In its World Islamic Banking Competitiveness Report 2013–14 EY forecasts that across the principal high growth markets that make up QISMUT ( Qatar , Indonesia , Saudi Arabia, Malaysia , the UAE and Turkey ) - Islamic banking assets are set to hit $1.6 trillion by 2018, up from an estimated $662 billion in 2013. This gives a CAGR of 19.7 per cent over the period and a 48 per cent share of the banking system profit pool. Yet, in terms of profitability, the average return on investment (ROE) for the top 20 Islamic banks, at 12.6 per cent, continues to lag the comparable conventional average of 15 per cent. The report argues, however, that continued success in growing scale, coupled with operational transformation programmes, has the long-term potential of closing this gap. Indeed, many Islamic banks are already in the process of replacing or upgrading core banking systems, which should ensure improved numbers going forward. It adds that capital planning, in view of Basel III and IFSB [Islamic Financial Services Board] guidelines will influence the preferred business mix toward better profitability - this against a backdrop of most Islamic banks believing digital and mobile banking adoption will grow beyond payments to more complex savings and financing products. But if ongoing growth in demand for Islamic banking services can be safely assumed, so too can the challenges the industry faces - not least the basic requirement from a would-be customer standpoint of having the capability to meet demand for services in a timely manner. To achieve this, in part, robust internal systems to manage risk, complexity, processes and ensuring products remain sharia-compliant, need to be in place. Indeed, failure to deal with a well documented issue such as compliance could result in reputational damage and consequent loss of business. Similarly, those vendors providing Islamic banking solutions to the industry also need to ensure (and be assured) their products are sharia-compliant. For them, at least, help is at hand. The Bahrain -based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) confirmed in February last year its partnership with EY to undertake certification of financial software products or core banking systems. Under the certification program AAOIFI and EY benchmark financial software products or core banking systems against AAOIFI's sharia and accounting standards. Hence, banking and financial information technology providers have the opportunity to properly incorporate AAOIFI standards into their products and systems. The task isn't easy. AAOIFI has already issued 88 standards in areas of sharia including accounting, auditing, ethics, and governance for international Islamic finance. Its standards are currently followed by most of the leading Islamic financial institutions across the world and marks a significant degree of harmonisation of international Islamic finance practices. The AAOIFI-EY initiative comes two years after data provider Bloomberg released its Islamic Finance Platform, aimed at increasing product transparency and providing analytical tools to maximise investment performance. Apart from standard services such as news provision, the platform offers analytics and search tools for more than 1,500 Islamic bond issues globally, including fatwa endorsements and structured diagrams of financial instruments. Additionally, its Islamic Community Database provides full transparency into more than 250 sharia scholars with details on which sukuk they have rated, boards they represent and their fatwa endorsements. Also included is a listing of more than 70 Islamic banks and profiles on all prominent Islamic institutions and regulators. In short, the AAOFI-EY partnership, along with services provided by the likes of Bloomberg and Thomson Reuters - the latter through its Islamic Financial Gateway suite of products - highlight the need for Islamic banking software vendors to keep fully abreast of developments, especially when it comes to compliance. From a software application standpoint key factors to consider include return on assets, return on capital and reducing cost/income ratios when replacing legacy systems. One of the leading players in his field is Geneva -based Temenos , whose software has seen 1,500 customer deployments in more than 125 countries - across both Islamic and non-Islamic platforms. Its T24 product, based on flexible open architecture, removes the need for end-of-day processing, enables a 24/7/365 online operation and can run on platforms ranging from small community banks to large retail banks with more than 15 million accounts. It is available as a model bank implementation, with pre-configured services and best practice banking processes and workflows built in, to allow for what it says is "an easier, more cost effective and low risk out-of-the-box implementation or a more tailored approach for customers preferring differentiation". Using 62 criteria, US research group Forrester , in its December 2012 report 'The Forrester Wave: Global Banking Platforms, Q4 2012', described Temenos as a 'leader' among the world's eight most significant banking software vendors. Its peers include TCS, Infosys and Sopra Banking Software . The remaining five - FIS, Oracle , Tata Consultancy Services , Polaris Financial Technology (Polaris FT) and SAP were rated as performing 'strongly'. While non-certification by AAOIFI may not necessarily be a game changer in the immediate future for software vendors it has the potential to be so when certification is granted then subsequently withdrawn – at least from a public relations standpoint. In October, AAOIFI announced that certification granted to Islamic banking and finance information systems offered by International Turnkey Systems (ITS) had been withdrawn, reportedly because the company refused to pay for a more detailed re-certification process. A similar situation had previously befallen Path Solutions. In a terse statement AAOIFI noted that as ITS no longer met AAOIFI's standards, AAOIFI no longer bore responsibility regarding the sharia compliance of ITS's systems. And therein lies the rub. Compliance will continue to be important just as AAOFI's role likely assumes ever greater importance. Should the latter prove to be the case software vendors may need to take a more considered view from a reputational standpoint. In the meantime, enhanced profitability can come not only from an increase in operational efficiency at the banking solutions end but also from greater regulatory clarity. History shows that drawing a distinction between non-Islamic and Islamic banking can provide not only greater clarity, but can also impact profits positively.
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