IFN speaks to Group Chairman and CEO Mohammed Kateeb to find out more about the impact of COVID-19 on Islamic financial institutions and his digital predictions for 2022.
Some would say that the COVID-19 pandemic is the most effective CTO [chief technology officer], having triggered rapid digital transformation across virtually all industries, including banking and finance. How did Islamic financial institutions cope with the unprecedented disruption that the COVID-19 pandemic caused?
The impact of isolation caused by the COVID-19 pandemic has triggered unheard-of revolution around the world, where customer behaviors massively changed, increasing the demand for online products and services through digital channels. This has forced Islamic financial institutions to accelerate their digital transformation that was already underway prior to the pandemic. The pandemic has unexpectedly forced them to operate differently, with staff often having to work remotely. This has heightened an already growing concern about cybersecurity and the ability of technology infrastructures to support future ways of banking. It has also caused financial institutions to rethink their contingency plans, since the pattern of disruption seen in the pandemic, particularly with limited movement, may not have been considered in past planning.
Clients’ remote interactions demanded the availability of digital channels which was challenging because of their existing application infrastructure. Some Islamic financial institutions compensated for that by assigning dedicated relationship managers to serve their customers remotely while focusing on boosting digital channels’ initiatives to create virtual branches, digital onboarding applications, enhanced and customized mobile banking features, intelligent chatbots, chat banking, etc.
Moreover, the crisis has enforced remote working procedures which highlighted the discrepancies of operating models which rely too heavily on manual procedures, leading to better efficiency in the work processes.
Do you think Islamic financial institutions were digitally ready to adapt to the disruption? Who were more equipped (from which regions)? Those who were not, how did they adjust?
I believe it is not specific to Islamic finance, but to the banking sector as a whole; some banks were ready more than others. The impact of the COVID-19 pandemic has magnified existing vulnerabilities and created many technological challenges for banks to uphold their standards of customer experience while mitigating operational hurdles. Islamic banks that were less prepared to implement adaptable technological solutions were more vulnerable to technological risk and cybersecurity risk.
Despite all this, Islamic financial institutions have shown extraordinary resilience in responding to the impact of COVID-19, and the rapid transition to financial digitization. As per the CIBAFI [General Council for Islamic Banks and Financial Institutions] Global Islamic Bankers’ Survey 2021 Report, the main weakness faced was their inability to meet increasing customer demand for digital or mobile banking services, while their main strength was the quick response to the regulators’ various directives and the flexibility to adopt new operational measures concerning the health of their employees and customers.
The global lockdown has dealt a heavy blow to consumer banking in all jurisdictions; in Asia, Islamic finance has a large share of the retail lending and microfinance market, while in Africa, Islamic microfinance has a place, but its market share continues to increase. Social distancing measures and retail closures have caused the most damage to SMEs and low-income groups.
Islamic financial institutions had to re-evaluate and reconsider their internal policies and procedures to better meet social distancing requirements. Now, as the crisis is entering the next stage, Islamic banks are constantly striving to provide customers with more flexible digital services, allowing them to customize their own offerings according to their specific needs. Even before the crisis broke out, governments and regulators in the GCC and Southeast Asia recognized the need to accelerate innovation by setting up fintech sandboxes in each jurisdiction for participants to test their Islamic financial propositions.
What were the biggest digital, innovation and fintech trends observed in 2020 and 2021?
The forced digital transformation starting from the banking channels where fintechs have played a key role deep into the core of the traditional financial institutions saw them dominate changes during the last year. Digital banking became the new norm focusing on digital onboarding using digital identity verification, liveness detection, eKYC [electronic know your customer], AML [anti-money laundering]/blacklist checks, digital signature and others. Few neobank licenses were issued in the MENA region which is leading the digital-only banks and financial services segment. And we saw a noticeable increase in collaboration between banks and fintechs in the segment.
What are your top three digital predictions for 2022?
As the world adjusts to the new normal, everything that we have been discussing for the last 10 years about the Industry 4.0 technologies will continue to accelerate. Artificial intelligence (AI) technologies will continue to be the most important set of technologies in driving the industry forward, and many initiatives will be introduced, but we will not see their full potential before the next 18 months — trends such as machine learning, predictive analytics, autonomous finance, voice-activated technologies (intelligent chatbots and virtual assistants, etc). The proliferation of biometric authentication and security systems to secure digital channels will continue to be a focus area. Many neobanks will be coming live, and open banking will accelerate permitting the sharing of banking data with accredited third parties.
Of course, other initiatives already in the works will come online in the coming year such as innovative digital payments, agency banking, robotic process automation, AI-powered fintech voice assistants, advance secure payments with the use of biometric data for payment authorization, video conferencing and remote assistance, chat banking through social media, robo-advisory and many others.
What do you think Islamic financial institutions should focus on or allocate their resources toward as far as digital and innovation strategies are concerned?
Islamic financial institutions should view this pandemic as a platform to transform and improve, mainly from a digital aspect. They should build on the momentum they have had in 2020 and 2021 to continue to focus on digital transformation initiatives throughout their organizations which will help them improve their digital banking experiences and bring new services to market fast. They should continue to further enhance their digital banking offerings to improve customer experience and increase their market share. Their focus should be on digital onboarding and increased process automation in the backend to improve productivity and operational efficiency. This is essential to enhance their digital infrastructure, modernize operations and automate processes.
What are some of the projects Path Solutions is working on? What were the rationales behind these projects and when can we expect them to come to fruition?
Path Solutions has been working on a series of key initiatives to enable banks to transform their operating models to respond to new market entrants, rising customer needs and profitability challenges such as working on an open API platform and a digital banking platform with off-the-shelf features that unify multiple channels, providing a convenient, personalized and seamless digital experience with services for retail, corporate, SME and investment banking.
We are now offering a digital and payment hub middleware that connects the new digital capabilities with existing processes and services and helps to orchestrate and administer all integrations between core banking and other peripheral systems, and acts as a digital interface for local and international instant payments and clearing channels.
In addition to that, we have launched our new customizable CRM [customer relationship management] solution based on Microsoft Dynamics 365 CRM, which empowers banks to provide a frictionless omnichannel customer experience.
The intelligent behavior segmentation that uses machine-learning algorithms allows a bank to reach even more specific niche markets by combining different segmentation styles. And we launched an intelligent AML engine that offers capabilities to recognize suspicious activity in real time.
The rationale behind these new and ongoing projects is to deliver highly customizable and state-of-the-art customer-focused digital solutions that tap into the most powerful asset a bank has: DATA!