Treasury Today Country Profiles in association with Citi

Automating Islamic finance

Kuala Lumpur skyline at night

In the space of a decade, Islamic finance has gone from being a niche practice to be more than a $2 trillion industry. But while the mainstream financial services landscape is becoming ever more digitalised, sharia-compliant financial products continue to require archaic manual, paper-based processes. Can a new rulebook recently announced by SWIFT change all that?

In the mid-fifteenth century, the first codified rules for the double-entry accounting system were established by the legendary Italian mathematician Luca Pacioli. The standardised conventions drawn up were nothing short of revolutionary. Merchants had, for the first time, a consistent measure for the worth of their businesses; a simple development that went on to fuel the Renaissance and, ultimately, the advent of modern, global capitalism.

The recent announcement from SWIFT that it will launch a new rulebook for the usage of certain types of financial messages in Islamic finance may well prove to be another – albeit lesser – example of the transformative power of standards.

In the past decade, Islamic finance has grown from a little-known niche, practised in a handful of nations in the Middle East and South East Asia, into an ever more important part of the mainstream financial services landscape. However, a 2013 report by EY, the accountancy group formerly known as Ernst & Young, suggests that the sector could be doing better. Islamic banks, it reveals, are falling behind conventional banks in terms of profitability. The return on equity (ROE) for Islamic banks, for instance, currently averages at 12% compared with 15% for conventional banks.

Some analysts, such as the management consultant firm AT Kearney, believe that (at least part of) this problem can be traced back to poor operational efficiency. Many of the activities in Islamic finance remain tied to archaic, paper-based processes that require a heavy degree of manual intervention over a multitude of documents. While conventional financial activities have reaped the benefits developments such as ISO 20022, Islamic finance has been shackled by a lack of Sharia-compliant equivalents.


For the past few years, SWIFT has been working on a solution, together with the Association of Islamic Banking Institutions Malaysia (AIBIM). The aim was to come to an agreement that would allow banks to make use of international SWIFT messaging standards to automate three types of financial confirmations covering foreign exchange, deposit placement and commodity placement.

That was not an entirely straightforward task, however. Even within a single jurisdiction, Sharia interpretations can vary considerably. As such, a lot of discussion within the Malaysian banking community was needed before any common ground could be reached. “In order to come up with this rulebook there was a lot of work involved coordinating and bringing the community of AIBIM banks together to harmonise Islamic finance practice,” says Kiyono Hasaka, SWIFT’s Asia Pacific standards specialist.

Now all that hard work is beginning to pay off. A new rulebook, which will clarify the use of financial messaging in Islamic Finance has now been agreed and is set to become available to the Message User Group (MGU) at the end of the year.

Tom Alaerts, Director of Payments and Reference Data, Asia Pacific at SWIFT who led SWIFT’s earlier standardisation effort in the Islamic Finance space – the development of Murabaha Message Usage Guidelines – says that the first beneficiaries of the new rulebook will be in the inter-bank space. The automation and efficiency arising from the Rulebook’s application in the interbank space will almost certainly help SWIFT-using corporates too, he adds. “More enriched data can now be exchanged in the interbank space, and that means that corporates communicating with banks using SWIFT can also enjoy the enriched data that is being passed on to them from the bank.”

More products, wider acceptance

But SWIFT does not plan to stop there. On the contrary, there are a whole range of other financial instruments – Murabaha flows, the Sukuk, Takaful and Wadia – that are now in the Society’s sights. If SWIFT can find a way to hammer out agreed standards on instruments such as these, corporates stand to benefit in a much more direct way.

“This is just the beginning,” says Alaerts. “You can expect us to look further at other standards that corporates can directly use, such as the sukuk. I can see the rulebook being extended in such ways as to automate operation and reconciliation end-to-end rather than just inter-bank.”

Work will also be done on extending the acceptance of such standards cross-regionally. Malaysia, as one of the largest markets for Islamic finance services, seemed like an obvious and sensible place to start. However, SWIFT says that its ultimate aim is to establish a rulebook that is truly international, and in that respect hope to bring on board other important Islamic financial centres such as Bahrain, and the UK, in the years ahead.

If SWIFT succeeds, it will be interesting to observe the impact this will have on the sector. Of course, the rulebook is not a major revolutionary development in the global financial markets. But can it provide a small, yet significant boost for Islamic finance?

“I believe so,” says Kiyono. When compared to the size of the entire global market, Islamic finance is still quite small. But that means it has plenty of space to grow. “Global connectivity can only be a good thing,” she adds. “I’m sure that adopting international standards will help to grow Islamic finance’s share of the market in the global economy.”