Sharia-compliant banking systems on the upswing

By Rosie Kmeid | 19 January 2015

Economies worldwide are making a global transformation, in which the information technology industry assumes increasingly greater importance. Indeed, technology is evolving in amazingly rapid speeds. The awe-inspiring advances that drive the technology industry forward have dominated several study topics, for they have taken productivity upwards.

Technologies and innovations always surprise, as they may have significant and disruptive impact on our economies, industries and livelihoods. There will be disruptions to established norms, and there will be broad societal and economic challenges. Nevertheless, we see considerable reason for optimism. Many technologies offer immense opportunities on the horizon, and provide an opening for new players to revolutionise the established order with breakthrough initiatives.

For the Islamic financial services industry, change is the key driving force in a complex global financial ecosystem. This change is mainly based on continuing advances in technology.

Technology and Islamic finance is a new relationship that has received limited attention until recently, as only a few studies have attempted to delve into the subject, and thus calls for various explorations from several angles.                                        

Technology as an enabler of operational excellence

Today’s climate of political and economic uncertainty and stiff competition gave rise to the need for Islamic financial institutions to quickly address various challenges and opportunities, driven primarily by market forces such as customer choices, compliance and regulatory requirements, the need to reduce operational costs and increase market share.

The adoption of new technologies is becoming a priority for Islamic financial institutions in keeping with the spirit of a progressive institution, as they strive to make banking as convenient, as technology-enabled and as cost-effective as possible.

For the past several years, Islamic financial institutions’ technology spending generally remained flat. During and right after the financial crisis, belt-tightening measures were enforced across the global financial services segment. In 2011 however, they finally enjoyed some breathing room thanks to some revived spending power.

Computerworld’s Forecast 2014 Survey of IT executives shows that IT budgets are indeed continuing to make a nice recovery since then. IT is expected to again kick up spending on security tools, alternative banking channels, social media, mobile applications, analytic systems and cloud computing.

But with regulatory scrutiny more intense than ever, Islamic financial institutions’ technology investments will likely focus more on driving efficiencies while complying with further stringent regulatory requirements.

Unleashing the potential of technology in Islamic finance

Islamic finance has thus far not benefited fully from modern technologies. One of the reasons it has failed to do so lies in the lack of awareness of technological advancement and considering the anticipated advantages. Moreover, supervisory authorities have failed to adopt a unified approach as to technological innovations. Not all of them believe that Islamic finance is a discipline in its own right that requires separate technologies, provided by dedicated system vendors. In a long race for competiveness and innovation, without a deep appreciation of the technological capabilities of Islamic finance, the industry will surely fall behind its conventional counterpart.

The use of technology in Islamic finance simply requires foresight and determination. As we observe the industry growing by leaps and bounds, it is important to address legal and regulatory compliance requisites and keep abreast of changing requirements and industry best practices. With the adoption of specialised technologies, the potential to sharply expand the industry globally is inevitable.

The usage of information technology is not solely seen as the only viable way towards improving the Islamic financial institution internal processes and enhancing its operational efficiencies, but also to ensure the compatibility of its activities with Sharia principles. An important principle behind Islamic finance is the desire to maintain the moral purity of all financial dealings. The rationale behind this is rather one of prudence and transparency as predicated in Ahkam al-Iqtisad wa al-Muamalah of Fiqh al-Muamalat.

The impact of faith-based technology in an age of globalisation

The complex and unconventional nature of Islamic finance requires dedicated software systems to cater to the different interpretations of Sharia in various jurisdictions, and ensure full compliance with the accounting standards for Islamic financial institutions as set by AAOIFI, and the risk management and capital adequacy standards as prescribed by IFSB. As these prudential standards and guidance notes are still evolving, and with the supervisory authorities framing and reviewing them regularly, a comprehensive approach that takes into account international and local regulations and the technological tools from a Sharia perspective is required.

The under-penetrated Islamic financial services sector necessitates concerted, evidence-based efforts by all constituents to harness current momentum and promote deep understanding and the value proposition of Sharia-compliant banking systems, better tailored to meet the needs of modern Islamic financial institutions.

While the industry has become sophisticated enough to appeal to a wide customer base, the pressure for a larger portfolio of new and innovative Sharia-compliant products and quick yet efficient banking services brought a complete paradigm shift on Islamic financial institutions’ performance in a bid to catch up with a rapidly growing demand. And as such, these institutions should be able to embrace new trends and exploit the opportunities of modern faith-based technology, given that change in a globalised world is only expected to hasten in the future.


The Western financial system has kept Islamic finance dormant for centuries. However, there has been a marked revival of interest lately. Despite an unfavorable environment and a financial recession which made the traditional banking system significantly suffer and contract, the Islamic finance industry is growing at a staggering rate of 15% to 20% annually, undeterred by the uncertain climate elsewhere in the world’s financial markets.

Recognising the increasing market demand for Islamic financial services, aspiring global players are fostering a more systematic approach to shaping the dynamic scene. As Islamic financial institutions continue to expand and grow in sophistication, Sharia-compliant technology is increasingly becoming a key enabler to gaining a foothold in this emerging sector.

For those not yet aware, the future of Islamic finance is now. In the modern age, new technologies proliferate rapidly. At Moody’s, assessing the technological sophistication of a financial institution is becoming an increasingly important element in the institution’s rating methodology. Leveraging technology for goal-driven performance optimisation is a must-have skill set to enabling an organisation to scale. In their quest to outperform conventional banks, Islamic financial institutions ought to take on an active role in making this happen.


By Rosie Kmeid, Vice President - Global Corporate Communications & Marketing, Path Solutions

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