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Islamic Banking: A Massive Growth Opportunity That Keeps Growing

It's a financial services opportunity with US$750 billion of assets and annual growth rates of 15 to 20 percent. It can also be one of the most challenging endeavors for many banks to undertake. But despite this dichotomy, Islamic banking is becoming one of the most important areas for global financial institutions to investigate.
Islamic banks offer products that are in compliance with the principle of "trading" as highlighted in the Quran, more commonly known as Shariah compliance. Lending at an interest rate is prohibited; instead, profit or income from a transaction is to be made via the trading process of selling goods and services to customers.

Focus on Trading

These requirements challenge IT managers to choose the right banking software to accommodate Islamic principles. "CIOs need to be mindful that while the system may be called a banking system, it has to behave as if it's a trading system," says Jamil bin Hassan, an Islamic banking technology expert and principal consultant for the Islamic banking practice at i-flex solutions. (Listen to Jamil bin Hassan's podcast series on Islamic banking.

"When you are trading, banks are required to keep track of their inventory and assets," he says. "But few traditional banking systems today have asset management and tracking capabilities that are comprehensive enough for these requirements. So institutions that are moving to Islamic banking will be required to beef up these areas."

Special Strategies

One of the common concepts used by Islamic banks is Murabaha, a cost-plus-profit strategy. Upon a client's request, a bank purchases specified goods, such as commodities from a third party and then sells the goods to the client at the purchase price, plus an agreed fixed profit that compensates the bank that provided the funds.

Some specialized financial applications now support Murabaha and other elements of Islamic banking. For example, i-flex's FLEXCUBE supports a variety of Murabaha transaction types, including funds-based and pool-based approaches for Mudarabah transactions.

In addition, FLEXCUBE accommodates Qardhul Hassan, or loans made without profit. The borrower is required to repay only the principal amount borrowed, but he may pay an extra amount at his discretion, as a token of appreciation.

Hassan adds that financial transparency is another core requirement for Islamic banks, which must disclose to investors sources of income and costs. "Your promise to depositors in Islamic banking is a ratio of your profit. So these investors have a right to ask you how you arrive at the profit you are offering them," he says.

To learn more, download the Islamic banking podcast series from i-flex solutions.

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