ith the rise of COVID-19, we saw a rapid shift from traditional toward digital banking with banks closing down branches and adding more channels to keep the customer experience positive. This is also true of Islamic banks which have been making solid strides toward digitalization. With all these increased channels, banks face a challenge to secure these access points and inefficient cybersecurity could leave them vulnerable to cyberattacks and financial crime, resulting in decreased client confidence.
Islamic banks are increasingly becoming a target for cyberattacks owing to the rise of digital communication causing accelerated demand for advancements in cybersecurity. Islamic banks are responding to this demand by ensuring secure banking services and improved user experience across the various touchpoints, particularly mobile banking.
As cybercrime continues to rise, regulators are implementing laws and regulations to combat the spread and are similarly encouraging banks to invest in their cybersecurity compliance. Islamic banks have begun prioritizing their investments in financial crime mitigation as they are aware of the advantages of protecting their clients and their reputation, preemptively avoiding fines and penalties and capitalizing on technological advancements.
Review of 2021
Gulf News reports that in the UAE — which owns a large share of the Islamic banking market — alone there was a loss of US$746 million a year to cybercrime, while users across the world lose US$318 billion annually, according to research by UK data provider Comparitech.
The Central Bank of the UAE has been persistent in the fight against cybercrimes, establishing the Networking and Cyber Security Operations Centre to help defend the financial system’s information technology infrastructure.
Additionally, in 2020 the Arab Monetary Fund published the report ‘Digital Identity and e-KYC Guidelines for the Arab Countries’ to extend its discussion on adopting digital onboarding tools.
Countries like the UAE and Bahrain have been among the early adopters of this with Bahrain launching its eKYC [electronic know-your-customer] project to facilitate KYC data-sharing among financial institutions authorized by the Central Bank of Bahrain while the UAE introduced its own eKYC platform.
In 2021, open banking in the Middle East became one of the major players in the digital transformation for Islamic banks due to the flexibility it provides the banking industry, giving open access to consumer banking, transaction and other financial data from bank and non-bank financial institutions.
This provides consumers with a great range of financial services but, as a result, opens up more paths for financial crimes and money laundering for banks.
Preview of 2022
In 2022, regulators like the Saudi Central Bank in Saudi Arabia plan to introduce a framework for open banking that allows third-party developers to securely access customer data as a way of balancing developments in financial technology against the rise in financial crime.
Just as the pandemic has accelerated digital transformation, it has provided cybercriminals with many opportunities to come up with new schemes and take advantage of a rapidly changing environment.
Islamic banks will need to create an improved governance framework for cybersecurity, but because of their reliance on a Shariah board for the evaluation and approval of cybersecurity practices and activities, they need to make sure that they are not only compliant with the traditional regulators but also with the Islamic financial laws.
Looking forward, cybersecurity will remain a hot topic and priority, especially for Islamic banks that will continue to increase their investment in new technology trends to protect their customers and their reputation and to meet regulators’ demands. Many Islamic financial institutions in the Middle East and the GCC face difficulties in overcoming and responding to these challenges; they need to not only reexamine their fraud controls but also conduct risk assessments to detect the latest threats and educate their customers on new risks.