30 Sep 09 Outsourcing in Islamic finance_Who will make the first move

Islamic finance (Shari’ah banking) has seen rapid growth over the past 30 years, particularly in the last 10 years. It has now spread across more than 75 countries across the globe. Total assets in the Islamic finance market are estimated to be in the range of $750 to $800 billion for June 2009 and are expected to touch $1 trillion by 2010, according to a study conducted by the Federal Reserve Bank of San Francisco.

Islamic finance and Malaysia
Along with Iran and Saudi Arabia, Malaysia is one of the leading players in Islamic finance. According to the Federal Reserve Bank of San Francisco, Islamic banking assets of Malaysia are estimated to be $68 billion for June 2009 (17.5% of the total Malaysian banking assets). The country currently has 17 registered Islamic banks. The Malaysian government, along with established institutes in Malaysia, has been the key catalyst in the growth of Islamic finance in Malaysia.

This growth of Islamic finance in Malaysia has opened up further opportunities for the outsourcing industry.

•    Analytics and technical domain: One of the growth opportunities that exists in the Islamic finance industry is through product diversification which will develop from issuance and trading of project finance, derivatives, private equity, retail banking, real estate products and similar such products. This will provide an opportunity for outsourcing players with expertise in analytics and technical domain. In order to diversify and offer such complex products to individuals, the Islamic bank will have to understand its existing and prospective customer demands and preferences to offer them a product ‘tailor-made’ to their needs.
•   Back office services: Apart from personalizing services to their customers, Islamic banks also have to focus on the huge amount of remittances that they receive. According to a recent study, nearly 200 million labors send a global aggregate of $300 billion per year back home. Managing such enormous amounts of transactions requires a robust technology along with efficient back office staff.
•   Information technology: The risk management norms adhered to by Malaysian Islamic banks are local and are not consistent with the BASEL II norms established by Basel Committee on Banking Supervision (BCBS). According to a recent survey conducted by Advanced Information Management, there is an added need for banks around the world to streamline and upgrade their technology and IT infrastructure in order to comply with the risk management norms of BASEL.

 
IT companies: Best positioned to grab the opportunity
Post the Asian crisis in 1997; banks in Malaysia were forced to outsource their non-core activities by the Central bank of Malaysia. This was in line with the Central Bank’s move to understand customer demands and curb losses through operational errors. This move saw investments in the BFSI segment in Malaysia with the entry of captives and third party service providers. BFSI along with Oil & Gas and Logistics have been the leading verticals that have seen integration with IT service providers in Malaysia.

IT companies with strong capabilities in the banking domain have an opportunity to tap into the Islamic finance domain. This provides growth prospects to already established players in Malaysia as well as players with capabilities in Islamic finance to invest in Malaysia with the support of the Malaysian government.

Recently, Maveric Systems, a software testing service provider entered the Malaysian market to offer services in the Islamic finance domain. Along with setting up a center in Malaysia, the company has also partnered with Malaysia University of Science and Technology (MUST) to roll out courses and training modules in line with Islamic finance and software testing.

The Malaysian outsourcing industry has been growing 15% annually and has touched $1.1 billion for the year 2009. The industry is expected to grow at a CAGR of 15% to reach $1.9 billion by 2013. Apart from a few small research companies offering services like data collection and data processing to Islamic banks, Islamic finance is one of the niche segments in Malaysia that remains untapped.

The above article is an excerpt from the report “Outsourcing in Malaysia: Scaling New Heights ”, a joint publication by Outsourcing Malaysia and ValueNotes. The report presents the competitive landscape of service providers in the Malaysian outsourcing industry.