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HOW ISLAMIC BANK MANAGERS ARE LEVELLING THE PLAYING FIELD IN THE COMPETITION WITH CONVENTIONAL BANKING

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islamic bank managers are levelling the playing field in the competition with conventional banking

There are now more than 300 Islamic financial institutions spread across 70 countries – including five Islamic banks in the UK, and 19 Islamic financial institutions in the USA.

An important factor in their growth has been the effect of the recent financial crisis on changing attitudes to risk given that Islamic banks were largely insulated from the crisis. Highly regulated operational environments, guided by Shariah principles, prohibited investment in the type of financial products which affected conventional banks and prompted the crisis. Western investors, disillusioned with the banking practices of conventional banks in the wake of the global financial crisis, have seen the potential for a safe harbour.

islamic bank managers are levelling the playing field in the competition with conventional banking

islamic bank managers are levelling the playing field in the competition with conventional banking

At the same time, the constraints imposed by regulation might hinder the efficiency with which banks can operate. The strict application of Shariah rules can increase operational costs since many Islamic banking products are bespoke. Furthermore, Islamic banks are typically small compared to conventional banks, and evidence suggests that technical efficiency increases with size in the banking industry. In addition, Islamic banks are often domestically owned and previous work indicates that foreign-owned banks are more technically efficient than domestically owned ones.

The rapid increase in Islamic banking internationally, and the importance of the sector for the economies of some countries (for example, Malaysia, Bahrain and the United Arab Emirates) make it important to have a greater understanding of the performance of Islamic financial institutions. Previous studies of  performance in Islamic banks relative to conventional banks have been inconclusive. In our research we compare conventional and Islamic banks in terms of efficiency and also what the underlying reasons might be. We focus on countries with a substantial (at least 60%) Muslim population and where there are both Islamic and conventional banks in operation, comparing the efficiency of 45 Islamic banks with 207 conventional banks across 18 countries over the period 2004–2009 (a period covering the start of the global financial crisis). We use an approach that breaks down overall efficiency into two components: one looking at the ‘modus operandi’ of the operation (we call this ‘type efficiency’), and the other at managerial competence at converting inputs into outputs (which we label ‘net efficiency’).

In taking this approach we gain new insights. First of all, we find that there is no significant difference in average overall efficiency between conventional and Islamic banks – which is in line with some previous findings. But this result conceals some important differences. The modus operandi in Islamic banking (measured by type efficiency) appears to be a less efficient system on average than the conventional one. Managers of Islamic banks, however, make up for this, as average levels of net efficiency in Islamic banks are higher than in conventional banks. So essentially, the apparent inefficiency of the system is counterbalanced by the efficiency of the managers.

Each type of banking could learn from the other. Islamic banks need to look at the conventional banking system for ideas on how to make their own system more efficient. An obvious possibility would be to standardize their portfolio of products as in conventional and the larger Islamic banks. Conventional banks need to examine the managerial side of Islamic banking for ideas on how to improve the efficiency of their own managers. If there is little difference in the inherent ability or the training of managers in each type of bank, then other aspects, such as the remuneration systems and project viability might hold the key.

Managers should also take note of the beneficial effects on efficiency of prudent behaviour in terms of holding reserves relative to non-performing loans. In a period of financial turmoil, the banks in this sample have typically suffered falls in their overall efficiency relative to the start of the period. The year 2008 had a particularly bad impact on overall efficiency, but there has been a limited recovery in 2009. An examination of the components of overall efficiency indicates, however, that the managers of Islamic banks have coped with the crisis better than those of conventional banks (based on the results for net efficiency), but that the gap between the conventional and Islamic frontiers has widened during this same period (based on results for type efficiency).This implies that the efficiency advantage of the conventional over the Islamic operating system has increased during the period of financial turmoil, suggesting that a shift to a more standardized process would help Islamic banks to maintain efficiency in the face of future crises.

We need to know more about why managers of Islamic banks appear to perform more efficiently than those of conventional banks – as a way of complementing the econometric analyses of bank level data – these findings are nevertheless important and relevant to both policy-makers and regulators, and the development of a secure and efficient banking system.

Dr Jill Johnes, Lancaster University Management School, www.lums.lancs.ac.uk

Banking

SoftBank telco unit rotates CEO, Son steps down as chairman

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SoftBank telco unit rotates CEO, Son steps down as chairman 1

By Sam Nussey

TOKYO (Reuters) – SoftBank Corp, Japan’s third-largest telco, said on Tuesday Chief Technology Officer Junichi Miyakawa would become its chief executive officer, effective April 1.

The change at the top of one of SoftBank Group Corp’s largest assets comes after two years of deliberation, with the telco emphasising the need to “pass on the strengths of its current management system to future generations.”

The rotation is likely to lead to speculation over SoftBank Group CEO Masayoshi Son’s own succession plans. The 63-year-old billionaire abandoned a previous plan to hand over the reins and went on to launch the $100 billion Vision Fund.

The son of a Buddhist priest, 55-year-old Miyakawa is a technical whizz driving projects including the wireless carrier’s 5G build-out. He replaces 71-year-old Ken Miyauchi, a key lieutenant of Son, who took up the post in 2015.

Miyauchi will take the post of board chairman from founder Son, who will remain on the board. A household name in Japan, Son joins business leaders such as former Apple CEO Steve Jobs in being the face of the company he runs.

During Miyauchi’s tenure, the telco had a bumper IPO in December 2018 to feed cash to SoftBank Group as it shifted its focus to investing in tech companies. Son has since further reduced the group’s stake after a series of high-profile stumbles.

Miyakawa takes the helm as the industry faces unprecedented political pressure to cut fees, potentially eating into fat margins in its core business.

Looking to grow sales beyond selling mobile and broadband subscriptions, SoftBank is integrating a hodgepodge of companies including online fashion retailer Zozo and message app operator Line Corp into internet business Z Holdings.

Known for blue sky thinking including flirting with the idea of making cars, Miyakawa’s pet projects include an attempt to deliver broadband via drones. Alphabet Inc said last week it was abandoning its own balloon-based attempt.

(Reporting by Sam Nussey; Editing by Tom Hogue, Shri Navaratnam and Subhranshu Sahu)

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Banking

Over 60’s turning to digital banking up by 90% during pandemic

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Over 60’s turning to digital banking up by 90% during pandemic 2

More than 90% of people aged over 60 have used online banking for the first time during the Covid-19 pandemic, according to a poll by iResearch Services, highlighting the importance of banks getting digital right in 2021.

In comparison, 17% of people aged under 30 said they were accessing services via an app or web browser for the first time.

The findings show how banks must adapt to help service the influx of new digital users and gain their trust, accelerated by the Coronavirus pandemic. With 97% of 18–24-year-olds trusting their bank with their data, compared to only 33% of people aged over 66.

Commenting on the findings, Gurpreet Purewal, Associate Vice President, Thought Leadership, at iResearch, said: “Our study demonstrates the lasting impact of Coronavirus on how people will access banking services from now on. Banks will be required to refocus on really understanding customer needs in order to engage with the different requirements of each individual customer.

“More than half (54%) of respondents said they are less likely to attend a physical branch after the pandemic. This demonstrates a seismic shift in the way people will access banking services now and into the future.”

In other findings, 63% of respondents said their bank acted in their best interests during the pandemic, but a third said they would consider switching their bank for better, more personalised communication.

Purewal added: “On the whole, High Street banks have emerged with great credit from the pandemic for the way they have supported their customers. As the economy rebuilds, it will be more important than ever that they communicate in the right way to help consumers through 2021 by leveraging digital platforms and understanding their needs fully.”

Asked how banks can improve their communication with customers, ‘connecting on a personal level’ ranked highest, followed by ‘more honest and open dialogue’, a ‘demonstration of how they are helping customers’, ‘more creative campaigns’, ‘consistent messaging across channels’ and finally ‘responsiveness to major events’.

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Banking on the cloud to create a crucial advantage in financial services

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Banking on the cloud to create a crucial advantage in financial services 3

By Rahul Singh, President of Financial Services, HCL Technologies

Once considered a revolutionary technology, cloud is now at the heart of agile and innovative businesses. The financial services industry is no exception, and has been a major adopter of cloud-based Software-as-a-Service (SaaS) for its non-core applications. Functions such as customer management, human capital management, and financial accounting have progressively shifted to the cloud. Several banks have also warmed up to using cloud for services such as Know your Customer (KYC) verification. IDC analysts say that public cloud spending will grow from $229 billion in 2019 to almost $500 billion by 2023, and a third of this will be spent across three industries: professional services, discrete manufacturing, and banking. The time is ripe for an increasing number of financial services providers to consider moving more of their core services to cloud.

Adoption is already on the rise

Earlier reluctance to move core activities to the cloud has softened, and many banks have put strategies in place to migrate services, including consumer payments, credit scoring, wealth management, and risk analysis. This significant change is driven by factors such as PSD2 and open banking, which require secure and cost-effective data sharing.

Regulators too were once cautious in their approach to cloud technology, but this is also changing. The Australian Prudential Regulation Authority (APRA), for example, whilst acknowledging the risks associated with cloud, also recognised the risk of sticking to the status quo. ARPA trusted the enhanced security offered by the cloud, and updated its cloud-associated risk advice. Wisely, APRA recommended that banks must develop contingency plans that allow cloud services to be provided through alternate means if required.

Rising pressure from new challengers

The other pressure for incumbent banks is from next generation fintech firms. These are cloud-native organisations, and are able to onboard customers remotely in minutes, roll out new services in days, and meet compliance requirements at lower costs.

As a result, the need for traditional banks to upgrade core systems and integrate the latest technologies is stronger than ever. The COVID-19 pandemic has been an additional driver, highlighting the importance of upgrading and migrating core systems to the cloud. Financial services organisations have been forced to rethink their approach to digital transformation, and pay special attention to a cloud-aligned culture. The industry is recognising how the cloud can address new and ongoing regulatory changes, meet different demands from customers, support the roll-out of emerging technologies, and enable incumbent providers to respond to the relentless competition from fintech firms.

New year, new priorities

As we enter 2021, financial services providers will need to reset their priorities, and go beyond using the cloud for scalability and cost efficiency alone. The new areas to focus on will include:

  • Creating a robust digital foundation: The cloud market is expanding fast, and there is an ever-increasing number of services on offer. Whilst the big three hyper-scalers are the obvious choice, various other players are also gaining traction, such as IBM, Oracle, and Alibaba Cloud. Organisations will need a robust digital foundation to adopt cloud at scale in a secure and compliant way. A well-architected digital foundation, supported by resilient operations, ensures that organisations have continued access to their systems and data, regardless of where employees are located, or what device they are using.
  • Adoption of technology platforms: Enterprises are finding ways to reduce complexity by embracing a platform approach, and increasing the speed of business IT consumption. Physical infrastructure is being abstracted into cloud-based platforms, with data consolidated into data lake platforms. Software products like Apigee are being offered as capability platforms to drive better analytics and intelligence.
  • Enhancing IT security: Cloud offers organisations greater security than on-premises servers, if implemented correctly. Financial services organisations have relied on control and compliance-based security for years, but these practices are increasingly vulnerable to cyber threats. Whilst service integrators create robust cybersecurity solutions for financial services organisations, cloud providers are also looking to provision industry-specific security and regulatory measures like end-to-end data encryption – making it easier for financial services organisations to be compliant whilst migrating to cloud.
  • Driving innovation: Cloud is the fundamental factor behind the ability of fintechs to innovate rapidly. Using cloud, financial services can leverage new technologies and tools like augmented reality (AR), virtual reality (VR), natural language processing (NLP), machine learning (ML) and the Internet of Things (IoT) to unlock new processes that improve customer interaction and experience with portable real-time services. Whilst fintechs have led the way in cloud-based innovation through open banking platforms, some of the leading banks are also adopting cloud to simplify their business processes, including KYC as a Service, to enhance customer experience.
  • Enterprise synchronisation: Effective collaboration, both internally and with external partners, is crucial to success in the ever-expanding financial services ecosystem. Cloud allows businesses to integrate collaboration through shared tools and platforms. This is a critical ability as it leads to faster decisions and improved innovation cycles.

Legacy systems hold banks back from improving revenue generation and restrict their ability to build a responsive and resilient business. Cloud is a key factor in the success of challengers: traditional banks have no time to waste in migrating their core systems to cloud and building a secure future.

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