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Islamic Banking Core Systems: The West European Opportunity (Strategic Focus)
Technology

  • Publication Date:March 2009
  • Publisher:Datamonitor
  • Product Type: Report
  • Pages:45

Islamic Banking Core Systems: The West European Opportunity (Strategic Focus) Technology

Introduction

Islamic banking has gained significant traction in many parts of the Islamic world. However, outside the UK, West Europe has remained a nascent market. New government policy changes may drive new entrants into this market over next 5 years. Given Sharia compliance has the significant implications on IT systems and processes this will create new opportunities for core system vendors.

Scope

Considers main potential Islamic banking markets in West Europe, including France, Germany, Netherlands and Italy, with look at development in the UK.

  • Examines impact of Islamic banking provision on technology systems and core system strategy
  • Covers Islamic and non-Islamic world based core systems providers looking at market presence across Middle East, South Asia, SE Asia and W. Europe
  • Examines overall Islamic banking sector, with drill-down on retail banking opportunity

Highlights

France is set to become the next growth market for Islamic banking in Western Europe, with the French government in process of adjusted policy to facilitate development of Islamic banking and a number of Islamic banks are expected to be authorized by mid 2009

Given the nascent nature of Islamic banking in Europe, technology spend to support and develop retail Islamic banking is currently a small fraction of overall technology spend. IT spending is expected to double over next five years (albeit from a small base) increasing from just under $30m in 2009 to over $60m in 2013.

Conventional banks are likely try to enhance / develop existing core systems initially in order to minimize capital expenditure outlay. Depending on uptake success, banks may then adopt new systems 3-5 years down the line. In contrast, standalone banks are more likely to deploy new Islamic specific core systems as part of market entry strategies.

Reasons to Purchase

  • Provides detailed insight into Islamic banking and challenges and requirements that banks need to overcome to meet Sharia requirements
  • Assess likely evolution of Islamic banking in West Europe, with examination of development likelihood in key markets
  • Examines competitive dynamics of Islamic banking core systems market looking at both niche providers and recent conventional core system entrants
  • Overview
  • Catalyst
  • Summary
    • Key Messages
    • Uptake of Islamic banking remains nascent in Western Europe despite recognized potential
    • France is following the UK in leveling the policy environment, with other Western countries likely to follow in medium-term
    • Sharia compliance drives core systems requirements beyond most conventional systems
    • Islamic banking has process implications across sales, origination and servicing
    • West European entrants will focus on core systems, plus online for standalone banks
    • Retail Islamic banking technology spend in Western Europe will reach $60m by 2013
    • Vendors need to demonstrate long-term commitment to Islamic banking
    • The competitive battlefield will be at country level rather than for overall Islamic offering
    • Table of figures
    • Market Opportunity
    • Islamic banking has become a viable alternative to conventional banking
    • Islamic banking concepts revolve around community banking, ethical investment and affinity marketing
    • The practical application of Sharia law to Islamic banking is subject to interpretation by Sharia scholars
    • Islamic banking can be provided by conventional banks through an Islamic window or Islamic subsidiary
    • Uptake of Islamic banking remains nascent in Western Europe despite recognized potential
    • The West European potential customer base from domestic and temporary Muslim population is significant
    • The Muslim population does not necessarily represent the potential Islamic banking market population
    • Public policy and regulation are the initial barriers, with understanding the long-term issue
    • The UK market has led retail Islamic banking provision in Europe, with basic Islamic products so far
    • Greater provision of UK Islamic banking coincided with removal of tax and regulatory disadvantages
    • Ownership of underlying assets creates additional tax liabilities for Islamic products
    • The structure of Islamic products often places them outside conventional banking regulatory frameworks
    • Shortage of contractual and legal expertise in Western European markets is a significant challenge
    • Take-up by the Muslim community has been good, but Islamic banking remains niche
    • UK Muslim understanding of Islamic products is long-term challenge, but financial crisis will assist take-up
    • The financial crisis has reduced the relative strength of conventional banking model
    • France is following the UK in leveling the playing field, with other Western countries likely to follow suit in the medium-term
    • The French government has adjusted policy to facilitate the development of Islamic banking
    • The German banking sector was an early mover in Islamic banking, but has not sustained momentum
    • Italian Islamic banking suffers from tax disadvantages and nascent political interest
    • The Netherlands has shown interest in developing Islamic banking, but limited movement so far
    • EU banking passport principles will drive less active governments to deal with Islamic banking
    • Customer Impact: Technology implications
    • Sharia requirements drive different accounting and calculation approaches in core
    • The need to distribute pooled profit means that calculating deposit returns is more akin to fund administration
    • Parameterization of conventional core systems will rarely be optimal for Islamic products
    • Haram requirements mean Islamic windows should co-mingle funds and treat accounting separate entities
    • A separate Islamic core system is not necessarily ideal for Islamic window structure
    • Islamic banking has process implications across sales, origination and collections
    • Bank ownership of asset drives different origination process and an asset management requirement
    • Achieving Sharia compliance requires attention to sequence of origination as well as contract content
    • West European entrants will focus on core systems, plus online for standalone banks
    • Initial IT priority in Western Europe will be on core, with standalone banks the main users of new systems
    • Technology development around origination is likely to be limited in the short-term
    • Strong direct channel and third party integration capabilities will be important for standalone banks
    • Retail Islamic banking technology spend in Western Europe will reach $60m by 2013
    • Retail Islamic banking technology market will be led by UK and France in the short-term
    • Achieving Sharia compliance is essential, but main core system investment business drivers still apply
    • Competitive Landscape
    • The Islamic banking core systems market remains fragmented with a strong regional aspect
    • Niche/regional Islamic banking core vendors remain important players in the Islamic core banking market
    • A number of the leading conventional core vendors have entered the Islamic core banking market
    • The leading conventional core vendors are catching up in the Islamic banking space
    • Niche vendors retain some advantage in Islamic markets due to cultural and process understanding
    • Growing reference lists mean that leading vendors are now likely to dominate larger and regional implementations
    • Go to Market
    • Vendors need to demonstrate long-term commitment to Islamic banking
    • The ongoing development roadmap is important with a view of Islamic banking beyond the Middle East
    • Vendors should develop Islamic services capability for both implementation and support
    • The competitive battlefield will be at country level rather than for overall Islamic offerings
    • Developing country specific out-of-the-box capability will be a valuable differentiator
    • Vendors targeting Western Europe should highlight conventional presence and Islamic expertise
    • Vendors should recognize that success metrics may differ from the non-Islamic market
    • Profitability metrics and business case drivers may differ, with greater focus on customer base growth
    • However, underlying IT drivers for core system investment around flexibility and time-to-market are similar
    • Recommendations
  • APPENDIX
    • Definitions
    • General terms
    • Glossary of key Islamic banking terms
    • Ask the analyst
    • Datamonitor consulting
    • Disclaimer
  • List of Figures
    • Figure 1: Customer sweet spots for Islamic banking models
    • Figure 2: Distribution and population density of Muslim population across Western Europe
    • Figure 3: Main Islamic deposit products provided in UK market
    • Figure 4: Main Islamic financing products provided in UK market
    • Figure 5: Islamic Bank of Britain customer deposit and operating income growth H2 2004-H1 2008
    • Figure 6: France is likely to be most significant Islamic banking market in the short-term
    • Figure 7: Banking activities affected by co-mingling requirements for Islamic windows
    • Figure 8: Technology spend on retail Islamic banking in Western Europe, 2009-13, $m
    • Figure 9: Business drivers for core systems investment in Western Europe
    • Figure 10: Islamic world-based Islamic banking core systems vendors
    • Figure 11: Pan-regional conventional core system vendors with Islamic banking offerings
    • Figure 12: Top functionality requirements for core system replacement in Western Europe retail banks
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