Never catch a falling knife: Why trying to retrofit universal banking systems for Islamic finance doesn’t work

In the world of finance, the phrase “never catch a falling knife” serves as a cautionary tale: trying to fix a rapidly declining situation without a clear solution in hand will likely make things worse. The principle is pretty straightforward.

Rushing in to stop a downfall can leave you with even more damage, especially when the problems at hand run deeper than you can see on the surface. This concept doesn’t just apply to stock markets or investments. It can also be applied to the way we approach technology, specifically, in the context of Islamic banking solutions.

The challenges with retrofitting systems

Many banks rely on Islamic banking software from vendors who take their universal core banking systems and add a layer of Islamic functionality to them. At first, this might seem like a simple solution. After all, how hard can it be to adapt existing tech to fit an Islamic framework, right?

The reality, however, is far more complex. Trying to take a universal banking system and force it to adhere to Islamic principles is like trying to put a band-aid on a broken bone. While it might look like it fits, the fundamental structure isn’t designed to handle the specific requirements of Islamic finance.

When a core banking solution is built from the ground up to work in a conventional banking environment, it wasn’t designed with Islamic finance in mind. There’s a fundamental difference in how profit-sharing models, interest-free financing, and ethical banking work in the Islamic finance space compared to traditional systems. So, when vendors take these universal systems and simply add an Islamic layer on top, the system is still simply not equipped to handle the unique requirements of Islamic finance effectively.

Take something like Profit Calculation Systems (PCS), a key component of Islamic banking. Many banks using these retrofitted systems experience challenges with PCS. That’s because the original system wasn’t designed to calculate profits in a Sharia-compliant manner. The system may struggle with accurately calculating Mudarabah, Murabaha, or Wakalah-based transactions, and this is where small gaps or issues can start to snowball into bigger problems: compliance issues, inefficient operations, and even regulatory breaches.

Why a purpose-built solution is crucial

This is where Azentio takes a different approach with iMAL, our Islamic core banking solution. Unlike many other tech providers who patch Islamic features onto universal systems, we built iMAL from the ground up, designed specifically with Islamic finance in mind. It’s not just a universal banking solution with a Sharia-compliant label slapped on top. Instead, iMAL was built from day one to be fully aligned with the principles of Islamic banking, ensuring everything from profit-sharing models to ethical finance practices works seamlessly within a truly Islamic framework.

For banks, financial institutions, and tech decision-makers in the Islamic finance space, it’s essential to choose a solution that addresses these unique needs. The financial system isn’t just about meeting numbers or ticking boxes; it’s about fostering a banking experience that is compliant, efficient, and sustainable. iMAL was designed to do just that.

Understanding AAOIFI certification

One key aspect that sets iMAL apart is our Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) certification. AAOIFI is an international standard-setting body that issues guidelines and accounting standards for Islamic finance. For a banking system to be certified by AAOIFI, it must meet rigorous requirements for Sharia compliance, transparency, and ethical finance practices.

We are proud to announce that Azentio has recently renewed our AAOIFI certification for another year, meeting the latest standards and certifying additional Islamic products. This is a testament to the rigorous standards we adhere to in providing fully Sharia-compliant software solutions. With this certification, banks using iMAL are assured that they are leveraging a solution that meets the highest Islamic finance standards, built for today and ready for the future of banking.

Avoiding the risk of “catching a falling knife”

By using a system that is designed for Islamic banking rather than a generic system that’s been retrofitted, Islamic banks avoid the risk of “catching a falling knife.” They don’t have to deal with the slow, frustrating process of trying to make a non-Islamic system fit their needs, and they certainly don’t have to face the consequences of system failures that could put them at risk of non-compliance.

In the same way that you wouldn’t build a bridge with outdated materials and expect it to last, retrofitting an old system for new purposes can lead to inevitable failure. The more you try to force something to work outside of its intended design, the greater the risk.

Don’t let small issues snowball

As we know, small issues that aren’t addressed early on, like a lack of functionality or system misalignment, can quickly snowball into much larger, costlier problems. In the world of Islamic banking, these aren’t problems you want to ignore. You might think the quick fix is enough, but patching up a broken system doesn’t prevent bigger issues down the line.

Instead of trying to force a system into compliance, it’s better to invest in a solution that was built to support you from the beginning. That way, you’re not just avoiding the “falling knife,” but ensuring your system is fundamentally built for success. Azentio’s iMAL is one example of this, designed specifically for Islamic banking and certified by AAOIFI, meaning it’s built to handle the unique challenges of profit calculation and compliance from the start, ensuring a smooth, seamless banking experience.

The takeaway is clear: don’t try to patch up problems with temporary fixes. In Islamic finance, where compliance, risk management, and ethical banking practices are crucial, cutting corners or using retrofitted systems can lead to big consequences. Instead, investing in a solution that was built for your specific needs will save you time, money, and headaches in the long run.

If you’re facing challenges with your existing banking systems, remember jumping in to fix something that’s already struggling might seem tempting, but it’s often better to choose a solution that was built for the job from the start.