Fintech was the talk of the town in 2016 – what were some of the major technological trends in the Islamic finance universe over the past year, and what trends do you foresee will dominate this year?
Over the last few years, changing customer behaviors and the emergence of new entrants with innovative business models have put financial institutions in general at a critical path to transform to adapt to the new environment, or compromise customers and revenues. They viewed change as a necessity, and not a matter of choice, to address the competitive threat from new entrants and offer their customers the new services they demand.
In 2016, it was mainly shaped by the growing demand for mobility, social services and intelligent analytics. By improving digital capabilities, financial institutions wanted to develop the ability to predict where the market will move by engaging customers, and thus formulate and present tailor-made services to them anytime and anywhere.
We’ve also seen the outspread of cloud technology – as this technology gains the regulatory support, more financial institutions will broaden their adoption to increase flexibility, gain new capabilities and reduce costs.
In 2017, banking technology innovations I spoke about earlier will accelerate to shape the global financial sector, including the Islamic one. Nowadays, the tech-savvy digital customer is ever ready to adopt anything that provides greater convenience. Transaction volumes are bound to increase with increasing demand for anytime and anywhere banking services. This is an opportune time to tap into the technological advances of mobility and fulfill the ever-increasing needs of the current digital generation. In my opinion, all financial institutions need the right technology partners to help them in this race, and to advance in critical areas of banking technology and innovation.
More specific in the Islamic finance universe, mobility and related technologies are playing an important role to empower financial inclusion. The tremendous opportunities and potential available in this area, and more specifically in Islamic microfinance, are critically driving product innovation and development. Islamic financial institutions are increasingly turning toward specialized technology vendors that develop Shariah compliant software solutions to address modern market needs.
How are data analytics and artificial intelligence redefining banking? Are Islamic banks well positioned to leverage on this technology?
Today, financial institutions have that rare opportunity to reinvent themselves again, with data and intelligent analytics powered by artificial intelligence (AI) and big data. Every single major decision to understand customer behavior, drive revenue, control costs, or mitigate risks can be infused with data and analytics. The story is no different for Islamic banks. I think the advanced analytics and the usage of artificial intelligence present an opportunity to redefine the playing field. Some Islamic financial institutions have already seized that opportunity to truly differentiate themselves. We, at Path Solutions, are building analytics based on artificial intelligence and data science that provide capabilities to improve risk assessment, predict customer behavior and drive revenues.
While the emergence of big data analytics is most welcomed in developing customized intelligent solutions for both financial institutions and customers, there are serious concerns about data privacy and security – how can financial institutions circumvent these concerns?
For sure, emerging big data analytics has caused serious privacy and security concerns, because for it to be effective, it should depend fully on collecting a large amount of data from all different sources about a specific person. The problem is larger than a single company or a single segment. There are many initiatives around the world to address the privacy of data such as ‘the right to be forgotten’ and many others. Meanwhile, it will continue to be an important issue across industries and it must be properly addressed.
On the security issue, many technologies such as encryption and adequate access control mechanisms, digital signatures using asymmetric encryption and regular audits are key in protecting the data and securing it. Security is less complicated to tackle than confidentiality and many companies are doing a great job achieving a relatively secure system. That said, going forward, the volume of digital information continues to grow exponentially and the access to this information is from anywhere, and both confidentiality and security will continue to be top priorities for financial institutions.
Financial institutions are actively seeking to integrate artificial intelligence to optimize operational efficiency – which brings us to the elephant in the room: the threat to employment rates. What’s your view on that? And how best should the Islamic financial industry tread this delicate line between efficiency and maintaining the human capital pool?
AI already has huge implications in our lives that many people don’t realize, and we will continue to see it in the coming years, penetrating almost every part of our lives from driverless cars to robotics doing a large percentage of the tasks that humans currently perform and so on.
I believe, during the transition which will take years, AI will have a negative impact on employment, but I also believe that it will allow all humans to work less and focus on more sophisticated tasks, and as a result enjoy a higher quality of life. I am very positive of the future of humanity with AI.
When it comes to Islamic finance, just like any industry, the impact is huge, from intelligent analytics that allows the understanding of customer behavior, to intelligent service that customizes itself, to smarter automated interactions with customers any time of day. The services and interactions will have higher quality and more consistency and predictability.
When discussing about financial technology, the general assumption is that Islamic financial institutions lag behind their conventional peers in leading the digital or fintech front; does that claim hold water and if so, why? If not, why?
I don’t believe that! I believe it is an institution and market-driven and not segment-driven. What this means is that in markets where customers demand these sophisticated services, conventional and Islamic financial institutions both must react or they will be outperformed. In many of these markets, I know of Islamic financial institutions that have more advanced digital strategy than their conventional counterparts.
On the business level, the Islamic finance industry’s growth has critically been spearheaded by innovative product developments that have enabled the sector to offer a diverse range of Shariah compliant financial products suited to meet the evolving financial needs while accommodating the community’s differences. The once nascent segment which focused mainly on deposit-taking and retail financing schemes until the mid-1990s has now evolved into an integrated financial system that provides Shariah-based financial solutions across diverse product areas including banking, equity markets, securitized debt markets, Sukuk issuance and insurance services. Lately, the Islamic finance industry’s scope is being widened to penetrate into newer growth areas including, among others, to support global financial inclusion and socially-ethical and environment-friendly development projects; to enable international risk management through Shariah compliant hedging instruments; and to spearhead the burgeoning international Halal trade business. All of the aforementioned business growth and innovations will be empowered by the digital transformation which will expedite achieving these objectives.
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