This article is published in 2005, 3 years later it still has some valuable points. IBFN (Admin)

Finding modular and modern architecture capable of servicing the needs of the Shariah-conscious remains a daunting task. This article looks at the challenges and options for Islamic banking software.

Traditional Islamic banks look at technology just as their conventional counterparts do, but often end up with the realization that there is a total paucity of systems catering to the Islamic principles. The early adopters were forced to cobble together systems and build the Islamic banking concepts into their processes in a manner that gave basic automation to allow a slow but painful growth path.

The current state of a highly competitive market with management decision-making stemming from exhaustive management information systems (MIS) and slicing and dicing market data still remains a tall order for the MIS and IT staff who are stretched to provide the basic data required for achieving an increased share of the market. While traditional markets and clients tend to stay put, the influx of larger marketing budgets to attract newer customer bases is eroding the base of sticky customers.

The bad news is that even the true believer in Islamic banking is sceptical about whether the processes followed are entirely Shariah-compliant. The hope for the Islamic products and Islamic banks offering them, therefore, lies in the introduction of highly flexible banking systems that offer a modular and modern architecture that the multinational and conventional local banks are fast moving to arm themselves with in the battle for customers and their business.

IT Scenario in Islamic Banks

The once-popular and older tandem-based systems that provided a stable and relatively high uptime fault-tolerant environment are being challenged by the need to upgrade and offer web-based interfaces as also the requirement of additional channels to boost transaction volumes. While the security and basic network infrastructure are under fire from a slew of external and internal scrutiny checks, the need to move to a more modern infrastructure is constantly being seen as the answer to quell some of these ongoing challenges.

The old generation monolithic software vendors, such as Misys, have conventionally tended to offer a tweak to their software that would treat a product with some of the Islamic profit calculations in an Islamic way. While this has been seen as an extremely expensive solution, the banks have worked around the problem by building their own internally developed software that, though considered fairly basic, still managed to solve the immediate problems of being largely compliant. But such effort is a quick fix that tends to live an extended life way beyond what was initially anticipated. The application environment is soon clustered with interfaces intertwined spaghetti-like to various systems, making a nightmare of the maintenance issues that crop up time and again. It is not surprising that many of these banks are looking at new systems that can take care of the much needed features that the internal business groups are clamouring for, but to which the internal application is not able to extend itself.

Challenges of Islamic Banking Software

Shariah is interpreted differently in most countries and across most regions and sometimes even within the country, depending on their individual Shariah advisor and his interpretation of how a banking product can be offered to the consumer. There are activities such as trade, where the Islamic interpretation can vary, depending on the type of transaction that is being entered into. What often wins the customer is the ability of the bank to appeal to the Islamic beliefs and values of the consumer and the authenticity of the products to be Shariah-compliant.

The lack of standards that define a truly compliant Shariah banking system will affect the ability of the banks to implement Islamic products and services. While various bodies are formed to address the creation of a coherent set of Islamic banking standards, the emergence of a clear standard will clearly aid in creating standardized systems that cater to the larger masses of banks and their customers looking for a truly Islamic bank to deal with, free from fear of any dilution of their belief sets.

The Evolving IT Application Architecture

The ability to create consumer-based products and services in minimum time is set to be the yardstick for choosing applications meant to automate the banking infrastructure. The banks are looking at state-of-the-art systems to go far beyond automation. They are expecting technology to assist in creating products in a short time, attracting and retaining customers through such tools as CRM-based market feedback, profiles of existing users and data warehouses being created to allow targeted marketing campaigns tailored to the profiles and spending habits of customers. The corporate customers are constantly being wooed by competitors and in such highly competitive environment often the extra fizz that a bank can offer makes up the winning mix that creates customer stickiness.

Modular architecture is the key – a building block approach is what suits most established as well as new banks. The ability to plug and play will surely emerge as the key. In this task, acquisition of ready-made modern pluggable components that can integrate smoothly will be an important consideration.

These applications will either be interfaced directly to the host or will establish connectivity through a middleware. The modular components have to take care of products such as:

  • Al Wadiah Savings Account
  • Al Wadiah Current Account
  • Al Mudharabah Investment Account
  • Islamic Financing
  • Al Ijarah/ Ijarah Wa Iqtina Leasing
  • Islamic Trade Financing
  • Islamic Treasury
  • Al Mudharabah & Al Musyarakah Equity Financing
  • General Ledger
  • Customer Information
  • Remittances
  • Telebanking
  • Internet Banking
  • E-Switch (ATM)

The Middleware dream of offering a common integration platform has got the industry abuzz with the option of using an MQ or any other integration platform such as Weblogic to provide a host of additional connectivity options with relatively lesser pain. This gives the IT infrastructure many integration options that offer IT staff a plethora of channels that allow a relatively easier plug and play route to connectivity and applications sharing.

There are a number of Islamic banks being launched while new licences are being issued for other fully-fledged Islamic institutions. Even existing banks are looking to add Islamic products to their portfolio. But basic to all such plans is the hope that they can start with a modern architecture that will enable them to look at growing the way the business grows rather than being limited by older systems that present more immediate challenges as well as restricts the manoeuvrability to challenge the conventional banks, which seem to be on a roll, partly due to their advances in technology infrastructure.