Promising Future of Islamic Banking

Promising Future of Islamic Banking

Islamic banking has become a major global industry with a growth of 10% to 15% per year over the last decade, to reach between USD 700 and 750 billion of assets worldwide nowadays. Currently, Islamic Banking is particularly developed in the Middle East, is definitively on the rise in the Asia-Pacific region, and is currently in an infancy stage in North Africa and in Europe.

North Africa represents a large and still untapped market of nearly 200 million people, with 95% Muslims, except in Sudan where Muslims represent 70% of the population. Furthermore, with an average GDP per capita of US$2,334 in 2007, the North African region is richer than the African average (US$1,137). Islamic banking is still a niche market in North Africa. This could be explained by the fact that North African consumers are traditionally less conservative than Middle East consumers and are used to conventional banking products and services. Furthermore, governments have not particularly encouraged Islamic banking development in their countries. However, things have recently begun to change with:

– New Islamic banks entering these markets; for instance, the UAE Noor Islamic bank which opened an office in Tunisia in June 2008

– Governments creating new regulations; for instance, in 2007, the Moroccan Central Bank decided to authorize certain kinds of Islamic financial products, called alternative financial products, in response to consumers’ demand.

The demand for Islamic Banking product exists in North Africa but also in Europe, where Muslims population is estimated at nearly 15 million people, and is particularly significant in France, the Netherlands, Germany, Belgium, Sweden, and UK. UK has taken the European leadership in Islamic Banking since 2004, when the FSA authorized the Islamic Bank of Britain, the first Shariah compliant retail bank in Europe. In 2006, the European Islamic Investment Bank, the EIIB, also obtained a license from the FSA. In France, the government recently expressed its wish to change the regulation to allow Islamic banking, and the first Islamic banks should appear in 2009. In the meantime, two Islamic banking products have already been launched in 2008 in a French overseas department, La Réunion, by BFCOI, a subsidiary of Société Générale.

In addition to the large and untapped Muslim population, Islamic banking is currently beginning to attract non-Muslim customers, who are interested in this alternative way of banking. Indeed, a growing number of non-Muslims are turning to Islamic banking as customers, spooked by turmoil in the Western banking system increasingly see the sector as safe and more connected to the real economy. In my opinion, Islamic banking will benefit from this new consumers’ interest and grow even more quickly than it recently did.

Indian Banks : Safe and Sound in a Protected Economy

Indian Banks : Safe and Sound in a Protected Economy

Indian banks enjoyed a competition-free era, operating under a protectionist regime, till 1991. The competition from private and foreign banks was hardly noticeable till the government liberalized the Indian economy in 1991. Ever since, the number of foreign banks has grown considerably and currently India has 29 foreign banks operating with around 277 branches and 1034 ATMs (as of March 2008). With the announcement of further liberalization on the cards, how has it affected the local banks?

In 2004, Reserve Bank of India, the central banking authority, announced the roadmap for the presence of foreign banks in the country. During the first phase, between March 2005 and March 2009, foreign banks will be permitted to establish presence by way of setting up a wholly owned banking subsidiary (WOS) or conversion of the existing branches into a WOS. At the end of the first phase, the government would conduct a review and decide on the further actions related to the extension of the national treatment to WOS and permission for mergers/acquisitions of any private sector banks in India by a foreign bank. In a way, this move has been a boon to the Indian banking system, as the local banks have vastly improved their banking processes and services in order to compete with the private and foreign banks. While it is unlikely that the foreign banks would compete in the rural and semi-urban segment, they have captured a good percentage of the urban customer base, from the public sector banks, with their customer-centric operations.

As of last year, many foreign banks were keen to open branches in India, including Royal Bank of Canada and Glitnir, an Icelandic bank. The public sector banks in India like Bank of Baroda and Canara Bank underwent rebranding exercises and image makeover, anticipating competition from foreign banks. However, one set of words played a spoilsport on all such plans : Global Financial Crisis.

As a result of the crisis, many foreign banks in India are reworking their strategy. Some of the banks, like Royal Bank of Scotland (ABN AMRO) and Citibank, are trying to sell off their India businesses. The Reserve Bank of India, which had proposed the review, may not ease the current norms, considering that it would open the financial system to the banks which have been faring badly in other countries. For the time being, the local banks can heave a sigh of relief and concentrate on their own expansion. With the General Elections happening in the next couple of months and a possible change in the government, the proposed liberalization policies may not see the light of the day in the near future.

Bank of America Puts a New Spin on Cross Selling and Online Banking

Bank of America Puts a New Spin on Cross Selling and Online Banking
Bank of America recently introduced a new program called Add it Up. This creative program allows BofA credit or check card holders to receive cash back (on their credit card or deposited to their BofA checking account) when they shop online at a variety of merchants. It’s an interesting move as banks don’t typically tie themselves into other industries (retail in this case). The partnerships with retail merchants are certainly a creative way of marketing and relationship building. There is a long list of merchants to choose from and the cash back percentages are quite decent. A couple of things caught my eye: – This is a great way to cross sell.You need to enroll for this via BofA online banking. In other words, if you have a BofA credit card but don’t bank online with them, you must now open an account. Or vice versa (bank online, need to get a credit card). A good way to cross sell and tie complementary products together. – The offer is attractive since people are trying to save money. The rewards offered here are exactly what US consumers are looking for. Money is tight and folks will be more than happy to save wherever they can. – This is the time for banks to solidify customer relationships. Consumers are wary, banks are shaky. This is a move that cost-conscious consumers will appreciate and it can certainly contribute to the relationship stickiness factor. It is important to note that this is NOT a new concept. Receiving a discount or cash back for online shopping has been available for some time through a variety of consumer sites. Examples are www.fatwallet.com and Live Search. Users of these sites don’t have much incentive to switch to BofA. However, Existing BofA customers who are new to the cash back concept will find a lot to like.

additup2

Did Anyone Catch The Tail-End of President Obama’s Address?

Did Anyone Catch The Tail-End of President Obama’s Address?
UPDATE: I posted to the Celent blog while eating breakfast this morning on the West Coast. Evidently, great minds think alike, as the NYT also put out a related article today (I swear I didn’t know the NYT piece was out). The NYT provided a much better description of USAs: http://www.nytimes.com/2009/03/07/your-money/07money.html?hp Last week, I’m sure that many of you watched President Obama’s Address to the Joint Session of Congress (i.e., his de facto State of the Union Address). Toward the very end of his speech, the president made the following statement: “To preserve our long-term fiscal health, we must also address the growing costs in Medicare and Social Security. Comprehensive health care reform is the best way to strengthen Medicare for years to come. And we must also begin a conversation on how to do the same for Social Security, while creating tax-free universal savings accounts for all Americans.” Tax-free universal savings accounts? Intrigued, I did some web research. Most details about universal savings accounts (USAs) originate from the early-2000’s and suprisingly come from conservative/libertarian sources (e.g., The Cato Institute). The main components of proposed USAs include the following:
  • Eligibility for all U.S. citizens, regardless of employment status
  • A contribution limit of the greater of $10,000 or 50% of taxable income
  • Distributions can be made tax-free after 3 years
  • Savings can be invested in stocks, bonds, money market accounts, etc.
To put it simplistically, a USA is basically an un-shackled IRA, designed to ease the pain of the impending Social Security crisis. I can’t help but think that President Obama “channeled” the Bush Administration when he mentioned USAs. Nonetheless, banks need to keep their eyes on any USA proposals, as there are certain to be implications and opportunities in terms of deposit growth, investment management, distribution tools (e.g., payment cards), customer service, reporting, etc. Interestingly, the health care policy space has proposals for its version of a USA; a Universal Health Account, or UHA. More on that in a future blog post…

FFIEC RDC Guidance

FFIEC RDC Guidance
The Federal Financial Institutions Examination Council, FFIEC, issued its long-awaited guidance on remote deposit capture risk management in January 2009. In our view, the guidance provides prudent measures for financial institutions to consider as they seek to fully-leverage RDC for deposit growth and customer convenience. Importantly, the guidance contained no surprises, and did not impose fundamental limitations on what banks could do with RDC. We welcome this outcome.

That said, we found two aspects of the guidance disappointing.

The guidance introduces remote deposit capture as a “deposit transaction delivery system” not simply a “new service”. We couldn’t agree more. But the guidance equates all forms of distributed image capture, branch capture, teller capture, ATM capture and merchant/client capture as RDC. While all forms of distributed capture share a common technology, the risks associated with each vary considerably. The focus belongs on distributed capture taking place by untrained ordinary non-bank employees. Financial institutions have been managing check image capture for well over a decade with good success. Guidance for those operations likely weren’t sought or needed.

The other troubling aspect of the guidance in our opinion is that it failed to recognize the many operational benefits of distributed capture. Arguably, the work process improvements enabled by modern image workflows can reduce risk, not elevate it. For example, instead of relying on tellers as a first defense against check fraud (e.g., 100% manual inspection) and antiquated day-2 rules-based fraud systems, RDC enables a highly automated and efficient set of deposit review and risk management tools that can be applied in near real time. Suspect items can be routed (via image) to trained operators for review well before posting.

With the sensible guidance issued, banks can now breathe a sigh of relief, and get busy leveraging this immensely popular technology instead of being paralyzed by highly over stated perceived risks.

PFM Meets Social Networking?

PFM Meets Social Networking?
There was an interesting article this morning in American Banker called, “E-Banking, Meet Social Networking.” After reading the article I came up with 2 conclusions: – Banks need to improve their personal financial management offerings (PFM). The article talks about how Geezeo is offering a white label version of its PFM software to banks. While many banks have PFM tools that they make available to their customers, they pale in comparison to those offered by non-banks in this space (e.g. Mint.com, Wesabe, Geezeo). I would like to see a few banks come up with more competitive offerings (either on their own, or using a 3rd party). Customers really value these tools and they are being demanded, particularly in tough economic times when folks carefully track their spending. – Social networking can be an interesting component of PFM but is not an absolute requirement. This is a nice to have feature, but not one that will keep customers coming back, particularly in the short term. Basic community features would be nice, or at least some spending stats from the overall user base. However, I see customers gravitating more towards the functional component of PFM as opposed to the social networking aspect. In fact, some banks may be scared off if they have to deploy PFM and social networking features in one swift motion. Banks will want to have the option of choosing the features they want to turn on or off.

Can the villagers spell A-T-M?

Can the villagers spell A-T-M?
Gone are the days when only the rich withdrew money from ATMs in India. India has seen exponential growth in ATMs, with a cumulative annual growth of about 70% since 2000. During 2007-2008 alone, the number of ATMs grew by 28.4%. However, there has been a clear lack of symmetry in their spread. The ATMs in India are concentrated in urban areas, and penetration into the rural market has been slow and lethargic. Around 70% of India’s population, with a literacy rate of about 60%, lives in the rural regions. To access the unbanked population, banks are looking to expand into the rural and semi-urban areas. With many of the rural population unable to read or write, how are banks tackling the problem of making the ATMs accessible to them? The Celent Report The Dragon and Tiger of the ATM Markets: China and India touches upon the usage of innovative channels like Biometric ATMs (with authentication through face, iris, and fingerprint recognition technologies) and handheld PDAs. As an update to the report, State Bank of India, the largest public sector bank, announced that it will be installing 150 biometric ATMs in the country by the end of March 2009. Other banks have installed biometric ATMs as proofs of concept at different villages all over the country. Most of these biometric ATMs work on fingerprint technology as the means of authentication. NCR and Diebold are the major players providing biometric ATMs in India. Other products like Grammteller, a low-cost ATM developed by IIT-M TeNet group and Vortex, have also entered the market and promise to significantly reduce the cost of operations for the bank. Despite such advances, some issues remain for the banks to sort out.
  • Connectivity. Without proper broadband penetration, banks will have trouble setting up ATMs in remote villages.
  • Energy. With many villages receiving less than eight hours of electricity per day, uninterrupted power is something that the banks need to think about
  • Maintenance. Remote villages will lack technical expertise to handle ATMs.
  • Security. Both the network security and the physical security of the ATM booths need to be handled.
The silver lining is that the rural population has been showing technological affinity for mobile and e-commerce. The process would be slow, but the banks should be able to reap the benefits over a period of time. How long? We will be there to find it out.

BAI Transpay

BAI Transpay

Going … Going … Going but not yet gone.

Greetings from BAI Transpay where bankers and vendors gathered to discuss payment issues. Check volumes are dropping and banks are racing to drop costs as quickly as customers are dropping volume. Checks are being imaged, converted to ACH and replaced by debit so that paper check handling is dropping dramatically.

Banks are making mighty efforts to drop costs in line with these decreases. JPMorgan Chase (plus WaMu) has dropped from 3200 people to 1400 in check processing and gone from 21 processing centers to 13.

BB&T has moved to 99% image exchange for sending and receiving images and has branch capture in 400 out of 1500 branches. Frost Bank has dropped head count in check processing by 30%. All banks are racing to reduce costs.

The most painful part of the process will be deciding when volumes get really low. A bank will need to decide whether to:

– Stop working with paper all together

– Keep what little remains in house

– Outsource the remainder

We aren’t there yet, but even the largest banks will soon get there.

Blogs – Banks get it too!

Blogs – Banks get it too!
Blogs are a great way to interact with the community at large. Banks are slowly but surely making use of blogs to communicate with their customers and the public. The early adopters like Wells Fargo actually have several blogs, including a new one called the Wells Fargo -Wachovia Blog. The Wells Fargo-Wachovia blog has a simple goal – to let customers ask questions and inform them about what’s going on. M&A for the masses! Bank blogs can take on many flavors. Everyone from large banks to little credit unions are taking part. Here are some additional examples: Verity CU BlogCelent recommends that banks explore the use of blogs and consider the various ways they can interact with the public. Those who have yet to do so should get a blog off the ground. Banks need to work on building and cementing relationships, particularly in these difficult times. A blog is a great way to interact with customers in a participatory manner and is yet another way to let them know how much you appreciate their business! I invite you to check out our series of reports on Web 2.0: Web 2.0 and Retail Banking: Less Hype Equals Opportunity Web 2.0: A Quantum Leap for Wholesale Banking