Islamic banking has become a major global industry, with growth of 10% to 15% per year over the last decade. Islamic Banking is particularly developed in the Middle East, is definitively on the rise in the Asia-Pacific region, and is in an infancy stage in North Africa and Europe. There are about 300 Islamic banking institutions, and, as the market is growing rapidly, there is still a huge potential for entrants in Islamic banking

 Islamic banking is yet to make its headway into Indian market as currently only Non Banking Financial Institutions are allowed to operate under Shariah principles.  Since the Shariah principles directly conflict with conventional banking principles, making it difficult for Indian banks to offer Islamic banking products. For instance Al Wadiah (for saving bank account): Section 21 of the Banking Regulation (BA) Act requires payment of interest on such deposits; thus, interest-free deposit and a simple charging of premium or Hiba is not permissible. Likewise Mudharabh (for term deposit or investment) under section 21 of the BR Act disallows such products where the bank can invest the money in equity funds (in India, equity exposure is determined by a separate set of rules), and the customer has complete freedom in the management. 

Reserve bank of India has formed a committee (Raghuram Rajan Committee) to look in to the matter and the Committee believes that it would be possible, through appropriate measures, to create a framework for such products without any adverse systemic risk impact.

India with a 15% Muslim population, the highest in a non-Islamic country and second highest in the world thus offers huge potential to exploit. The size of the market will be very large as the Indian population is over a billion thus making it about 150 million Muslim population and majority of them, in the name of religious faith, are looking for interest free banking and finance.

However, realistically speaking, Indian market will have to wait for another 2 – 3 years for an Islamic bank to become operational. Apart from this awareness of Islamic banking and products, dearth for Shariah scholars, designing Shariah compliant products are still are challenge.

Recently I went to Beijing and Shanghai visiting insurance companies again. By talking to CIOs and IT managers, I realized that something is changing.

- IT plays a more important role. In most insurance companies in Asia, the main objective of the IT department is to support growth. It is common that business departments raise requirements, and the IT departments are responsible for developing the corresponding solutions. But I also see steering committees of some insurance companies in China requiring the IT department to not only support business innovation but also promote and even guide innovation. In these firms, IT departments already play a more important role within the organization. The IT department study technology trends and suggest innovative solutions that can add value to business process. Starting from a solid business case is very important.

- Some middle tier insurance companies start to reduce outsourcing of core software development, try to do business analyze and technology analyze internally, only outsourcing coding. They said the reason is because of the increasing cost of outsourcing and the low quality of business analyze from vendors.

- More innovative thinking in service. I hear from some companies talking about e-business, mobile solution, geography information system, e-policy…… We are living in a changing world. Various types of uncertainty are growing. Companies that see emerging trends and set up strategy around them early will gain competitive advantage. Forward thinking is crucial for both short-term and long-term survival and success.

The Indian capital market regulator, Securities and Exchange Board of India (SEBI), has finally approved two different but equally important means of access to the stock markets. Both mobile trading and smart order routing have been approved by SEBI.
Mobile trading was being eagerly expected in the retail markets. India has a mobile phone user base of 645 million people, compared to only around 11 million demat account holders. As mobile connectivity is available to a far greater proportion of the population as compared to internet connectivity, industry participants believe that it could lead to a boom in stock market participation. While the brokerages that wish to provide this facility would have to ensure that they provide secure access, encryption and security, we believe that the infrastructure provision would not be the difficult element if mobile trading has to succeed in India. Globally, mobile trading is successful in markets such as Korea where people are very comfortable in using this medium. But in many other leading markets, mobile trading has not really taken off as people do not feel comfortable accessing the amount of information required to come to a decision about buying and selling a stock. So in the end successful adoption will come down to a trade-off between how comfortable mobile trading is as a medium of access and how important it is for the target investor to access the market through his/her mobile. Even though internet connectivity is not available to many Indians, physical access to brokerages still exists in most far flung Indian towns but we still have only 11 million stock market investors. Hence, the Indian brokerages have to ensure they put in sufficient effort to target the latent demand for stock trading in the population. If this does not happen, we could end up with a situation that exists in western markets where only a small proportion of the investors are interested in using mobile trading.
While Smart Order Routing (SOR) is a different technology targeting a different segment of the market, a similar word of caution would be in order. The brokerages that want to provide the facility have to comply with a number of regulations. They will have to apply to the respective stock exchanges (mainly NSE and BSE). The exchanges have to communicate their decision to brokers within 30 days. Brokers will also have to submit a third-party system audit of its smart order routing system and software, beside providing an undertaking that the new system will route orders in a neutral manner. They have to provide an alternative mode of trading system in case of failure, besides maintaining logs to facilitate an audit trail. Furthermore, the broker server that would route orders will have to be located in India. So there is a lot of infrastructure that has to be put in place before brokerages can begin to offer the service. Besides, there is still a lack of comfort with the use of the technology in the leading exchange, NSE. Its position as the market leader could possibly be threatened, especially once MCX-SX, the exchange promoted by Financial Technologies, comes online. While SORs could help increase liquidity and encourage algorithmic trading the inability, at times, of the exchanges to cope with high volumes during peak hours could be a barrier to their widespread adoption. As in the case of mobile trading, there are a number of factors beyond the technology itself that will be at play in the next few months and years.
So while we are certainly looking forward to the desired success of both mobile trading and smart order routing in India,  a lot of effort would be required on part of the brokerages, and also the exchanges, to make this happen. With the large size of the stock markets and the mobile subscriber base, it is easy to think that both these technologies will succeed, but that is not something we can take for granted.

The ADB report on the rise of the middle class in Asia Pacific has lot of valuable information for the financial institutions in India. It also provides a pointer in the direction of which sectors need to be regulatory helped and which sectors have to be restrained and restricted. The comparison with China helps us in understanding the focus areas in financial services development in India as many of the sectors where in a very similar state 20 years back.

The most penetrated segment has been insurance. Regulated by IRDA, it has manifested as a sold good – distribution agents taking the lead to sell it in a FMCG manner. The high ( as compared to other segments in the sector as well as compared to other geographies) means that motivation to sell certain products ( ULIPs) has been very high. While whether these products actually achieve the insurance goals of the buyer is debatable, there is no discussion on the penetration.

On an average, the adoption is around 65% in the Indian middle class. With the growth of the middle class, this is a key sector of growth. In sharp contrast, we can see the growth and penetration of other sectors namely Investment trusts and pensions.

As the old age population is going to grow, key questions arise –
• Should pensions be sold like insurance products in India.
• If so, should it be expected from the insurance players to grow the pension market especially in a context where the ULIP business is so lucrative?
How PFRDA handles this issue as well as answer the question of increasing pension coverage in a not-so-highly-financially literate population with a large unorganized sector will determine the future of social security in India. Innovative use of traditional channels like post office, tying up with non-governmental sector for awareness building, regulatory parity of commissions across various financial products and policy level changes are all important for this paradigm shift.

The Reserve Bank of India (RBI) recently put out a draft report on introducing credit default swaps as OTC derivatives product for corporate bonds in India. Two attempts to introduce the product were already made earlier in 2003 and 2007. The timing of the latest proposal indicates that perhaps the central bank was waiting for the financial crisis to subside and also buy that extra time to learn lessons from the crisis. However, RBI has not incorporated some key lessons from the crisis. The following are a few glaring shortcomings in the proposal –

1) At a time when the world is moving towards centralized clearing systems, issues such as opacity and counterparty risk associated with OTC markets seem to have been overlooked, at least for now. What is more worrisome is that the proposal is not even keen on establishing a trade reporting platform. While it envisages the establishment of a trade reporting platform in the future, the proposal gives a green signal to begin CDS trading without setting up a trade repository.

2) The proposal says that the market is essentially a dealers market. Users are only allowed to buy CDS from dealers alone. However, what is very surprising is that it does not allow CDS buyers to unwind the protection by entering into another offsetting contract. If buyers desire to unwind, they have to terminate the position with the original counterparty, thereby allowing excessive and unfair control to the sellers.

3) The trade reporting format provided in the proposal does not include price data, which makes it even more unfriendly to the buyers. Opacity in prices even on post-trade basis, along with transparency issues arising out of the OTC nature of the market loads the dice heavily against CDS buyers.

One would just hope now that the CDS market does not suffer in the same manner in which interest rate futures market did, especially given that India certainly needs a mature CDS market to manage systemic risks prudentially.

Bancassurance is growing in many Asian markets buoyed by deregulation of banking sector on one hand and Insurance companies intending to optimize distribution via banks on the other hand. On the local level, bancassurance business in Asia-Pacific countries has evolved in different ways.

While different geographies are targeting different customer base and products, for instance countries like Malaysia, Indonesia, Thailand where Muslim population is high and growing, insurance companies are joining hands with banks to provide a wide range of Islamic finance and takaful insurance products. And in some other emerging economies with predominant agricultural countries like India banks are joining hands with co-operative societies and Regional Rural Banks to reach out to vast untapped population.

Asia Pacific region is “Agent” dominated distribution in terms of both life and non life, however Bancassurance is growing quickly. Penetration of Bancassurance ranges from <10 percent in countries like Japan and Thailand to as high as 40 – 50 percent of new business in countries like South Korea and Malaysia

The existing bank branches and other infrastructures like ATM, online, telephone, and mobile modes have triggered the insurance companies to come up with various innovative models in collaboration with banks to effectively use the already existing channels.

Bancassurance is one of the growing models that insurance companies are targeting to reach various customer segments. Since bank customer are co-related to savings and insurance customers are co-related to retirement, pension etc, routing insurance products via bank branches will not only build long lasting relation with customers, but also act as one stop shop for all financial needs of customers.

An inter-ministerial committee on financial inclusion has recommended structural changes in the operation of postal savings bank accounts ( POSB) . The focus is on using the postal service as an important channel of financial inclusion. India Post has 155000 branches, twice as big as the outreach of all the commercial banks in India. Even currently, Post Office Savings Bank contributes 45% of the revenues of Indian Post.

The key focus of the report has been to examine potential synergies between the efforts at broadbased banking and financial services delivery at India Post and the larger policy goal of financial inclusion. One of the key take-away from the report has been that the role of postal service is huge in the goal of achieving universal financial inclusion. Another key suggestion has been to evolve India Post as a P2P payment system. This is done with an eye on the huge Government to Person payments which can be routed through India Post.

Key recommendations:

1) It has been suggested that India Post should provide a no-frills low cost bank account with a focus on the financially excluded and that India Post should look for ways to leverage its low cost platform by providing India Post branded accounts to other strategic partners like MFIs and mutual funds and insurance companies.

2) Another recommendation has been in the area of money orders. It is suggested that the organization should apply itself towards the challenge of achieving high volumes of money orders. Specific stress has been made on the evolution of the money order to become a mechanism for transferring money from one POSB account to another, instead of just being a mechanism for delivering cash from one person to another. Thus a payments infrastructure with the postal organization at the centre and an array of contracts with partners should connect up all POSB accounts and accounts of its partners, to effectively become a person-to-person money order capability (through mobile phones or web browsers) for the populace.

3) Another suggestion has been in terms of handling the G2P payments. It has been advised that India Post form a large number of partners in terms of financial inclusion players, mobile service providers and innovative new technological choices in order to increase the size of the network.

Thus this committee suggests an alternate solution to financial inclusion with the postal service at the centre of the plan – being the banker and payments provider for the financially excluded. An advantage of this solution is that the infrastructure is already in place and a quick implementation is possible. But this means that a key aspect of banking might be going out of the hands of the banking sector. Also issues regarding KYC/AML norms have to be figured out before this is adopted on a large scale, but still it is an interesting and innovative move towards financial inclusion.

One lesson of the recent crisis for wealth management firms is the need to address changes in client attitudes. Of late there has been a massive increase in the range of products leading to complex combination of investment scenarios. Wealth managers, in their aim to remain trusted advisors, have turned to market data providers to remain knowledgeable about market news and gain deeper insight into market analysis. Market data, considered a commodity till recently, is gaining importance for wealth managers for redesigning portfolios and to provide information from different sources in a single and user friendly space.

The primary users of market data through wealth management applications include front office staff, including advisors, relationship managers, and investment specialists who use data to analyze existing portfolios and develop investment strategies. Market data is also used in the back and middle offices for handling the management, oversight, and administration of investments and trades.

In Asia, different countries are at different levels of maturity in terms of wealth management. Japan is the biggest market and mostly institutional; Singapore and Hong Kong are sophisticated and closer to the Swiss private banking model. Outside Japan, Australia, Singapore, and Hong Kong, requirements are very local and domestic in nature in terms of product choices, regulatory and compliance requirements, and language issues. Investors in these countries prefer domestic asset classes, and mostly invest on their own without relying on advisors heavily.

So far wealth management firms have mostly been relying on traditional portals like Bloomberg, Thomson Reuters, etc. With greater regulatory oversight post-crisis, emerging focus on online channel and greater demand for global data, wealth management firms’ approach to market data is changing. Before the financial crisis, firms mostly preferred siloed solutions for separate job functions. This not only increased cost for data management systems but also resulted in duplicate data. This attitude is slowly changing, and firms are after an enterprise wide market data strategy. Move to web-based technology, request for specific services like email and mobile alerts are also notable trends in this market of late.

Still, the market is not as sophisticated as those in the West. Many global market data vendors use the same central solution in Asia, with some customization required for local requirements. Celent has learnt that some vendors use a simpler version of their product in Asia by disabling many functions and having small, product-specific resources. Local data vendors have strong presence in Japan; many software vendors, working in conjunction with the content providers, are active in this space, especially in India and China. Other regions are mostly dominated by the global players.

It was in 1964 that Walt Disney first told us in song that “it’s a small world, after all.” As we apply the concept to insurance in 2010, it is clear that Walt was well ahead of his time. The opportunities and challenges for today’s insurers around the globe seem to transcend time zone and cultural differences.

I recently spent a week in Tokyo, in part for the Celent Insurance Roundtable. (No, I did not go to Tokyo Disney.) To be successful, a trip like this has to include some very fresh sushi, and a flurry of fresh perspectives. Thankfully, I found both.

In our roundtable discussion and in my conversations with Japanese clients I was struck by how similar Japanese insurer concerns are compared to those of North American insurers. Common themes included finding the right levers to drive company-level growth despite flat industry-level demand, concerns over outdated IT approaches, and the challenges associated with optimizing short- and long-term strategies simultaneously.

Comparing Tokyo consumers to their counterparts in North American cities of similar size is also interesting. Looking around a Tokyo Starbucks, I saw that same curious mix of eccentric 20-somethings and 40-something professionals that I see in New York. Most were on laptops or smart phones, enjoying high speed connectivity to stay in touch with friends or to crank out emails from their virtual offices. The Japanese may still have more affection for their keitai (cell phones) than do North Americans, but the gap is clearly closing.

Another symptom of our rapidly shrinking planet (where is Al Gore when you need him?) is that global competition is no longer limited to the manufacturing sector. Looking at the names on Tokyo buildings tells the story. IT services firms are aggressively building out their presence in new geos. Insurers are buying companies halfway around the world. Software vendors that got their start in one country are now reaching critical mass in others. While I typically preach focus for any firm that haven’t mastered its “home” domain, I think that expanding the vision to new countries is essential for successful firms that have high growth ambitions. Good ideas, powerful tools, and game-changing strategies are welcome visitors to just about any country.

As a futurist and as an entrepreneur, Walt Disney dreamed big dreams. We may not be commuting to work by personal jet pack (yet), but otherwise Walt had it about right. It’s a small world, indeed.

The Securities Contracts (Regulation) Rules (SCRR), 1957 was recently amended to incorporate a minimum 25% public float for all listed companies – private and public. The amendment also applies to listed statutory corporations. Public float is defined as that part of a listed company’s shares that are not held by the promoter. The proposal to push for a 25% public float had been around for some time now, and it has finally seen the light of the day, with the proposal turning into a law with a strong push from the Finance Ministry.

There is little doubt about the objectives of the amended law – greater public float creates deeper public markets, making the markets more efficient, thereby reducing the cost of raising funds. However, the crucial question that is being asked now is about the timing of the amendment, and about the time-frame given to companies to comply with the new law. While equity markets all around the world still appear shaky and offer no compelling signs of recovery from the financial crisis, it appears that the amendment is a tad hasty. It is not very convincing that the next 2-3 years is the best time to dilute shareholding, especially given the volatility and the subdued valuations. The criticism is equally about the short time-frame (2-3 years on average) given to the companies to comply. This compliance is estimated to raise money in excess of Rs. 1.6 trillion. Companies might be unable to put the forcefully raised money to any better use.

The premise that ‘greater public float results in greater liquidity’ also appears shaky. Higher public float might discourage many companies which are more comfortable with smaller divestment from listing. Also, listed companies which do not want to divest at the moment, might rather prefer to delist than comply with the new law. This might in fact result in lower liquidity. While the objectives of the amendment are noble, and definitely in the right direction towards creating more mature equity markets, the government should have waited for more convincing signs of global economic recovery before making the law.