LICUOS, Dubai and Islamic banking

Dubai welcomes Sibos this year with a special attention to the financial markets in the middle East. Middle Eastern Markets have been outperforming the SWIFT average growth in the rest of the world by 45%, according to SWIFT statistics.

The first modern commercial Islamic bank, Dubai Islamic Bank, opened its doors in 1975. In the early years, the products offered were basic and strongly founded on conventional banking products, but in the last few years the industry is starting to see strong development in new products and services.

Financial products that comply with the Shariah, are evolving from a novelty into a normal part of doing business in much of the developing world. However, the SME Shariah-compliant financing market is under-served and, as such, has substantial demand for solutions.

The core principles of Islam lay great emphasis on social justice, inclusion, and sharing of resources between the haves and the have nots. Islamic finance addresses the issue of “financial inclusion” or “access to finance” promoting risk-sharing contracts that provide a viable alternative to conventional debt-based financing.Image

Islamic banking principles and Working Capital Management

The feature that all Islamic financial products share is the absence of interest. Instead, the investments are set up as leasing arrangements or investments in which money is turned over to third-party trustees who share profits with Islamic depositors.

According to Ishrat Husain, former governor of the Central Bank of Pakistan, “there are two characteristics of Islamic banking which distinguish it from conventional banking. One is that every transaction has to be backed by real assets. Every loan should be backed by collateral such as real estate, business, etc. You cannot create wealth or money without associating it with real wealth creation. Second, the borrower is a partner in the business in which the bank has invested as financier. There is no guaranteed fixed rate of return. If the business is not doing well, the bank will suffer along with the account holder. In contrast, conventional banks offer a fixed return to depositors. The bank has to pay interest irrespective of the performance of assets.”

Because Shariah law forbids the payment of interest and trading debt is also not permitted, there would seem to be little common ground between Islamic finance and conventional working capital financing activities. But there may be more similarities than at first appears.

A key to the nature of Shariah-compliant working capital activities is that there should be no element of speculation involved in the deal. For instance, the price of the goods/services should be fixed and cannot be changed even if there is a delay in the repayment, as charging for the delay would be considered as interest, which is prohibited by Shariah.

Rather than providing a loan and charging interest on it, the bank effectively buys the asset and then sells it to an end-buyer, with the mark-up being the profit. And that’s an ethical deal – it’s a solid asset being sold. Typically, the bank will have ownership of the goods/services, buying them from supplier, and will then transfer them to the buyer. In this way the debt has been transferred to the bank through the transfer of ownership of the goods/services. The way the financier makes money from the transaction is through a mark-up in the value of the goods/services as sold to the buyer. The bank may apply the time value of money in his mark-up calculation, and then the price given to the buyer is fixed regardless of an early settlement, a payment on time or a delay of payment.

LICUOS´ Shariah –compliant netting platform

As Shaheryar Ali, Vice President, Relationship and Sales Manager at BNY Mellon, says “An Islamic treasury function, like a conventional one, must generate and utilize liquidity in an optimal manner. However, it must also function in accordance with Shariah principles. All practices must fit with the principles of Islamic finance. There can be no interest, no speculation, and no contingent speculative liability in any transaction. Yet as long as these principles are complied with, it is possible for a treasury services function to be Shariah-compliant and for there to be no difference between Islamic and conventional cash and trade. In fact, Islamic principles may help convergence because, in most examples when applied to the true methodology, neither cash nor trade are based on speculation.”

With limited Shariah-compliant products for SME customers, LICUOS launched a Shariah-compliant B2B payment platform to meet the cash management and finance needs of these customers. LICUOS is a global business-to-business payment platform where businesses can compensate and pay their commercial debts. The platform provides netting, payment and funding services for accounts receivable and payable for businesses, allowing them to reduce their dependence on the traditional banking system alternatives so that they can significantly improve their working capital and cash flow management. By applying our solution, businesses from all economic sectors and sizes, including public administration and nonprofit, will achieve an important reduction in their funding needs and credit risk exposure.

This product meets the needs of our SME customers seeking world class Shariah-compliant solutions to finance their local or international invoices. Our unique proprietary and patent-pending technology enables an efficient and highly secure processing of accounts payable and receivable transactions, 24/7 and in real-time, to deliver the best financial optimization and user experience. Our algorithms automatically identify and generate the most convenient and efficient netting, payment and funding proposals. They manage all of the associated transactions that allow businesses to significantly reduce or eliminate their commercial debts. LICUOS gives businesses full control and visibility into the payment process and allows them to easily communicate and negotiate with their business partners. We are able to support the working capital funding needs through a Shariah-compliant solution.

Supply Chain Finance and Islamic banking

The growth in Islamic banking that has been seen in the Middle East over the last years has been brought about by a response to the pent up demand for Shariah-compliant banking and combined with trend to converge cash management and trade finance services offered by the Middle Eastern bankers, this is likely to provide a significant boost to technology providers in the Supply Chain Finance (SCF) space.

As we explained in one of our previous posts, SCF refers to the set of solutions for financing specific goods as they move from origin to destination along the supply chain. In this environment, highly characterized by the integration of the supply chains, collaborative solutions have started to grow in order to enhance the negotiation and collaboration between suppliers and buyers. Currently, only a small percentage of companies are using SCF techniques, but more than half have plans or are investigating options to improve supply chain finance techniques. Slow adoption of SCF programs does not depend on lack of demand from businesses but on the resistance of the Banking System to change the way it operates.

Banks reluctance to adapt their services to the new needs and offerings is causing the rise of solutions that promote the investment of available liquidity in one’s own supply chain, accelerating payments and cash collections, so that early payment discounts are seen as an asset allocation alternative with higher profitability and less risk than those offered by banks. This collaboration creates a win-win relationship for members of the chain, increasing their combined financial strength.

In addition to this, there are other alternatives that go one step further, leveraging not only the supply chain itself but also the network that each individual company creates from its own daily operations in order to find potential netting cycles that can compensate commercial debts.

Through this process, companies are able to minimize the number and volume of cash transactions, and hence, the banking fees associated with the same transactions. These solutions allow businesses to reduce their dependence on the traditional banking system alternatives and at the same time significantly improve their working capital and cash flow management. By applying these techniques, businesses achieve an important reduction in their funding needs and credit risk exposure.

LICUOS is one of the few companies capable of offering this degree of innovative and disruptive processing. Among other Shariah-compliant principles, LICUOS complies with the Islamic principle of encouraging people to settle payment debt as early as possible.

LICUOS´s multilateral early-payment proposals (leveraging the complete supplier network) allow the buyer to utilize liquidity in an optimal manner collaborating with his Supply Chain. Faster collections mean, for the suppliers, more working capital, less need to borrow and reduced collections costs. This is a real commercial synergy. It does not just reduce the cost of goods. It does not just reduce the cost of borrowing. This reduces the cost of doing business.


LICUOS, as the first Innotribe Start-up Disrupt winner, will be presenting at the Innotribe tunnel on Wednesday, 18 September at SIBOS in Dubai. The aim of the Innotribe Start-up Disrupt competition was to encourage and recognize financial technology firms that have the capacity to transform the Financial Services (FS) industry. The first Startup Disrupt was organized on 25 June 2013 at Next Bank Madrid.

LICUOS, the first payment platform that helps businesses to reduce their debts instead of just paying them, will present its features including its Shariah-compliant services.