The rise of Islamic banking

With Shariah compliant banking surging in popularity around the world, CXO hears about its potential in Europe from NG SUBRAMANIAM, President of TCS Financial Solutions.

Could you shed some light onto how Islamic banking has exploded into a US$300 million industry in recent years? How much of a footing does it have in Europe?

NG Subramaniam. Islamic banking has been growing at a rate of 15-20 percent every year, spanning most of Asia and the Middle East, and is now beginning to make inroads into the western financial markets. The growth in Islamic Banking can be attributed to high revenues from the petro-dollar and the trickle effect on affluence in the Middle East and Asia, as well as socio-demographic trends such as the population growth and rising affluence of Muslims worldwide.  

Many countries in Europe have begun showing interest in Islamic banking. France recently announced that it has eliminated tax obstacles and improved the legal framework for the setting up of Islamic financial institutions in the country. Many German banks have been active in the global scene issuing Sukuks, and are in the early planning stages for retail banking offerings in the domestic market, while the UK is home to the only five Islamic banks in the EU so far, with UK£5.5 billion in Sukuks on its stock exchange.

What are the challenges international banks face when wishing to offer Shariah compliant products for their customers, whilst ensuring that they meet international standards and regulations?

NGS. International banks face many challenges in setting up Islamic banking operations. The regulatory environment, local taxation and contract laws need to accommodate Islamic banking products. There is a need for different countries to put in place the appropriate local regulatory framework to address Islamic banking, especially in areas such as tax treatments. The biggest challenge yet lies in the shortage of skilled resources in Islamic banking as well as Shariah scholars qualified to advise banks operating internationally under Islamic law.

What impact does it have on their core banking systems?

NGS. Islamic banking may differ from western-style conventional banking in many respects but the same business, regulatory and technology requirements prevail. Most banks today deploy core banking systems to support their business processes and increase operational efficiencies. This requires enterprise-wide planning, commitment and resources. There are also considerable complexities and risks associated when a bank attempts to set up an Islamic banking window using the existing conventional core banking system to support Islamic banking. The major areas of concern that banks need to address are product compliance, profit sharing/distribution and the requirement to maintain separate entity books for customers and for reporting purposes.

Could you explain how your Islamic banking services and products are benefiting financial institutions today?

NGS. TCS BαNCS enables business transformation in Islamic banking in the form of increased market share for our customers, superior service quality, consistent and well-designed product integration, alongside a lower cost infrastructure for transaction processing. Endowed with a customer-centric bent, it helps banks manage their customer relationships effectively. This comprehensive solution maintains distinct identities of Islamic financial products and coexists with conventional banking solutions, complying with Islamic principles and Shariah laws.

The TCS BαNCS platform encompasses an array of pre-configured, customisable banking product lines, including deposits, investments, retirement accounts, consumer and commercial loans, mortgage loans, equity financing, cards, payments, treasury management and trade finance. In addition, transaction banking services, clearing and settlement functions across the banking value chain can be enabled through the solution's business process configurability and service integrator component. We also offer Sharia compliant insurance solutions based on Takaful to meet the varied needs of insurance enterprises across multiple lines of business, distribution channels and customer segments. TCS BαNCS, with solutions in core banking, universal banking, payments, regulatory compliance, wealth management, meets the needs of a diverse range of organisations, including microfinance, euro-zone powerhouses, and the operators of one of the largest branch networks in the world. Built using advanced SOA technologies, the solutions are robust, STP-enabled, flexible and highly scalable.

N. Ganapathy Subramaniam is the President of TCS Financial Solutions, a strategic business unit of Tata Consultancy Services Limited. A part of TCS and the Indian IT Industry for the past 25 years, NGS has had numerous opportunities to perform a variety of roles in delivering solutions to customers globally, especially in the banking and financial services sector. www.tcs.com/bancs