2020 is a different year; a year in which we could never have expected such drastic changes in banking across the world. It is fair to say that the COVID-19 global pandemic is the most defining event of 2020, with implications for many years to come. Governments, banks, including Islamic ones, organizations, and individuals around the world are reconsidering ways to ensure stability and have been forced to innovate and digitally transform on an unprecedented basis to ensure continuity.
The status quo continues to evolve as people are coming to terms with social distancing, restricted traveling, remote working, homeschooling, online banking, financial market volatility, and supply chain disruptions. A new normal is created at a time when the overall economy is slowing down.
Review of 2020
During 2020 and earlier, technological advancements have been positively disrupting many of the Middle East and North African economies in the last few years. This resulted in increased use of digital banking services but also in an increased level of security risks that are now accelerated due to the pandemic. There has been a surge in fraudulent activities linked to Covid-19 as residents are restricted to their homes to curb the spread of the virus.
While the world is focused on the health and economic threats posed by this new reality, fraudsters around the world jump on the pandemic capitalizing on this crisis. The Islamic finance industry is no exception and market leaders have developed several approaches to tackle this threat.
The UAE Banks Federation, Central Bank of the UAE and Abu Dhabi and Dubai police forces are jointly rolling out the country’s first national fraud awareness campaign as more residents use digital banking services during the pandemic. Under the theme #TogetherAgainstFraud, the social media campaign aims to equip consumers with the knowledge to protect themselves against fraudsters harassing them with coronavirus-linked scams.
Islamic Development Bank, announced the allocation of US$2 billion to cushion the impact of COVID-19 on both public and private sector in its member countries
The fraud relating to COVID-19 has been spreading as fast as the virus. Indeed, the World Health Organization and Europol are all predicting further significant increases in financial crime related to COVID-19.
Even though the bad actors will continue to exploit a “new normal”, it’s a big problem – not just for the victims of fraud but also for the governments and authorities working to stop the criminal gangs. The same goes for Islamic banks with their legal responsibility to do all they can to protect their customers’ money and data and prevent money laundering.
In response to this increased threat, government bodies and regulators encourage Islamic banks to consider whether their current internal controls are up to standard. When the authorities encourage organizations to look at their controls, they are reminding them that they should follow a risk-based approach (RBA) where the bulk of their efforts are efficiently and effectively aimed squarely where the highest risk lies. Following an RBA to prevention and mitigation, Islamic banks can tightly focus their efforts and better protect their customers from financial crime not just that linked to the virus.
Lately, even pre-covid, there has been lots of emphasis on ‘advanced segmentation’ otherwise called ’peer grouping’. The goal of such an approach is to understand customers deeply and group them into similar categories.
To do so, Islamic banks have to crunch a whole lot of data, and then be able to understand the outputs and act in a timely way without unnerving – or aggravating – their customers. This can be achieved with the addition of an AI-powered financial profiling tool that is looking at transaction types, peak and trough inflows and outflows, averages across timeframes, along with other spending patterns to create a financial DNA for each customer. Similar customers can then be grouped together so that the appropriate measure and controls are targeted where the risk is greatest. These groupings can then adapt automatically as the underlying customer behavior changes.
Preview of 2021
While this crisis has generated a lot of challenges, it has also created opportunities, particularly in the technology sector, as businesses across all industries have been forced to digitally transform and adapt to the new environment. In the area of financial crime what seems clear is it has not changed the game – merely amplified the problem.
From 2021 onwards Islamic banks have to protect the whole of society, businesses and all other organizations against the nefarious activities undertaken by the criminals. Leveraging newer technologies, such as AI and cloud, the market is offering solutions to protect the Islamic banking sector from financial crime and prevent cyber-attacks. These solutions can be on premise, on private or public cloud, or they can be consumed as a Service (SaaS).
Financial Crime Mitigation (FCM) is mandatory in a regulated environment. All Islamic banks can benefit from a complete FCM proposition, while particularly small/mid-size Islamic banks, where the cost of FCM is disproportionately high, can choose software as a cloud service that can offer flexibility and cost benefits to boost profitability. Such a complete solution can help banks to tackle the growing threat of financial crime and protect their reputation and customers’ assets without compromising the user experience.
Fadi Yazbeck is the senior product manager at Temenos Islamic. He can be contacted at [email protected].