UK CARVES A SPACE IN ISLAMIC FINANCE

By Manish Jain, Industry Principal and Sreenivas Pallapothu , Principal Consultant, Finacle – Infosys

UK Prime Minister, David Cameron, made his government’s ambitions clear at the recently concluded ninth World Islamic Economic Forum (WIEF) in London. The first time that the event has been held in a non-Islamic country, Cameron spoke of his desire to see London count among the great capitals of Islamic finance globally, and not just in the Western worldi.

The story so far

Manish Jain

With US$19 billion in Islamic finance assetsii, the UK currently ranks ninth in the world. Approximately 20 banks – six fully Sharia-compliant – offer Islamic banking services across the UK. The London Stock Exchange is also an important global channel for the issue of sukuk, and Islamic investments have powered major developmental projects including the Chelsea Barracks, which was the largest Islamic finance deal in Europe to date.

This growth is the result of progressive policies and reforms, whereby amendments have been made to conventional banking legislation to allow Islamic features, as well as a strong ecosystem of infrastructure and support services. An educational system spanning the banking industry, schools, and general public has also addressed one of the key challenges for the development of Islamic finance, namely the availability of trained professionals.

With Islamic investments growing at over 150 per cent since 2006 and expected to reach £1.3 trillion by 2014iii, it is inevitable there will be an increased focus on how the UK can gain a larger proportion of this opportunity. The UK’s first Islamic Finance Task Force is a clear manifestation of this drive, launched earlier this year with the mandate to drive the UK’s Islamic finance sector, attract Islamic investments in infrastructure projects and support overall economic growthiv.

The global push

Even as the UK moves to consolidate its position in Islamic financial services, the global market continues to post impressive growth figures. Over the past three years, the top 20 Islamic banks, accounting for nearly 57 per cent of global Islamic banking assets, have grown by approximately 16 per cent annuallyv. These banks are concentrated in core Islamic banking markets such as Saudi Arabia, Malaysia, the UAE (the top three in terms of assets), Bahrain, Kuwait, Qatar and Turkey. The Middle East & North Africa (MENA) region – specifically in countries like Egypt, Iraq, Libya and Tunisia – is also expected to develop and strengthen its Islamic banking legislative frameworks and contribute to the next phase of growth and expansion for the sector. Other countries, including Indonesia, India, Pakistan and Bangladesh, and which together account for over 40 per cent of the global Muslim population, also present a huge opportunity for developing Islamic financial services.

Islamic finance on the high street

As growth in existing markets continues, new core Islamic markets are added and Western economies proactively pursue opportunities in Islamic finance, financial institutions with an Islamic focus will continue to increase.

Given the immense growth potential and the positive supply and demand dynamics of the Islamic finance industry, there is a huge opportunity for even conventional high street banks to develop and offer Sharia-compliant solutions for their customers. More importantly, Islamic finance is no longer considered to be relevant only from the perspective of religious scripture. Following the 2007-8 global financial crisis, the principles of Sharia-compliant banking have as much relevance to any customer looking for a fair, transparent and mutually rewarding financial relationship. For banks, it could even be the opportunity they need to reestablish trust with their customers.

Next steps

Sreenivas P

As more banks finalise plans to opt into Islamic finance, the choice of banking solution will be central to their capability to design and offer Sharia-compliant solutions. Contemporary off-the-shelf core banking solutions will not be able to support both conventional and Islamic banking activities. Though customisation is an option for high street banks planning to launch an Islamic window, it is a complicated and lengthy process, and hard to justify in terms of cost and time expenditure.

Take for instance a high street bank that offers automotive loans to customers as part of its conventional banking portfolio. In the context of Islamic banking, the same transaction would require the bank to purchase the automobile and then sell / lease it to the customer. To support these concepts of Islamic banking across business lines, the bank would have to make large-scale changes to its core banking systems.
A better alternative is for the bank to deploy a specialised Islamic banking solution, compliant with Sharia board injunctions, which can be integrated with existing systemsvi.

Solutions

It is critical that all solutions support the range of functions and products associated with Islamic banking. They should have the flexibility and scalability to change depending on business strategy; for example launching Islamic banking as a window at one location and then extending it to other locations or converting one location to a standalone Islamic banking operation. Most importantly, they should also be capable of delivering some of the fundamental features that are requisite for success in banking today, such as a 360-degree customer view, omni-channel operations, personalisation and customer-centricity.

The Islamic banking opportunity is no longer defined only by the needs of specific religious demographics. In a post-crisis world, it has the potential to resonate with a broader cross-section of customers looking for an equitable financial partnership. For financial institutions, it represents an emerging market segment with volume and growth rates that cannot be ignored. For governments, such as the UK, it opens up new possibilities to attract developmental investments and shore up the economy. The presence of over 2,000 political and business leaders from 120 countries at WIEF in London this month is just the beginning.

Gov.uk, 29 October 2013, World Islamic Economic Forum: Prime Minister’s speech: https://www.gov.uk/government/speeches/world-islamic-economic-forum-prime-ministers-speech

The City UK, 23 October 2013, Islamic Finance 2013: https://www.thecityuk.com/research/our-work/reports-list/islamic-finance-2013/

Gov.uk, 29 October 2013, World Islamic Economic Forum: Prime Minister’s speech: https://www.gov.uk/government/speeches/world-islamic-economic-forum-prime-ministers-speech

^ Gov.uk, 11 March 2013, Government launches first Islamic Finance Task Force: https://www.gov.uk/government/news/government-launches-first-islamic-finance-task-force–2

^ Ernst & Young, 10 December 2012, The World Islamic Banking Competitiveness Report: http://www.ey.com/Publication/vwLUAssets/The_World_Islamic_Banking_Competitiveness_Report/$FILE/World%20Islamic%20Banking%20Competitiveness%20Report%202012-13.pdf

^ Infosys Finacle, 2013, Accelerate innovation:http://www.infosys.com/finacle/solutions/Documents/Islamic-Banking.pdf

By Manish Jain, Industry Principal and Sreenivas Pallapothu , Principal Consultant, Finacle – Infosys

UK Prime Minister, David Cameron, made his government’s ambitions clear at the recently concluded ninth World Islamic Economic Forum (WIEF) in London. The first time that the event has been held in a non-Islamic country, Cameron spoke of his desire to see London count among the great capitals of Islamic finance globally, and not just in the Western worldi.

The story so far

Manish Jain

With US$19 billion in Islamic finance assetsii, the UK currently ranks ninth in the world. Approximately 20 banks – six fully Sharia-compliant – offer Islamic banking services across the UK. The London Stock Exchange is also an important global channel for the issue of sukuk, and Islamic investments have powered major developmental projects including the Chelsea Barracks, which was the largest Islamic finance deal in Europe to date.

This growth is the result of progressive policies and reforms, whereby amendments have been made to conventional banking legislation to allow Islamic features, as well as a strong ecosystem of infrastructure and support services. An educational system spanning the banking industry, schools, and general public has also addressed one of the key challenges for the development of Islamic finance, namely the availability of trained professionals.

With Islamic investments growing at over 150 per cent since 2006 and expected to reach £1.3 trillion by 2014iii, it is inevitable there will be an increased focus on how the UK can gain a larger proportion of this opportunity. The UK’s first Islamic Finance Task Force is a clear manifestation of this drive, launched earlier this year with the mandate to drive the UK’s Islamic finance sector, attract Islamic investments in infrastructure projects and support overall economic growthiv.

The global push

Even as the UK moves to consolidate its position in Islamic financial services, the global market continues to post impressive growth figures. Over the past three years, the top 20 Islamic banks, accounting for nearly 57 per cent of global Islamic banking assets, have grown by approximately 16 per cent annuallyv. These banks are concentrated in core Islamic banking markets such as Saudi Arabia, Malaysia, the UAE (the top three in terms of assets), Bahrain, Kuwait, Qatar and Turkey. The Middle East & North Africa (MENA) region – specifically in countries like Egypt, Iraq, Libya and Tunisia – is also expected to develop and strengthen its Islamic banking legislative frameworks and contribute to the next phase of growth and expansion for the sector. Other countries, including Indonesia, India, Pakistan and Bangladesh, and which together account for over 40 per cent of the global Muslim population, also present a huge opportunity for developing Islamic financial services.

Islamic finance on the high street

As growth in existing markets continues, new core Islamic markets are added and Western economies proactively pursue opportunities in Islamic finance, financial institutions with an Islamic focus will continue to increase.

Given the immense growth potential and the positive supply and demand dynamics of the Islamic finance industry, there is a huge opportunity for even conventional high street banks to develop and offer Sharia-compliant solutions for their customers. More importantly, Islamic finance is no longer considered to be relevant only from the perspective of religious scripture. Following the 2007-8 global financial crisis, the principles of Sharia-compliant banking have as much relevance to any customer looking for a fair, transparent and mutually rewarding financial relationship. For banks, it could even be the opportunity they need to reestablish trust with their customers.

Next steps

Sreenivas P

As more banks finalise plans to opt into Islamic finance, the choice of banking solution will be central to their capability to design and offer Sharia-compliant solutions. Contemporary off-the-shelf core banking solutions will not be able to support both conventional and Islamic banking activities. Though customisation is an option for high street banks planning to launch an Islamic window, it is a complicated and lengthy process, and hard to justify in terms of cost and time expenditure.

Take for instance a high street bank that offers automotive loans to customers as part of its conventional banking portfolio. In the context of Islamic banking, the same transaction would require the bank to purchase the automobile and then sell / lease it to the customer. To support these concepts of Islamic banking across business lines, the bank would have to make large-scale changes to its core banking systems.
A better alternative is for the bank to deploy a specialised Islamic banking solution, compliant with Sharia board injunctions, which can be integrated with existing systemsvi.

Solutions

It is critical that all solutions support the range of functions and products associated with Islamic banking. They should have the flexibility and scalability to change depending on business strategy; for example launching Islamic banking as a window at one location and then extending it to other locations or converting one location to a standalone Islamic banking operation. Most importantly, they should also be capable of delivering some of the fundamental features that are requisite for success in banking today, such as a 360-degree customer view, omni-channel operations, personalisation and customer-centricity.

The Islamic banking opportunity is no longer defined only by the needs of specific religious demographics. In a post-crisis world, it has the potential to resonate with a broader cross-section of customers looking for an equitable financial partnership. For financial institutions, it represents an emerging market segment with volume and growth rates that cannot be ignored. For governments, such as the UK, it opens up new possibilities to attract developmental investments and shore up the economy. The presence of over 2,000 political and business leaders from 120 countries at WIEF in London this month is just the beginning.

Gov.uk, 29 October 2013, World Islamic Economic Forum: Prime Minister’s speech: https://www.gov.uk/government/speeches/world-islamic-economic-forum-prime-ministers-speech

The City UK, 23 October 2013, Islamic Finance 2013: https://www.thecityuk.com/research/our-work/reports-list/islamic-finance-2013/

Gov.uk, 29 October 2013, World Islamic Economic Forum: Prime Minister’s speech: https://www.gov.uk/government/speeches/world-islamic-economic-forum-prime-ministers-speech

^ Gov.uk, 11 March 2013, Government launches first Islamic Finance Task Force: https://www.gov.uk/government/news/government-launches-first-islamic-finance-task-force–2

^ Ernst & Young, 10 December 2012, The World Islamic Banking Competitiveness Report: http://www.ey.com/Publication/vwLUAssets/The_World_Islamic_Banking_Competitiveness_Report/$FILE/World%20Islamic%20Banking%20Competitiveness%20Report%202012-13.pdf

^ Infosys Finacle, 2013, Accelerate innovation:http://www.infosys.com/finacle/solutions/Documents/Islamic-Banking.pdf