TCS BNCS

Issue 3

Powering BankMuscats customers with a multi-channel DMA and a 2-in-1 banking and brokerage account.

Thats certainty

BankMuscat is the largest financial services provider in Oman. BankMuscat wanted to enhance its Investment Management and Private Banking offering by providing its customers with Direct Market Access and Internet Trading facility. It needed an integrated brokerage and investment banking platform that would enable clients to trade directly on multiple markets in GCC countries, besides facilitating online risk management, Straight-Through-Processing (STP) with street-side, core banking and internal systems. Further, BankMuscat wanted to differentiate itself by offering seamless trading through a linked two-in-one brokerage and BankMuscat account. Tata Consultancy Services (TCS) implemented TCS B NCS Securities Trading and Securities Processing, a comprehensive front-to-back office solution. As one of the worlds fastest growing technology and business solutions providers, TCS enabled a common platform for securities trading, portfolio management, corporate actions and funds, which also complied with the business regulatory requirements of the region. Empowering BankMuscats customers with seamless trading in multiple markets via multiple channels and multi-market portfolio management services. And, of course, enabling BankMuscat to experience certainty.

To learn how your business can experience certainty, visit www.tcs.com

Foreword A recent report by the Boston Consulting Group provides some interesting statistics: 12 major banks representing 50 percent of the market capitalization in the Middle East showed a cumulative average ROE of 17.5 percent in 2009. The global average was 4.1 percent. The forecast is indeed, optimistic for the Middle East economy, with GDP expected to grow above average from the latter half of 2010. Reinforcing this trend is the recent move by most banks in the region in broadening their regional presence. The financial crisis in 2009 left most of the GCC markets grappling with a liquidity challenge, although, on the whole, the region -- along with other emerging markets -- has proven resilient. Apart from following prudent economic policies and the more crisis-resistant Islamic form of banking, financial institutions in the region are proof of the fact that investments made in a downturn are equally important to maintaining competitive advantage during growth. This train of thought sets us on a path to consider what firms can do in a crisis, or post-crisis? More importantly, what are the takeaways from the highly publicized financial services meltdowns world-wide? What is needed to drive business in uncertain times? Is it strategic thinking and execution? Or, a renewed emphasis on people, processes, customers and, eventually, profits? Strategy today must mean the transformation that is required in an organization, for its people, customers, partners and processes when it is faced with challenging times. In my opinion, it is about the following priorities taken in the following order: (1) Its about listening to clients, partners and employees, being flexible, being transparent and agile in responding to situations (2) Its about being able to cut the flab, reduce costs where they can be cut and focus on operational efficiencies (3) Its about being able to invest where you feel the future is going to be, and being able to nurture and motivate talent and innovation It is about clarity regarding what an organization will and can do, and also wont do--through continual engagement and communication with all stakeholders; it is also about pushing and moving boundaries to make room for alternate business models and making our products and services unique and relevant. And, that is possible only through technology. Let us briefly encapsulate the economic scenario in the GCC region. From a highly pressurized real estate market post the Dubai crisis (which caused Central banks all across the ME region to urge banks to create more transparency and reduce exposure to risks), to the new surge in demand for oil driving petrodollars into the region, how do these trends augur for technology and its role in a business, especially that of a financial services institution or bank? How has the industry been responding?

Firstly, from the industry perspective. Liquidity injection has taken on multitudinous forms from the reduction of interest rates to emergency bank lending among a host of other moves to communicate flexibility in the systemand the regions financial health. Amidst this backdrop is the proposal for a common currency (Khaleeji) union for the six-member states, the advancements in Islamic banking and finance, and the concept of the GCC union itself. Now, from a technology perspective: (1) With risk management being brought to the forefront post the downturn, an increased use of analytics and intelligence in operations, products and services for more informed decision-making took center-stage. Technology is helping Institutions to renegotiate collateral types, assess exposures on a more real-time basis (surveillance) and be in a better position to provide for optimal and adequate capital meeting the norms (2) Optimization of IT took center-stage in terms of bringing about alignment of business and IT, creating shared services, and separating Run the Bank and Change the Bank portfolios. Run the Bank expenses were optimized. Better processes and governance meant greater operational efficiencies and reduced cost per transaction processed (3) Expanding existing customer relationships, delivering projects that enable business growth, front-end and channel-related solutions, architectural projects related to SOA (ServiceOriented Architecture) and BPM (Business Process Management) are reshaping the backoffice structures of banks. Payment applications are also gaining amplified significance In Capital markets, the focus is on Multi-market, Multi-asset, Multi-platform, Multi-channel trading, virtualized infrastructures, higher levels of automation, flexibility to add new instruments, the ASP and SaaS models for procurement, hosting and management, and the consolidation of cross-asset platforms alongside holistic and transparent risk management. Efforts are being made to excel in the form of best execution, differentiated algorithms, capital raising strategies, diversification of debt, among others. Treasury systems are being integrated with ERP and EIPP systems to better manage the supply chain. The virtualization market is being driven by the need for centralized processes and infrastructure control alongside reduction in costs and energy. Security issues are now de-selling the cloud computing idea to some extent. SaaS is becoming a popular topic, considering the pluses it gives organizations by helping them deploy new software rapidly, reducing time to market for new products, and total cost of ownership. With regulatory and governance bodies encouraging the idea of an IT-aware population in MEA, this has pushed the adoption of middleware, portals and Web 2.0 technologies, including social and mobile networking for retail banks. Banks are increasingly looking at how to leverage these new developments to enhance revenue and the customer experience. We expect firms to define and articulate their trading policy, and the level of risk they will assume followed by liquidity management measures. With the buy sides demands growing, including the need for control and transparency, most players will look at building a comprehensive product set that includes algorithms, smart order routers, Multi-asset trading platforms and post- and pre-trade transaction analysis. The need to improve technology related to OTC derivatives trading and infrastructure such that it improves operations, and measures and monitors risks in a sophisticated manner is an imperative.

With global banks making dramatic changes to the way they conduct their businesses, including targeting new business segments such as Islamic Banking (analyst reports peg the number of Islamic finance institutions at more than 300 and spread across 51 countries globally, growing at a rate of 10-15% a year), banks will need solutions that can handle transparency and seamlessly move between their Islamic and non-Islamic funds, accounts and reporting systems. This would not necessarily mean a dedicated and separate Islamic banking solution but on the contrary it could be a unified solution that can manage this complexity with ease (like TCS BaNCS) and allow the differentiated branding of such products and services, if you will. As awareness of Islamic Banking expands beyond existing geographies, Takaful products for reinsurance, bancassurance and microinsurance are generating more global demand. However, due to the lack of overall industry experience and consensus, Takaful operators are finding the acceleration modest. They also seek to partner with experienced technology providers for automation and software. Focus areas will be efficiency in processes, product configurability, and innovation. To put things in a nutshell, financial services organizations are fundamentally shifting their strategy canvas by not just focusing on customers and competitors, but on end-customers and new players, or alternatives. This would mean creating new sources of value for buyers and new demand, thereby shifting the strategic pricing, packaging, white-labeling and delivery of solutions. They are also adopting different efficiency strategies for Retail and Wholesale segments and are demanding shared infrastructure. SOA is enabling them to avoid redundant and hidden costs of ownership. Investments or Change the Bank strategies are largely around channel-aware and channel-agnostic initiatives to truly realize the potential of the any place is a banking place paradigm of the future.

NG Subramaniam President TCS Financial Solutions Tata Consultancy Services

Letter from the Editor As early as the 8th century, financiers in the Islamic world were responsible for the economic development in Muslim countries by acting as intermediaries for finance, trade and payments. In many ways, we could say that they inspired finance in the Western world. Following this, there was a short period when Islamic finance declined but over the past few years it has re-emerged as a vital, thriving global force, with South Asia, GCC and Iran being its largest markets. Currently, Islamic banking assets represent between USD700 and USD750 billion worldwide, with marketsand not only in Islamic lands but across the globebeing developed and evolving. In this edition of TCS BaNCS Research Journal, we bring you insights that touch upon the growth of Islamic finance, with emphasis on the Middle Eastern and African (MENA) regions. We also delve into topics that are of interest to the banking and financial services community on the wholesuch as predictive analytics, payments, global custody, among others. Hope you enjoy reading the articles and will get back to us with your thoughts and opinions, and contributions. Warm Regards,

Anjana C Srikanth Marketing and Communications TCS Financial Solutions Tel: +9180-67256963 e.mail: anjana.srikanth@tcs.com

2010 Tata Consultancy Services Limited. All Rights Reserved The views expressed herein are those of the authors and do not necessarily reflect the views of Tata Consultancy Services Ltd.

Portfolio
The New Landscape in GCC Integrating Risk and Business Intelligence Standardized Pre-validation Models for Islamic Markets Exchange-traded Funds: Yesterday, Today, and Tomorrow Making Relationship-based Pricing a Reality in Financial Services Mobile Payments in MENA-Driving Convergence Emerging Trends and The Future of Global Custody Services Regulatory Challenges & Opportunities in MENA Banking on Islam - A Technology Perspective Opportunities Grow for Takaful: Demographic Drivers & Technology Implications 9 11 15 18 21 26 29 34 38 42

The New Landscape in GCC

In 2010 GDP is forecast to grow by 3.8 percent across the GCC countries. As the dust begins to settle, it is time for banks to go back to being engines of growth and the stabilization in the economy, says Gopakumar, CIO, Bank Muscat, in an interview with Shekar Hegde, from TCS BaNCS Securities Trading, where he shares his thoughts on the way the financial services sector in the Middle East is heading. Here are excerpts from the interview. Q. What are the key challenges faced by financial service firms post the Lehman and Dubai crisis? Gopakumar: The UAE market is poised at an interesting and challenging time. With much publicized financial and real estate debacles and the shaking of the foundations of the economy, the banking sectoralong with the markets is taking a cautious pause and awaiting the emergence of new trends. 2009 was a year of unpredictable changes. 2010 is the year of revival and clean up. And, also correction.

liquidity, speculation and growth in the construction and financial sectors led to a recipe for disaster, just like other parts of the world. Post the Lehman collapse and the resultant shutting off of liquidity, made the same sector invest cautiously without any long-term strategic planning. Recovery is extremely slow the long-term debt markets are no longer available and real estate growth is yet to pick up. Q. What initiatives are being taken by the capital markets and governments for revitalization, especially now that the IPO market is now moribund? Gopakumar: I am not sure if any concrete measures to reinvigorate the capital markets are being taken at this stage. In Oman, where Bank of Muscat is based, the focus is on market stabilization. The government has created a market stabilization fund which has helped in making the Muscat market less volatile compared to other markets. The regulatory regime is encouraging companies to go public. But, slowly, we see signs of change with second telecom operator going public and heralding a natural process of revival. This is the scenario across all GCC countries. Q. Do you expect more foreign banks/brokerages to set up shop going ahead? Given that most of the brokerages are either banks/bank subsidiaries, is there a case for specialized brokerage models? Gopakumar: Brokerages in the Middle East are bank brokerages and the standalone brokerage model is yet to catch

on. We see many joint ventures in foreign banks, while there are many nonbank brokerages being established. Regional investment banks are showing more activity in recent times. In their efforts to beat the competition, banks are looking at multiple ways to relate to their customers, and this is one approach. Q. With the Middle East home to more than 300,000 HNIs, how are wealth management and asset management companies shaping up? Gopakumar: Wealth management is an area where international private banks, because of their experience, are acting as major players. However, over the last couple of years, local banks have also become active in the wealth management space and are targeting the asset management market. They are offering mutual fund products and real estate based products although real estate based products have now taken a backseat. Q. Post the meltdown, organizations are finding themselves becoming more risk averse. Which asset classes are popular today? Gopakumar: We are seeing a shift in the preference for asset classes. The shift is to primarily from real estate to other asset classes such as bonds and equities and to some extent commodities. Bonds, as an asset class, have become very popular. In the years 2003-2007, because of the huge amount of liquidity bonds, pricing was always more in

Over the last couple of years, local banks have also become active in the wealth management space and are targeting the asset management market.
Primarily, most of the Gulf markets, especially both the banking and corporate sectors, propelled by excess

favor of the issuer rather than the investor. However, post the financial crisis the coupon rates are attractive leading to a rush for bonds. Q. The introduction of derivatives will help in raising the capital markets to the next level by reducing volatility and attracting foreign investment. Would derivatives be permissible under Islamic Finance rules (Shariah)? Gopakumar: Capital markets are not at the right level of maturity for the introduction of derivatives. Leading exchanges in Dubai have introduced derivatives but many other exchanges have not done so. The pre-requisites for introducing the derivatives segment i.e., mechanisms such as stock lending and borrowing and short selling are missing here. There is also a chance for misuse as investors are not sophisticated enough, and there is a tendency to view the instrument with suspicion. Q. With Islamic Banking products growing at a CAGR of 18% in the last five years, what are banks doing to tap into this opportunity? Gopakumar: Banks are interested in Islamic banking and investments as per Shariah law. There are a lot of Islamic products which are being introduced to tap the growing appetite for Islamic products such as Musharaka, Mudaraba, and Shariah-compliant mutual funds. Q. What are your insights on the introduction of a single GCC currency and the underlying opportunities/ challenges? Gopakumar: A single GCC currency will lower accounting fees and transaction costs. It would also create the worlds third largest currency behind

the euro and the dollar, in which case other countries in the region might be persuaded to use it as their reserve currency. A single currency is also the first step towards the goal of a common GCC market. Having said that, a single currency can be fraught with uncertainty and numerous challenges. A common currency will require significant development time and cooperation among the member countries. UAE has already pulled out of this move. The single currency that was set to roll out by April 2010 seems highly unlikely. In short, we are not seeing any momentum in this sphere. Q. What are the benefits of having a common technology platform for asset management and broking businesses? What are the challenges? Gopakumar: A common technology platform offers several benefits, the most significant one being the ability to offer integrated broking and advanced portfolio management services to our clients. Integrating our offerings becomes more difficult with multiple vendors and technology platforms. Working on a common platform makes it easier from an IT management perspective by leveraging the hardware, while having a common source of data helps from a MIS perspective The need is for a solution that is agile and that can be easily scaled up to cater to higher volumes, help design new financial products, while making vendor management easier. The main challenge is to find a vendor who has a product which can meet the varied functional requirements of both the broking and asset management businesses. Q. What according to you are the areas that will receive the most

attention Centralized Trading, Risk Management, Clearing and Settlement, CRM or Business Intelligence? Gopakumar: At Bank Muscat, the focus is on e-broking and efforts are being made to service markets from Oman, Saudi Arabia and Kuwait from a common technology platform. The value proposition we are trying to communicate is that of making multiple products available to the customer from a single software instance, for a more integrated portfolio of offerings. Q. With banking and brokerage revenues dipping, there is a huge emphasis on reducing operational costs, especially in IT. Would small and mid-tier banks look at hosted solutions to reduce operational costs? Gopakumar: I agree with the concept of hosted services, but I dont see the market picking up this trend soon. The benefit of sharing costs with hosted services is attractive but there are other negatives such as the lack of product differentiation, client confidentiality and support issues. An area where hosted services could be relevant is at disaster recovery sites for multiple firms. Q. Can you comment on risk management policies being adopted at your bank, given the backdrop of the crises? Gopakumar: Two primary areas of focus for banks across the globe are risk management and compliance today. We see investments in an enterprisewide approach to governance, risk and compliance, which will include sophisticated ways of monitoring exposures to risk across all business lines, products and customers. A common view of assets and products across customers and the bank is critical.

10

New landscape in GCC

Integrating Risk and Business Intelligence

Predictive analytics is often seen as a tool to improve customer retention, aid direct marketing, detect fraud and enhance customer relationships. Predictive analytics, without risk intelligence being considered in conjunction with business intelligence, will more often than not yield inaccurate predictions. This is clearly demonstrated by the recent subprime crisis. Sales executives from the banks, burdened with their sales targets and peer competition, focused primarily on business intelligence, ignoring the risks involved. This resulted in large amounts of loan being given to counterparties, leading to scenarios that could aggravate the situation such as increased interest rates, adverse changes in credit quality, among many others. This, as is well known, was the primary cause of the recent financial crisis. A better understanding of the risks associated with the business would have induced tighter controls or, at least, ensured better preparedness to deal with the crisis.

Predictive analytics goes hand in hand with business intelligence and recent events have clearly highlighted the need for integrating business intelligence with risk intelligence to derive its full benefits. Today, most organizations are discovering new approaches to effectively couple and complement business with risk intelligence in each step to get the desired results out of predictive analytics.

Lets take a simplistic but intuitive approach. Every business is driven by a defined strategy. Each strategy has its own set of risks and rewards attached to it as shown below (Figure 1): Risk, often termed as a threat, can also be seen as an opportunity. Hence, risk intelligence is a continuum and not a one-time activity. It is an ongoing process and should be carried on regularly so that it remains closely aligned with business intelligence. Building a Risk Intelligent Enterprise involves a process of managing an organizations risks within a cohesive framework fully aligned with business objectives. By using a building block approach to successively integrate the risks at each level, a firm can retain the advantage of diversification across its business lines. The steps involved in building a Risk Intelligent Enterprise are as follows:

Today, most organizations are discovering new approaches to effectively couple and complement business with risk intelligence to get the desired results out of predictive analytics.

Figure 1:
Mission/Vision

Approved Strategy

Strategy

Business

Business Objectives

Business

Risk

Risks

Risks

Risks

Risks

Controls

Mitigate

Manage

Avoid

11

Figure 2: Risk Intelligence Architecture

Risk Integration

Integrate to RAROC

Risk Management

Risk Capital Allocation for Business

Risk Transfer

Quantification

Statistical Modeling

Risk Databases

Risk Quantification

Qualitative/ Self Assessment

Strategic Risk Assessment

Business & Process Risk Assessment

Cultural Risk Assessment

Profiles: Expected & Experienced Risk Policies & Procedure Manuals

Risk Identification

Senior Management Discussion Current Initiatives Review

Business Process Owners

Risk Libraries

Audit Reports

Foundation

Risk Strategy & Structure (Governance)

Risk Management Policies

Risk Framework

Risk Framework Process Model

Knowledge Management

Program Management

Project Definition and Management

Step 1: Laying the Foundation for the Risk Management Architecture within an Organization by: a. Defining Risk Classes: Aligning risk management to organizational structure and business strategy has become an integral component today. Every organization needs to identify risks that are applicable and prepare strategies for each one of them to avoid, reduce, transfer, retain or exploit it b. Process Metrics: Designing all stages of business process across the organization to optimize the entire life cycle of processes

By using a building block approach to successively integrate the risks at each level, a firm can retain the advantage of diversification across its business lines.
c. Risk Governance and Policies: Designing a robust governance framework describing the roles, responsibilities and accountability of the risk function across the

organization and supporting it with policies is the foundation for defining all the processes and tolerances for risk activities in the organization d. Risk Warehouse and Systems: Designing a proper infrastructure so that the organization is prepared to produce early warning bells and has improved ability to manage risk and execute business Step 2: Identification & Qualitative Assessment At this stage, possible risks within an organization - across all levels - are

12

Integrating Risk and Business Intelligence

Figure 3: Integrated view of Risk Management

Level of Sophistication Tier 5 Strategy and Architecture
No formal co-ordinated setting of a risk management strategy

Tier 4
A strategy for risk management set at a Group level is not clearly linked to business strategy

Tier 3
Risk management strategy is communicated and accepted across the business units, with clear objectives in line with business strategy. Individual roles and responsibilities are aligned to the individual components of risk The definition is used universally across the organization and contains a clear distinction of all risk categories

Tier 2
The strategy is adopted by all business units and it is integrated into all risk classes. There are clear metrics to demonstrate return on investment All duplications are eliminated. There is clear role and responsibility allocation between Group center and business units There is a resolution of the grey areas in the boundaries between credit, market, operational and other risks

Tier 1
The strategy is totally embedded into the businesses and fully integrated into other risk classes

Risk Governance and Organization

Roles and responsibilities are not defined or clearly allocated for risk management function

Some roles and responsibilities are defined in a co-ordinated fashion - generally focusing on Group center There is a single definition but it is applied or interpreted in an inconsistent manner across the organisation There are Group-defined processes for managing operational risk, but which lack robustness and business buy-in

There is a fully optimised and cost efficient model in place with all responsibilities clearly defined

Risk Definition and Categorization

No overall definition of risk factors

There is a fully integrated definition positive in nature, decomposed into risk categories

Processes and Policies

There are limited formal processes for risk management, uncoordinated across the organization

There are methodologies and tools which are consistently applied by the business units

There is a complementary and integrated suite of tools to cover each aspect of the process

An optimal control framework, including full cost vs. benefit analysis of the methodologies employed

Regulatory Compliance

Minimum standards of regulatory compliance are observed

Rudimentary compliance framework in place

Deep linkages between compliance outlook and business strategies, in focus areas There is complete coverage of data management across the business. Analysis of the data remains generally historical Operational risk responsibilities within the business units are discharged by individuals with appropriate skills

Institutionalized compliance framework, benchmarked against available best practices

Thought leadership in compliance, at global level

Risk Systems and Technology

No formalized or co-ordinated process for handling data. Prevalence of subjective techniques There are only a few individuals within the organization who have skills within risk management

Some tracking of data, not uniform across the business. Incorporation of medium scale technological applications Risk management roles are generally populated by individuals with inherent skills and experience

Data collected is more forward looking and there is a move away from historical analysis to future predictions There is a high degree of understanding of risk across the organization, supported by training

The organization has complete loss data, seamlessly incorporating internal and external loss and near miss experience Effective allocation and use of resources efficiently applying the skill sets of existing resources

Skills and Resources

Year 1

Year 3

Year 5

Figure 4: Business Transformation (Training & Communication)

Phase 1 Gap Analysis & Planning 8 weeks Phase 2 Framework Design & Specification 12 - 14 weeks Phase 3 Implementation Phase 12 - 18 months Phase 4 Risk Based Decision Making 6 - 12 months

Key Methodologies/ Tools

Business Gap Analysis

Business Intelligence Framework Risk Management Framework

Business/Risk Process Redesign Enterprise Data Warehouse System Implementation

Data Gap Analysis

Implementation of Risk Based Performance Measurement Tool Risk Based Pricing Portfolio Optimization Customer Profitability Analysis

System Impact Analysis

Functional Architecture

Reporting Infrastructure Implementation of Risk Monitoring Framework Dashboards Workflow

Define Projects to fill Identified Gaps

System Architecture

Application Implementation

13

identified. This not only improves the existing method of management of risk but also creates risk awareness within the organization.

Designing a robust governance framework describing the roles, responsibilities and accountability of the risk function across the organization and supporting it with policies is the foundation for defining all the processes and tolerances for risk activities in the organization.
a. Top Down Approach: Senior management participates to highlight and address risk issues which are critical from the organizational perspective b. Risk Culture Assessment: Determination of risk awareness and responsiveness within the organization c. Bottom Up Approach: Middle level and junior management participates to highlight risk issues that are critical from a day-to-day business running perspective Step 3: Quantitative Assessment Risk can be managed only if it can be measured. Every organization needs to quantify risk as a number to have an approximation of the unforeseen, unexpected losses. There are various

methods for doing it but the basic method is to start capturing all losses. This includes developing a specific procedure and providing both functional and technical support in building a framework around risk quantification. A risk transfer price mechanism also needs to be built, which could be used for each of the profit centers to enhance the method of evaluating performances of each of the business lines based on the risk level existing within the portfolio. This is a good starting point to arrive at risk based evaluation across the enterprise. Step 4: Integrated View of all Risks Most organizations often misunderstand this and rely completely on systems for integration or aggregation and for having a single view of all the risks. It is important for the organization to have a defined method for aggregating all possible risks and have a single view of it. However, this cannot be solved only by a system. Proper infrastructure is necessary to capture data at each level, which can further be used at different levels to integrate or disintegrate the view - as mentioned in step 1 (laying the foundation). The integrated view is for the senior management and the board as they are responsible for the entire organization.

should not be considered important only at the times of crisis. Typical business and risk Integration projects follow a four-phased approach as shown in Figure 4. Lessons Learned The results generated by risk intelligence systems will only be as accurate as the data and the methodologies used to generate those outputs. A heavy reliance on the systems without considering the appropriateness of the inputs and the methodologies is fallacious. An aggressive credit decision made purely on business overrides will only get flagged at the time of default at which point it might just be too late. It is, therefore, essential to not rely on the systems blindly but to create and use the systems in such a way that it yields objective and accurate results. Lastly, risk intelligence needs to be incorporated in decision making and monitored properly.

It is important for the organization to have a defined method for aggregating all possible risks and have a single view of it. However, a system alone cannot solve this issue.
It should be understood that risk intelligence is an ongoing activity and

Alok Tiwari Alok Tiwari is the founder & CEO of Aptivaa, a global risk, governance and compliance firm serving over 100 clients. Prior to Aptivaa, Alok led Enterprise Risk Solutions Group at a Big 4 consulting firm in India. He has over 15 years of experience in the area of risk management. He has an extensive knowledge of risk management techniques in the area of credit, market, operational risk, ALM, strategic, reputational risk and enterprise risk management.

14

Integrating Risk and Business Intelligence

Standardized Pre-validation Models for Islamic Markets

Markets with specialized local practices such as Islamic finance in the Middle East and North Africa always pose a unique challenge. Alongside compliance with legal requirements, they are often regulated by parliamentary decree. They do not have the flexibility to adopt global standards such as netting of securities and cash, Central Counterparty Clearing (CCP), nominee accounts or securities lending, unless you create a special zone and jurisdiction like the DFSA in Dubai, which regulates the DIFX/NASDAQ Dubai. They have to follow a set of practices yet modernize, if not standardize, to be able to attract global investment. Each market tries to do this in its own way, thereby, resulting in the creation of unique models. Islamic economic rules were formulated based on analysis of the Quran

(such as opposition to riba or usury or interest), and from Sunnah, the sayings and doings of the Prophet Muhammad. Principles based on readings from Sunnah lead to an Islamic theory and practice of a coherent economic system with a blueprint for a new order in society, in which, all participants would be treated more fairly and present a much broader framework and identify seven classes of financial market fairness - freedom from coercion, freedom from misrepresentation, right to equal information, right to equal processing power, freedom from impulse, right to transact at efficient prices, and entitlement to equal bargaining power. Trading risk, hence, needs to be disallowed or eliminated, not managed. Settlement models in the Middle East and other markets follow Pre-validation with three basic principles:

Pre-validation of securities at the time of trading: Value of the assets, which vary based on the changing price, are to be owned by the investor at the time of trading A guaranteed cash obligation Gross settlement of securities at the investor level

Trading risk needs to be disallowed or eliminated, not managed.

The two BIS (Bank of International Settlements) models of settlements prevalent in the Middle East are: Model 1: Gross (securities) and Gross (cash)

Figure 1: PVM 1

Orders

Stock Exchange

Requests

Investor

Broker

Bank 1

Demat/Remat/Transfer Depository

Settlement Caps

15

 Model 2: Gross (securities) and Net (cash) In both models, the holdings are prevalidated when trade is matched, cash settlement is assured either by having a guaranteed fund deposits or by validation against a settlement cap (Principle 2), and the security settlement is at the investor level (Principle 3).

Pre-validation Model 1 (PVM1) Depository managed Pre-validation Model 2 (PVM 2) Exchange managed It also puts forth a set of global standards that can be blended with either of these two models to create a set of standard practices for Islamic exchanges, clearing and settlement organizations. Pre-validation Model 1 (PVM1): Depository Managed In this model, dematerialization, rematerialization or transfer requests are routed to the depository, which is the primary owner of security holdings and settlement cap details. The stock exchange confirms the availability of securities and cash obligation limit with the depository before the trade is matched. The balances are pre-validated and updated real-time at the depository. Hence, no reconciliation is needed. The typical flow of events in the depository-managed, pre-validated model is:

The clearing/central bank sends the settlement cap details to the depository for pre-validating the order and for settlement of cash obligations.

In Pre-validation Model 1, dematerialization, rematerialization or transfer requests are routed to the depository, which is the primary owner of security holdings and settlement cap details.
This paper attempts to outline two models of Islamic markets for clearing and settlement:

While Islamic markets can implement one of the two pre-validation models, it becomes necessary for them to comply with some of the standards prescribed by the G30
On-exchange transactions (in the Stock Exchange) o Order requests are sent to the Depository for approval o The depository checks the availability of the stock holdings and netted settlement cap Requests to the depository by brokers are accepted without communicating with the stock exchange,

Figure 2: PVM 2

Orders

Settlement Caps

2 Stock Exchange

Requests

Investor

Broker

Bank 2

Demat/Remat/Transfer Depository

Settlement Caps

16

Standardized Pre-validation Models for Islamic Markets

as the depository has full control on the balances The depository blocks securities, updates settlement cap if available and responds to the stock exchange with a positive/negative response Pre-validation Model 2 (PVM2): Exchange Managed In this model, the Stock Exchange is the owner of the security holdings and settlement cap details during trading hours. It uses the holding details for pre-validation of orders when a trade comes in and blocks the securities, if available. The depository confirms all the debit requests it gets directly from the Exchange and intimates the Exchange about all credits to enable the Exchange to have the correct balance for pre-validation. Blocked and unblocked balance details are sent by the Exchange to the depository at the end of the day for reconciliation. The typical flow of events in an Exchangemanaged model is: 1. The depository sends information related to participants, instruments and balances to the Stock Exchange at the beginning of the day 2. The clearing/central bank sends the settlement cap details to the Stock Exchange for the pre-validation of orders and to the depository for settlement of cash obligations 3. Intra-day off-exchange transactions (in the depository) Such transactions are sent to the Stock Exchange for approval. Debit bookings are done in the depository only on the approval of the Stock Exchange and credits bookings are sent to the Exchange for a balance update

4. Intra-day on-exchange Transactions (in the Stock Exchange) The holdings available with the Stock Exchange are validated and, if available, they are blocked for trade settlement The netted cash obligation is checked against the settlement cap 5. The depository receives the End-ofDay (blocked and unblocked) balances from the Stock Exchange for reconciliation Relevant Global Standards that can be blended with PVM1 and PVM2: While Islamic markets can implement one of the two Pre-validation models, it becomes necessary for them to comply with some of the standards prescribed by the G30, to give comfort to global investors and attract investment. What is missing today is a clear articulation of standards that a market complies with because of the perception that it is difficult to marry the pre-validation models with global standards. In order to achieve efficient processing, Islamic markets need to adopt the following standards and have them coexist with one of the pre-validation models: Harmonize messaging standards and communication protocols such as: o ISO15022/20022 o TCP/IP Synchronize timing between different clearing and settlement systems and the associated payment systems this will also be a step in the possible integration of GCC markets

Settle in central bank funds wherever possible, to reduce the risk of settlement failure While both models have their advantages and disadvantages, the tightly coupled nature of pre-validation has an impact on performance and latency. In a world moving towards low latency trading, PVM2 has a slight edge over PVM1 in facilitating better performance of systems at Exchanges.

R Vivekanand As Global Head, Market Infrastructure, TCS BaNCS, Vivek is responsible for the Product businesses of TCS in the Capital Market Infrastructure space covering stock exchanges, clearing organizations, central depositories/registries, central banks and regulatory bodies.

Sasidhar Suram Sasidhar is an Application Architect in TCS Financial Solutions. In this role, he works with customers and with market research teams to translate business processes into product specifications. He has 10+ years of experience in Capital Market implementations.

17

Exchange-traded Funds: Yesterday, Today, and Tomorrow

Emergence of ETFs Exchange-traded funds (ETFs) have emerged as a major investment vehicle, with assets now exceeding USD 1 trillion worldwide. Their rate of growth has been phenomenal. At the end of 1999, there were 33 ETFs listed globally, with USD 40 billion in assets. By 2004, this had changed to 336 ETFs with USD 310 billion. At the end of 2009, there were 1,939 ETFs listed on 41 exchanges, with assets worth USD 1,032 billion. This growth is more remarkable when viewed in the context of the worlds financial markets. The S&P 500 price index of US, which was 1469 on December 31, 1999, decreased to 1212 by December 31, 2004, and fell further to 1115 by December 31, 2009. MSCIs All-Country World stock price index fell from 341 to 299 over the same decade. While stock markets suffered from the burst tech bubble at the beginning of this century and the recent near meltdown of global financial institutions, ETFs came into prominence. ETF Primer ETFs are a hybrid of closed-end investment funds. A closed-end fund issues a limited number of non-redeemable shares. After their Initial Public Offering, closed-end funds can only be traded in a secondary market (usually a stock exchange). Closed-end funds often trade at a significant discount or premium to their actual value, because their price is determined by the supply/demand dynamics of the market and is not tempered by an arbitrage mechanism. That is, a trader cannot make an arbitrage

profit by buying shares when they are at a discount and redeeming them for NAV. ETFs, similarly, trade on stock exchanges and do not issue or redeem shares to individual shareholders. Unlike closedended funds, however, ETFs sign contracts with financial counterparties (Authorized Participants, or APs) that allow the fund to issue or redeem a round number of shares to/from the AP, usually in exchange for a basket of securities that closely resemble or are a fully replicated slice of the underlying fund. This round number of shares is called a creation unit (CU), and is usually a multiple of 10,000. By receiving and delivering securities in exchange for shares, ETFs do not have to purchase or sell securities in response to shareholder activity, and so remain immune to the associated trading costs that affect the performance of open-ended investment funds. An exception to this process occurs with the so-called swap-based ETF. These ETFs use over-the-counter (OTC) derivatives to deliver performance, rather than holding the underlying securities that provide investment return. This type of ETF does own securities, but the securities are unrelated to the ETFs performance mandate, instead of acting as collateral, protecting the fund against possible default of the swaps counterpart. In the US, the swap-based structure is generally used in leveraged or inverse ETFs, which provide exposure to risks that are otherwise available only to investors with derivatives-trading

accounts. However, this structure is popular outside the US even for otherwise simple stock-index ETFs. Roughly half of the USD 327 billion of ETFs listed outside the US are derivativesbased, about 15% of total ETF assets worldwide. The ETF creation/redemption process makes it difficult for ETF portfolio managers to pick stocks actively or to rebalance their portfolios dynamically when the market conditions change. Most ETFs consequently provide only passive exposure to markets; they provide a return, explicitly tied to a particular stock, bond, or commodity index, with no implied promise of outperforming their benchmark. The mechanism that allows APs to create/redeem shares also enables them to arbitrage the publicly traded shares of ETFs. For liquid ETFs, robust arbitrage activity ensures that their publicly traded price is a fair approximation of its NAV at any given time. The ability to monitor intra-day NAVs of ETFs is facilitated by NYSE Euronext, which calculates and publishes intra-day NAVs every 15 seconds for the ETFs it lists. This comprises a competitive advantage for NYSE Euronext over other exchanges. Popularity There are several reasons why investors have flocked to ETFs. Investors appreciate the ability to trade ETFs all day, unlike mutual funds or other unit trusts, which can only be traded at end-of-day NAV. ETFs have significantly lower shareholder servicing costs than

18

Exchange-traded Funds: Yesterday, Today, and Tomorrow

comparable mutual funds, and this is passed on to shareholders in the form of relatively attractive expense ratios. In the US, tax laws that exempt in-kind redemptions from realizing capital gains result in ETFs having lower after-tax costs than comparable mutual funds. Also, many ETFs offer inexpensive and transparent means to obtain focused, leveraged, and/or inverse exposures to industry sectors, commodities, and illiquid markets that are unavailable through mutual funds. Lastly, over the past few years, several investors have been attracted towards the ETF due to its passive investment style and transparency. Securities Processing Challenges From the standpoint of securities processing, ETFs are in most respects similar to normal unit trusts. So much so that, when Vanguard entered the ETF market, it did not create new funds, instead, treated ETFs as a separate share class of its mutual funds. This choice was successful, judging by the USD 92 billion of assets in Vanguards ETFs the end of year 2009. The key operating challenge to ETFs is found in the in-kind free-delivery mechanism by which, ETFs issue and redeem shares. In the US, ETF custodians send a Portfolio Composition File (PCF) daily, for each ETF, to the National Securities Clearing Corp (NSCC). The PCF lists a basket of security and cash holdings that will be exchangeable the following day for a creation unit of the ETF. The value of these positions must exactly match the value of a CU of the ETF. For example, if an ETFs closing NAV per share the following day is USD 20, and a CU is 50,000 shares, then the value of the PCF must be equal to USD 1,000,000.

The NSCC must receive the PCF the evening prior to the day when the list becomes the delivery basket for a given ETF. The NSCCs website lists detailed specifications for the format and contents of the PCF as well as a protocol for rejection and warning messages if data in the PCF is incomplete or otherwise problematic. Outside the U.S., similar clearinghouses for creation basket data have not emerged. However, regardless of listing domicile, all ETFs AP agreements normally include detailed provisions for delivery of CU data in a similar timeframe as in the U.S. Since the PCF must be published the day prior to its effective date, holdings information must anticipate corporate, which likewise become effective on the following day. The cash amount must similarly anticipate fund distribution activity. Both cash and holdings should reflect trading activity that the ETF expects to execute on the next day.
Table 1: Graphic Illustrations: ETF growth in 2009

The cash amount is calculable as the difference between the value of a CU and value of the non-cash securities in the PCF. The cash amount published on T-1 is considered an estimate. When the cash component is recalculated on T using current prices, this cash amount will remain unchanged only in the case where the PCF file is an exactly scaled slice of the ETFs holdings and the nextdays corporate actions and trades are all perfectly anticipated. Small changes in the cash amount between T-1 and T are acceptable if based on rounding or sampling error. But APs rely on the cash estimate when they hedge their trading of the securities in the PCF. They will not continue to create shares for an ETF that does not publish reliable cash estimates. The primary source of revenue growth for ETF providers is new assets, so accurate and scalable data processing is a central priority.

YoY % increase YoY increase ($ bn) 2009 AUM 2008 AUM

World 45% 321 1032 711

U.S. 42% 209 706 497

Europe 57% 81 224 143

RoW 44% 31 102 71

Worlds top ETF providers, in $ billions as on December 31, 2009

iShares (BlackRock) SSgA Vanguard Lyxor (Societe Generale) Deutsche Bank Powershares (Invesco) ProShares

Assets 489 161 92 46 37 34 23 882

% of total 47% 16% 9% 4% 4% 3% 2% 85%

19

Process Evolution and Conclusion The unexpected, explosive growth of ETFs gave rise to infrastructural strains and gaps that are being addressed on a triage basis. These gaps are concentrated around the PCF and impact both front and back office operations. The critical role played by the PCF requires that ETF portfolio managers have discretion on its composition. As a result, the PCF does not generate directly from fund accounting data, but instead, moves through the front office to allow for editing, sampling, and/ or optimization before it is valued and published. This first step in the process of PCF creation is not supported by existing off-the-shelf portfolio management or order management software. To fill this gap, front offices have created supplemental processes that often are manually intensive.

Most ETF providers back offices do not have well-integrated systems for processing the preliminary PCF data provided by the front office. For example, most systems do not support applying next-day mandatory corporate actions (such as splits, rights issues, spinoffs, ID code changes) to evanescent holdings data. Prior to the advent of ETFs, it was not a priority to project holdings into the future on a daily basis. Doing so, at many institutions, entails inefficient use of human resources and frequent errors and omissions. As with the above mentioned tasks, the process that prices the PCF and estimates the cash component often relies on systems that use resources inefficiently. For example, the calculating agent must ensure that the pricing data in the PCF is identical to that used by the ETFs accountant. When this

agent is a different entity than the fund accountant, establishing and maintaining linkages across legal boundaries creates challenges to systems that normally rely on their own securities pricing data. These infrastructure limitations act as a capacity constraint on the growth of ETF products globally. It is revealing that BlackRock, which is understood to have the most robust ETF-related infrastructure in the industry, has a 47% share of ETFs worldwide (with $489 billion), and a 52% share of the US ETF market (with USD 364 billion). State Street, with a relatively small 16% market share, is BlackRocks nearest competition. As the ETF industry continues to grow, significant evolution will occur in securities processing infrastructure. Firms that act aggressively to streamline will be best positioned to threaten BlackRocks dominance.

Figure 1: ETF Asset Mix (% of worldwide assets managed by ETFs as on December 31, 2009):

Fixed Income 16%

Commodity 2%

Steve Wetter Steve is a Solutions Architect in TCS Financial Services, focusing on Securities Processing. He has over 20 years of experience in the financial services industry as a business leader, trader, and asset manager. As a portfolio manager, he has managed several ETFs as well as handling complex beta-replication assignments for some of the worlds largest institutional clients.

Equity 82% References: Source for data on ETF assets: BlackRock, ETF Landscape Year End 2009, National Stock Exchange, IndexUniverse.com Sources for index level data: mscibarra.com, finance.yahoo.com

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Exchange-traded Funds: Yesterday, Today, and Tomorrow

Making Relationship-based Pricing a Reality in Financial Services

Most financial institutions tend to provide exclusive offers to their key and valued customers. These services do not follow a pre-determined yardstick as they depend on the negotiation skills of both customers and financial advisors. Quite often, a savvy customer would visit a banks branches to check out various pricing deals that she can receive, and in instances such as mortgages or short-term deposits, negotiation skills play a significant role in anchoring the final rate of interest or terms of agreement. ditch effort to retain the customer by offering the lowest possible price, even at the cost of heavy risks and profitability to the bank. At the same time, it is an accepted market reality that the same price cannot be applied to all customers. Therein comes the concept of dynamic pricing of financial products, which is fast gaining higher priority in business planning. This article attempts to draw a statistical approach to Relationship-based Pricing (RBP) as there are no models on which a banker can arrive at the customized price for a deal. We desist from discussing specific statistical algorithms for usage as the optimum algorithm would be determined on the nature of the data used for the analysis. It maintains the discussion at an activity level and expects the reader to leverage appropriate statistical talent to develop specific models for each activity. Customer Lifetime Value Customer Lifetime Value (CLV) is the primary driver for Relationship-based Pricing. Naturally, a financial institution should maximize the CLV through a flexible bouquet of products with specific pricing attached to each product. How does one arrive at a specific figure for CLV for each customer and maximize the total CLV for the entire customer base for an institution? Figure 1 outlines an optimized methodology for CLV calculations. Let us look at each one of these steps in greater detail.
Figure 2: Output of an unsupervised clustering exercise on a customer database
Segment# (% of base) 10 5% 1 18%

Customer Segmentation For a focused approach to customer segmentation, the bank should arrive at customer groups or clusters based on homogeneity and common characteristics. The homogeneity may be based on various dimensions such as demography, product holding, transactions, interactions, among others. Customers not belonging to any of the identified segments need to be ignored for the rest of the exercise. Figure 2 shows a typical output of an unsupervised clustering exercise on a customer database. The segment profiler for the above segments is shown in Figure 3. This helps in understanding the variables or dimensions defining a particular segment. Each segment has a different set of significant dimensions in varying order of importance. It also shows the

Customer Lifetime Value (CLV) is the primary driver for relationship-based pricing.
Although the one with the best negotiation skills eventually wins, the other party is left with a feeling of being shortchanged. This is further aggravated by competing institutions providing a last

Figure 1: Optimized methodology for CLV

Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Segment the customer base Derive CLV for each segment Identify product bundles Determine price elasticity Optimize product bundle allocation Define value based targeting strategy Deploy rule engine

9 16%

8 11%

2 2% 9 9%

7 4% 6 7% 5 13% 4 15%

21

Figure 3: Segment profiler for segments in Figure 2

Identifying Product Bundles Once the current and future value for each product is arrived at, the next step will be to understand the association between various products. This also needs to be clubbed with possible cross-influences between various products as well as within the same product. For example, it has been observed that the probability of pre-mature termination of a term deposit decreases as the number of term deposit accounts held by the customer increases. Similarly, the probability of default on a personal loan repayment decreases if the customer also holds a term deposit, whereas in the case of a housing loan, the term deposit does not hold any correlation.

distribution of the dimension within the segment as against the customer base. For example, the Balance Total dimension is the most prominent variable for definition of Segment 9. The customers in this segment have lower balances as compared to distribution in the customer base. Similarly, considering the other dimensions, some sort of inference can be arrived at for each segment. Here, Segment 9 probably consists of customer with lower than average total balances and with lower profitability than the rest of the customer base. Deriving CLV for each Segment The definition of CLV is taken as the discounted cash flow of the customers

future product usage or purchases less the cost for servicing the products and the customer. The following equation helps in defining the future CLV of the customer (Refer Figure 4).

The probability for the period is a composite of the following: 1. The probability of churn or early termination of product subscription 2. The probability of additional products that can be cross-sold 3. The probability of the willingness of the customer to spend more and upgrade to new solutions

Once the current and future value for each product is arrived at, the next step will be to understand the association between various products.
The products held by each customer base or segment are subject to an association analysis, which provides an understanding of the interlinking between multiple products in the portfolio of the institution. Figure 5 displays

Figure 4: Deriving CLV for each Segment

Net present Value of the Relationship CLV

Revenue of Product i Ri

Cost of Product i Ki

Maintenance - Retention L - Customer services S

Cost of Acquisition I

Probability for period t p

Discount rate d

22

Making Relationship Based Pricing a Reality in Financial Services

Figure 5: Results of a link analysis

The next step is to determine the price at which a customer may purchase a product. In econometric terms, the price elasticity of each product is arrived at for each segment and for each product bundle. This is essential since the existence of certain products in the bundle impacts the price of other products. For example, the existence of a housing loan can lead to a successful sale of a lower rate for a recurring deposit compared to the rate offered to other customers.

the results of the link analysis and the respective associations between multiple product combinations. The existence of a connector line between products indicates the association between them, thickness of the line, and strength of the association. Another version of this analysis is the sequence algorithm. This activity considers not only the products being held by customers but also the sequence in which each product was added to the bundle. This gives a good understanding of the typical products a customer will buy at various stages over a lifetime. Figure 6, called a Rule Table, also depicts the above analysis. It shows frequently occurring product combinations on the basis of the support and confidence percentages. The combinations occurring on the topmost rows give the dominant product bundles subscribed to by the customers in the segment under consideration. These are the possible bundles

or products that the customer will buy over a lifetime. Determining Price Elasticity At this stage, the customers have been split into homogenous clusters. For each cluster the expected value from each product is calculated, and, the product bundles that each segment is likely to subscribe to are identified.

The price elasticity of each product is arrived at for each segment and for each product bundle.
This step aims at arriving at the various price points and the probability of successful sale or subscription by the customer. For example, consider a personal

Figure 6: Rule Table

23

Figure 7: Product Probability

Credit Card 1. APR 8.0% 2. APR 8.5% 3. APR 9.0% 4. APR 9.5% 5. APR 10.0% 6. APR 10.5%

function is defined by the business. This could be any of the following or maybe even one outside those listed below: 1. Maximize the number of products sold 2. Maximize the expected revenue from the products sold 3. Maximize the product holding ratio for given customer segment 4. Minimize the capital adequacy required 5. Maximize customer relationship lifetime 6. Minimize risk exposure

Housing Loan 1. Base + 25bps 2. Base + 50bps 3. Base + 75bps 4. Base + 100bps 5. Base + 105bps

Arrive at probability for each rate / price in each product

Savings Account 1. Free bill payment 2. Overdraft 3. Multi city checking 4. Gold Debit card 5. Silver Debit card

Using this objective and the product bundle, the product expected value, product lifetime period, product rate card and the probability of success for each rate card option, the application of an optimization algorithm gives the optimum product bundle to be sold to
Figure 8: Optimized Product Bundle
Credit Card 1. APR 8.0% 2. APR 8.5% 3. APR 9.0% 4. APR 9.5% 5. APR 10.0% 6. APR 10.5% Housing Loan 1. Base + 25bps 2. Base + 50bps 3. Base + 75bps 4. Base + 100bps 5. Base + 150bps Bundle #1 1. Credit Card APR 8.0% 2. Housing Loan Base + 75bps 3. Saving Overdraft Bundle #2 1. Credit Card APR 9.5% 2. Housing Loan Base + 50bps Bundle #3 1. Credit Card APR 8.5% 2. Housing Loan Base + 50bps 3. Saving Overdraft 4. Free bill payment 5. Gold Debit card Bundle #4 1. Credit Card APR 9.0% 2. Housing Loan Base + 25bps 3. Gold Debit card 4. Overdraft 5. Multi city checking

loan, with a certain base rate that normalizes the price across various points in time taking into account possible inflation. With past data on the price point, i.e., the interest rate, at which a customer either accepted or rejected the product, a price elasticity model is developed. This model will help to arrive at the probability of successful sale for various price points, i.e., the interest rates. Probability tagged to a particular product will vary when the product is considered a part of a different set of products (Figure 7). Optimizing Product Bundle Allocation In this step, the appropriate rate or price point to be applied to each bundle is determined. This is a typical operations research problem where the objective

Savings Account 1. Free bill payment 2. Overdraft 3. Multi city checking 4. Gold Debit card 5. Silver Debit card

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Making Relationship Based Pricing a Reality in Financial Services

Figure 9: Customer Strategy

Actual Value High Keep Keep/Grow

Low

Efficiencies Low

Grow High Potential Value

the right price to sell for each product is known. A rule engine will enable the customer facing entity to determine the appropriate product and price to close for each sale to the customer. This will help enforce the optimum allocation and go a long way in achieving the desired results. Any possible deviation from the expected result needs to be noted and fed back into the step 1 so that changing consumer preferences can be accommodated, and the model tweaked accordingly. This approach is a radical shift in the way financial institutions currently approach the customer with their basket of offerings. As such, there is a significant impact on the processes and technologies employed in the operational activities involved. However, the benefits far outweigh the efforts to be invested to enable the institution to treat each customer as an individual, and provide products and services in a personalized manner. This also enables the institution to arrive at an appropriate relationship definition and strategy.

each customer or customer segment. Figure 8 depicts the possible outcome. Defining a Value-Based Targeting Strategy The optimum product bundle and product pricing are now available for each customer or customer segment. Assuming this as the most probable scenario, the future value of each customer can be arrived at. This coupled with the current value gives us a 2 x 2 matrix with relation to the current value derived from the customer and the future potential value expected from the relationship. A financial institution may decide on a 3 x 3 matrix or even a 4 x 3 matrix depending on its customer management strategy. Lets look at a 2 x 2 matrix between the current value and the future potential value of a

customer segment. This leads to a fourpart strategy for each customer based on the quadrant each segment is on (Refer Figure 9). The above matrix using current (actual) valuation and potential valuation provides insights into the most effective approaches for customer segments based on the incremental value available within the customer segment. Figure 10 is another way of utilizing the available valuation information to derive a customer differentiation strategy. Deploying the Rules The last step in this exercise is to operationalize the strategic information derived so far. At this stage, the information about customer segments, the product bundle to be pitched as well as

Figure 10: Customer Differentiation

High contribution High unrealized potential

High potential new customers

Potential Value Actual Value Neither a high current contribution nor high unrealized potential Negative contribution

Most Valuable Customers

Most Growable Customers

Most Growable Customers

Feroz DSilva Feroz DSilva had served as the head of the Customer Intelligence Practice at SAS Institute India Private Limited for over three years. He can be contacted at michaeldsilva@gmail.com

Migrators

Low Value Customers

25

Mobile Payments in MENA-Driving Convergence

Mobile phones are fast becoming a substitute for underdeveloped or nonexistent financial infrastructure in developing countries. It is estimated that the number of mobile payment users will be more than 30% of the MENA regional subscriber base by 2012 (Figure 1). Here is what V Ramkumar, Director and the Global Practice Head of Business Technology at Cedar Management Consulting International, opines about the growing importance of mobile payments in the MENA region in an interview with TCS BaNCS Research Journal. What is the potential for providing mobile financial services to the unbanked population in emerging markets/MENA? The impact of mobile payments is more in poorer economies than in

advanced ones, with market dynamics that are starkly different. The greater impact of mobile payments in emerging markets is also due to the demand from consumers who have lower incomes and lack bank accounts. Interestingly, the highest growth rates of worldwide non-cash transactions are in CEMEA and BRIC countries, suggesting that the proliferation and adaptation of mobile payments will leapfrog in these countries, addressing the demand for low-value, high-frequency transactions. (Figure 2) Over two billion people in the world do not have a bank account. The distribution network in rural areas is far better penetrated by mobile handsets than bank branches. In markets like India, while there is a bank branch for every 16,000 people, one in every third

person has a mobile phone, and this provides a great opportunity for financial services institutions to reach out to unbanked populations. The benefits of mobile penetration are already here to see. From eliminating middlemen to tracking the prices of commodities, small and individual businesses across the world have seen significant benefits. A 10% increase in mobile phone penetration is estimated to potentially increase the annual per capita GDP by 0.8% for the lower and middle-income economies. What type of transactions are expected to be addressed through mobile payments, and what could be categorized under early adaptors? Airtime top-up is the most common type of money transfer that the mobile phone has enabled in the pre-paid user market. Mobile banking and payment of bills using portals are already in vogue in most parts of the world. SMS-enabled parking fee payments are common-place in many countries including the GCC. Mass transit, traffic fares and retail payments are the other important applications of mobile payments. The drivers for mobile contactless payments are essentially shorter transaction time, plastic card substitution, reduced cost and, most importantly, convenience. More active use of mobile payments is expected in domestic and international remittances business, or what is commonly called as mobile-money.

Figure 1: Mobile phone subscriber statistics in MENA

800 700 600 500 400 300 200 100 0 2007 2008 2009 2010E 2011E 2012E 445 528 584 621 648 667

Total Mobile Subscribers Source: Cedar Research

Mobile Payment Users

26

Mobile Payments in MENA-Driving Convergence

Figure 2: Growth of Non-cash Transactions

BRIC CEMEA L. America w/o Brazil Rest of Asia Japan+Aus+S.Korea+Singapore Europe (incl Eurozone) N.America (US+Canada) 0% Source: Cedar Research 6% 5% 5% 10% 15% 20% 25% 30% 16% 16% Mature Economies 19% 26% 25% Developing Economies

Would Near Field Communication (NFC) or mobile payments ever replace cash? Mobile payments provide banking and credit access to a large percentage of unbanked customers thus increasing the pie of transactions. While a major portion of this increased pie will be driven by new payment mechanisms, NFC is unlikely to cannibalize the existing share of card or online transaction in the near future. While mobile payments may not exactly replace cash, it will significantly address the increasing volume and frequency of cash transactions of smaller ticket size, which are primarily driven by the benefit of convenience that the consumer would experience. The proliferation of mobile cameras can be seen as a representative analogy in this context. Historically, with every non-cash payment mechanism cheques, cards and direct debits, there was an alternative payment technology expected to replace cash. Interestingly, as Figure 3 indicates, cash in circulationeven in

Overall CAGR 8.6%

Services such as Kenyas M-Pesa allow mobile subscribers to send text messages to make or transfer payments from phones, registering high rates of acceptance and adaptability in a short timeframe. Where do you see mobile operators and banks in International Money Transfers? International remittances pegged at more than USD 230 billion a year, are already a major source of income for many developing countries and a very important factor in their economic development. India, for instance, is both the worlds fastest growing mobile services market and the biggest recipient of overseas remittances in the world, accounting for around 10% of the world market, and 30% coming from the Middle East. The remittance inflow is almost four times as much as the FDI, and hence, a key factor for its economy. Globally, 200 million international migrant workers have a need for making easy and secure remittances to their dependents, many of whom dont have bank accounts. The number of

recipients of international remittances is expected to be one in four people over the next four years, and the size of the international remittances market is expected to grow over four times to more than USD 1 trillion. With a mobile network that is expected to cover geographies that have more than 80% of the world population, there is clearly an opportunity to exploit the extensive reach of mobile networks, which can complement existing local remittances channels and make international money transfers affordable.

Figure 3: Cash-in-circulation/per capita non-cash transaction

3.0 2.8 Euro (Bn) 2.6 2.4 2.2 2.04 2.0 2002 2003 2004 2005 2006 2007 2.20 2.26 2.35 2.49 2.53

Source: Cedar Research

27

the Euro-zonehas grown faster than the non-cash transaction per capita in the same period.

What are the key challenges for the advancement and proliferation of NFC and mobile payments? Every revolution be it the internet or

mobile operators joining hands. There is a very important role that the mobile operators will need to play in terms of sourcing and distribution of handsets, educating and supporting customers and managing the storage of applications on SIM cards alongside the associated security. Hence, what we would see over the next decade is increased convergence and partnerships between banks and mobile operators, driven by the latent demand that mobile proliferation is likely to bring in by way of convenience in financial transactions.

India, is both the worlds fastest growing mobile services market and the biggest recipient of overseas remittances in the world, accounting for around 10% of the world market, and 30% coming from the Middle East.
One more interesting phenomenon that is expected to happen in this decade is the convergence of all smart card applications into mobile devices, thus leading to a consolidation of cards and mobiles. This could include loyalty cards, gift cards, public transport passes, access control devices or even simple data storage applications.

credit cards or e-mails or, even the good old locomotive, has gone through a process of evolution before becoming a well-accepted part of life, and NFC is no exception. Universal standards and mandatory security evaluations for payment applications across different regions will need to evolve to shape the handset architecture, infrastructure and roll-outs. It is estimated that about 20% of the handsets sold in 2012 will be NFC-enabled. Also important is the aligned adaptation of supporting infrastructure. For example, while buying a movie ticket through the mobile phone via an NFC-enabled poster, it is also important to streamline the payment and ticketing. Implementation of NFC will depend on the emergence of a collaborative model (Figure 4) with both banks and

V Ramkumar V Ramkumar is Director and the Global Practice Head of Business Technology at Cedar Management Consulting International. He has significant experience in the areas of bank-wide technology platforms, including core banking systems, credit cards, loyalty and payment systems. He specializes in business-aligned technology strategy formulation, application selection and implementation management, with a primary focus on the banking and financial services industry. He can be reached at v.ramkumar@cedar-consulting.com.

Figure 4: Bank-Mobile Operator Collaboration

Financial & Security knowhow Sales Channels & Payment Offerings Stability & Security Banks

Mobile knowhow Sales channels & mobile offerings Technology & tools Mobile Operators

Enable new payment & settlement system Customer convenience

Collaboration

28

Mobile Payments in MENA-Driving Convergence

Emerging Trends and The Future of Global Custody Services

The recent financial crisis has provided custodians the right opportunity to evaluate their business models and potentially set new trends that could change the face of the business. In this article, we explore these opportunities in greater depth. The custody business came into existence when the US government passed the ERISA act in 1974, mandating the separation of investment management activities from the custody of underlying assets. It has since evolved into a highly specialized and complex global service, offering a wide array of services. Assets under management (AUM) have also grown explosively and are estimated to grow up to USD 200 trillion by 2015. (Source: Global Finance, Sept 2008, A Safe Heaven). The recent slowdown led to the industry safeguarding itself through consolidation activities, and by foraying into new markets. business. Driven by risk averse investors and the demand for more value for money, a global custodians role today also includes specialized, complex value-added services such as performance measurement, compliance monitoring and commission recapture, among others. The nature of custody services offered has changed from regional to global, back-office operations provider to customer relationship management, core to value-added, processing to analytics, and, commodity to liability. The custody business is considered to be one of scale, with the management of niche, value-added services being crucial to success. With fierce competition, margins on value-added services are also getting thinner.

Driven by risk averse investors and the demand for more value for money, a global custodians role today also includes specialized, complex value-added services.
Complex financial instruments, crossborder investments and the development of emerging markets propelled the growth of the global custody

Figure 1: Global Custody Value Chain

Increasing costs, decreasing margins are paving way for custodians to increase their breadth of services Custody Services to cater to heightened regulation, risk averse customers and increase M & As

Value Added Services Collateral Management Risk Analysis Outsourcing Compliance Monitoring Commission Recapture

Enhance Custody Services to cater to globalization and increased customer demands Core Services Safekeeping Settlement Corporate Actions Management Income Processing

Initial Custody Offering

Portfolio Administration Cash Management Tax Management Reporting Record-keeping Investment Accounting Funding Securities Lending, Equity Repos & Collaterals Trustee Services Performance Measurement Transition Management

29

Figure 1 shows the growing coverage of custody services. Keeping in mind the demand for increased transparency and aversion to risk, combined with regulatory rigor and technological advancements, the global custody industry is fast witnessing changes. We look at some of them here. Consolidation in the custody industry is being driven by the need for cost reduction, competition in the limited business space, service demands from customers, and efficiency of cross-border trades. Service providers are forced to deliver packages that are configurable to customer-specific needs.

of global custodians, resulting in joint ventures, mergers and acquisitions. The creation of RBC Dexia Investor Services (IS) through the joint venture (JV) between the Royal Bank of Canada and Dexias institutional investor services businesses, the merger of the Bank Of New York and Mellon, and JPMorgans acquisition of ANZs custody services arm in Australia and New Zealand are some of the recent examples of consolidation. RBC was one of the major players in Canadian market; however, it did not have any direct and significant presence in USA and Europe, respectively. Dexia, on the other hand, was recognized for its European transfer agency business. Both the organizations realized that when competing against bigwigs like BNY and State Street, what was required was the show of strength in terms of scope, capabilities and scale, which was not achievable through organic growth. Jose Placido, CEO of RBC Dexia IS in the year two of JV, credited the number of wins to the combined capabilities of the new company (source: http://www.rbcdexia. com/documents/en/FeatureArticles/ Anatomy of a Successful Joint Venture.

Today, back-office outsourcing is seen as an essential driver in changing business models.

Over the past decade, several banks have left the custody services market, selling their books to a small list

pdf ). JP Morgans recent acquisition of ANZs custody arm in Australia and New Zealand is to increase client coverage in Australasian financial centers and provide the full range of services, including global, local, sub-custody and fund administration to domestic and international customers. The Bank of New York and Mellon Financial Corp. merger in 2007, which resulted in Bank of New York Mellon Corp., has shown considerable growth as a provider of choice, globally. Their performance after the merger clearly demonstrates the same, with the share price performance outperforming the S&P Financial index (source: www.bnymellon.com/ investorrelations/events/gs120909.pdf ). The diversity in the services offered clearly puts them in an advantageous position as compared with their peers. Today, back-office outsourcingwith an increased focus on cost managementis seen as an essential driver in changing business models. Hedge funds and asset managers are keen to let global custodians run their backoffice operations and manage operational and cost challenges. The change in the landscape of prime-brokerage

Figure 2: BNY Mellon Performance Indicators (Source:www.bnymellon.com)

BNY Mellon: Share Price Performance

Outperforming S&P Financial Index

Diversity Driving Performance

Compelling scale and expertise
BNY Mellon State Street
$17.9T AUC -0-

Northern Trust
$3.6T AUC -0-

110 100 90 80 70 60 50 40 30 20

Asset Servicing Broker Dealer Services

#1 Globally, $22.1T AUC #1 US: 50%+ market share

Asset Management
Wealth Management Corporate Trust
BNY Mellon (45%) S&P Financials (50%)

#8 US, #11 Globally, $966B AUM

Top 10 US #1 Globally, #1 Global #1 US #1 US, UK and Ireland Top 5 Globally Top 7 US $11.9T

$1.4T AUM
-0-0-0-0-0-0-0-

$500B AUM
Top 5 US -0-0-0-0-0Top 15

Depositary Receipts Stock Transfer Clearing Services Global Payments

1/1/08

3/31/08

6/30/08

9/30/08

12/31/08

3/31/09

6/30/09

9/30/09

11/30/09

Cash Management
Note:

Assets under management / assets under custody and corporate trust data are as of 9/30/09. Peer data from company reports. Peer assets under management have been adjusted for an estimated level of securities lending assets.

Goldman Sachs U.S. Financial Services Conference 2009

Goldman Sachs U.S. Financial Services Conference 2009

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Emerging Trends and The Future of Global Custody Services

is also a key driver. Firms have restructured themselves to consolidate, or to outsource back-office processing to centralized firms within the same market or to offshore locations. This has forced global custodians to invest in newer technologies capable of supporting the demands of new business models. Outsourcing demands that solutions are more flexible and configurable to support the new opportunities from the market. The flexibility and configurability in IT platforms allow global custodians to adapt to new business models quickly. The shift towards outsourcing has created a need for platforms with the ability to support multiple business entities on a single system with appropriate data segregation. The capabilities related to the support of multiple currencies and languages have become inherent to the platform. The features mentioned above allow global custodians to support additional business lines within their IT systems as independent business entities with required levels of data segregation to cater to local jurisdiction laws/reporting requirements. Having this capability also helps global custodians to manage their operational costs as the set of operations resources may be deployed to manage the in-sourced business, too.

also resulted in recommendations for standardization. This set of recommendations provided a measure against which many markets could benchmark themselves. SWIFT standards have been in place for decades now, but standardization has not progressed at the necessary pace. From a global custodians perspective, receiving corporate announcements in a consistent manner from sub-custodians is still a distant dream. In spite of having the SMPG (Securities Market Practice Group) and NMPG (National Market Practice Group) guidelines, standards are not being followed consistently. Lack of standardization is also increasing the cost due to lower STP rate and avoidable operational overheads. Clearly, the success of global custody rests on the extent to which standardization can be achieved. The immediate requirement is to address standardization issues not only at the global custodian level but also at agent/depository and end customer level. Strict adherence to SMPG/NMPG guidelines is a must where SWIFT standards are adopted. One way of influencing agents and end customers could be through good value incentives for higher compliance to messaging standards. Regulators, globally, have stressed the importance of stronger risk management across the industry and are enhancing existing regulations on a number of fronts. The greatest challenge for sometime will continue to be market volatility, fierce competition and heightened regulation. Tougher global regulatory conditions will create opportunities for custodians to offer new products and services and help institutional investors to navigate this new environment.

Collateral management has risen to the top of investors concerns as they try to better manage their counterparty exposure, creating an opportunity for providers to seamlessly hold customers assets, value them accurately, and initiate appropriate actions in response to market fluctuations. There is also an increased focus on risk analytics and regulatory reporting. The Financial Stability Board (FSB) was formed in April 2009, as a successor to the Financial Stability Forum (FSF), to recommend new structures for enhancing cooperation among the various national and international supervisory bodies so as to promote stability in the international financial system. Since its formation, the FSB has released multiple reports covering areas such as principles for the oversight of hedge funds, shortcomings in the Basel capital framework, amongst others. The European Commission intends to form the European Systemic Risk Board (ESRB) that will closely work with the Financial Stability Board and the International Monetary Fund to monitor and manage international financial stability and economic surveillance. In the United States, the Financial Services Oversight Council (FSOC), a group of key financial regulators, has been created to fill supervisory gaps, resolve regulatory disputes and identify emerging risks. The US administration is considering a proposal for the creation of a Consumer Financial Protection Agency (CFPA) that would have broad authority and enforcement powers to ensure consumer protection regulations. With the increased regulations in the market, there is constant pressure on global custodians to comply with regulatory reporting requirements. The

The success of global custody rests on the extent to which standardization can be achieved.
Standardization: Significant activity by the Group of Thirty (G30) in 1988 to identify clearance and settlement risks

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stricter norms in countries like USA, Canada and Europe require compliance related to tax and QI (Qualified Intermediary) reporting a must. The sheer number of such forms for each market requires an automated generation process and a capability to manage changes in the future. Risk Management The paradigm shift in the nature of services being offered by global custodians is driven to a large extent by the risk aversion shown by investors and the need for value-added services. Collateral management has risen to the top of investors concerns as they try to better manage their counterparty exposure, creating an opportunity for providers that can seamlessly hold customers assets, value them accurately, and initiate appropriate actions in response to market fluctuations.

As part of their responsibility to deliver information related to corporate announcements to their end customers on time, global custodians are just not relying on their agents/sub-custodians for the same. They are also subscribing to vendor-services such as Telekurs/ Bloomberg/Xcitex and incorporating them in the earliest stage in the lifecycle. In addition, adequate steps are being applied to scrub this data to improve the quality of information being disseminated. Winning lies not in just being the first to provide information but also data with the required level of accuracy and reliability. Investors need to make decisions related to the recall of loaned securities, near future investments and right options selection. The quality of received agent messages needs to be continuously assessed and improved while their Straight-Through Processing (STP) at the global custodian as well as end customer level is an imperative. The challenge posed by the quality of post-trade transactions is another area of concern today. Controls need to be established to stop automated transaction processing based on the counterparty, client, place of settlement, tolerance limits, availability of securities and funds, timing of arrival, and, the value of the transaction. The onus of enriching the transaction and providing a comprehensive transaction in time to minimize the risk of settlement failure lies with the global custodian. In addition, global custodians are striving to provide analytic reporting beyond their core competency. The trend is catching up to provide quantitative reporting. This has actually seen an increase in business as institutional investors are including delivery of such services in their custody contracts. Apart

from the various reports being provided, risk analytics, portfolio analytics, treasury analytics and investment strategy control reports are being provided to help investors align their investments and make them profitable. In the future, we will also see custodians providing more sophisticated reporting on performance measurement and transaction analytics such as STP and repair transaction reports to control costs, investment alignment with the investment strategy reports, investment risk based on the type of instruments and markets. Technology Advancements Continuous consolidation and globalization are driving custodians to spend more on technology with a focus on integrated business and shared services. Custodians today also have to focus on managing distinct technology platforms and processes. The solution also needs to protect stakeholders from the inherent complexity of the transition in case of consolidation, while also maintaining the required service levels to their end customers. Service Oriented architecture (SOA) has been a great enabler in providing these capabilities. The BNY Mellon formed through the merger of BNY and Mellon Financial Corp. needed to integrate its operations, including business processes and IT systems. It required an IT solution that could cater to the business requirements of the new entity and ever-evolving business strategies. SOA was gainfully applied to merge the complex technological platforms of the two organizations. The bank spent enough thought on defining the guiding principles by bringing together IT and business to ensure that any development will cater to future business objectives. The use of shared services

Continuous consolidation and globalization are driving custodians to spend more on technology with a focus on integrated business and shared services.
As part of managing risk for their end customers, custodians are being forced to look at the capabilities of their IT systems related to the quality of information received and disseminated. The major aspects being relooked at relate to information on corporate announcements and posttrade transactions.

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Emerging Trends and The Future of Global Custody Services

to bring disparate systems together also enabled the elimination of redundant components. (For the details of the strategy applied refer to case study published on 07 Jan 2009 on http://www-01. ibm.com/software/success/cssdb.nsf/CS/ CPOR-7N3SKQ?OpenDocument&Site=de fault&cty=en_us ) Stringent regulatory compliance requirements are driving technology platforms to be both open and flexible to cater to different regulatory reporting requirements.

addressed in the near future relate to articulating the potential to business units, addressing issues related to security, lack of control, lock-in with the vendor, and reliability. The capital markets are a technology-intensive domain it is very likely that small and medium sized financial institutions may opt for this route in the near future. Although computing power is a vital element, competitive edge will be maintained by ingeniously designed, agile and adaptable products and applications. In conclusion, it may be said that, consolidation is the way forward. Any joint merger or acquisition opens up opportunities and also poses significant risks. The risks related to human resources and integration management need to be managed effectively to deliver value-added benefits to the end-customers. Increasing volumes due to inorganic or organic growth will result in increased standards compliance, deployment of talent in handling mid and back-office operations, enhanced operational transparency and increased risk management. Outsourcing will emerge as one of the strengths, which will further drive new business. It is evident that the influence of governments is likely to grow in the financial industry by means of increased investments and strengthening of regulations. Technology providers will have to develop capabilities in anticipation of changes in business needs, markets and regulatory requirements. The management of risk for investors will be a reckoning force which will

drive the services to be more aligned toward enhanced analytics reporting and substantial efforts will be spent in improving quality and accuracy of information shared with customers and the street on corporate announcements and post-trade transactions. The advancements in technology will act as enablers in making this a reality. References 1. www.thomasmurray.com 2. www.globalcustody.net 3. www.icfamagazine.com 4. www.gfmag.com 5. www.bnymellon.com 6. www.rbcdexia.com 7. www.ibm.com 8. Global Finance, Sept 2008, A Safe Heaven

The risks related to human resources and integration management need to be managed effectively to deliver value-added benefits to the endcustomers.
The recent economic crisis has enhanced global sourcing and encouraged developments in grid cloud and social computing, collaboration software and other areas. Though there are concerns regarding security and risk involved in these technologies, there is enormous potential for saving on costs. The hosted services are being taken a step further by an evolving concept of Hosted Services on Demand encompassing Software as a Service (SaaS) on a cloud as an option for the future. Today, IT departments understand how operational efficiency may be increased and capital expenditure reduced through the use of these technologies; however, the same is not appreciated by business. The challenges which need to be

Bharti Munjal Bharti Munjal is Global Program Head for RBC Dexia Investor Services implementation, involving implementation of multiple TCS BaNCS products including Announcement Capture, Corporate Actions and Securities Processing. She was responsible for world-wide implementation of product across 100+ markets for several large financial institutions. Bharti comes with 20+ years of Information Technology experience with over 15 years of experience in the capital market domain with TCS Financial Solutions.

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Regulatory Challenges & Opportunities in MENA

Introduction The Middle East and North Africa region, with a population of about 660 million and clocking GDP of about USD 2.7 trillion, has witnessed significant levels of macroeconomic stability and reform in the past decade. However, the regulatory sector in the region is in its nascent stages albeit throwing up an important challenge for financial institutions operating in the region. Regulators in the region are growing in size, strengthening their links regionally and internationally, but the picture remains mixed, with some further down the line with Basel II than others. The lack of Shariah expertise poses many challenges, especially due to Islamic finance being in its infancy at many levels. The interest in Islamic derivative trading has increased over recent years, and, the International Swaps and Derivatives Association (ISDA) has been working with the International Islamic Financial Market (IIFM) towards the goal of creating a set of guidelines for the industry.

Growth in the Islamic Banking and Capital Market Sectors Banking institutions, especially commercial banks, dominate the MENAs financial system and are susceptible to market variations. The limited openness in some of the countries and huge public-sector ownership has impacted the credit direction in MENA. The privatization process launched in the last decade has been slow and not yielded the required results for capital markets development. In most MENA countries, stock markets are characterized by the concentration of ownership and the limited role of market forces. Although the corporate governance framework is in place, there still are areas for improvement with respect to transparency, disclosure, protection of non-controlling shareholders, directors independence, their qualifications, and related compensation. The challenges in the areas of legal and regulatory frameworks, and property rights can also be considered as barriers to implementing corporate governance. There has been stupendous growth

Islamic finance. The limited number of Shariah-compliant securities that emanated from the lack of both harmony and Islamic financial prowess, poses yet another challenge in the development of the industry. There certainly is a market for Shariah compliant securities, while it is also awaiting the entry of new Islamic instruments. The core mandate of the International Islamic Financial Market (IIFM) is to focus on bridging these gaps and attracting more investments into the Islamic financial markets.

There has been stupendous growth over the past decade in the Islamic banking sector (1520%).
Key Regulatory Challenges The basic difference between Islamic finance and conventional finance is the feature in the latter to put a cost on money in financial transactions, i.e., interest, or Riba as it is known in the Islamic financial world. In Islamic finance there is no concept of money as a commodity, there is always an underlying contract in the form of a partnership or venture that is entered into between the lender and the borrower, with profits or losses and risks being shared. This perspective of Islamic finance confers a

Even though considerable progress has been achieved in the past, with freer markets and greater foreign interaction, a lot more needs to be done. There is little doubt that financial sector reform and regulation should be given high priority so as to promote continuing and lasting economic growth.

over the past decade in the Islamic banking sector (1520%), which is based on the principles of Islamic law (Shariah law).The market will continue to grow for Islamic finance products with tailwind from GCC governments wanting a part of this market and promoting regional financial centers for

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Regulatory Challenges & Opportunities in MENA

soul to business activity. The motives are the welfare of the people, an egalitarian society, and the opportunity for all to benefit without being exploited. Islamic finance covers the social aspect of being in an enterprise. Above all, it is trust-based.

and adaptations, need to be applied to Islamic finance. The Islamic financial industry has to be adept with techniques and competitive products to improvise and emulate the conventional banking and finance industry. The biggest challenge towards achieving greater compatibility between the international regulatory and capital standards and Islamic finance is to understand ways to change providers attitude to achieve greater integration. The transition to Islamic finance is highly technical and complex, hence, a balance needs to be maintained in order to provide adequate returns and to remain within the boundaries of the Holy Quran and Sunnah, which cannot be done without quality Shariah supervision.

systems may differ greatly. Some of the Islamic financial products, such as Musharaka, may not be approved as regulated mortgage products by the conventional western risk management systems. The current need is for an improved and integrated regulatory and capital structure, which can contribute to the growth of the region. Increased transparency, better governance and collaboration between states and organizations can result in major advances to promote the growth of Islamic finance and boost the uptake of new financial products, globally. Regulations - Financial Collaboration The current need is for a comprehensive process that is standardized, repeatable and measurable across and within borders. Consensus in the Fatwas can be achieved by the centralization of the Shariah rulings through a central Islamic authority such as the Islamic Fiqh Academy of the Organisation of the Islamic Conference (OIC), which is recognized by a large majority of scholars. The pursuit should be towards creating uniform regulatory frameworks based on the principles and standards designed by universally accepted organizations such as the Islamic Financial Services Board (IFSB) and the Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI). The adoption of the guidelines drafted by these institutions is the panacea for the Shariah arbitrage that exists otherwise. In order to achieve this, regulators of the capital and money markets will have to encourage the development of educational institutions that offer

There is an increased need for a comprehensive solution that can maintain distinct identities of Islamic financial products, in compliance with Islamic principles and Shariah laws.
There are mainly five schools of thought in Islamic jurisprudence, namely, Hanafi, Shafei, Hanbali, Maliki, and Ibadi. Each school of thought has its own set of Muftis (scholars) on Islamic financial issues which, more often than not, create conflict and ambiguity in decisions on the veracity of a transaction, in terms of its compliance with the Shariah. So, the biggest challenge faced by the regulators of Islamic finance is in harmonizing and standardizing these interpretations towards a consistent and efficient regulatory framework for unimpeded Islamic financial intermediation. The difficulty in emulating the conventional financial system and applying the Basel II principles is another challenge. Effective risk management measures, with necessary modifications

Consensus in the Fatwas can be achieved by the centralization of the Shariah rulings through a central Islamic authority such as the Islamic Fiqh Academy of the Organisation of the Islamic Conference (OIC), which is recognized by a large majority of scholars.
Basel II norms were originally created for mainstream western banks with no regard to the very specific risks faced by Islamic institutions. Hence, applying the same regulatory attitude to Islamic

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programs and syllabi for Islamic financial technical skills. INCEIF (International Centre for Education in Islamic Finance) in Malaysia, for example, has designed the CIFA (Chartered Islamic Financial Analyst) course, which prepares students for a specialized course in Islamic finance. Product and industry trade bodies have shown the value of international collaboration on regulatory progress. The work under development is to be called the ISDA/IIFM tahawwut (hedging) master agreement and is on course to be the standard contract for international cross border Islamic derivatives transactions. Although progress towards these standard contracts has been made, the ISDA has stressed the need for individual Islamic jurisdictions to strengthen their own regulatory and legislative environments to ensure that the agreed transactions are legally enforceable. The ISDA also highlighted that issues related to regulatory capital, and accounting policies surrounding Islamic derivatives transactions need to be addressed by local regulators. The Dubai Financial Services Authority provides a good example of how a new regulatory framework can be developed to be compatible with both mainstream and Islamic finance companies. Dubai has created a common law-based system and a regulatory environment, which is based on existing international structures, yet, is supportive of the key aspects of Islamic finance. Saudi Arabia, which has the biggest economy in the region,

established the Capital Market Authority in 2003, which issues rules, regulations, and instructions related to capital markets. In Qatar, the Qatar Financial Centre Regulatory Authority was set up in 2005, and, in 2004, the Central Bank of Bahrain issued its CBB Rulebook, with updates appearing regularly ever since. The Gulf Cooperation Council (GCC) is making progress to align with the global framework, with more than 85% of Middle East banking assets expected to be covered by Basel II.

Having a consolidated approach towards both conventional and Islamic finance sectors can offer significant benefits such as: a) Better management of the financial sector: There is tremendous growth in the Islamic financial sector and there is no single regulatory measure to cover this area completely. The regulatory measures such as BASEL II are covering the conventional financial transactions, but not the Islamic banking sector. Any financial transaction must adhere to a global standard and, hence, Islamic financial products also need to follow a set of guidelines that are globally acceptable. Several banks operate both conventional and Islamic accounts separately owing to the lack of a single regulatory measure that covers both the platforms b) Better appreciation from nonIslamic nations for the Islamic financial market: Today, Islamic banking persists in one or the other form in more than 75 countries. Although there is growing demand, in many countries, including India, there are no Islamic banks operating and the major challenge is to set up a Shaiah Supervisory Board in order to monitor the activities of banks. This can be addressed if there is a consolidation of both the conventional and Islamic sectors, and a regulatory measure is formed to address both factions

Having a consolidated approach towards both conventional and Islamic finance sectors can offer significant benefits.
The Need for Compliance Islamic finance has become a global business and with its continued growth, customers are seeking Islamic banking and finance products that will provide opportunities to invest and borrow according to Islamic principles defined in Shariah law, while still offering the benefits of diversification and a complete range of banking products. There is an increased need for a comprehensive solution that can maintain distinct identities of Islamic financial products from conventional banking solutions, in compliance with Islamic principles and Shariah laws, also enabling both conventional and Islamic instances of banking to exist on the same platform.

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Regulatory Challenges & Opportunities in MENA

c) Help develop better Islamic products that have global reach: Islamic finance follows a unique method of operation and there are several benefits to Islamic finance that are making it popular across the globe. In order to popularize the Islamic way of managing finance, a single regulatory body is most needed d) Reduce excess liquidity: Due to the lack of Shariah compliant products and instruments, Islamic banks have more than 60% unused, excess liquid funds. There is a need for suitable regulatory measures and products that can help to divert excess funds and get more funds into the financial system

need to keep up and, indeed, be proactive. As plans for a GCC common currency and the creation of a common GCC market are making some progress, the opening of markets will mean that regulators will have to work more closely to create a common approach. By appreciating the fact that excessively tight regulatory structures could hamper the development of innovative new products we can look forward to a strong corporate governance standard built for the financial sector in the region. The effort can be enhanced with Islamic product providers considering their products to also be appealing to non-Muslims. With the western sovereign issuers looking to tap into the massive demand for Shariah-compliant products, the day is not far when a nonMuslim country will issue a Sukuk. The compliance and regulations help in guiding the Islamic Banks to get more innovative. If the structure is formed and is clear, the reach and impact of the product can easily be judged. This will further help banks in bringing out more products that are partnerfriendly with a global rather than a regional reach. Good corporate governance practices are essential for ensuring efficient access to financing, attracting foreign investors, and promoting sustainable development. More pronounced intraregional integration should enable investors throughout the region to achieve portfolio diversification, and improve resources allocation. More importantly, deeper regional cooperation

needs be in place if MENA is to keep up in an increasingly competitive global environment. References: http://www.qfinance.com/financial-markets-best-practice/middle-east-and-north-africa-regionfinancial-sector-and-integrati?full http://www.qfinance.com/regulatory-compliance-key-concepts/ compliance http://www.qfinance.com/financial-regulation-checklists/regulatory-and-capital-issues-under-shariah-law

Good corporate governance practices are essential for ensuring efficient access to financing, attracting foreign investors, and promoting sustainable development.
Conclusion Financial integration within these regulatory authorities in the region will help deepen financial markets, and increase their efficiency. The development of regulatory institutions in the GCC has shown marked progress, as growth in the finance sector has increased the

Padmanabhan Premkishore Prem has over 13 years of IT experience with Tata Consultancy Services in sales, delivery, infrastructure and security, relationship, project management, faculty and other areas. He also brings his extensive experience of working in the financial products, software as a service, life science and healthcare, banking and financial services, manufacturing, transportation and logistics domain businesses, providing them with stateof-the-art solutions based on their business needs and project objectives.

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Banking on Islam - A Technology Perspective

The emergence of modern Islamic Banking dates back to the 1960s. It has evolved and grown in the last decade with sophisticated products and financing arrangements arriving on the scene. Further, the maturity levels of Islamic Banking technology solutions and emerging standardization efforts coupled with the recent credit crisis has brought Islamic Banking and its business models to the forefront, making it a viable option for conventional banks. Islamic Banking principles provide the guiding rules for what is halal or allowed under Shariah law and what is haram and prohibited under Shariah law. These principles include: The prohibition of RIBA or interest. Procuring or paying interest in any form is forbidden as it is considered unearned income, and therefore, unjust. Any risk-free investment or guaranteed income from a financing proposal is also considered to be usury Money is not a commodity. Money cannot be traded like a commodity and does not offer value over time if not used against physical assets. It is the value of the asset that determines the rate of return The prevalence of justice at any cost. All forms of exploitation are eliminated and justice is established between financiers and entrepreneurs Uncertainty of any form is discouraged. Uncertainty, or gharar,

in a contract is prohibited, with speculation and gambling considered as forbidden activities. For example, futures, and options contracts are not permissible as the return from such investments relies on the occurrence of events which may or may not take place and are, therefore, uncertain. A contract must be agreed to by both parties with full knowledge of all the terms therein. Any transaction where the subject matter, the price, or both, are not fixed in advance by the concerned parties is not permitted under Shariah law Islamic finance today is a global business spanning Asia, the Middle East, and many countries in the Western world. According to industry estimates, Islamic Banking growth was pegged at 10-15 percent growth each year and is projected to continue to grow in this manner for the next few years, with Islamic financial assets already reaching around USD 1 trillion as customers turn to Islamic finance as a socially responsible banking alternative. Islamic Banking is defying the recent global financial crisis with the repercussions being minimal so far as compared to those witnessed by many Western financial institutions. In recent years, and, largely in the past year due to the economic slowdown, Western banking and financial services organizations are displaying significant interest in gaining a slice of the Islamic banking pie. For instance, France recently announced its readiness to join

countries already established in this sector. The United States hosts some nineteen Islamic Banking institutions spanning retail, investment, mortgage companies servicing a potential customer base of around eight million Muslims. UK is home to many well-established Islamic Banking institutions.

Islamic Banking has become a potent force for innovation in the Banking industry, offering products and services that are beginning to attract interest from various segments, and not just those of the Islamic faith.
Growth in Islamic Banking and finance can be attributed to socio-demographic trends, such as: High rates of population growth in the worldwide Islamic community supported by growing affluence, particularly across Asia More customers seeking Islamic Banking and finance products that provide opportunities to invest and borrow according to Islamic ethical principles as defined by Shariah law, while still offering the benefits

38

Banking on Islam A technology perspective

of diversification and a full range of banking products and services Although Islamic Banking and conventional Western style banking are vastly different, similar challenges and requirements prevail from business, regulatory and technology perspectives. Both use similar customer channels and offer functional equivalents for just about every product in the banking mix. Islamic Banking has become a potent force for innovation in the Banking industry, offering products and services that are beginning to attract interest from various segments, and not just those of the Islamic faith. Islamic Banking services include a broad range of profit-sharing, safekeeping, leasing, cost-plus financing and joint venture agreements. Innovative new technology solutions have enabled banks to meet the increased demand for these services. Now, virtually every product and service offered by conventional financial institutions has a Shariah-compliant equivalent, from loans to mutual funds, and electronic payment systems to stock indices. Islamic banks perform the same financial intermediation as conventional banks, i.e., they attract financial resources from individuals and institutions and invest these funds in businesses that need external finance to support their activities. However, they share the profit or loss of the business activities rather than relying on interest payments from borrowers. Fee income is also a significant source of revenue for Islamic banks. Islamic banks can be categorized into purely Islamic, i.e., Islamic-only products

and services and Islamic windows set up by conventional banks. Most banks today are deploying core banking systems to support their business processes and increase operational efficiencies. This is usually not a straightforward exercise and requires enterprise-wide planning, commitment and resources. Also, these implementations are more complex in Islamic windows where conventional core banking systems are tweaked to support Islamic Banking activities. In these cases, banks are required to maintain two separate entity books for customers and reporting, respectively.

financial institutions with the following capabilities: Complete coverage of lines of business, including a comprehensive set of investments, financing, payments, cards, treasury management, trade finance and anti-money laundering services Cross-channel integration, providing a consistent customer experience across multiple channels with total visibility to the financial institutions sales and servicing agents enabling banking anywhere anytime Single view of the customer and the financial institution, providing a comprehensive view of customer activities across lines of business and access channels, as well as a single view of the banks products and services to the customer Enterprise-wide information relating to regulatory reporting, risk management and bank-wide reporting Profit distribution engine, providing flexibility in pool definition, profit sharing schemes, and revenue reserves allocation and distribution alongside the ability to perform what if scenarios prior to the distribution of profits Compliance with Shariah law, AAOIFI accounting standards and IAS, among others The implementation of an Islamic core banking solution must transform IT to become an enabler for business by providing an agile platform to achieve corporate objectives. It often forms an integral part of a business transformation program addressing key banking issues such as:

The implementation of an Islamic core banking solution must transform IT to become an enabler for business by providing an agile platform to achieve corporate objectives.
Additionally, Islamic finance products have attained a high level of maturity and banks are continuously seeking to innovate with new products and services spanning personal finance, cards, wealth management, insurance and corporate financing. This process of innovation requires core banking solutions that support sophisticated and flexible product manufacturing processes, allowing banks to build new products rapidly and well ahead of the competition. The implementation of an Islamic Banking solution must provide

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 Increased Market Share (Unique Positioning): Historical data and worldwide experience indicates that market share can be quickly attained through aggressive pricing, superior service quality and consistent, well-designed product integration, alongside a lower cost infrastructure to support transaction processing

Configurability/Speed to Market: A state of the art core banking solution must continue to lead the market into the future and support the current banking requirement. It is required to be agile by providing flexible configuration facilities for efficient and effective processing of desired products and services while allowing for additional functional-

ity and the introduction of new customer products and services Reduced TCO: Simplification of technology, operations and superior performance must result in significant reductions in TCO Centralized Customer Information and Risk Management: Customer centricity must

Figure 1: Core Banking Value Chain

Channel Management Transaction Processing Conventional Baking Savings Accounts Checking Accounts Time Deposits Call Center Swift Payments Hybrid Products Mortgage Loans Consumer Loans SME Loans Corporate Loans Leasing & Hire Purchase Real Time Limits & Exposure Monitoring Revolving Credit Syndicated Loans Service Components Clearing & Settlement

Customer User Based

Inter Bank

Islamic Banking IMusyarakah Joint Venture Mudarabah Profit Sharing Murabahah Cost + Financing Hajj Savings Wadiah Current Account QardhulHassan NO Interest Loans Salaf Forward Purchase Istisnaa Construction Finance Ijarah Lease Financing Bei AI Arboun Goods Financing Kafalah Bank Guarantee

Component Pool Interest, Profit or Margin Calculations Pricing, Fees & Charges

Settlement Instruction

Elec. Settlement Links Trade Brokers/Advisors External Systems Treasury

Branch Teller

Inward Outward

Intra Bank Transfers

Inter Bank Transfers

Internet

Business Orders

Sweeps & Offsets

User Balancing Retail Position Transfers to Treasury Corporate G/L Transfers Interest, or Profit Capitalization NPL Processing

Order Processing

Security Layers

Lending Workflows Multilingual & Multicurrency Operations Collateral Management Product & Service Definition Alerts and Task Management Funding & Correspondent Banking Limits & Exposure Processing Services

Delegation Layers

KYC

Watch Lists & Sanction Processing

Securitization Client Reporting / Analytics MIS

Loan/Deposit Calculators

Regulatory Reporting

Delivery

Processing

Pseudo batch

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Banking on Islam A technology perspective

encompass all products identified within the Islamic Banking solution as well as external systems. It must manage all known relationships with any given customer, including family affiliations, prospects, and support comprehensive company structures Connectivity and Integration: Flexible, agile and interoperable solutions that support product innovation are in demand today, and this is critical to Islamic Banking solutions as they usually need to integrate with other systems in multiple ways, including readily available APIs that can be exposed to other systems

hybrids, to the conventional banking environments Liquidity has had no problems but, of late, there have been issues related to uncertainty and liquidity shortage Banks have been slow to adopt a comprehensive risk management approach but it is expected to be the next area of interest in the medium- to long-term period The proliferation of accounting standards: There exist about 60 AAOIFI accounting, auditing, governance and Shariah standards today. The convergence of standards will gain momentum as Islamic Banking moves from a regional jurisdiction to a global jurisdiction Islamic Banking needs to embrace international standards such as IAS 39 and IFRS 2 and concepts such as fair value with corresponding modifications to existing AAOIFI standards. Some work has been done in this area with more progress on the horizon Local regulatory frameworks need to address Islamic Banking, especially, in areas such as tax treatments, as Islamic Banking gains momentum in the Western world Shortage of scholars: There are an estimated 50 to 60 scholars in the world qualified to advise banks operating internationally under Islamic law. Some Shariah experts feel that it may take more than a decade to train scholars, but even the most optimistic ones do not expect a

new generation of Islamic scholars for at least another five years Shortage of skilled resources in Islamic Banking, as 85 per cent of the estimated 300,000 Islamic banks employees require more education and training programs These challenges require collective and collaborative effort from banks, regulators, scholars, standards bodies, analyst organisations and solution and service providers to help sustain the accelerating growth in Islamic Banking. Islamic Banking technology solutions will provide the vehicle to facilitate this growth. They need to leverage the knowledge gained from past experiences in conventional banking to exploit its successes and avoid failures.

Islamic Banking technology solutions will need to leverage the knowledge gained from past experiences in conventional banking to exploit its successes and avoid failures.
Islamic Banking has emerged as a prominent force in the financial system today. It has proven so far that it can weather the storm and, in many cases, garner revenue and profits. Yet, there are many challenges facing the Islamic Banking sector, which include: Sociographic system Islamic mix in from many purely

Charlie Hamdan Director, Product Management, TCS BaNCS Charlie has been involved with TCS BaNCS in senior roles since 1994 ranging from software development management, to product strategy management and sales support management for financial services solutions with Retail, Corporate and Wholesale Banking with various responsibilities in areas such as Core Banking, Treasury, Trade Finance and Payments.

countries with a financial ecoranging to Islamic-conventional

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Opportunities Grow for Takaful: Demographic Drivers & Technology Implications

As insurance companies shake off the effects of the financial crisis, their sights will once again turn to market expansion. The growing wealth of developing nations will feed this resurging appetite for new markets. Globally, the demographics of Muslim population size and wealth growth in developing Muslim geographies strongly indicate an opportunity for insurance organizations to invest in the development of Shariah-compliant Takaful products and distributors. Demographics Drive Demand for Takaful in Muslim Centers Muslims account for nearly one-quarter of the worlds population. Not only are the sheer numbers of Muslims compelling, but also the concentration of Islamic population in some regions makes investment in Takaful development a sound business decision. The potential exists to achieve critical mass rather quickly if the appropriate plan is developed. point is reached at which residents begin to need insurance. very important role, allowing Takaful operators to expand. Recently, several global insurance companies, most specifically Swiss Re, Hannover Re, Munich Re, and Tokyo Marine have established Retakaful businesses. The global strength of these organizations will allow Takaful operators to access deep financial backing that will accelerate the growth of Takaful. Banks are one of the primary distribution channels for insurance in many geographies. Because banks are the leaders in developing awareness of Shariah-compliant products, BancaTakaful is a natural extension of bancassurance. In Malaysia, BancaTakaful already captures approximately 20% of all Takaful contributions. Technology Recommendations for Takaful Operators Technology to track contributors to a Takaful fund and to track fund allocations, investment, and investor transactions is fundamental. Though Takaful is in a very early stage of development, technology needs will grow. There is a positive side to being new to technology: Takaful operators do not bear the burden of legacy systems. In fact, Takaful technology support in some instances is ahead of technology support in many conventional insurance companies that are still constrained by old legacy mainframes. Takaful technology experts indicate that the lack of legacy systems allows many operators to immediately adopt leading-edge solutions. Mobile devices

Organizations offering Retakaful have filled a very important role, allowing Takaful operators to expand.
Takaful is in its infancy. With only roughly 2% of the Islamic population having insurance, it is apparent that the opportunity for Takaful is vast. Depending on geography, Takaful is growing between 15% and 25% annually. In contrast, conventional insurance growth rates range from 2.5% to 10%, depending on geography as well as year. Takaful market size ranges from an optimistic $20 billion (USD) projected by Standard and Poors and leading Islamic financial experts at the 2009 Islamic International Foundation for Economics and Finance conference, to a more conservative $8 billion estimated by Ernst & Young and Swiss Re. Evolution of Additional Takaful Lines While Family Takaful and General Takaful products are the leading products, additional business segments are starting to develop, such as Retakaful and BancaTakaful. Managing corporate risk exposure and financial solvency through reinsurance is an insurance fundamental. Organizations offering Retakaful have filled a

Wealth growth in the major Muslim centers is the trigger that makes the discussion of investing in Takaful compelling.
Wealth growth in the major Muslim centers is the trigger that makes the discussion of investing in Takaful compelling. As nations economies develop, assets become concentrated until a

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Opportunities Grow for Takaful: Demographic Drivers & Technology Implications

are extremely common in many developing geographies, and software vendors have developed Takaful applications for mobile devices. Data and Information The starting point for dealing with the challenges of product evolution must be adoption of data warehouses. Operators will not be able to understand the performance of current products without data aggregation and data management technology. Given the limited experienced employee base in the Takaful industry, workers need data and information support in order to maximize their time and results. All insurers need to invest in collaborative customer data technology. Takaful operators are no exception, especially in BancaTakaful. Banks have a definite advantage in having access to large amounts of customer information because of the number of products the banks usually provide each customer. The opportunity quickly leads to a responsibility to aggregate the information and use it for service. Consumers will expect the BancaTakaful operator to have a complete 360-degree view of their accounts. BancaTakaful operators will need to accomplish this capability to compete successfully with conventional bancassurance. Catastrophe Management Many of the geographic regions where Takaful is prevalent as well as the main areas for Takaful expansion are prone to natural catastrophes such as typhoons, earthquakes, and tsunamis. Technology to support catastrophe management is very important for the long-term survival of operators as well as overall profitability of the segment. The recent involvement of some of the

largest and most sophisticated global reinsurers brings catastrophe management capabilities to the Takaful segment, which is highly beneficial. Some catastrophe management technology vendors offer hosted solutions and this may be a practical alternative for operators that cannot afford the technology infrastructure to support catastrophe modeling. Takaful Technology Solutions Providers Are Evolving At this point, only a small number of technology vendors have seen the opportunities represented by Takaful. Technology vendors have focused on the Takaful market with technology for infrastructure, back-office functionality, Business Process Outsourcing (BPO), product configurator software, and Software as a Service (SaaS). Because human resources experienced in Takaful insurance are so thin, Takaful operators would be wise to partner with experienced technology organizations for automation initiatives. The alternative, a do-it-yourself approach, will lead to time-consuming, expensive projects, causing financial drain that most operators will not be able to afford. Solutions exist in the marketplace that allow operators to have open, flexible systems that can respond to needs for multiple languages and distribution channels. Even more critical are Web services and Internet distribution, consumer demand for which is increasing. Business process outsourcing (BPO) or information technology outsourcing (ITO) is an option for Takaful operators that choose not to partner with technology vendors for IT development. Creating call centers and back-office processing environments are very expensive endeavors that many Takaful operators cannot afford. Outsourcing

these functions to existing experienced technology providers enables the Takaful operator to supply customer services at a level equal to that of conventional insurance competitors in a cost-effective manner. Conclusion Great Opportunities Exist For most insurers, the emergence of large-scale, defined, new market segments is an infrequent occurrence. Globally, the demographics of Muslim population size and wealth growth in developing Muslim geographies strongly indicate an opportunity for insurance organizations to invest in the development of Shariah-compliant Takaful products and distributors. A few technology vendors have specific Takaful-based capabilities around product development, infrastructure, and business services as well as business process outsourcing and SaaS capabilities for Takaful operators that require lowcost speed to market. All in all, Takaful will become an integral part of the global insurance market.

Karen Pauli Research Director, Insurance, Tower Group kpauli@towergroup.com Karen Pauli is a Research Director in the insurance practice at TowerGroup. She covers a wide range of topics in property and casualty insurance, specializing in distribution, underwriting, claims, predictive analytics, core systems, and business optimization.

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Enabling Takaful International to maintain its first in Takaful status.

Thats certainty

Formerly known as Bahrain Islamic Insurance Company (BIIC), Takaful International (TIC) is the first Takaful insurance company in Bahrain with a rich and diverse product portfolio. To meet its ambitious growth plans, TIC needed to grow organically and expand business in the Middle East and the emerging markets in the GCC. TIC needed an integrated IT system that would satisfy all business and functional requirementspolicy administration, claim management, reinsurance administration and financial accountingthat could be accessed anywhere-anytime via the web, and even offer customer facing documents in Arabic. It also needed all existing data to be migrated from existing systems to a centralized integrated system. Tata Consultancy Services (TCS) configured TCS BaNCS to suit the entire core insurance, reinsurance and accounting functionalities required by TIC in both personal and commercial lines of business for property and casualty insurance and family Takaful operations. As one of the worlds fastest growing technology and business solutions providers, TCS leveraged this highly scalable and flexible TCS solution to serve as a complete end-to-end solution, supporting all mainstream products, sales channels, and lifecycle functionalities. Empowering TIC to introduce new products rapidly and enhance operational efficiency. And of course, enabling TIC to experience certainty.

To learn how your business can experience certainty, visit www.tcs.com

Enabling NASDAQ Dubai to join the league of leading global stock exchanges in seven months straight.

Thats certainty

NASDAQ Dubai (DIFX) is the only international stock exchange in the Middle East. In order to become a premium exchange of Middle East, NASDAQ Dubai needed to adopt working standards comparable to those of worlds leading exchanges. They set a timeline of seven months to achieve this. A sophisticated, scalable and robust infrastructure that complied with global best practices and standards was required. Tata Consultancy Services (TCS) implemented TCS B NCS Market Infrastructure, a comprehensive solution for clearing organisations and depositories, from TCS Financial Solutions. As one of the worlds fastest growing technology and business solution providers, TCS ensured real-time connectivity for a seamless integration to NASDAQ Dubais international participants and payment systems. Helping NASDAQ Dubai function with enhanced agility and adaptability within seven months. And of course, enabling NASDAQ Dubai to experience certainty.

To learn how your business can experience certainty, visit www.tcs.com

NG Subramaniam President TCS Financial Solutions Tata Consultancy Services

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