Having seen a significant uptick in recent years, (see Fig. 1) Islamic banking is forecast to more than double in the next half decade or so, according to Mohammed Kateeb, Group Chairman and CEO of Islamic and investment banking software solutions provider Path Solutions. However, in order keep pace with an ever-evolving financial marketplace and match increasingly lofty customer expectations, the Islamic banking sector must first ensure it invests sufficiently in technological advancements.
To reach optimistic industry expectations, the boom must be led by a banking sector that is willing to invest substantially in IT across the whole value chain.
“Not only in the banking industry, but in almost all industries, technology in the last 10 years has become one of the key strategic drivers of growth, and I believe this to be very much the case in Islamic banking,” says Kateeb.
“That is why the role of the IT department has changed a lot for the sector and become an absolutely critical source of investment for the sector. We’re witnessing trends that are similar to those in the conventional banking sector, in that digital banking is increasingly seen as important – and even the norm – in banking activities.”
New platforms and alternative methods of transaction are emerging on a daily basis, and Islamic banks must implement an adequate IT framework at every juncture if they are to adapt accordingly.
The growing importance of technology in the Islamic banking sector has seen companies such as Path Solutions come to play an increasingly crucial role in gaining a better understanding of the customer and of how the sector can expand on the world stage.
“I believe that customer expectations for financial services are generally much higher,” says the Path Solutions CEO. “Demand is for a more personalised approach and one that is a lot more varied in scope. Quite plainly, we’re finding that customers are asking for increasingly sophisticated Islamic banking products and services and that promise is being delivered upon by means of technological improvement.”
Firmly set origins
Founded in 1992, Path Solutions is recognised the world over as the market leader in the provision of Islamic and investment software solutions for financial institutions. Based in Kuwait, the global firm exhibits a strong commitment to the empowerment of the Islamic banking sector across the globe, and understands the importance of technological advancement if the Islamic sector is to rival its conventional banking counterparts.
Path’s tailor-made solutions are based on a modular approach, though simultaneously ensure full and seamless integration across the different modules.
“Considering the breadth of provided services, banks and financial institutions need to refer to a single point of contact for their total business requirements in order to save considerable time, energy and expense,” says Kateeb. Companies such as Path Solutions play a vital part in facilitating the implementation of just such support.
The Union of Arab Banks states that deposits into Islamic banking institutions have been growing at a rate of between 25 and 40 percent annually since 1975
“I believe that the main differentiator between ourselves and our competitors is that we’re 100 percent committed to Islamic banking, in that our solution is designed and built from the ground up based on sharia rules and regulations,” he continues.
“We have not bought a foreign bank, much like our foreign competitors have, customised it and marketed it to our customers as an Islamic banking institution. We do not take a conventional system, like our conventional competitors do, and dress it up to look Islamic.
“We believe Islamic finance to be completely different in the various ways in which it deals with products and solutions, and we believe it is this that has given us the competitive edge in this arena.”
Path Solutions understands that technology is a key competitive advantage for those in the Islamic banking market, and with the company’s prestigious user base and unparalleled understanding of the industry, it is well equipped to convert this expertise into efficient solutions and services in IT.
“Not only were we the first sharia-compliant software firm to be recognised and certified by the AAOIFI, but we have tremendous expertise in the market. We work with almost 100 Islamic banks worldwide, and we understand their many and various requirements in this space,” says Kateeb.
“We are committed to R&D in this specific segment and whereas for our conventional competitors Islamic finance represents one or two percent of their business, for us it represents 100 percent.”
With a range of services and solutions intended to enhance system optimisation, solution scalability, flexibility, support and risk management to name but a few benefits, Path Solutions’ integrated IT solutions suite is one that has served to streamline what at first glance appears an overly complex Islamic banking sector.
Optimising budgetary restraints
Technological solutions are not without their own set of complications; however, as the Islamic banking space has encountered its own set of problems, and budgets are becoming increasingly stretched as a result, one must look at efficient and reliable software providers with a proven track record.
Although tech spending and preparedness to invest, on the whole, remain relatively low, “we feel that banks will look for value wherever they can, with perhaps the best option being fully integrated IT solutions, which actually provide much better value and total cost of ownership over time. Systems such as Path Solutions’ iMAL are preferable to a best of breed strategy, that so often complicates the environment through the integration of different modules and different vendors’ systems, introducing different inefficiencies along the way.”
The Union of Arab Banks states that deposits into Islamic banking institutions have been growing at a rate of between 25 and 40 percent annually since 1975, and that each day an estimated $200bn is transacted in Islamic banks worldwide.
However, this is not to say that the sector has necessarily been immune to the financial crisis, and while managed assets have risen throughout, recent crises, along with globalisation has given rise to collapse, closure, and a great deal more consolidation.
“As a result of all this consolidating, downsizing and closure, the number of financial institutions has decreased in many countries, while at the same time the Islamic banking industry in terms of assets has actually increased,” says Kateeb.
“The assets are understandably concentrated in far less financial institutions than pre-crisis, of course, but this can be seen as a negative or positive for Path Solutions. Although this set of circumstances results in less customers, a smaller number of Islamic banking institutions has made the banks markedly more sophisticated and some even have more in their IT budgets to spend on services and products.”
As an industry leader, Path Solutions must ensure that it follows the direction of the Islamic banking sector wherever it may go, whether this is with regards to geography, technology or regulation
A shift in the sector’s scale and distribution is far from the only challenge to Islamic banking at present, with a distinct lack of regulatory uniformity being the most widely cited and enduring complications. However, “We feel we are flexible enough to cater for the lack of standards in the segment,” says Kateeb, “which makes us very unique, because for this business you need a very flexible system that is highly parameterised.”
The argument that Islamic banking should push for the adoption of a uniform standard is one that is reinforced by Path Solutions’ integrated strategy, which demonstrates that the Islamic banking system, when united under a single framework, can be made far more efficient in various departments.
Aside from the numerous challenges at hand in the Islamic banking sector, Path Solutions looks to benefit in the near term due to the company’s growth being inextricably tied to that of the wider Islamic finance sector.
“Today, the Islamic finance sector is growing at 16 percent annually, so, provided we can keep up at this same pace, the future looks to be an especially bright one for us in terms of growth.
“Of course, in addition to simply keeping pace, we intend to grow horizontally and are always looking at new segments in Islamic finance that will give us additional growth paths. We believe that in five years we will be, at a minimum, double our current size.”
As an industry leader, Path Solutions must ensure that it follows the direction of the Islamic banking sector wherever it may go, whether this is with regards to geography, technology or regulation. The sector has mirrored many of the same advances as its conventional banking counterparts, and in order for the industry to continue, the responsibility lies with companies such as Path Solutions to instil positive technological and structural change from within.
“Technology is certainly very important not just to the financial services industry but also to the global economy as a whole,” says Kateeb.
“New requirements are crossing the paths of those in the Islamic banking sector every single day, demanding that innovative technologies are implemented for numerous purposes, and it is only with companies such as ours that these ambitious technological demands will be met.”