I experience the same problems with Hebrew books. Specifically, to try answer your questions:
1. I open a Hebrew book a flip a few pages. After that all Hebrew book titles do show up properly. Maybe you'll need to select an Arabic font as a fallback font? This is mostly a one-time thing till the next restart or firmware update. Lately I had to do that a very few times after side loading more books. I don't know why. I contacted Kobo customer support, I hope you'll do the same to so they'll know of more people affected by this issue and give it a higher priority, hopefully.
2. There's a patch in libnickel that replaces the 2nd keyboard, and I bet it could be adapted to Arabic
https://www.mobileread.com/forums/sh...d.php?t=349230
Someone, it seems, did that in the past:
https://www.mobileread.com/forums/sh...rabic+keyboard
Still, I wonder how typing words using this keyboard will work. Will it still be right-to-left? I'm not sure, I haven't tried this myself.
Edit
3. Actually, there's a 3rd big issue: I can't browse or borrow Hebrew books using Overdrive directly from my Kobo device. Also, borrowed books from the libby app will not sync. I have to go through ADE and the authorization thing is a bit finicky. The reason for that, or so I was told here on some other thread is because the Kobo store doesn't offer those Hebrew books for sale.