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Islamic Banking in the Digital Age FEATURE FOCUS
Islamic finance has experienced a meteoric rise in popularity when compared to conventional systems, but can stepping into new digital channels help it go that extra mile?
Alex Hamilton Senior Reporter
W
hether Muslim or non-Muslim, consumers demand a certain level of service from their bank. Digital initiatives have been a driving force across the globe for inclusive, customer-first technology. Where do digital banking and Islamic finance meet? Those looking from the outside might expect that there is little to no innovation, and that Shari’ah compliance is a by-word for conservatism. In fact, a lack of inhibiting legacy infrastructure can make Islamic banks extremely fertile ground for fresh digital initiatives.
From a retail perspective, enrolment in online banking, mobile banking, online bill pay, person-to-person payments and account-to-account transfers are continuously found to have a positive effect on digital engagement, attrition and transactions. A strong digital strategy has also been found to support cross sales; mobile banking customers hold a higher level of products, while ATM and ACH transactions in the three months after mobile banking enrolment also increase exponentially.
A golden resurgence?
Innovation lies at the heart of Islamic finance. The modern cheque – though probably not a great analogy for digital change – was originally based on an Arabic instrument, namely a written vow to pay for goods on delivery. During the Islamic Golden Age, a businessman could cash a cheque in China drawn up by his bank manager in Baghdad. Arguably, the first modern experiment with Islamic banking occurred in Egypt in 1963, with the establishment of a new savings bank based on profit sharing by Ahmad El-Najjaar. Four years after the bank’s foundation in the town of Mit Ghamar, eight more had joined its ranks. The Islamic sector has seen popularity rise in recent times.
Globally, Islamic banking assets were estimated at around 17% in 2015 according to TheCityUK research, a rise of more than 11% from 2006. Islamic funds and sukuk led year-on-year growth with 14% and 11% respectively. Figures from Tufts University show that Islamic banks’ capital has grown from $200 billion in 2000 to close to $3 trillion in 2016.
Yet, the emergence of digital banking as a priority for Islamic banks comes amidst a slowdown in the issuance of Islamic bonds or sukuk. In 2016, Standard & Poor predicted that the global sukuk market will reach around $50 billion or $55 billion
in the next year or so, compared with $63.5 billion in 2015 and $116.4 billion in 2014. The research firm reckons that the complexity of sukuk issuance will weigh on market activity.
Islamic finance customers have become more affluent and are taking advantage of tourism, fashion, health and beauty. They’re also armed with the latest in tech gadgetry. The GCC has a youthful population of almost 60 million. It’s highly mobile and has better access to global media and technology than ever before. According to EY, mobile-banking usage in the UAE stands at 34%, followed by 27% in Kuwait, 19% in Qatar and 15% in Saudi Arabia.
New model payments
Despite this relatively high penetration of smartphones in the GCC, a substantial amount of transactions are still made on desktop computers, ATMs and in bank branches. In its 2016 report, EY found that 38% percent of conventional banking customers used mobile banking, compared with 26% for Islamic- banking customers and 36% for hybrid-banking customers. According to Accenture, of the more than $50 billion spent on fintech globally, only 1% has come from the Middle East and Africa.
That hasn’t stopped Islamic banks from trying to encourage their mobile-first users. October 2017 saw Mashreq Bank, the oldest privately-owned bank in the UAE, launch a digital banking subsidiary, Mashreq Neo. The digital subsidiary will provide credit cards, debit cards, current accounts, personal loans, remittances, global stock trading, gold trading, investment and deposits. Users will also be able to perform free cash withdrawals at all of the participating ATMs.
“We have entered a new era in the digitisation of retail banking,” said Abdul Aziz Al Ghurair, CEO of Mashreq Bank, on the rollout.
www.ibsintelligence.com | © IBS Intelligence 2017
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