Islamic Banking Tech Readying For Growth

ISLAMIC BANKING TECH:

Readying For Growth

The financial services sector in core Islamic markets in the Middle East, Africa and South Asia - MEASA countries are abuzz with talk and activity on digital transformation strategies including open banking and payments

Traditional core Islamic markets in the Middle East, Africa and South Asia (MEASA) are among the fastest-growing emerging markets digitally. Islamic banks are accelerating and strengthening the digitalisation of complex processes as well as end-to-end customer journeys in lockstep with their conventional peers.

The financial services sector in core Islamic countries in the MEASA region is abuzz with talk and activity on digital transformation strategies including open banking and its regulation, payments as well as how banks can develop robust customer acquisition and engagement.

“Accessing bank services digitally, issuing Sukuk on a digital platform using blockchain technology and enhancing cybersecurity will be the three main factors to help improve the industry’s resilience,” said S&P Global.

The market share of Islamic financing assets in core Islamic markets is set to continue outperforming their conventional peers this year. Growth will be driven by the economic recovery in Muslim majority countries in the GCC region plus Malaysia and Turkey, which in turn are expected to enhance credit growth and demand for Shariahcompliant products.

Islamic industry experts expect blockchain and smart contract protocols to revolutionise the issuance of Sukuk for the better. With new applications within artificial intelligence (AI), blockchain technology and the internet of things (IoT)

being explored, the tokenisation of Islamic bonds remedies certain inefficiencies associated with Sukuk issuances, it increases the transparency of underlying Shariah-compliant assets and cash flows in addition to reducing costs.

The unprecedented digital transformation in the financial services sector is also creating some exceptional challenges for the industry including cyberattacks. However, Islamic financial institutions in the MEASA countries are bolstering their cybersecurity capabilities with technical and operational changes to mitigate the frequency and range of ransomware attacks.

The last two years demonstrated how the capacity of a bank to shift its business online is critical for its continuity. Digital transformation in the Islamic banking sector together with collaboration between fintechs and incumbent banks is expected to strengthen the industry’s resilience in more volatile operating environments while opening new avenues for growth.

Sukuk tokenisation

Sukuk issuance, which bans interest payments and pure monetary speculation, has been gathering steam outside of core Islamic finance centers such as in Luxembourg and London. However, the industry remains largely fragmented and plagued with several challenges including the uneven implementation of rules as well as high costs and the probability of human error due to multiple intermediaries that are involved in the issuance process.

The rapid advancement in financial technologies, increasing socio-economic pressures and infrastructure investments are opening doors to disruptive innovation in Islamic capital markets. The tokenisation of Islamic bonds by leveraging blockchain technology is expected to reduce the various costs associated with the issuance process—potentially opening the field to startups and small and medium enterprises (SMEs).

Abu Dhabi’s Al Hilal Bank was the first financial institution in the world to leverage blockchain technology in November 2018 to issue $500 million Sukuk. S&P Global expects digital Sukuk to generate significant investor interest in the future once the necessary prerequisites are implemented.

Similarly, blockchain has the potential to accelerate and unlock the long-term potential of the Islamic finance sector while enhancing its appeal beyond its traditional borders. Blockchain technology allows for all transactions to be unalterably timestamped and uniquely cryptographically signed— increasing operational efficiency, cost reduction and enhancing transparency. Transparency, which is one of the primary characteristics of blockchain, is also one

of the essential attributes that will serve as validation of Shariah compliance for the masses.

GCC countries have grown in relevance for emerging market investors and several trends in the region such as economic diversification signal continued growth for Sukuk markets. Sharjah-based property developer Arada raised $350 million in its debut foray into the debt market earlier in June while Islamic Development Bank (IsDB), a regular issuer in the capital markets, raised $1.6 billion in five-year Islamic bonds in April—the Saudi-based multilateral development lender’s first public Sukuk issuance this year.

S&P Global projected in June that total global Sukuk issuance will plunge this year compared with stabilisation at $147.4 billion in 2021 and $148.4 billion in 2020. Meanwhile, Moody’s sees soaring crude oil prices reducing the funding needs of oil-rich GCC countries leading to low Islamic bond issuances throughout 2022.

Smart Sukuk can help generate more secure and immutable data while reducing the number of intermediaries involved and facilitating smaller denominations in Islamic bond issuances potentially extending the benefits of the structure to SMEs (Nida Khana et al, 2020).

Digital banking

The current operating environment is putting to test Islamic banks’ digital transformation journeys and, in some

cases, forcing the c-suite level to revisit their strategies and make customers the focal point of their digitalisation drive. “Many Islamic banks have made significant strides in digitalisation, such as those in the GCC and Malaysia, but players in other core Islamic finance countries are yet to follow,” said S&P Global.

Like their conventional peers, Islamic banks in the GCC region are pro-innovative and industry experts expect them to continue to dominate the financial services industry as the sector goes more digital. Though Islamic banks’ digitalisation drive is partly self-motivated, the emergence of challenger Shariah-

MILLENNIALS AND THEIR YOUNGER COHORT WILL RESHAPE THE FINANCIAL INDUSTRY IN THEIR TECH-SAVVY, MOBILEFIRST IMAGE, WITH RAMIFICATIONS FOR ALL CONSUMERS, COMPANIES AND INVESTORS

– Morgan Stanley

compliant banks such as Zand and the changing demands from tech-savvy Gen Z customers are also accelerating banks’ digital transformation.

Zand, the UAE’s first Shariah-compliant neobank, is expected to open its doors for business soon. It’s shareholders acquired the majority of shares in Dubai Bank from Emirates NBD last December. The digital lender secured the backing of investors such as Franklin Templeton, Al Hail Holding, Yusuff Ali of Lulu Group and Aditya Birla Group in February as it seeks to seize on opportunities thrown up by fintech.

The neobank will be competing with the offshoots of traditional banks such as Dubai Islamic Bank (DIB), Al

Hilal Bank and Abu Dhabi Islamic Bank (ADIB). DIB unveiled its digital offering, rabbit, in December 2021—a digital app that is aimed at tech-savvy customers. rabbit offers a current account, globally accepted debit card, payments and money transfer services.

The digital banking platform is on track to establish new standards for innovation in the financial services sector as part of DIB’s broader strategy to make banking effortless and fun for its customers.

“Millennials and their younger cohort will reshape the financial industry in their tech-savvy, mobile-first image, with ramifications for all consumers, companies and investors,” said Morgan Stanley.

ADIB launched “Amwali”, the Shariahcompliant bank’s digital offering targeting the growing segment of tech-savvy youths, last August. Amwali brings together an entire suite of banking products and technology to enable young customers to enjoy a whole new way of banking that is paperless, signatureless and branchless.

Meanwhile, in Southeast Asia, Malaysia’s Bank Islam, Al Rajhi Bank and AEON Credit Service have been working with financial technology solution providers including Mambu and Codebase as they enter the more

competitive digital banking landscape.

Dubai’s financial hub, DIFC, has also been investing heavily in fintech through its DIFC FinTech Accelerator Programme. Shariah-compliant startups that have benefited from the program in the past include Malaysia-based HelloGold, IslamiChain—which leverages blockchain to enhance philanthropy and compassionate giving, Hakbah and Wethaq.

SMART SUKUK CAN HELP GENERATE MORE SECURE AND IMMUTABLE DATA WHILE REDUCING THE NUMBER OF INTERMEDIARIES INVOLVED AND FACILITATING SMALLER DENOMINATIONS IN ISLAMIC BOND ISSUANCES POTENTIALLY EXTENDING THE BENEFITS OF THE STRUCTURE TO SMALL AND MEDIUM ENTERPRISES

– Nida Khana et al, 2020

Customer onboarding

The Islamic finance sector has evolved over the year and so too have the product structures as the industry moves to offer tailored features to meet the needs of a growing investor base. The importance of the Middle East to Islamic finance continues to be clear as the region is home to the world’s largest Islamic banks by assets including Al Rajhi Bank, Saudi National Bank, Dubai Islamic Bank, Bahrain Islamic Bank and Kuwait Finance House.

Islamic banks are putting customer experience at the center of nextgeneration operating models and digital onboarding is an essential feature that determines whether they can easily acquire new customers, especially the tech-savvy millennials. Digital customer onboarding is the first contact that a new customer has with the bank and the process should be intuitive, seamless, responsive and efficient.

“The onboarding journey is so important in creating a great first customer experience, setting the tone for the ongoing relationship and acting as a key control point,” said Deloitte.

An automated onboarding process is a mutually beneficial situation offering speed, efficiency and convenience for the customers and bank professionals for more value-added tasks. Customer onboarding entails the guidance of a new user in the first steps of platform accessibility. The process is a critical step in a customer’s journey with a financial institution as it leaves a long-lasting impression in the clients’ minds about how they perceive a financial institution.

Digitalisation in the Islamic banking sector is customer-driven as financial institutions seek to enhance services and products as well as tap into new market and customer segments. The Islamic finance sector has evolved over the years and banks continue to build on the digital banking momentum to tap into the growing millennial and Gen Z tech-savvy customer segment. Having seamless onboarding and origination processes is pivotal in accelerating digital-first executions and increasing cross-sell opportunities.