Roadmap to Islamic Banking Digital Transformation


Much like their conventional counterparts, Islamic financial institutions are rapidly embracing digital transformation to augment their business operations and appeal to the new generation of tech-savvy customers.

Islamic banks are moving towards adapting their product offerings to be more accessible on multiple devices across different platforms. The industry is still considered quite young but their digitization efforts are catching up fast.

Positive growth over the past several years generates an optimistic future for the Islamic finance industry. Now is the best time for Islamic banks to make strategic choices and address operational fundamentals to be in a stronger position in order to capture untapped market opportunities and master the changing dynamics of their industry.

DDCAP Group™ reported last year that Malaysia’s market share of Islamic banking assets to total banking system assets reached 34.2%. Islamic financing fared even better reaching 41% of total loans/financing of the banking sector, with total Islamic deposits and investment accounts to total deposits not far behind at 38.9%.

This means that the country’s Islamic banking and Takaful industry are on a steady march towards the stated goal of the government to achieve parity with the conventional sector in terms of 50% market share of the total banking sector by 2030.

Diagram 1: Growth of Islamic Banking and Takaful in 2020 (BNM Annual Report, 2020)

Malaysia’s Islamic banks are backed by a strong role by the sector in COVID-mitigation support packages, boosted by a proactive Minister of Finance Tengku Zafrul Aziz who launched the COVID-mitigation RM500m Prihatin Sukuk last year, culminating in April 2021 with a US$1.3 billion Sustainability Sukuk, the first such sovereign issuance in the world, and followed by a US$1 billion Sukuk offering by Khazanah Nasional Berhad.

“The Bank remains committed to advancing Islamic finance with focused efforts on supporting a sustained (post-COVID) economic recovery, building social and climate resilience as well as empowering halal trade,” said Bank Negara Malaysia (BNM) Governor Nor Shamsiah Yunus in the central bank’s 2020 Annual Report released in April 2021.

Taking the First Leap

While it may seem obvious that Islamic banks must digitally transform their operations, taking the first step can be a complicated and potentially daunting process. It involves change that will impact every aspect of a business, getting acquainted with new ways of working and more than likely stepping out of the institution’s comfort zone. To commence your journey towards digital transformation consider the following:

  1. Digital Customer Experience (DCX)

The goal of digital transformation is mainly to improve digital customer experience (DCX) as an important catalyst in driving the evolution of the banking business, in addition to technology and other market factors. The rise of branchless services has brought forward completely new propositions encompassing not only new and improved services, but also serving a more technologically-literate customer base.

Unlike previous generations, millennials have little or no desire for physical branches to provide them with banking services. They demand direct access and immediate response to their needs without having to walk into a branch. They rely on mobile wallets and other digital platforms to conduct banking transactions without compromising on privacy and security, and thus producing a digital footprint in banking services.

Through digitization, banking is now provided at the customer’s doorsteps. These services include access to financials, instant view of transactions and statement of account, payments, transfer of funds, handling end-to-end loan life cycles, and many more.

  1. Operational Agility

To successfully achieve operational agility there are some structures, tools, and processes to put in place. Using digital transformation to gain competitive advantage also means that your company’s operating model needs to adapt. An agile business will achieve this by making steady, iterative steps towards its goal.

Agility requires much more than applying technological fixes. It is the ability to respond rapidly to opportunities and disruption. It is also a strategic imperative for financial services organizations. In a volatile world, agility is required to respond and adapt to a changing and uncertain environment.

Truly agile organizations rewire the business for speed, adaptiveness and stability, adjusting leadership, culture, risk and governance, funding and investment, the organizational structure, workforce, channels and operations, technology and data. They embrace both continuous change and radical transformation.

Islamic banks can make this shift and continue their digital transformation by changing approach, replacing legacy frameworks, and working to develop a digital culture internally before developing single-use digital features. Once the digital culture is achieved, digital platforms and services can offer a great deal of value to consumers, especially when supported by automation, AI, big data, and blockchain technologies.

Diagram 2: Organizational Agility Conceptual Model (Žitkiené & Deksnys, 2018)

  1. Culture of Innovation

Last but not least, in order for digital banking transformation to be successful, there must be alignment at all levels of the organization. Organizations need to focus on the overarching company values, the actions of people within the organization (behaviors), and the internal environment (climate). These are much less tangible and harder to measure and manage, but just as important to the success of innovation and the ability to create a sustained competitive advantage.

As banking transactions get more complex and/or if the customer requires immediate resolution or answers, customers tend to switch channels and perform these activities in the channels they can get human help. When it comes to reporting a stolen credit card, disputing fraud, stopping a payment, or opening a loan or mortgage account, they’ll default to an assisted channel where they can get help from an advisor.

You need to transform the branch experience to meet the evolving needs of your customers. Your employees must be empowered to drive the necessary change to deliver next-generation customer experiences.

Create a culture that clears the way for employees to drive change and innovation toward a successful digital transformation.

Diagram 3: Channel of Choice for Banking Activities (Aite Group, 2020)

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