WEBINAR 6

Digitalization of banking: lessons learned from 2020

Organised by: In Strategic Partnership with:

Whitepaper10 NOVEMBER 2020

Session Partner:

A G E N DA Looking back on 2020, the year has been filled with major disruptions affecting Islamic banks, as the global impact of the coronavirus continues to be felt. When Covid-19 first appeared, there was a near-worldwide lockdown that drastically curtailed economic activity. To address the impact of this shock, governments and central banks provided stimulus to reduce the severity of the economic contraction while also providing a lifeline to banks in the form of liquidity facilities and allowing them to draw on the countercyclical buffers built up in better times. Coinciding with this, energy markets were also hit hard as demand declined severely due to the lockdown.

Even as some counties have contained the coronavirus and been able to open up, the outlook for oil demand remains uncertain. These shocks have hit Islamic banks due to their connection to the real economy as customers postponed payments under government-instituted loan deferment programs.

Amid all the challenges facing Islamic banks, there were some bright areas where growth was occurring including in digital finance, as the world started to embrace the work-from-home model, and in capital markets with multilaterals (Islamic Development Bank), sovereigns (Indonesia) and corporate issuers in Malaysia, Indonesia, the UAE and Saudi Arabia issuing into strong market demand. Throughout 2020, the key phrase to define what was occurring was ‘acceleration’, particularly in digital banking. As we look back, we need to ensure that we learn key lessons from this year, to increase our resilience against future crises and pandemics.

M O D E R ATO RAXEL THRELFALLEditor-at-Large, Reuters

S E S S I O N PA R T I C I PA N T SADEL AL MAJEDVice Chairman & CEO, Boubyan Bank

AYMAN AMIN SEJINYCEO, Islamic Corporation for the Development of the Private Sector - ICD

ARSALAAN AHMED (OZ)CEO, HSBC Amanah

PHILIP KINGGlobal Head of Retail Banking, Abu Dhabi Islamic Bank

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S U M M A R Y P O I N T S• Covid-19 has unlocked the banking sector’s long-term

potential, spurring transformative innovation, and accelerating internal digitalization efforts.

• Despite the difficulties that economies and consumers suffered in Q2 of 2020 due to the Covid-19 pandemic, Islamic banks delivered solid financial performance in Q3 supported by a rebound in economic activity and positive client sentiment.

• The Islamic Corporation for the Development of the Private Sector’s (ICD) is currently looking at introducing investment opportunities across its 54 member countries through its new online platform, the Bridge. The platform connects its 119 member banks to facilitate the sharing of knowledge, technologies, and experiences, and provide them access to shariah-compliant investments, advisory, sukuk, financing, and other deals.

• Many positives have come out from the Covid-19 crisis. HSBC, for example, has enhanced its investment solutions by launching a world-first AI-powered investment equity index, and has launched an omni channel collections service to support corporate businesses and SMEs in their transition from physical to online sales. ADIB has also launched remote sales capabilities that enabled customers to interact remotely with staff members and complete financial transactions.

• Regulators have been at the forefront of encouraging Islamic finance market participants to innovate solutions that meet the needs of customers. Throughout the global Islamic economy, governments are granting digital banking licenses, introducing sandboxes, and providing a growth environment for challenger banks to spur competition.

• As interest rates continue to fall, it’s going to be more difficult for challenger banks to break even financially. At the same time, Covid-19 has woken up traditional banks and offered them a second lifeline to accelerate their digital agendas.

• Nevertheless, challenger banks could launch specific propositions that undermine traditional banks. Therefore, banks need to keep an eye at all the different digital players that are around, be it big tech, small tech, or challenger banks, and move in a very agile way to compete.

• The Islamic finance industry needs to start focusing on areas where it naturally has a benefit over conventional banking. Such areas include the capital that requires no financial return in the form of waqf, sadaqah or zakat, and the different ways of bringing that capital into the financial system to support customers as well as the progress of communities and society.

• Overall, the last 12 months have seen a tremendous change in the capabilities of Islamic banks. Staff can now work from home. Customers can interact remotely with the bank on sales transactions, and they can buy products online.

W E B I N A R D I S C U S S I O N

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The last 12 months have been highly disruptive for Islamic financial institutions given the sector’s exposure to the real economy, small and medium enterprises, micro finance, and retail lending. However, the attention is quickly shifting to the opportunity that the Covid-19-related disruption has provided in terms of diversification, transformation, digitalization, and financial technology.

For Boubyan Bank, a shariah-compliant financial institution in Kuwait, the Covid-19 crisis presented several challenges in relation to the bank’s digitally readiness. Adel Al Majed, Vice-Chairman and Chief Executive Officer of Boubyan Bank said that while the bank was advancing, they were more focused on the customer’s interaction and were ready on delivery channels.

When there was a lockdown, the staff could not go to the call centre. The bank needed to get permission and they could only get it for a few staff. As a result, service at this channel was slow, and customers called frequently and complained.

“Everybody was at home, online, using credit cards, and calling the call centre. When we tried to deal with this, we were faced with another problem. All the banks and telecom companies were trying to work from home so there weren’t enough laptops in Kuwait. These are simple things which we thought we were ready for. We never thought we would need to be fully digital from within the bank, or that all our staff would have to work from home. We were caught off guard,” said Al Majed.

At the same time, the Government of Kuwait was pushing banks towards digital transactions and completely stopped accepting cash for bill payments. Customers had no option but to shift to online payments.

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D I G I TA L R E A D I N E S SBoubyan managed to operate a digital banking model for about a week but could not keep it up because some companies only had cash and some customers were not able to do online transfers; they either needed to make cash transfers to their unbanked relatives or they needed cash themselves. The bank had to open a few branches to deal with these issues, and the regulators cooperated by quickly approving these requests, according to Al Majed.

Abu Dhabi Islamic Bank (ADIB) went through a similar experience. Philip King, Global Head of Retail Banking at ADIB, said that the bank had to suddenly move from a situation where staff were working in well-equipped offices and dealt with calls and customers, to a socially distanced environment, with a maximum 30 percent capacity, or remote working. The bank quickly adapted to this situation and is considering continuing with this flexible working model.

Despite the difficulties that economies and consumers suffered in Q2 of 2020, ADIB delivered solid financial performance in Q3 supported by a rebound in economic activity. The bank’s net profits reached AED 533.8 million in Q3 2020, an increase of 68 percent compared to Q2 2020 and 98 percent compared to Q1 2020, driven by strong revenues and cost efficiencies.

“Our financials were completely different in Q3 versus Q2 so let’s hope that the new coronavirus vaccine [currently being developed by Pfizer Inc. and BioNTech SE] will position the world economy and affected industries in a positive way going forward,” said King.

Ayman Amin Sejiny, chief executive officer of the Islamic Corporation for the Development of the Private Sector (ICD), said that the entity has been busy helping member countries advance financial inclusion. ICD has a network of 119 financial institutions, more than half in which the corporation is a shareholder. Because it services many fragile states where bank branches are far from their clientele base, ICD has been looking at ways to introduce biometric KYC in those countries.

“We needed to get them comfortable with the new way of doing business globally. On the other hand, a lot of our member countries do not have large banks with a long history of hundreds of years or IT luggage that they need to carry with them. It was much easier for these countries to start implementing the changes and execute them faster,” explained Sejiny.

Speaking about ICD’s new initiative, The Bridge, he said that the online platform connects their 119 financial institution members to facilitate sharing of knowledge, ideas, technologies, and experiences among this community. Through the platform, they can access shariah-compliant investments, business opportunities, advisory, sukuk, financing, and other deals.

“In Africa alone we have 42 banks. These banks can start introducing clients to each other and they’ve done a great job, especially between Tunisia and Morocco as they are geographically connected. In Sri Lanka, some of the banks who were four hours away from their clients have been able to do financial inclusion and provide services at their client’s location by having a digital branch,” said Sejiny.

ICD is now looking at introducing investment opportunities through its broad geographic platform that covers 54 member countries. These countries have a lot of investment funds, but most of them are not introduced to each other, and the people who live in these countries are not aware of these funds.

“For example, if I’m in Saudi Arabia and would like to invest in Indonesia, most likely I won’t find a fund that I can access right away. This is what we want to help with. We want to assist countries through their local banks to be able to register those investment funds or get them approved in the capital market authorities, and do the right KYC or due diligence of their clients to start having a healthy exchange of investment funds,” explained Sejiny.

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E N H A N C E D S O L U T I O N SWhile there have been many setbacks because of Covid-19, the Islamic banking sector should keep an eye on the progress that has been made, the experts advised.

For HSBC Amanah, one of the positives has been a re-evaluation of how they serviced customers. The bank examined ways in which customers would not need to visit branches, but which also made them feel secure in the transactions they were doing.

“That’s when we had to introduce new things around biometrics such as voice – something we didn’t really need before. At the same time, we started to see an evolution of needs as we spoke to our customers increasingly through zoom. People had family members in other countries, so we needed to find methods to transfer their money a lot quicker than we historically did. That’s why we enhanced our international transfers,” said Arsalaan Ahmed, chief executive officer of HSBC Amanah.

In response to customer demand, HSBC also enhanced its investment solutions by launching a world-first AI-powered investment equity index in May, which scours non-traditional data sources like tweets.

Additionally, the bank launched Omni Channel to support corporate businesses and SMEs in their transition from physical to online sales. The service streamlines the way businesses collect payments by providing omni channel connections. One of the companies that benefitted from this solution and reinvented its retail experience was Sports Direct, the UK’s largest sporting goods retailer by revenue, which currently operates over 30 retail stores in Malaysia.

For ADIB, the sudden need to adapt changed the bank’s approach to digitalization. According to King, the bank was very much a “build organisation” but has now become both “build and buy”. Since the start of Covid-19, ADIB’s interaction with fintechs has skyrocketed, and because of its ability to engage with such firms, the bank managed to launch remote sales capabilities within three weeks. This enabled customers to interact remotely with staff members and complete financial transactions as if they were doing so face to face. Moreover, the bank launched a chatbot that allows it to relieve calls to the call centre when capacity is under pressure, and that can respond in Emirati dialect, classical Arabic, or English.

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C H A L L E N G E R B A N K SAccording to Ahmed, regulators have been at the forefront of encouraging market participants to innovate banking solutions that meet the needs of customers, whether banked, underbanked, or unbanked. Throughout the global Islamic economy, governments are granting digital banking licenses, introducing sandboxes, and providing a growth environment for challenger banks to spur competition.

Commenting on challenger banks, Ahmed said that such banks typically start up with low capital, offer a great customer experience and focus on liabilities. This worked well when interest rates were high. As interest rates continue to fall, it is going to be more challenging for these entities to break even financially. At the same time, Covid-19 has woken up banks and offered them a second lifeline to accelerate their digital agendas.

Al Majed believes that traditional banks are quickly catching up with the digital revolution as they continue to develop their automated channels. Moreover, most banks nowadays offer their services digitally through their apps and digital platforms. Therefore, unless challenger banks offer something different from what traditional banks offer through their digital channels, they won’t be a threat.

King similarly suggested that in the current low-interest rate environment, if a bank is a liability-only player, they’re going to struggle. Nevertheless, the banking sector needs to keep an eye on challenger banks as they could launch specific propositions that undermine traditional banks. For example, there are opportunities for specialist players in the areas of SMEs, financing and assets, or the technology that drives asset decisions.

Essentially, banking is about trust, and the industry needs to understand how customers feel about financing with digital banks or bigtech firms such as Google, Amazon, and Facebook.

“We’ve been quite happy with our customer response to the Apple Pay product. Who would have thought that Apple would enter the payment space many years ago? Ultimately, we need to keep an eye at all the different digital players that are around, be it big tech, small tech, or challenger banks, and move in a very agile way to compete,” said King.

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P R E PA R I N G F O R T H E N E X T P H A S EAs Islamic banks emerge from the Covid-19 crisis, they are much better prepared for the future. At ADIB, 50 percent of new accounts are being opened through digital channels, 75 percent of customers are using digital channels, 97 percent of fund transfers are digital, and 80 percent of corporate transactions are being done online. The bank will continue to focus on the retail side being a predominately retail-driven financial institution, where up to 70 percent of revenues are from retail banking.

“The last 12 months have seen a tremendous change in our capabilities. Our staff can now work from home. Customers can interact remotely on sales transactions whilst getting the same wealth management, and they can buy products online. Just the fact that we’re now engaging with more fintechs than we’ve ever thought means that more is coming. We’re not sitting on our laurels. We are digitalizing internally, and we’re digitally enabled for customers. We also have many technological installations that have made our bank a positive environment to work in,” explained King.

Looking ahead, the Islamic finance industry needs to focus on areas where it naturally has a benefit over conventional banking. Such areas include the capital that requires no financial return in the form of waqf, sadaqah or zakat, and the different ways of bringing that capital into the financial system to support customers as well as the progress of communities and society. Ahmed highlighted that this segment of

Islamic finance has never been looked at properly, but with the advent of digital communities, the industry can connect these areas more quickly.

The Islamic Development Bank estimates the global value of zakat to be between $232 billion and $560 billion annually. “The numbers are eye watering. If you were to bring those funds in an appropriate fashion that is shariah compliant into the financial system – to support the progress of communities and society – it would be a big move and a wonderful challenge to crack,” said Ahmed.

Meanwhile, Boubyan has enhanced its retail banking and is looking to expand its footprint outside Kuwait, by innovating new products and services that are not available in those markets.

“Technology is easy to buy today and you can create a bank on the cloud in three months. The challenge is how to come up with something that entices other bank customers, whether in your country or abroad, to come to you. Whoever cracks this will be a winner,” said Al Majed.

Finally, on the topic of remote work, he said that it has served its purpose during the Covid-19 lockdowns and would not last. He expects the future to be a combination of digital and physical banking as there will always be a need for human interaction, where a customer can visit the bank, have a coffee, and meet with the staff.

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