The global Islamic finance industry, which is a USD2.1 trillion industry, has been expanding slowly in the last few years. According to S&P Global Ratings1, the industry is predicted to continue growing steadily at 5% during the current year. This is mainly due to the tepid economic situation in significant Islamic finance markets, a which is the result of the instability of oil prices and the geo-political risks. In this regard, S&P believes that Financial Technology (FinTech) can play a vital role in the growth of the Islamic finance industry globally. The untapped opportunities that exist within the industry are tremendous, especially when addressing the major acute issues in the Islamic world such as inequality, poverty, and financial exclusion. For instance, as reported by the Islamic Finance News2, 71% of Muslims globally have no bank account and most of them are from developing countries. The two largest Muslim population countries have the largest Muslim unbanked population3, i.e. Pakistan has 100 million unbanked Muslims and Indonesia has 95 million unbanked Muslims. Meanwhile, the World Bank4 has indicated that only 14% of the adults in the Middle East have bank accounts. One of the main reasons cited by these unbanked populations for not having a bank account is religious concerns. These numbers show that there is a pressing demand in these markets for access to Islamic finance. Accordingly, Islamic FinTech can contribute to addressing this demand and closing the gap in the Muslim unbanked population, which can lead to the growth of the Islamic finance industry through financial inclusion. Muslims living in non-Muslim majority countries also have similar demands. Despite their interest in Islamic financial services and products, this segment of customers has limited or no access to such products and services. Since most of their markets are advanced in digital banking, they have solid technical infrastructure and supporting regulations in place. It is evident that these ecosystems are capable of providing Islamic finance services through Islamic FinTech. Meanwhile, by looking at the increasing number of Muslims worldwide, which is expected to reach 3 billion by 20605, the new generations will be born as digital native and will not accept the idea of visiting a branch or traditionally conducting their financial transactions. Therefore, this is another segment of customers that will eventually demand access to Islamic finance services and products through digital means and FinTech.
ISLAMIC FINANCE AND FINTECH CORRELATION Islamic finance is a financial system that is based on Shari’a principles, which promotes justice and forbids interest, avoids gambling and investment in prohibited actives like pork and alcohol, and prohibits risk-transfer loans etc. All these prohibited activities have been specified in Islamic law to ensure equality and fair management of wealth. Moreover, many ethical principles are being encouraged in the Islamic finance industry including the ones related to avoiding conflict of interest, confidentiality, justice, accuracy, transparency, and avoiding the misuse of data and abuse of power. All of these principles exist in the spirit of FinTech, where it provides and ensures shared prosperity as well as growth that is more inclusive by empowering customers to use their social capital in supporting and contributing to causes of their interest. Additionally, FinTech has a number of characteristics that go in line with Islamic finance principles and achieve its objectives such as transparency and speed of transactions, traceability and security of transactions, improved governance structure, and last but not the least accessibility to Islamic financial products and services.
ISLAMIC FINTECH LANDSCAPE FinTech is changing the financial industry including Islamic finance, through different opportunities that can be tapped into for innovative Islamic financial products and services. Islamic FinTech can be defined as FinTech firms that provide Shari’a-compliant finance related products and services using digital means. These FinTech firms could be a standalone start-up or a subsidiary of an existing Islamic finance institution. Islamic finance institutions such as banks are taking different strategies related to the Islamic FinTech to leverage its potential. These Islamic banks are using five main strategic approaches. First is acquiring Islamic FinTech or non-Islamic FinTech and using it to provide certain services to their customers. Second is investing in Islamic FinTech through venture capital arms to make profits out of these advanced business models. The third is incubating these Islamic FinTech inside the bank to work closely with them on different innovations. Fourth is partnering with Islamic FinTech or non-Islamic FinTech by joining forces to provide a unique innovative financial product or service in the market. The fifth is using internal capabilities to create an innovative product that can be pushed into a market as a standalone Islamic FinTech. It is worth noting that 87% of these Islamic finance institutions prefer to engage and partner with Islamic FinTech according to the Global Islamic FinTech Report in 2019. There are key markets globally that are home for different Islamic FinTech including the UK, Malaysia, Bahrain, and the UAE. As per IFN Islamic FinTech Landscape, there is a total of 113 Islamic FinTech companies that are covering 11 financial sectors such as crowdfunding, digital banking, blockchain, crypto-assets, wealth management, InsurTech etc. At the moment, 85% of these Islamic FinTech are either seeking to be regulated or have been regulated like Beehive, Ethis Crowd, and Yielders. Meanwhile, 76% of them have been certified as Shari’a-compliant or are expecting to be certified soon. This indicates that there is a desire by Islamic FinTech to have formal representation in the markets and gain the trust of customers. The Global Islamic FinTech Report has found that the top five expected growth sectors in Islamic FinTech in 2020 will be in the areas of Crowdfunding followed by Challenger Banks, Blockchain and Crypto, RoboAdvisory and Personal Finance Management (PFM), and finally Lending. In this regard, it has been stated that the current challenges faced by these Islamic FinTech companies are primarily related to accessing capital, finding the right talent, raising customers’ awareness and education, being market regulated, and expanding into new geographical markets. Addressing these challenges shall provide a supportive ecosystem that enables the growth of the Islamic FinTech, which eventually will lead to faster growth of the Islamic finance industry worldwide. These challenges can be solved by providing a regulatory framework that understands the Islamic finance requirements as well as various technologies to issue the right regulation that will empower Islamic FinTech. Furthermore, creating fund of funds and encouraging more investment companies to invest in these Islamic FinTech can result in meeting the existing demand, while increased awareness about their potential and opportunities can address the different financial needs in a Shari’a-compliant manner and close the financial exclusion gap among the Muslim populations. Additionally, educating and reskilling the existing workforce in different markets can create the right talent pool that meets the demand of the digital and FinTech sector. All these solutions can lead to opening avenues and reducing barriers for Islamic FinTech to expand geographically.
ISLAMIC FINTECH MODELS The Islamic FinTech startups through the utilisation of different technologies have managed to come up with innovative business models that provide Islamic financial services and products digitally. The technologies used vary in term of complexity based on the model applied, where it can be as simple as Mobile Money up to using Blockchain and Artificial Intelligence. Regardless of the technologies applied, the innovation of their business models come from the opportunities in the market that these FinTech startups capitalise on to build their businesses.There are five models that these Islamic FinTech companies have followed: The first model focuses on serving customers that are currently not being served by banks (including the unbanked and underbanked). An example is, Insha, which is the first Shari’a-compliant digitalonly bank in Germany. This digital bank provides Islamic financial services and products to the Muslim population in Germany that has limited access to such services and products. This is mainly due to the fact that most of the banks in the market are conventional and do not provide Shari’a-compliant financial services. This Islamic FinTech has grabbed the opportunity presented by the existing need of a segment in the market, not being met by the existing financial system. The second model identifies the existing inefficiencies in the banking processes and accordingly provides better financial services. For instance, Beehive is a crowdfunding platform that provides Shari’acompliant financing for SMEs. This platform has identified the weaknesses in the current banking system related to serving SMEs in term of high financing rates and speed of financing that results in SMEs having to wait a long time to get finances. Given these inefficiencies, the platform is providing lower financing rates than other banks in the UAE market and the speed of financing is described as fast by SMEs that have already received financing from this platform. The third model directly competes with existing banks by providing similar financial products and services to the same segment of customers. For example, Wahed is a wealth advisor online platform that uses Artificial Intelligence-based Robo-advisors to do investment for customers in a Shari’a-compliant manner. This platform provides investment advice using Robo-advisory services, which previously has only provided through fund managers in banks or other financial institutions to the same segment of customers. The fourth model uses banks’ existing infrastructure to provide Islamic financial products and services. An example is alneo, which is a digital payment solution that replaces the traditional POS devises and allows businesses to receive payments from their customers using a mobile application. This application has been developed by an existing Islamic bank in the market (Al Baraka Turk) and launched in the market as a FinTech solution that utilises the bank’s existing infrastructure to deliver its innovative service. The fifth model offers a new and disruptive Islamic finance product or service such as “HelloGold”. This FinTech company provides Blockchain-based platform for gold investment, which allows customers to buy and sell gold from their mobile application in a Shari’acompliant process. This type of investment could not be possible without the existence of technologies like blockchain and therefore it is considered disruptive in the world of financial services. Despite the slow rate of growth in the Islamic finance industry, Islamic FinTech can play a substantial role in the development of the industry through first meeting the existing demands in the Islamic world for Islamic finance products and services, second, using the different innovative models to come up with Islamic FinTech, and third overcoming the challenges these FinTech companies face. By addressing these three points, the progress of the industry can be assured and more financial inclusion can be achieved.
Wajeeha H. Awadh is the Section Head of Digital Banking & FinTech, Al Baraka Banking Group.