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

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

Islamic banking has become a viable alternative to conventional banking
- Islamic banking concepts revolve around community banking, ethical investment and affinity marketing

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
- 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

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
- Haram requirements mean Islamic windows should co-mingle funds and treat accounting separate entities

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

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

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

Figure: Customer sweet spots for Islamic banking models
Figure: Distribution and population density of Muslim population across Western Europe
Figure: Main Islamic deposit products provided in UK market
Figure: Main Islamic financing products provided in UK market
Figure: Islamic Bank of Britain customer deposit and operating income growth H2 2004 - H1 2008
Figure: France is likely to be most significant Islamic banking market in the short-term
Figure: Banking activities affected by co-mingling requirements for Islamic windows
Figure: Technology spend on retail Islamic banking in Western Europe, 2009 - 13, $m
Figure: Business drivers for core systems investment in Western Europe
Figure: Islamic world-based Islamic banking core systems vendors
Figure: Pan-regional conventional core system vendors with Islamic banking offerings
Figure: Top functionality requirements for core system replacement in Western Europe retail banks

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