their core banking solution but they need to alter the front end for a more Islamic solution, then they only need to purchase from us the front end and we would integrate seamlessly with whatever core solution they already have. We don’t tie them, we don’t say you have to have the whole package or nothing.” Ethix is probably enough to be getting on with, but Abdou says ITS is looking at perhaps developing an engine for Islamic insurance companies in a similar way to the company’s banking solutions. “It’s smaller, but I believe it will be a gowth area, and follow the footsteps of the banking sector.” he says.

For further information:
T: +965 2240 9100
E: haitham.abdou@its.ws
www.its.ws