Digital banking will speed up the reach of Shariah-based financial products and services. It's only a question of how soon. Image Credit: Gulf News Archive

2020 was mostly spent in managing COVID-19. Almost all countries had schemes announced by their 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 was not applicable for conventional banking clients.

Business direction moved from growth to portfolio protection and stabilization. The credit underwriting criteria was tightened due to the slowdown, with greater focus on hard hit sectors like hospitality, airlines, 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 monthly EMIs 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 frontline teams working in branches, customer service, sales and collections, who continued to service the clients in a very challenging environment.

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Ahead in digital game

As we all glided into the new normal, what stood out was the accelerated behavioural shift towards digital. What probably would have been achieved in the next two- to three years happened in six months. Banks who were already on the road to digitization had a relatively easy job as 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 products like mutual funds or takaful.

Growth tempo

From an industry perspective, Islamic banking continues to grow with markets like Malaysia, Pakistan, the UAE, Bangladesh and Indonesia on a growth trajectory. In Pakistan, the government announced a roadmap to increase the share of Islamic banking from 15 per cent to 25 per cent 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. Islamic banking subsidiaries also 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 the growth in Islamic deposits and financing.

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:

Shariah governance

The growth in Islamic banking also brings greater demands from central banks to strengthen the governance culture and move towards greater standardization and transparency. In UAE, we have seen increased rollout of new regulations covering the operating model of Islamic banks, product structures, and governance requirements.

It is also expected that we will see Shariah boards being more accommodative towards product structures and processes to accommodate the evolving consumer needs fuelled by the pandemic.

Islamic fintech

Fintechs will continue to challenge traditional banks who will have to choose between ‘compete’ vs ‘collaborate’ approach. Many banks will oscillate towards value-adding partnerships with fintechs, with the objective of reducing operational costs and which will lead to competitive product offerings reaching to a wider target market.

With Malaysia and Indonesia already active in the fintech space, the Middle East is catching up fast. Fintech Bay (Bahrain), DIFC Fintech Hive (Dubai) and ADGM (Abu Dhabi) are creating an ecosystem for entrepreneurs and investors offering incubators, co-working spaces, mentoring, access to investors and user-friendly regulations.

The UAE was the fourth largest market in terms of the number of Islamic fintech start-ups globally. Similarly, Bahrain witnessed the launch of the first fully licensed crypto asset exchange called RAIN. It became operational in mid-2019 and was also the first Sharia-compliant crypto exchange.

With digital penetration on the rise and markets like Malaysia touching nearly 60 per cent 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 have a great opportunity to play a leading role.

Socially responsible finance

There is a natural link between social responsibility and Islamic finance as Shariah puts emphasis to maintain 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 alms giving (zakat). This approach will result in introducing new Islamic products and which will provide a competitive edge.

2020 has taught us many lessons, the most important being to create a financial system that delivers a positive social impact. This presents an opportunity for Islamic banks to drive financial inclusion and contribute to create a more sustainable and equitable financial system.

In addition, the accelerated need for digital solutions presents the opportunity for Islamic banks to redefine client journeys and develop more customer oriented value propositions.

- Ali Allawala is Global Head, Islamic Retail Banking at Standard Chartered Bank.