Feature interview with Mohammed Kateeb, Group Chairman & CEO, Path Solutions

As demand for Sharia-compliant banking continues, what role is technology playing in this segment?

First, let’s talk in a broader sense; we all agree that technology has long been playing a key role in the financial services industry. It is actually changing the whole industry. It is introducing new players, new business models and giving the power to the customer. For instance, banks nowadays are required to provide 24-hour service using eChannels. For Sharia-compliant banking there is no difference. Sharia-compliant banks compete with conventional banks and have to provide the same level of service, and hence need to deploy the latest technologies and the most sophisticated solutions to gain a genuine competitive edge.

More specifically to the Islamic banking segment, there are many challenges that are no longer existing in the mature conventional banking system like lack of standards; complex new products that are completely different in structure from the conventional ones; and lack of industry knowledge. Technology has to be able to address all these issues and challenges as well.

What are the advantages of Sharia-compliant technologies?

Sharia-compliant banking is very different from the conventional one. Trying to take conventional banking systems and customizing them to address Sharia-compliant banking needs has been repeatedly proven a failure. Many banks are tempted to do it, they go down that path and they suffer. Many banks contacted us for help after realizing they wasted tremendous amounts of money, resources, time and effort.

Sharia-compliant banking systems are designed and built from the ground up based on the Sharia principles. The concept of “interest” that is center of all conventional finance, is prohibited in Sharia banking activities. Same for Gharar and speculative activities. Banks that realize this and build it into their business model are usually very successful. Banks that ignore that fact will eventually fail. Customers are getting educated every day and asking for true Sharia-compliant banking products and services, and banks are required to attend to their specific needs.

Can you elaborate more on the special modes of financing in Islamic banking, such as profit sharing and fee-based financing approaches?

It is very simple model to understand. In Islamic finance, the principle of taking money for no work or effort is forbidden, so money doesn’t produce money, which means interest here. Profit sharing concept relates to what we call “Musharaka products” which means a bank customer takes a percentage of the risk with the bank as partner in selling a product or performing a project. In this arrangement, profits and losses are shared between the bank and the investor. Such sharing contracts promote greater stability in financial markets. For fee-based financing also called “Murabaha”, a commodity is sold by the bank for cost plus profit, and both the customer and bank know the cost and the profit involved, but the customer isn’t financially able to make the purchase directly, so the profit being a mark-up that both the bank and customer agree on upfront, and which will be distributed across a number of payments as agreed.

With the industry demand for Sharia-inspired products in retail, private and commercial banking, insurance and asset management significantly increasing, how does Path Solutions help shape this growing sector?

Path Solutions has designed and built a suite of innovative banking applications that adhere to the Islamic law and in full compliance with industry regulators. The interpretation of Sharia may differ from one country to another and from one region to another. Unfortunately, in Islamic finance there is no set of financial standards till today that forces all banks across the world to adhere to as is the case in conventional finance. This means that the system has to be flexible and customizable to allow these differences in implementation and that’s what we do.  We have developed the most comprehensive and integrated modular system to cater to the complex needs of banks worldwide, with the ability to launch new Sharia-compliant products to the market at a very fast pace. We were the first company to develop a pure Sharia-compliant solution for the financial sector and we continue to be the only vendor that is 100% focused on this segment. We cover the entire range of Islamic Banking; Retail and Corporate Banking, Investment and Financing, Treasury, Asset Management, Back-Office, etc. In addition, we provide great supportive modules for business analytics and reporting like Business Intelligence, Risk Management, and Regulatory Reporting.

What impact are regulations having on Sharia-based technologies? How does technology help Islamic financial institutions meet international regulations and compliance?

This industry is a heavily regulated one even though with the barrier to standardization. As I said earlier, it differs greatly from one country to another because of the lack of concurrent viewpoints and a unified Sharia school. For example in Malaysia, they have Sharia board on the country level, and in coordination with the Central Bank of Malaysia they regulate this industry. In other countries, Central Banks set burdensome laws and regulations, and each bank has its own Sharia board to interpret the Sharia and create financial products that fits the board’s interpretation. The only way to adhere to these multiple sets of heavy rules and regulations is to have flexible technologies, all-embracing regulatory reporting tools pre-built in the system, to anticipate and address pending regulatory changes while maintaining compliance in the most cost-effective and efficient manner.

How is Islamic finance developing in key new markets around the world? Where is your current target market?

Islamic finance continues to develop in various parts of the world, each of which is at a different level of development. In some markets, it is mature with very strong fundamentals and in others like in the West, it is just starting to wake up to its potential.

We saw some markets go through consolidations in the last few years and other new markets came to existence. Due to the political and economic turbulence in the Middle East and Europe, the last few years experienced tremendous slowdown in key Sharia-compliant financial markets like Iraq, Syria, Yemen, Libya and others. In Europe, many key initiatives either halted or slowed down. On the other hand, Africa continues to grow as an emerging market and we have seen rapid growth markets in several regions there. South East Asia continues to be a stable mature market and Central Asia is a key emerging region, forecasted to be the next centre of Islamic finance, but still at its infancy stage now.

What are the key challenges you are facing in the industry? Is there a big competition?

There are different types of challenges that we are facing in this industry. The first challenge is related to the level of maturity of the industry. Islamic finance is an emerging segment of the financial services industry that lacks standards and witnesses rapid changes, which puts tremendous pressure on IT vendors to keep abreast of the sector’s requirements and developments. The second big challenge is the level of understanding of how different this industry really is from its conventional counterpart. Most of the people working in this industry come from conventional finance and they think they can force conventional processes, procedures and IT systems on this segment. This of course opens the door to any vendor providing conventional banking systems to come and try to compete in this segment, which brings tremendous number of competitors to a segment that they simply cannot serve.

How do you see the sector developing in 2015?

With Dubai willing to join as a global hub for Islamic finance, London getting serious about this segment too and enforcing new banking laws, and Malaysia trying to recreate itself to protect its leading position, I believe these initiatives will accelerate positive changes within the industry in the coming few years. We will see increased pressure towards standardization, Islamic banks will go through consolidations, and the geographic coverage will continue to expand, but I am not sure how much of it can be accomplished in 2015.

Where do you see your strengths as a leader in the segment?

We are by far the number one provider of financial technology and business solutions when it comes to the number of Islamic financial institutions we serve in this segment, according to leading research firms and market analysts such as Gartner, Forrester, IDC and IBS. We cover the segment geographically from as far as Malaysia in the East to Great Britain in the West. We are the only vendor that is 100% focused on this segment and we do not get distracted. This amazing coverage and focus allows us to understand this segment better than any other vendor and allows us to develop and implement software solutions that are flexible to any market and to clients’ specific requirements.

Can you talk about the company’s strategy for this year and its position relative to its competitors?

In 2014, we introduced a new state-of-the-art technology platform with innovations that no other IT vendor can match. The new integrated platform gives financial institutions a single view of their customers coupled with real-time customer analytics, a complete view of risk, a compelling and interactive channel banking experience and the most advanced reporting tools; all while lowering their IT expenditures through greater process automation. We also brought in the mobility and the cloud to our offerings. And have introduced new and improved BI and RM solutions, characterized by flexible technical architectures and an expanding data warehouse built on SQL server. And we focused on upgrading and expanding our eChannels.

2015 will be the year of upgrading our existing clients to this great platform, that we are very excited about, which allows them to offer the best digital services to their customers, run more efficient operations and give them great insight and in-depth understanding of their business. In addition, we will continue to grow our line of Sharia-compliant software solutions, invest and launch innovative modules, thus meeting the highest demands of our clients. Of course, we are determined to continue our geographic expansion to new markets, wherever Sharia-compliant banking may be.

What kind of messages would you like to communicate to your clients and prospects?

The Sharia-compliant finance is a unique segment that is simply different than the conventional one. This also applies to processes, procedures, documentations and IT systems. A financial institution has to understand that it needs a unique and robust solution that is built to address the requirements of this segment specifically. There are many examples in the market where banks tried to implement tweaked conventional banking systems and they failed. Selecting the right technology partner with the right solution is critical to the success of any financial institution.