Technology And Innovation Malaysia Technology And Innovation In Islamic .
TECHNOLOGY AND INNOVATIONIN ISLAMIC BANKINGMALAYSIAWORLD’S ISLAMIC FINANCEMARKETPLACETECHNOLOGY AND INNOVATIONIN ISLAMIC BANKINGOver the last decade, Islamic banking has increasingly gained acceptance amongst market participants. The risingawareness of Shariah-compliant propositions has prompted more countries and entities to join the global cohort ofIslamic finance stakeholders. Across the global banking industry, with the Islamic banking sector closely involved, thecurrent technology move is paving the way towards critical changes to meet changing customer behaviour and newcompetitive banking environment.25 March 2015MALAYSIAWORLD’S ISLAMIC FINANCEMARKETPLACEwww.mifc.com1
MALAYSIATECHNOLOGY AND INNOVATIONIN ISLAMIC BANKINGWORLD’S ISLAMIC FINANCEMARKETPLACETechnology and Innovation in Islamic BankingOver the last decade, Islamic banking hasincreasingly gained acceptance amongstmarket participants. The rising awarenessof Shariah-compliant propositions hasprompted more countries and entities tojoin the global cohort of Islamic financestakeholders. The value of global Islamicbanking assets reached an estimatedUSD1.48tln as at 1H2014, having recordeda CAGR of 16.89% between 2008 and2013. The largest Islamic banking marketsare in in the Middle East and North Africa(MENA) region and Asia: MENA (ex-GCC)accounts for 42.9% of the total Islamicbanking assets worldwide; the GulfCooperation Council (GCC) on its ownhas a 38.2% share in the aggregate; Asianjurisdictions cumulatively make up the thirdlargest domicile area for Shariah-compliantbanking assets with a 13.8% share1.volatility and intensified competition.Meanwhile, banks have to cater forheightened customers’ rapid changes inbehaviour and expectations as consumersadopt digital modes of communication.Across the global banking industry, withthe Islamic banking sector closely involved,the current technology move is paving theway towards critical changes, partially fromthe pressures facing banks themselves,and by the opportunities generated byinnovative technologies. Banks need torestore growth and profitability in today’schallenging market of lower returns, higher1KFH Researchwww.mifc.com1
TECHNOLOGY AND INNOVATIONIN ISLAMIC BANKINGIn the post-crisis environment, the bankingindustries worldwide are characterised bymoderated growth, stringent capital, very stiffcompetition and closer regulation. In light ofthis, banking organisations have to reflect theirbusiness model, cost base (refer to chart below)and operations to meet bottom-line growth.At the same time, banks have to constantly beaware of the rapid change impacting customersand societies they service, amidst changes withindemographics and the global balance betweentraditional economic power and the arrival of thedigital economy. Banks can respond with newtechnologies, which are addressing consumers’behaviour and needs towards their banks whilepresenting opportunities for banks and new nonbanking entrants.IT spending by banks according to region400350USD 5077596368391115237440Eastern EuropeMENALatin AmericaAsia-PacificJapanWestern EuropeNorth %4.62%841005001352013E 2014F 2015F 2016F 2017FSource: Boston Consulting GroupToday, these converging trends have put banksat a critical path to transform to adapt to thenew environment, or compromise revenues,relevance and returns. Most banks view changeas a necessity particularly at this point and not amatter of choice. Therefore, it is critical for banksto reposition themselves to be a market leader or aloser in technology-enabled environment.It is encouraging to observe that while the latestMALAYSIAWORLD’S ISLAMIC FINANCEMARKETPLACEtechnology adoption acts as a part of the bank’schallenges, it can also help the banks with theirsolution to some teething issues. Emergingtechnologies could be used as measures totackle underlying cost and quality issues in theiroperations and at the same time enhance theirfinancial performance, address the competitivethreat from new entrants, and offer customers awhole new service suite they demand. Technologyalso enables new market entrants to target thebanking business, from established businessessuch as retailers and telecommunicationscompanies to innovative new start-ups. Meanwhile,many banks are already undergoing complextransformation initiatives to restructure andreshape their business as a result of the financialcrisis. Some are experimenting with new digitaland mobile services, predicting where the marketswill move. It is observed that those businesses thatcan effectively engage technology to sustain andreinvent their business models, possess the abilityto effectively adapt to the different dimensions ofchange.Banking Technology DriversBanks worldwide are facing an unavoidable movetowards a digital marketplace, changing customerbehaviours and the emergence of new entrantswith innovative business models. These challengesdemand broad and deep change across banks’business and operating models. Reducing costsrequires banks to manage the high level of humancapital in their businesses by automating work,or adapting to ongoing digitisation by improvingtheir digital and mobile capabilities and refiningphysical networks to work in a multi-channelsystem. New capabilities are also required tocapture growth and manage risks more effectively.Banks in the developed markets are strugglingto reach a sustainable level of profitability in theface of increasing regulatory costs, and volatilerevenues have exposed high and inflexible costwww.mifc.com2
TECHNOLOGY AND INNOVATIONIN ISLAMIC BANKINGbases. Meanwhile, emerging market banks arestruggling to maintain profitability as margins areunder pressure and investments in new capabilitiesare required to capture growth opportunities.At bank’s level, improvement and advancementmust cater the sensitivity of customer insightvia enhancement of customer experiences. Thisrequires banks to invest in analytics capabilities,empowering risk managers with better credit,enhance market and enterprise analytics toimprove risk outcomes. Critically, technologyenabled business transformation able to rebuildincome generation that banks need to achieve toreach sustainable levels of profitability.The Pillars of Banking Technology Drivers21The Four DriversConnect2Social3Data4CloudSource: AccentureSpanning connectivityAs of 2012 there are 6 billion mobile phoneconnections globally and around 2.5 billioninternet users3. Already, developed markets areseeing mobile banking grow faster than internet23Adapted from Accenture“Harnessing the technology wave in banking”, Accenture, 2013MALAYSIAWORLD’S ISLAMIC FINANCEMARKETPLACEbanking over a similar period after launch, with30 million mobile money users worldwide, insome emerging markets mobile money, pre-paidaccount services on mobile phones, now reachesmore people than traditional banking.Socially engagingThere are more than a dozen social networks withvast users today. Time spent on social media isgrowing rapidly. Most banks have built a socialpresence, some have millions of likes, but only afew have started to drive business through socialengagement. Social and digital marketing willplay an increasingly important role to engagecustomers as online peer recommendationbecomes a key influencer in customer purchasedecisions, especially for the digital nativegeneration banks.Deciphering mass dataGoing forward, the volume of digital informationwill grow. Banks already manage vast amounts ofcustomer, payments and market data, but manyare still facing the task to digest and make senseof the growing volume and rate of information.The critical issue here is getting the rightinformation from an increasing volume of date.A few are pioneering new ways to drive value fortheir businesses by building insight from their vastdata pool.Emergence of cloud technologyCloud technology is maturing and serviceofferings move up the technology stack fromdata storage and infrastructure to software,platforms and business process. More businessesare adopting cloud to increase flexibility, gain newcapabilities and reduce costs. Financial servicecompanies spending on cloud could make up toone quarter of their total spending. In addition,many companies are adopting the technology tobuild their own private or hybrid cloud bank.www.mifc.com3
MALAYSIATECHNOLOGY AND INNOVATIONIN ISLAMIC BANKINGWORLD’S ISLAMIC FINANCEMARKETPLACEIslamic banking technology todayConventional banks have intensely invested intechnologies which has transformed the way theyconduct their banking services and disseminatetheir products. They have reached a level wherecustomers are able to execute financial and nonfinancial transactions online, from any location,with the help of internet and mobile banking.In accordance to social media banking, digitalconsumers prefer doing their own research beforetaking a decision on the best suited product orservice offered by their banks. They can interactonline or set up a meeting with their relationshipmanagers via unified communications technology.In view of this all, a growing number of Islamicbanks are offering customer service throughdigital channels as well. However in somejurisdiction where these Islamic banks operate,majority of the customers still seem to preferthe brick and mortar structure than any otherchannels. While basic services like account inquiryand transfers are offered online, interactive andadvanced services are yet to be offered throughin ternate and mobile banking.Global Islamic Banking SectorOver the last decade, Islamic banking has increasingly gained acceptance amongst market participantsas rising awareness of Shariah-compliant propositions has prompted more countries and entities to jointhe global cohort of Islamic finance stakeholders. According to KFH Research database, individually thetop ten countries in terms of Islamic banking assets – namely, Saudi Arabia, Malaysia, the UAE, Kuwait,Qatar, Turkey, Bahrain, Indonesia, Bangladesh, and Pakistan – hold about 91% of the global total Islamicbanking assets (excluding Iran). This demonstrates the indubitable prominence of the Gulf and keyAsian jurisdictions in the Islamic banking sector. In recent years, Turkey has emerged as a key player inthe global Islamic finance industry, on the back of Islamic finance related initiatives implemented by thecountry’s regulatory authorities and strong local retail and corporate demand for banking products andservices that comply with the Shari’a law. The first quarter of this year has seen MENA’s Libya, Moroccoand Tunisia renewing their push for the accommodation of Islamic banking activities in their respectiveterritories, as part of their economic reinvigoration efforts. The banking industry is also growing strongin neighbouring Egypt and strengthening its foothold in other African countries as well includingDjibouti, Guinea, Kenya, Mauritania, Mauritius, Niger, Senegal, South Africa, and Sudan.Islamic Banking Assets (2008-2014F)1,8001,6001,400USD (blns)1,2001,000800600OthersAfrica (ex.North Africa)AsiaMENA FSource: Central banks, annual reports, KFHRwww.mifc.com4
MALAYSIATECHNOLOGY AND INNOVATIONIN ISLAMIC BANKINGWORLD’S ISLAMIC FINANCEMARKETPLACEGlobal Islamic Banking Assets by Country %Kuwait5.97%Malaysia9.56%Source: Central banks, annual reports, KFHRSaudi Arabia18.57%The Islamic finance industry’s growth has critically been spearheaded by innovative product developmentsthat have enabled the sector’s offerings to include a diverse range of financial products suited to meetthe evolving market needs. The once nascent segment which focused mainly on deposit-taking and retailfinancing schemes till the mid-1990s has now evolved into an integrated financial system that providesethical financial solutions across diverse product areas including banking, equity markets, securitised debtmarkets and insurance services. In recent times, the Islamic finance industry’s scope is being widened topenetrate into newer growth areas including among others: to support green, ethical and environmentallyfriendly development projects; to enable international risk management through Shariah-complianthedging instruments; to spearhead the bourgeoning international halal trade business; to fund internationalinfrastructure projects; and also to enhance liquidity management and capitalisation of Islamic financialinstitutions in line with newer regulatory requirements, for e.g., Basel III standards.Appealing features to support financial inclusion and enterpreneurship objectivesThe tremendous opportunities and potentials available in these new growth areas are critically drivingproduct innovations and developments in the global Islamic finance industry. Islamic finance playersare increasingly turning towards financial engineering and innovations to develop Shariah-compliantproducts that can cater to modern market needs. There is significant potential in Islamic microfinanceto support financial inclusion, especially in countries with a sizeable low-income population. Generally,financial inclusion is weaker in countries with lower-income and even within countries, there are urban-ruraldisparities.The essence of Islamic finance is in risk-sharing contracts, which are very supportive of entrepreneurshipand wealth creation to support SME industries. Importantly, the use of risk-sharing contracts eliminates theneed to charge riba’ and excessive penalties in case of default. Consequently, Islamic banks then have avested interest in supporting the success of business, which is especially important for SMEs. In other words,access to finance can be improved by utilising Shariah-compliant contracts. Both households and businesscan use Islamic financing to fund asset purchases or as working capital. SMEs which need working capitalfinancing may utilise various contracts such as Mudharabah and Musharakah.www.mifc.com5
TECHNOLOGY AND INNOVATIONIN ISLAMIC BANKINGBanking technology innovation to shapeIslamic bankingIn this world, the tech savvy digital consumeris ever ready to adopt anything that providesgreater convenience. Internet usage isimproving daily, giving the rise to new devicesand gadgets. This is an opportune time to tapthese technological advances and fulfil the everincreasing needs of the current digital generation.Furthermore, Islamic banks must race alongits conventional counterpart in critical areas ofbanking technology and innovation.Mix of innovation related IT investment indifferent areasChannel innovation7%Product innovation12%26%Process innovation16%21%18%Customer service andexperience innovationSales and marketinginnovationOther innovationSource: Efma-Infosys Innovation Survey 2013The omni-channel banking environmentFinancial institutions including Islamic financialinstitutions have to open up more touch points tocustomers. Immerse the customer with anytimeand anywhere banking, with almost any electronicdevice they have. Transaction volumes are boundto increase with increasing ease of access tobanking services. Funds transfers, payments, billpayments, inquiries and service requests can beinitiated online, without having to go to a branch.Customer origination, account origination andverification procedures can also be initiatedthrough online channels and can be completedthrough call canter or branches. Conventionalbank branches have achieved significantproductivity improvements by launching onlinechannels. Branch staff can divert their attentionto other critical tasks, which mandatorily needshuman intervention.MALAYSIAWORLD’S ISLAMIC FINANCEMARKETPLACEConvenience entices new customerMany banks in advanced countries have shiftedtowards online account opening and customeracquisition. Prospects can view the productsonline, and apply for products by providingnecessary identification documents. The entireprocess, including application filing, identityand address verification, signature capture andcreating new account, can be accomplished online.Islamic Banking can also adopt these techniquesto initiate customer acquisition and accountopening and online. These steps help banks inincreasing customer base and also increase theproductivity of bank employees. More importantlythis poses a very cost saving avenue in growingdeposit pools of the bank.Banking for the whole familyThis allows customers manage accounts belongingto their family members through online banking.Parents could be allowed full control of their kids’account, including inquires and transactions.Parents could also set transaction limits or evenrestrict payments to online shopping sites throughtheir kids’ account. Personal finance managementcan be extended to plan a monthly budget, andthey could even monitor the spending habits oftheir kids. While kids get to plan their finances,it gives greater control to parents as well aseducating their child on financial discipline.The social media webThe younger generation of digital consumerswould like to interact with their friends andseek their opinion on products. They might alsowant to share their banking experiences whichmight be useful to others. Such information andrecommendations act as indirect marketing forbanks. Banks can leverage social media for viralmarketing and increase their reach. While makingsecure banking services available through socialmedia portals, banks also need to ensure thatnecessary safety measures are put in place forprotecting the privacy of customers.www.mifc.com6
MALAYSIATECHNOLOGY AND INNOVATIONIN ISLAMIC BANKINGInteractive customer experienceVisual representation of calculations are alwaysappealing to customers. A variety of toolsincluding charts and graphical illustrations can beused to explain and do a comprehensive productcomparison through internet banking and mobilebanking. These tools can be designed to takeinputs from the customer and provide illustrationsin a way that is preferred by the customers, thusgiving an interactive experience and enhancingself service capability.Digesting data for analyticsAn avenue that conventional banks are adoptingnow is to gauge customer experience levelthrough customer analytics. The ability to analysecustomers’ data in different dimensions, to deriveintelligent actionable insights, is the next wavein banking analytics. Consider a customer, whomay be doing frequent high value transactionsthrough mobile banking can be protected usingadditional authentication measures for performingWORLD’S ISLAMIC FINANCEMARKETPLACEthese transactions and can be alerted over ane-Mail as soon as the transaction occurs. Similarly,a customer who generally uses internet bankingfor inquiry purposes could be offered a discountor reward points for paying bills online. Analyticsis not only vital to service customers but to alsoeffectively develop a product or service suitewhich can be sold to the customer.Online customer servicingThe whole online banking experience involvingself-service channels will take us to a pointwhere the customers feel the need for personalassistance. It could be for discussions about anew product offering, or guidance on initiatingsome transactions online, or even tips on savingsoptions. Remote advisory services, wherecustomers can interact with their relationshipmanagers or customer care representatives online,would go a long way in creating a loyal customerbase and enhance customer experience.While considering such innovations, banks must keep the “4C”s in mind – 4 key themes which areimportant for the success of an online banking portal4:Community: Bring like-minded customers andporspects together under a common platform,and allow them to interact online. Create onlinecommunities and discussion forums.Communication: Allow secure interactionamongst customers and easy access to bank’sstaff members. Effectively communicate with thecustomers about new products and services andIslamic banking concepts. Enable mass usage ofcontent created by online communities.Banking technologycore “C”sCollaboration: Enable customers and prospectsto collaborate with the bank, and co-createproducts and services that suit their needs.Online communities and social media wouldenable collaboration and co-creation.Commerce: Create an ecosystem where traders,suppliers and consumers can interact andcollaborate and have a differentiatede-commerce experience.Source: Finacle4Infosys, “Thought paper”, 2012www.mifc.com7
TECHNOLOGY AND INNOVATIONIN ISLAMIC BANKINGBeyond the conventional risks, the acquisitionand implementation of an Islamic banking systempresents a number of unique challenges that banksneed to deal with as part of the procurement.A fundamental common ground here would beaddressing special intricacies of products andprocesses of Islamic financial products whichcan be more delicate than conventional financialproducts as a result of the use of sale contracts,leasing arrangements, agency and profit-sharingarrangements and other structures in place ofstraightforward interest-bearing loans, bankaccounts and other conventional banking products(such as credit cards and insurance). It is achallenge for a bank to procure an Islamic bankingsystem with reasonable certainty that the systemwill comply, ‘out-of-the-box’, with their respectiveShariah resolutions. In view of Shariah compliance,Islamic banks have to ensure that vendors ofIslamic banking systems fully understand thecomplexity of the products that the bankingsystem needs to support and to avoid disputes asto whether or not the need to support the relevantproduct was contemplated by both parties as partof the system contract.Islamic banks like any other business entityhave continuously invested in their business. Inline with its growth agenda, Islamic banks havenot only innovated the technological aspect oftheir operations but also products and servicesofferings. The Islamic banks have to contendwith stiff competition with their conventionalcounterparts which have increased the bar ofproduct innovation. These products cater toevery aspect of the banking function either forthe bank’s own use i.e. treasury functions orproducts offered to their customers. Internetand mobile penetration continues to rise, and sodoes banking on these channels. As the digitalgeneration constitutes a major portion of theonline banking population, it is essential for banksto provide a differentiated experience throughonline banking portals and mobile apps. Today’sdigital generation need rich and personalizedonline banking experiences that is safe and secure.5KFH ResearchMALAYSIAWORLD’S ISLAMIC FINANCEMARKETPLACEInnovative customer experience offered throughmultiple channels and devices is one of the criticalsuccess factors for the uptake of new generationportals.The story is no different for Islamic banks. Overthe last decade, Islamic banking has increasinglygained acceptance amongst market participantsas rising awareness of Shariah-compliantpropositions has prompted more countries andentities to join the global cohort of Islamic financestakeholders. The Islamic banking sector, whichcomprises the majority of global Islamic financeassets, is forecasted to amount to more thanUSD1.7bln by end-20145. In view of supportiveeconomic, regulatory and demographic factors,Islamic banking is set to gradually take the leadas the main banking sector in top Islamic financejurisdictions such as Saudi Arabia, Malaysia andKuwait; the sector is also making continuedinroads in other countries including Qatar, theUAE, Bahrain, Pakistan, Indonesia, Bangladesh,and Brunei. These jurisdictions are expected toreceive significant boost to their Islamic bankingmandates on account of various Islamic financeregulator-driven developmental plans. Islamicbanks can leverage the capabilities of online mediaand other technological innovations to enticethe digital generation and create a pool of loyalcustomers, who can be the banks’ ambassadors.www.mifc.com8
TECHNOLOGY AND INNOVATIONIN ISLAMIC BANKINGMALAYSIAWORLD’S ISLAMIC FINANCEMARKETPLACEDisclaimerThe copyright and any other rights in the selection, coordination, arrangement and enhancement of the information in this publication are owned byBank Negara Malaysia. No part of this publication may be modified, reproduced, published or transmitted without prior permission in writing from BankNegara Malaysia and the relevant copyright owner.Although every effort has been made to check the accuracy and completeness of this publication, Bank Negara Malaysia accepts no responsibility orliability for errors or omissions, if any. The information published here is only up-to-date at the time of printing, and is not exhaustive and may be updatedfrom time to time on the website: www.mifc.com. Bank Negara Malaysia appreciates any feedback or suggestion for improvement.Copyright 2015 Bank Negara Malaysia.The MIFC logo is a registered trade mark in Malaysia.All rights reserved.www.mifc.com9
stakeholders. The value of global Islamic banking assets reached an estimated USD1.48tln as at 1H2014, having recorded a CAGR of 16.89% between 2008 and 2013. The largest Islamic banking markets are in in the Middle East and North Africa (MENA) region and Asia: MENA (ex-GCC) accounts for 42.9% of the total Islamic banking assets worldwide; the Gulf
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Basic Concepts of Innovation and Innovation Mgmt M.Lorenzo 2010-03-253 Introduction What is Innovation? Innovation is typically understood as the introduction of something new and useful Innovation is
