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Name: Soh Shi Qian
Student ID: I19017524
Section: 8FN1
Program: BBUS Finance
Course: FIN4245 Islamic Capital Markets
Title: The Digital Transformation of Islamic Banks

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Driving Inclusion with Digital Not Exclusion

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Driving Inclusion with Digital Not Exclusion

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Although the inclusion of financial services through digital solutions is all the rage, it is still the digital divide exists. Therefore, Bank Islam considers financial inclusion to be the most important issue to ensure that the underbanked and unbanked have equal access to financial services (Fong, 2022).

Bank Islam not only needs to take care of digital users but also face-to-face service users. This is because some people are not friendly with digital and they will worry about cybersecurity issues and so on.

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The Malaysian financial services space is undergoing an interesting phase in its evolution, shifting consumer behaviors and entrants of new players are giving incumbent banks reasons to rethink their digital strategy.

Many of Malaysia's incumbent banks are actively looking at beefing up their digital strategy, spinning off a new digital banking unit, or partnering with fintechs. This is in part thanks to the 5 new digital banking licenses dished out by Bank Negara Malaysia (BNM). These new digital banks are anticipated to launch within the next 24 months.

For Bank Islam's CEO, Muazzam Mohamed, the route he has chosen is all of the above.

Strengthening their Digital Core

The bank has recently rolled out a 4-year blueprint (2022-2025) which includes significant capital investments into the bank's IT capabilities.

This blueprint will primarily focus on 3 areas which include; establishing a resilient IT architecture foundation, strengthening skill sets in areas like data analytics, artificial intelligence and machine learning, as well as adopting new ways to enable the IT and business divisions to work together more effectively.

Muazzam stresses that merely having a good digital strategy does not guarantee success, the biggest challenge he says, is always the acceptance by the stakeholders. He adds that it is essential to instil a transformative culture within the organisation to ensure momentum throughout the journey and to allay any fears of being redundant or obsolete.

To that end, Bank Islam had embarked on its CODE21 in 2019, which was aimed at driving a culture of excellence.

Muazzam said that this include "reimagining their core shared values based on TAAT (Think Customer, Act with Integrity, Advance Beyond and Take Charge)", introducing new behavioural competencies, adopting Kaizen for operational best practices, and providing reskilling and upskilling programmes to increase employees' digital literacy.

Referring to his employees endearingly as BITIZENs, which stands for BIMB's Citizens, Muazzam said that it is equally important to invest in both technology and talent - a commitment which he said is shared by his Board of Directors.

In doing so, they have established their own Digital Academy to offer digital upskilling programmes across all job levels for both technical and non-technical staff. The academy also includes programmes where employees will apply what they have learned to come out with prototypes based on real use cases.

Muazzam further commented,

"Our vision is to have a workforce that is ready to embrace change, dare to shake things up and take the leap, while being ready to accept failure in order to move forward. This mindset is key to facilitate generation of new ideas, digital innovation and collaboration to thrive in our workplace."

Digital Banking Spinoff

In 2021, Bank Islam had set up a new division named the Centre of Digital Experience (CDX) to lay out the foundation to set up a fully digital bank and explore unchartered territories.

The new digital bank, Be U, was made available for downloads in the Apple App Store and Google Playstore in June with a full launch slated for mid-July. The bank hopes to attract between 350,000 to 400,000 downloads within the first 12 months of launch.

The goal he said, was to broaden Bank Islam's customer base, capturing and empowering the growing unserved and underserved target segments, particularly the gig-workers, independent contractors, and solopreneurs. Through Be U, they also aim to improve customer access to their Shariah-ESG total financial solutions.

Muazzam stresses that this initiative is not a response to BNM's newly dished out digital banking licenses but instead it was a response to Malaysia's rapidly growing digital economy and gig economy. Work on Be U, he said, began two years ago before the licensing framework was issued.

The digital banking unit seeks to leverage technologies like big data and AI to offer personalisation and bite-sized products that are accessible and affordable to all including - micro-savings, micro-financing, and micro-investing.

It's no secret that the talent war has intensified ever since the licenses were issued, with incumbent banks and digital banks alike all fighting for the already limited pool of talent. The CDX unit was established in part as an incubation lab to attract key tech talent by providing them a fulfilling career development roadmap and room to experiment with new technologies and business models.

Leveraging on Strategic Partnerships

"Digital transformation is a journey, not a destination. There will always be a 'shiny new thing' that appears to replace what we have,"

Muazzam said, alluding to the importance of forming partnerships not only with fintechs but also with technology vendors as well. In 2021, Bank Islam signed a partnership with TM One as a service provider to help accelerate their digital transformation journey.

"BIMB has appointed TM One in early 2021 as a service provider in supporting us to accelerate our digital transformation journey, providing us the opportunity to obtain up-to-date solutions and infrastructure, particularly for digital infrastructures such as cloud data centre, cybersecurity and big data analytics."

He further added that this partnership enables the bank to strengthen their IT infrastructure and capabilities to keep up with the ever-evolving regulations, guidelines, and policies by BNM.

Bank Islam's CDX had also previously entered into partnerships with Mambu, Experian, and Pod.

The engagement of Mambu allows the bank to configure Shariah-compliant banking products, while Experian will provide eKYC solutions for digital onboarding.

Meanwhile, Pod is a homegrown fintech that enables Malaysians to save in a smarter way. Bank Islam worked together with Pod to develop an alternative credit scoring model to enable a wider net of gig workers to access financial services.

Driving Inclusion with Digital Not Exclusion

While driving financial inclusion through digital solutions is all the rage, we must remember that in Malaysia, the digital divide still exists. It's important not to lose sight of those who are not as digitally savvy.

Echoing that sentiment, Muazzam expressed that,

"From BIMB's perspective, the more important issue is financial inclusion - ensuring equal access to financial services for the underbanked and unbanked. Towards this end, we take the deliberate approach to drive the financial inclusion agenda through Islamic Social Finance.

As a provider of financial services, we believe in putting the needs of our customers at the core of our offerings, providing them with multiple channels to our financial services and offerings, while educating and guiding all segments of the society to be comfortable and familiar with digital channels. Technology should be a means to an end, and it should not create exclusion. Technology adoption should not be sophisticated and make it complicated for customers."

In 2019, they've established their own Centre of Social Finance to drive financial inclusion with the ultimate goal of nurturing the next generation of bankable customers and promote upward social mobility for the underserved segment.

He stressed that the industry shouldn't rush into having customers adopt digital-only channels, especially with the rise of fraud and bad actors. He adds that it is important to educate this segment of customers and protect them from ending up as a victim of fraud, scams, and cyber attacks.

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How Malaysia's Oldest Islamic Bank Is Reinventing Itself Against the Wave of Digibanks - Fintech News Malaysia

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The Malaysian financial services space is undergoing an interesting phase in its evolution, shifting consumer behaviors and entrants of new players are giving incumbent banks reasons to rethink their digital strategy. Many of Malaysia's incumbent banks are actively looking at beefing up their digital strategy, spinning off a new digital banking unit, or partnering with fintechs.

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CIMB Bank Berhad and its platform, CIMB Clicks.

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CIMB Bank Berhad and its platform, CIMB Clicks.

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CIMB Clicks is the digital banking service platform offered by CIMB Bank Berhad for their current cardholders. The users can use the platform to check their account balance, view transaction history, transfer money, purchase online, and pay bills and loans. On the other hand, this platform can also help the users can invest in certain investment platforms and can ensure that the investment platforms are safe and secured from malware or hacking (Amir, 2021).

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Bank Islam Malaysia Berhad and its platform, Be U. 

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Bank Islam Malaysia Berhad and its platform, Be U. 

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Be U is a fully cloud-native digital banking proposition. The statement claims that the new app facilitates seamless banking transactions, bypassing the inconvenience of visiting a branch, thus broadening financial inclusion among digital-native, younger generations (Technode Global, 2022).

Using Mambu Digital Core as its technology backbone, Be U is hosted on the Amazon Web Service (AWS) cloud; With zero legacies, the app is able to meet customers' needs quickly (Technode Global, 2022).

Users can enjoy a curated, user-friendly and personalized banking experience by leveraging Be U's cloud-based advantage (Technode Global, 2022).

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Malaysia-listed banking firm Bank Islam Malaysia Berhad has on Sunday officially launched its fully cloud-native digital banking proposition named Be U, the first-of-its-kind technology stack which is anticipated to be the cornerstone of all upcoming digital banks to be introduced in Malaysia.

Made available to the public since mid-June this year, Bank Islam said in a statement that it targets between 350,000 and 400,000 downloads and users of the Be U app within the first 12 months of its operations.

According to the statement, the all-new banking app allows users to do their banking transactions seamlessly, without the hassle of visiting a branch, thus broadening financial inclusivity by targeting the digital-native, younger generation.

Its engaging and user-friendly interface is intended to help users quickly understand and manage their finances.

Bank Islam Group Chief Executive Officer Mohd Muazzam Mohamed said Be U is a gamechanger for the firm and the Islamic banking industry as it is a product that intends to redesign and catalyse Bank Islam's future growth by leveraging the rapidly changing fintech landscape and further allowing customers access to an affordable and easy-to-use financial solution.

"Through Be U, Bank Islam is shifting from being product-centric to customer-centric in building products that fulfill customer needs. This effort aligns with our five-year business strategic plan (LEAP25), which aims to become the champion in Shariah-environmental, social, and governance (ESG) total financial solution with leadership in digital banking and social finance," he added.

He also said that having taken a holistic approach to meet customers' needs, the bank has designed the digital bank proposition to be different and complementary to what is presently available in the market.

According to him, Be U is targeted at the younger generation, offering a savings account that allows zero balance, fund transfer capabilities, and a "nest" feature that helps users save for specific goals.

He also noted there will be frequent new functionalities or offerings on the Bank Islam Be U app over the next 12 months, including term deposit, gig marketplace, debit card, personal financial management, micro-financing, micro takaful and much more.

"We will replicate the learnings from Be U into the entire organisation, which is the bigger picture we're looking at. We want to turn Bank Islam into an increasingly agile organisation by adopting new ways of working, attracting talents with new skillsets, using the latest technology, and leveraging data and automation. This will, in turn, enable Bank Islam to serve our customers better," he said.

Be U uses Mambu Digital Core as its technology backbone and is housed in Amazon Web Service (AWS) cloud. Having zero legacies allows the app to meet customers' needs quickly.

By leveraging its cloud-based advantage, Be U users can benefit from the agility of the app and enjoy a curated, user-friendly and personalised banking experience.

"Be U focuses on customer segments that Bank Islam does not, capturing users still in the early stage of their working life. Once their financial footing is
more stable, and they require more complex financial products and instruments, Be U will be there, offering Bank Islam's various products and services," Mohd Muazzam explained.

Bank Islam is Malaysia's first public listed Islamic Bank on the main market of Bursa Malaysia Berhad. Established in July 1983 as Malaysia's first Islamic Bank, the bank has 141 branches and more than 900 self- service terminals nationwide.

As a full-fledged and pure-play Islamic bank, the bank provides banking and financial solutions that strictly adhere to the Shariah rules and principles and are committed to the ideals of sustainable prosperity and ESG values.

The core subsidiaries of the Bank Islam Group are pioneers in various Islamic financial services, including investment and stockbroking, namely BIMB Investment Management Berhad and BIMB Securities Sendirian Berhad.

Malaysia's Cradle Fund's outgoing CEO Rafiza Ghazali to lead KAF-led digital Islamic bank

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Malaysia's Bank Islam launches digital banking app - TechNode Global

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Malaysia-listed banking firm Bank Islam Malaysia Berhad has on Sunday officially launched its fully cloud-native digital banking proposition named Be U, the first-of-its-kind technology stack which is anticipated to be the cornerstone of all upcoming digital banks to be introduced in Malaysia.

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Cyber security risk is the main risk that will be faced by the digitalization of Islamic Banking (Zahra, 2022). This is because there are a lot of cyber security cases that occurred during these years.

Cybersecurity Risk is the probability of exposure or loss resulting from a cyber-attack or data breach on your organization (Tunggal, 2022). In the other words, cybersecurity risk is the potential loss or harm related to technical infrastructure, use of technology or reputation of an organization.

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In order to reduce operational costs and marketing costs for Islamic banks, digitization can help them collaborate with financial technology service providers to provide banking products to the public, which will make them more economical for operational costs and marketing costs (Baidhowi, 2018).

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The CEO of Bank Islam, Muazzam Mohamed said "The digital transformation is a journey, not a destination." Therefore, it is important to form a partnership with FinTech and also technology vendors; To accelerate its digital transformation journey, Bank Islam partnered with TM One in 2021  (Fong, 2022).

Bank Islam can cooperate with other organizations to strengthen the digital banking position of the bank by learning and developing with other organizations which are good at technology.

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To lay the foundation for a fully digital bank and explore uncharted territories, Bank Islam established the Centre of Digital Experience (CDX) in 2021; A full launch of the new digital bank, Be U, is scheduled for mid-July, with downloads available in the Apple App Store and Google Playstore (Fong, 2022).

Rolling out the new digital bank, Be U, is convenient for customers because the customers can use the digital application anywhere and anytime.

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A blueprint from 2022 to 2025 has been released by Bank Islam, which includes significant investments in the bank's IT capabilities (Fong, 2022).

The blueprint focuses on:
1. The establishment of an IT architecture that is resilient
2. The acquisition of skills in areas such as machine learning, artificial intelligence, and data analytics
3. Developing new approaches

By strengthening the digital core of the bank, they can make sure that the security of the digital platform and the privacy of the users can be assured. Not only that, but it can also help Bank Islam to retain potential clients and attract more new clients to enjoy the services given by the bank. Bank Islam can also come out with a new strategy to improve the bank itself in the digital sector.

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The Way that the Oldest Islamic Bank in Malaysia Reinventing Itself Against the Wave of Digital Banks.

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The Way that the Oldest Islamic Bank in Malaysia Reinventing Itself Against the Wave of Digital Banks.

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The CEO of Malaysia's oldest Islamic bank, Bank Islam, Muazzam Mohamed has shared how Bank Islam reinvents in the wave of digital banks.
1. Strengthening their Digital Core
2. Digital Banking Spinoff

3. Leveraging on Strategic Partnerships
4. Driving Inclusion with Digital Not Exclusion

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1. Vincent, F., 2022. How Malaysia’s Oldest Islamic Bank Is Reinventing Itself Against the Wave of Digibanks. Available at: https://fintechnews.my/31836/virtual-banking/how-malaysias-oldest-islamic-bank-is-reinventing-itself-against-the-wave-of-digibanks/ [Accessed: 25 September 2022]

2. Zahra, 2022. Digital Transformation in Islamic Banking. Available at: https://feb.ugm.ac.id/en/news/3541-digital-transformation-in-islamic-banking#:~:text=Islamic%20bankings%20tend%20to%20carry,and%20adapt%20to%20existing%20conditions. [Accessed: 25 September 2022]

3. Everfi, n.d. What Does Digital Transformation in Banking Really Mean? Available at: https://everfi.com/blog/financial-education/what-does-digital-transformation-in-banking-mean/ [Accessed: 25 September 2022]

4. Dauda, A, A., 2020. IFSB Working Paper Series. Available at: https://www.ifsb.org/download.php id=5161&lang=English&pg=/index.php [Accessed: 25 September 2022]

5. Rosie, K., 2017. Why Islamic banks must commit to digitalization. Available at: https://www.bobsguide.com/articles/why-islamic-banks-must-commit-to-digitalization/ [Accessed: 25 September 2022]

6. Josh, F., 2019. Malware explained: How to prevent, detect and recover from it. Available at: https://www.csoonline.com/article/3295877/what-is-malware-viruses-worms-trojans-and-beyond.html [Accessed: 25 September 2022]

7. Mitch, S., 2021. 5 Benefits Of Digital Banking. Available at: https://www.forbes.com/advisor/banking/benefits-of-digital-banking/ [Accessed: 27 September 2022]

8. Raheel, I., n.d. How Islamic Banks can capitalize on Digital to Drive Growth. Available at: https://www.codebtech.com/how-islamic-banks-can-capitalize-on-digital-to-drive-growth/ [Accessed: 28 September 2022]

9. HCLTech, n.d. What are the advantages of digitalization in banking? Available at: https://www.hcltech.com/technology-qa/what-are-the-advantages-of-digitalization-in-banking [Accessed: 30 September 2022]

10. Adam, H.,2022. Banker Trojan. Available at: https://www.investopedia.com/terms/b/banker-trojan.asp#:~:text=A%20banker%20Trojan%20is%20a%20piece%20of%20malware%20that%20attempts,client%20data%20to%20the%20attacker. [Accessed: 30 September 2022]

11. Baidhowi, 2018. Sharia Banking Opportunities and Challenges in the Digital Era Available at: https://www.atlantis-press.com/article/25903159.pdf [Accessed: 30 September 2022]

12. Abi, T, T., 2021. What is Cybersecurity Risk? A Thorough Definition. Available at: https://www.upguard.com/blog/cybersecurity-risk#:~:text=Cybersecurity%20risk%20is%20the%20probability,or%20reputation%20of%20an%20organization. [Accessed: 30 September 2022]

13. Technode Global, 2022. Malaysia's Bank Islam launches digital banking app. Available at: https://technode.global/2022/07/18/malaysias-bank-islam-launches-digital-banking-app/ [Accessed: 1 October 2022]

14. Mohammad, B., A., 2021. The Best Digital Banks in Malaysia. Available at: https://www.trustedmalaysia.com/best-digital-banks-malaysia/ [Accessed: 1 October 2022]

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In a nutshell, I encourage the Islamic Banks in Malaysia to transform themselves into digital to make them competitive with other conventional banks that are good at digital. Digital transformation in Islamic banks can also help them to build customer loyalty because digital transformation in Islamic banks will bring convenience to customers such as they can make transactions anywhere and anytime. Besides, the regulators of the banks need to also be aware of potential new risks that pose a threat to digital Islamic banking, such as data privacy, cyber security, consumer protection and others (Fong, 2022). I hope that the Islamic Banks in Malaysia can grow in the digital sector in the future to lead them to become the world well-known Islamic Banks and can be listed in the Global Finance’s World’s Best Islamic Financial Institutions.

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Malware is the short form of malicious software and is a blanket term for viruses, worms, trojans and other harmful computer programs (Fruhlinger, 2019). Hackers use malware to wreak destruction and gain access to sensitive information.

In online banking, the Banker Trojan is a type of malware that hackers use to gain access to steal the financial information of the users; the hacker will use the spoofed website of a financial institution to get the data of the users (Hayes, 2022).

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Digitization has brought banking to the doorstep of the customer. Services include access to financials, instant viewing of transactions and statements of account, payments, funds transfers, and end-to-end loan management.

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Digitalization can also increase the competitiveness of Islamic banks among financial institutions (Kmeid, 2017). The World Islamic Banking Competitiveness Report 2016 has shown that Islamic banks have lower customer penetration in digital banking services compared to conventional banks.

When digital is applied in Islamic banks, automation, blockchain technology and electronic contracts will make banking faster and easier. Islamic banks can provide their customers with better services and no need to worry about losing out to the established competition (Iqbal, n.d.).

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The Digital Transformation of Islamic Banks in the World

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The Digital Transformation of Islamic Banks in the World

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According to the survey data from IFSB (2020), there are 13% of Islamic banks completely transformed to digital during pre-Covid-19 and 4% of Islamic banks completely transformed to digital during the Covid-19 pandemic and there are 77% of Islamic banks still in the progress of digitalization.

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Digitalization in Islamic banks is a time-consuming process (Iqbal, n.d.). It spends a long time to adapt, improve and enhance. It is difficult to transform faster into digital because Islamic banks need time to train their employees to be familiar with the system.

Moreover, the reason that digitalization is a time-consuming process is that Islamic banks need complete planning to have further growth in the digital sector. If they have not planned, they may not know what they need to do for the next step and all the effort is in vain. Therefore, Islamic banks need to have a sufficient preparation to transform themselves into digital.

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The Benefits of the Digitalization of Islamic Bank

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The Benefits of the Digitalization of Islamic Bank

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Digitalization can also bring convenience to the customers to save their time because they do not need to queue for a long time to solve their banking process such as opening a banking account, transferring a large amount of money, paying a credit card loan or changing the transaction phone number (Strohm, 2021).

Digitalization has benefitted customers by facilitating cashless transactions (HCLTech, n.d.). Therefore, the customer can store less cash in hand and they can make transactions online anytime and everywhere (Baidhowi, 2018).

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There are 72% of respondents agree on that legacy infrastructure and technologies will affect the digitalization of Islamic Bank based on the IFSB survey (Zahra, 2022).

Using legacy technology infrastructure to cope with the rate and speed of technological transformation may cause Islamic Banks concerns about mitigating operational risks (Baidhowi, 2018). Islamic Banks that still rely on outdated legacy infrastructure, outdated applications, siloed data platforms, an overextended branch network, disparate data sources, and rigid internal operations and cultures will be under even more pressure (Asafa, 2021).

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According to the IFSB survey, there are 57% of respondents agree on there is a lack of human resources to carry out the digitalization of Islamic Bank (Zahra, 2022).

Innovation cannot be successful without human capital development. Therefore, if there is a lack of human resources in the digital transformation of Islamic Banks, it cannot be successfully transformed digitally because digitalization needs a high professionality and knowledge in the digital areas to make sure the security of the digital platform is guaranteed. Domain experts and highly specialized human capital are required for the digital transformation process. The automation of most banking operations, for example, would call for a new competency model in the human capital strategy of the IBs (Asafa, 2021).

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Digitalization will help Islamic banks become more efficient in order to reduce human errors and build customer loyalty (Iqbal, n.d.). This is because when Islamic Bank is digitalized, the accuracy of the banking process will increase. Digitalization can also help to shorten the process of applying for a loan so the customers can immediately enjoy the credit and facilities that have been promised (Baidhowi, 2018). Therefore, the satisfaction of the customers will be maximized and they will complain too much to the customer services of the banks.

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The Challenge of Digital Transformation in Islamic Bank

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The Challenge of Digital Transformation in Islamic Bank

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If the Islamic banks do have not many experiences in digital transformation, it may be a lot of technology crime problems caused. In fact, technology crime is the most tricky problem that is faced by most banks not only Islamic banks but also other conventional banks. Online crime activities such as wiretapping, burglary, and cybercrime in financial transactions have frequently occurred in our life and these activities made the customers afraid to use the digital platform to make the online transaction (Baidhowi, 2018).

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People nowadays are more dependent on using the internet and mobile technology. According to Kmeid (2017), millennials are less likely to seek out banking services in physical branches than previous generations. Using mobile wallets and social media platforms, they conduct banking transactions without compromising privacy or security, which leaves a digital footprint.

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What is the digital transformation in banking?

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What is the digital transformation in banking?

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Digital transformation in banking is a process that the bank largely entails the shift to offering online and digital services as well as the massive number of backend changes required to support this transformation (Everfi, n.d.)

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The digital transformation of Islamic Banking

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The digital transformation of Islamic Banking