2020 was mostly spent managing COVID-19. Almost all countries had schemes announced by their respective central banks which entailed a payment holiday or relaxation of some sort. This often required a change of systems and processes with Islamic banks closely working with their respective Shariah boards. We also witnessed that some policies announced by central banks were beneficial for Islamic banking clients. For example, profit accrued during the payment holiday period could not be capitalized on Islamic products which in some markets were not applicable for conventional banking clients.
Review of 2020
Business direction moved from growth to portfolio protection and stabilization. The credit underwriting criteria were tightened due to business slowdown with a greater focus on hard-hit sectors like hospitality, airline, etc. This was the time for banks, particularly Islamic banks, to demonstrate their true values by engaging with clients to ease the burden in settling their equated monthly installments for card, personal finance, auto or home finance.
Protecting the safety and health of bank staff and clients was also of immense importance. A big salute to the frontline teams working in branches, customer service, sales, collections and such who continued to service clients in a very challenging environment.
As we all glided into the new normal, what stood out was the accelerated behavioral shift toward digital. What probably would have been achieved in the next two to three years happened in six months. Banks which were already on the road to digitization had a relatively easy job compared to those who were still strategizing. Banks introduced new digital services ranging from remote account opening for credit cards and deposits to conducting webinars with their clients selling complex products like mutual funds or Takaful.
From an industry perspective, Islamic banking continues to grow with markets like Malaysia, Pakistan, the UAE, Bangladesh, Indonesia, etc, on a growth trajectory. In Pakistan, the government announced a roadmap to increase the share of Islamic banking from 15% to 25% by 2023 under the National Financial Inclusion Strategy.
In Malaysia, which spearheads the growth of Islamic finance, we saw that banks are managing their consumer financing portfolios well as a result of prudent underwriting practices — thanks to the regulatory guidelines for responsible financing. Also, Islamic banking subsidiaries keep their cost income ratio manageable as they leverage on their parent’s infrastructure. With greater acceptance of Islamic products and the ‘Islamic first’ approach by some large banks, we will continue to see growth in Islamic deposits and financing.
Preview of 2021
As we embark on 2021, it is noticeable that the landscape for retail banks has evolved significantly due to the low interest rate regime and digitization of key financial services. The emerging themes for Islamic banks in 2021 are likely to be:
1. Shariah governance standards
The growth in Islamic banking also brings greater demand from central banks to strengthen the governance culture and move toward greater standardization and transparency. For example, in the UAE we have seen an increased rollout of new regulations covering the operating model of Islamic banks, product structures and governance requirements. It is also expected that going forward we will see Shariah boards being more accommodative toward product structures and processes to accommodate the evolving consumer needs fueled by the recent pandemic.
2. Islamic fintech
Fintechs will continue to challenge traditional banks which will have to choose between the ‘compete’ vs. ‘collaborate’ approach. Many banks will oscillate toward value-adding partnerships with fintechs, with the objective of reducing operational costs which will lead to competitive product offerings reaching a wider target market.
With digital penetration on the rise and markets like Malaysia touching nearly 60% penetration of the total adult population in July 2020, the trend of minimal face-to-face interaction will continue as it has become the new norm. Client journeys will have to be redrawn and Islamic fintechs will have a great opportunity to play a leading role in this space.
3. Socially responsible finance
There is a natural link between social responsibility and Islamic finance as Shariah puts an emphasis on maintaining a balance between wealth creation and wealth circulation. The focus on ‘equitable distribution of wealth’ and promoting the doctrine of ‘Prevent harm and Do good’ is deeply rooted as part of Maqasid Shariah (the objectives of Shariah). With this backdrop, Islamic banks should take the lead and develop products around concepts of endowment (Waqf), donation (Sadaqah) and almsgiving (Zakat). This approach will result in the introduction of new Islamic products which will provide a competitive edge.
2020 has taught us many lessons, the most important being to create a financial system which delivers a positive social impact. This presents an opportunity for Islamic banks to drive financial inclusion and contribute to creating a more sustainable and equitable financial system. Also, the accelerated need for digital solutions presents an opportunity for Islamic banks to redefine client journeys and develop more customer-oriented value propositions.