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Islamic Banking and Financial Services:
Where Tradition Meets Innovation

Allison Karavos

April 8, 2024

Embracing Advanced Risk Decisioning in the Digital Age

Islamic banking, a rapidly evolving facet of the financial services sector (primarily in the MIddle East), presents a unique blend of traditional Islamic principles and modern financial practices, challenging professionals in finance, lending, credit, and risk decisioning to rethink their strategies. At its core, Islamic banking adheres to Sharia law, which has a number of implications on everyday financial transactions. 

Some of these principles include:

  • Paying or charging interest (riba) is prohibited (instead of interest, islamic financial institutions essentially profit-share with a model called equity participation)

  • Maisir (gambling) is prohibited

  • Gharar (excessive risk) is also prohibited

  • Financial transactions must be backed by tangible assets

  • Investments in industries deemed ‘unethical’ is not allowed

These rules and frameworks create a complex landscape of commercial transactions, with stricter parameters and compliance procedures governed by principles such as profit and loss sharing and risk-sharing models, distinguishing it significantly from conventional banking systems. For financial institutions navigating these intricacies, the integration of sophisticated automation becomes not just a competitive advantage but essential. Automation technologies, including risk decisioning, can play a pivotal role in ensuring compliance with the dynamic regulatory requirements and adapting to evolving consumer demands. They offer the agility needed to align with nuanced, principle-based transactions while maintaining efficiency and competitiveness in the global market. And the Islamic finance sector continues to expand, with more than 560 banks and over 1,900 mutual funds around the world that comply with Islamic principles. Between 2015 and 2021, Islamic financial assets grew to about $4 trillion from $2.17 trillion and are projected to rise to roughly $5.9 trillion by 2026, according to a 2022 report by the Islamic Corporation for the Development of Private Sector (ICD) and Refinitiv. Global Islamic finance assets are said to have reached $4.5 trillion USD in 2022 and are projected to reach $6.7 trillion USD in 2027. The industry has more than doubled since a decade ago, and almost 60 countries now have Islamic finance regulations, with several new markets in Asia and Africa exploring the introduction of Islamic financial services.

Leveraging technology to harmonize these rich traditions with the demands of modern finance has become increasingly crucial for institutions aiming to thrive in this distinctive financial landscape.

Islamic Banking: Complex Needs Means Complex Challenges

Looking deeper at the complexities of Islamic banking reveals numerous challenges faced by financial institutions. One significant hurdle is the inherent variability in Islamic finance principles, which can differ across regions and jurisdictions. This diversity, influenced in part by differing interpretations of Sharia law, leads to variations in products and services offered, complicating compliance and operational strategies. Additionally, the Islamic finance sector, like all of finance, is subject to continuously evolving regulations, adding layers of complexity for institutions striving to remain compliant. On top of that, there are often regional differences in regulations and legislation, adding additional legal complexity on top of the cultural challenges, affecting the overall structure, delivery, and compliance requirements of Islamic financial services. And let’s not forget operational costs, which can be prohibitive when considering the requirements to align financial products and services with Islamic banking principles/guidelines – often needing specialized expertise and processes to ensure all nuances are covered. 

This is where the use of outdated or legacy risk decisioning technology can pose a significant threat – not only to the overall adherence to Islamic banking principles, but also to the overall customer experience, which, as we all know, is key to customer retention and loyalty. Traditional risk management and assessment tools, typically designed for more conventional financial services systems, can fall short in decisioning accuracy when faced with the unique considerations of Islamic banking. This can lead to overall operational inefficiencies, increased risk exposure (including credit losses and fraud), and an inability to adequately meet the demands of your customers, especially when it comes to tailored product offerings and frictionless experiences across the entire journey. And introducing unnecessary (and unwelcome!) friction in the customer experience is a surefire way to negatively impact customer satisfaction and overall retention.

Embracing Advanced Risk Decisioning Technology

But the good news is, investing in advanced, automated, adaptable risk decisioning technologies can enhance the customer experience and help you maintain a competitive edge, while still effectively managing your risk in an increasingly complex financial landscape. Upgraded risk decisioning tech, especially when it includes embedded intelligence like AI/ML, can transform your risk management strategy, while still ensuring compliance with Islamic banking principles. AI can analyze vast amounts of data, identifying patterns and risks that may be overlooked by traditional evaluation methods, enabling a more holistic, accurate assessment of risk and your customers – and more compliant decision making. The integration of advanced technologies also streamlines your risk processes, reducing the time and effort required to accurately evaluate your customers. Gaining this efficiency means lower operational costs, but it also helps to accelerate the delivery of financial products and services to your customers, greatly enhancing the overall experience and helping ensure customer satisfaction and loyalty. Islamic banking customers, like customers of just about any industry these days, expect fast, personalized offers – which isn’t easy to do with more legacy tech. 

Besides these obvious benefits, updating your legacy risk decisioning technology also helps to support further innovation within the Islamic banking sector. Like everything else in finance, change and evolution is the name of the game – but it’s very difficult to remain agile and adaptable with outdated, siloed systems and processes. Leveraging more flexible tech, especially with embedded intelligence, enables the rapid development of new, compliant financial products and services that meet the evolving needs of both customers and the market as a whole. Consider advanced risk decisioning a dual-force, empowering Islamic financial institutions to navigate complex compliance requirements with ease, while also fostering an environment of innovation (and bonus, don’t forget that whole customer satisfaction piece). Mitigating risk and driving the industry forward in a way that aligns with both traditional Islamic principles and modern customer expectations means you can strike that necessary balance in this unique environment.

Future-Proofing Your Decisioning Technology

So if you’re convinced of the importance of upgraded technology to support risk mitigation, customer experience, and adherence to Islamic banking guidelines… what can you do to ensure you are implementing the best risk decisioning technology that not only meets your needs now, but also supports your needs in the future?

Some key things to keep in mind are:

  • Data: Ensure you have access to a rich variety of global data sources, including both traditional and alternative data, and that your data can be easily accessed and integrated into your risk decisioning workflows.

  • Ease-of-Use: Do you need to rely on vendors or your IT team to implement any new changes in your decisioning processes, or can you make changes yourself? Look for tech that is business-user friendly, with an intuitive, low-code UI, drag-and-drop processes, and easy visualization so you can make changes in minutes. 

  • Embedded Intelligence: Make sure you have access to your decisioning data and the ability to use advanced analytics and embedded intelligence to understand your decisioning performance and optimize accordingly.

  • End-to-End: Can you make decisions across the entire customer journey, all in one platform? Eliminate siloed processes and disparate systems with end-to-end decisioning that allows you to onboard customers seamlessly, detects and prevents fraud, optimizes collections treatment strategies, and enables personalized, relevant product offerings (including upsell/cross-sell opportunities) across the lifecycle.

  • Case Management: Not every decision can be automated – but with case management integrated into your decisioning, you can streamline referral handling for frictionless investigations.

Just like Islamic banking beautifully blends tradition and innovation, so too can your risk decisioning technology. Incorporating advanced technology in your risk assessments, including AI/ML, allows you to respect the traditional values of Islamic banking while embracing technological innovation to meet the dynamic needs of today’s customers. And if you can’t replace all existing technology with upgraded solutions, start small and integrate new processes and solutions alongside existing systems to start reaping the benefits of automation as quickly as possible. 

By integrating these advanced technologies, you can foster an environment of innovation, driving the industry towards a more inclusive, efficient, and forward-thinking future.


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