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At the heart of any banking operations, the software plays a fundamental role in entailing operational efficiency. Islamic banks are expected to make appropriate investments in best- in-class software with Islamic capability with components covering business process modelling, compliance and risk management tools that would enhance banks' profitability and performance, thereby passing the benefits indirectly to the end-customers of Islamic banks.
The software used by Islamic banks needs to be fully compliant with the tenets laid down by Shari'ah and should also support operational efficiency. Recent analysis by EY indicates that Islamic banks have experienced a decline in profitability and their average return on equity (ROE) lags behind that of conventional banks by 20 per cent. Operating expenses are also 50 per cent higher for Islamic banks. Falling oil prices have further aggravated the situation, as banks are under extreme pressure to cut costs and become more efficient. With the usage of wide-ranging transformation programmes, that include digital transformation, the profit pool of Islamic banks could potentially increase by 25 per cent.
THE ISLAMIC BANKING SOFTWARE MARKET
The growing demand for tier 1 software that has Shari'ah compliant functionality (also known as Islamic core banking system) has entailed several existing and new players joining the software arena. In terms of Islamic banking, such systems can be categorised under two groups: 1) modular software with Islamic banking capability--these are the software which have an existing capability to support conventional banking. The module to support Islamic banking is developed over the conventional part of the system; 2) pure play software with Islamic banking capability, systems developed only to serve Islamic banks.
There has recently been significant improvement in the level of participation of governing bodies, senior executives from banks and certain tier 1...