<Insert Picture Here>

Making Things Simple

Ensuring Technology and Financial Instruments Complement Each Other

Islamic Finance Intelligence Summit, London

November 6th, 2008
Safe Harbor Statement

Due care has been taken to make this Presentation as accurate as possible. Certain statements made
in this presentation may not be based on historical information or facts and may be “forward looking
statements” and may be subject to risks and uncertainties that could cause actual results to differ
materially and adversely from those that may be projected by such forward looking statements.
These risks and uncertainties and other factors that could affect, including but not limited to,
competition, acquisitions, economic conditions, ability to retain highly skilled employees,
technology, law and regulatory policies, managing risks associated with its business.
i-flex makes no representation or warranties with respect to the contents hereof and shall not be
responsible for any loss or damage caused to the user by the direct or indirect use of this
Presentation. i-flex may alter, modify or otherwise change in any manner the content hereof,
without obligation to notify any person of such revision or changes.
All company and product names are trademarks of the respective companies with which they are
associated.
i-flex® and FLEXCUBE® are registered trademarks of i-flex solutions. Reveleus™, Daybreak™,
Equinox™, Mantas and PrimeSourcing™ are trademarks of i-flex solutions and are registered in several
countries.
All company and product names are trademarks of the respective companies with which they are
associated.

COPYRIGHT © 2008 i-flex solutions limited.

All rights reserved.

2
 Discussion Topics

 Shariah’s Principles in Islamic Finance

 Islamic Finance Organizations
 Technology Footprint for Islamic Finance
 Making Things Simple
 Architecture
 Technology Suppliers
 Conclusion
SHARIAH’S PRINCIPLES IN ISLAMIC FINANCE

No Shariah’s Principle

#1 Prohibition of Riba (Interest)

#2 Application of al-bay’ (trade & commerce)

#3 Avoidance of Gharar (Ambiguities)

#4 Prohibition of Maisir (Gambling)

#5 Disengagement from production of prohibited commodities –

pork, liquor

Islamic Banking Takaful Islamic Money Islamic Capital

Market Market
 1.Al-Bay’
Principle #2:
2.Ijarah RISK
Application of Al-bay’ (Trade &
3.Salam (Ghurm) Commerce)
4.Istisna’
5.Mudarabah
6. Musyarakah

WORK &
= ‘IWAD
PROFIT EFFORT
(Equivalent countervalue)
(Ikhtiyar)

TWO PRINCIPLES OF SALES

“Al-Gharm bil Ghanm”
“Al-Kharaj Bil Dhoman”
LIABILITY “No Reward Without Risk”
(Dhoman) “With Profit comes Responsibility”
Source: Prof Saiful Azhar, INCIEF
Source: Assoc. Prof Dr Engku Rabiah Adawiah,
International Islamic Univ, Malaysia
 Most sukuk 'not Islamic', body claims

About 85% of Gulf Islamic bonds do not really comply with

Islamic law, a body which sets standards across the Middle
East has said.

Scholars at the Accounting and Auditing Organisation for

Islamic Financial Institutions (AAOIFI) said the body could
review rules for the industry, which could be worth as much
as $50 billion next year.

AAOIFI said it could tighten rules to discourage borrowers

signing repurchase agreements that underpin most Islamic
bonds, which have drawn investors from Asia to the United
States looking for exposure to booming Gulf economies.

Source: Reuters, 27th Nov 2007

BBA judgement by Malaysia’s Justice Wahab Patail
The High Court recently ruled that
the application of the Al-Bai'
Bithaman Ajil (BBA), a hugely
popular Islamic home loan financing
contract in Malaysia for the last two
decades but much criticised abroad,
is contrary to Malaysia's Islamic
Banking Act 1983.

In what is set to be another widely

discussed judgment, High Court
Judge Datuk Abdul Wahab
Patail ruled that the sale element in
the BBA is "not a bona fide sale". He
also brought into question the profit
portion of the facility.
The written judgment, dated July 18
but made available to lawyers
involved in the case late last month,
may force Islamic banks and
financial institutions to re-examine
their legal documentations.

Source: Malaysian Reserve, 7th Sept, 2008

 Discussion Topics

 Shariah’s Principles in Islamic Finance

 Islamic Finance Organizations
 Technology Footprint for Islamic Finance
 Making Things Simple
 Architecture
 Technology Suppliers
 Conclusion
 Islamic Finance Organizations (IFOs)
Customers
Dedicated Customers (15%)
Independents (70%)
Non Believers (15%) Compliance
1. Audit
IFO
2. Central Bank
Products  Established within the last 5 years
3. Risk Mgmt
Rapid Evolution  Less than 1m customer accounts
 Less than 50 branches 4. Shariah Audit
Multiple Contracts
 Asset Size of USD5b or less 5. Shariah Council
Debt & Equity & Fee
 Limited budget on Technology 6. AAOIFI
 Inadequate IT Expertise 7. IFSB

Competitors
Islamic Banks
Conventional Banks
 Discussion Topics

 Shariah’s Principles in Islamic Finance

 Islamic Finance Organizations
 Technology Footprint for Islamic Finance
 Making Things Simple
 Architecture
 Technology Suppliers
 Conclusion
Islamic Finance – Technology Footprint

12
Source: Assoc. Prof Dr Engku Rabiah Adawiah,
International Islamic Univ, Malaysia
Profit Distribution – Tight linkages between Assets
and Liabilities
Deposit Class Deposit 1
Murabahah
(eg. Weekly)
Investments Subscriptions Deposit n
Ijara
Deposit Class Deposit 1

Musharaka (eg. Monthly)

Deposit n
Fund
Deposit Class Deposit 1
Sukuk
(eg. Quarterly)
Deposit n

Mudaraba
Deposit Class Deposit 1
(eg. Tenor x)
Fixed Assets Deposit n

Profits
Assets
Bank’s Share

Mudharabah Fund –
Reserves

Investment Acct Holders

Returns
The Reality on Technology Implementation
for Islamic Banking

• Decision making has been too quick without proper vendor assessment. Many
banks are paying today for making the wrong choices through extended timelines for
implementations

• Banks have been under-budgeting for Islamic banking systems. Although

they spend in the millions for conventional systems, they tend to budget less than $500,000
for Islamic banking systems. This leads to:
– Tweaking of existing systems to cater to the requirement
– Shoddy implementation and ill-conceived products

• Lack of knowledge amongst vendors often leads to ‘tweaked’ products

being delivered. Often, banks end up doing the work themselves as the system is unable to
meet the short time-to-market requirement for Islamic banks

• Vendor misleading the customer into believing that their Islamic banking offering is a
simple solution

• Varied interpretations of the Shari' a across geographies and banks operating in

similar markets

IBS Guide on Islamic Banking - 2007

Technology for Islamic Banking System–
An Observation

Key Areas Islamic Banking Conventional Banking

Proof of Concept, 1-3 days 2 weeks – 1 month

Demonstration

Implementation Period 4-6 months 6 months – 15 months

User and IT Minimal, mostly those Significant, especially

Participation directly reporting to CEO middle mgmt, IT &
functional experts

Modules to be All key modules in one go Staggered in Phases

implemented – Investment, Financing,
Ijarah, Treasury

Use of External Minimal Significant

Consultants
 Discussion Topics

 Shariah’s Principles in Islamic Finance

 Islamic Finance Organizations
 Technology Footprint for Islamic Finance
 Making Things Simple
 Architecture
 Technology Suppliers
 Conclusion
Making Things Simple - Architecture
Adopt similar architecture (blueprint) used by leading
international banks – core banking, channels,
interfaces etc
Choose a core banking solution that can closely
match this architecture
Insist all subsequent vendors to comply to this
architecture
Benefits
 Clarity of thoughts to support business directions
 Similarities lead to lower cost of acquisition, training,
operation, support and enhancements
 Easier for Internal or Outsourced Parties to Manage/Take
Over
Making Things Simple – Technology Suppliers
Maintain the number of suppliers as small as possible
Stick to other modules provided by your core
banking/takaful supplier if possible
Choose suppliers that:
 Adopt similar architecture as your core banking/takaful
provider
 Have the broadest product offerings in Banking/Takaful
 Are committed to Islamic Finance market
 Are financially strong and able to survive for the next 5 years
 Make use of mainstream technologies
 Are compatible to your working culture
Conclusion
• IFOs have limited IT budget and IT expertise in
servicing their customers and in fending off
competitors
• Banking Technology footprint is generally complex
and expensive. IFOs are subjected to the same cost
and complexity.
• Keeping things simple via judicious adherence to a
good IT architecture and minimizing the number of
technology suppliers will:
– Lower overall costs, including transaction costs
– Contain complex technology to a manageable level
– Sustain agility of IFOs to compete in the market place
– Simplify adherence to Shariah’s requirements
 Thank You

Jamil Hassan
Principal Consultant, Islamic Banking
jamil.hassan@iflexsolutions.com