Digital banking growth in UAE is bolstered by regulatory reforms, study shows

By Puja Sharma

The UAE banking sector reports a 31% increase in net profits, amid growing demand for digital services, according to the KPMG report

Major factor contributing to the sector’s stability is the government’s commitment to regulatory reform

The UAE banking sector has enjoyed a promising year and is expected to maintain a stable outlook in 2023 with the growing demand for digital financial services, rapid adoption of FinTech solutions enhancing customer experience, and industry competitiveness. These are among the key findings of KPMG’s annual UAE Banking Perspectives report, which examines the relevant topics and trends impacting the country’s banking sector.

The report lists the top 10 UAE banks having robust operating and financial performance in 2022, with a 31% increase in their net profits. The cost-to-income ratio during the year also improved on average by 1.8% and banks maintained sufficient capital levels well above the minimum regulatory requirements. The report also found that the banking sector’s total assets have increased by 10.6% year-on-year driven by strong growth in deposits, loans, and advances.

Abbas Basrai, Partner and Head of Financial Services, KPMG Lower Gulf, said, “The UAE’s vibrant economy and its favorable business environment has attracted a significant amount of foreign investment, with banks benefiting from large pools of capital and high net worth customers the UAE is attracting. One of the major factors contributing to the sector’s stability is the government’s commitment to regulatory reforms. Measures taken by the Central Bank of the UAE to strengthen governance frameworks have led to increased transparency and accountability.”

According to the KPMG study, banks are recording an increase in the cost of compliance to manage risks associated with regulatory reform. From 2019 till early 2022, the Middle East recorded a 63% increase in the size of its organizations’ compliance teams. The total projected cost of financial crime compliance is $4.2 billion in early 2022, with the UAE representing a sizeable chunk of this at $1.7 billion (40%). It is anticipated that compliance functions will implement technology platforms to maintain and monitor regulatory obligations, enabling compliance risk assessments, alerting potential noncompliance incidents, and allowing action plan tracking.

As part of the study, KPMG partnered with social media analytics company, DataEQ, to analyze key drivers of consumer satisfaction amongst major UAE banks. Industry Net Sentiment improved from last year – based on 96,321 tweets about seven UAE banks tracked from 1 January to 31 December 2022. The UAE banking sector achieved an industry aggregate of -7.4%, a seven-percentage point improvement from the industry aggregate of -14.4% last year.

To compete in a dynamic environment, UAE banks are embarking on digital growth strategies focused on cloud adoption; expected to provide benefits including scalability, flexibility, faster time-to-value, and cost-effectiveness. Consumer demand is also driving banks to deliver technology-enabled services going beyond traditional banking. UAE banks, particularly the larger banking institutions, are exploring the metaverse as a new channel to provide financial services to their customers and connect with the larger banking ecosystem.

Customer service generated the highest volume of negative conversations on social media; the biggest pain points for customers were slow turnaround time, non-responsiveness, and staff competency issues. The 2023 study saw downtime overtake perceptions of business conduct as the biggest risk factor, as customers complained about their inability to access online banking, malfunctioning mobile apps, and faulty ATMs.

Combatting financial crime remains a key challenge for the banking sector and the deployment of machine learning (ML) and artificial intelligence (AI) for financial crime detection is also expected to accelerate. Advancements in technology and data will also result in new ways to know your customer (KYC) and customer due diligence (CDD) in the next ten years.

Key Highlights:

• Banks are recording an increase in the cost of compliance to manage risks associated with regulatory reform
• Industry Net Sentiment improved 7% from last year, with customer service generating highest volume of negative social media conversations
• UAE banks are embarking on digital growth strategies focused on cloud adoption; expected to provide benefits including scalability, flexibility
• Combatting financial crime remains a key challenge for the banking sector and the deployment of machine learning (ML) and artificial intelligence (AI) for financial crime detection is also expected to accelerate