Finance & Banking


Islamic Fintech has a potentially transformative
impact on the economy, and as such, authorities and
regulators need to carefully nurture a policy regime that
promotes innovation and growth of Islamic Fintech companies
and startups. In this era of digitalisation, traditional rules and
regulations will not be sufficient for the existing and new
entrants in the financial industry. Increasing commoditisation
of technologies such as artificial intelligence and machine
learning produce new pandora boxes for regulators.1 Smart
regulations are fundamental to the future of the Islamic
Fintech sector.

Smart regulations minimise the obstacles to Islamic financial
markets including Islamic Fintech while maintaining control.
Regulators through smart regulations can test and experiment
with the new service providers. They can also monitor their
performance and be flexible in issuing them with a license,
which should be improved subsequently. Innovation office,
regulatory sandboxes and RegTech can together be very
supportive for regulators instead of depending on only one
approach that may leave pitfalls and room for inaccuracy.2

In formulating an effective regulatory framework for Islamic
Fintech, regulators have to comply with fundamentals such
as standardisation, financial stability, innovation with Maqasid
al-Shari’a, cyber-security, consumers’ protection and capacity
building. These essential features are indispensable for the
growth, development and sustainability of Islamic Fintech
given the unique nature of Islamic finance itself. These
features are discussed below.

  1. Standardisation

A prerequisite for the rapid growth of Islamic finance in
general and Islamic Fintech in particular, is standardisation of
Shari’a interpretations and legal documentations. This would
fuel growth by streamlining the whole process, which is still
complicated and time-consuming. This is also one of the
critical reasons for the lack of Islamic Fintech as compared
with conventional Fintech companies.

In this context, standardisation means the establishment
of universal Shari’a standards by the flexible codification of
Shari’a principles, which would ultimately reduce the shortage
of Shari’a scholars and also help promote unity among the
different schools of fiqh.3 This signifies that a universally
recognised Islamic manuscript or standard should be issued
to harmonise differences in fiqh opinions concerning Islamic
finance in order to further enhance product development and
reduce Shari’a non- compliance risk.

The best solution provided in the matter of standardisation
is by Dr. Muhammad Tahir ul Qadri. He suggested that the
solution to this problem lays in the adoption of the theory
of Taqlid-al-Madhahib “Neo-Juristic approach of inclusive
accommodation and flexibility”, which is based on strong
Islamic legal foundations. He is of the view that, with
the application of this approach, the uncertainty in postdefault resolution mechanism in Islamic finance matters will
be eliminated.4 This will subsequently enhance investors’
confidence, resulting in transparency and appropriate risk

2. Innovation with Maqasid Al-Shari’a

Standardisation without innovation does not guarantee the
sustainability of Islamic Fintech. Without a doubt, innovation
is imperative for the development of the Islamic Fintech
sector. But at the same time, achieving Maqasid al-Shari’a
should be the primary objective. Without attaining this goal,
Islamic Fintech cannot compensate and fill the gaps left by
the Islamic finance industry. Financial innovation in Islamic
finance must be within the Shari’a parameters and tested
against the Maqasid al-Shari’a, both in form and substance, where the primary objective is the realisation of benefits to
the people.5 When formulating regulations for the Islamic
Fintech sector, authorities and regulators should aim to fulfil
Maqasid al-Shari’a through two main objectives: financial
stability and sustainable development.

3. Financial Stability

Fintech is changing the landscape of financial services,
providing more opportunities to seek financing and increasing
financial inclusion. Regulators are responsible to provide
a framework that supports the sustainable development
of the industry while protecting consumers and ensuring
financial stability. The Financial Stability Board (FSB) recently
published a report on Fintech and its implications and the risk
to financial stability. The report concludes that, while there
are no irresistible financial stability hazards and risks from
emerging Fintech innovations given the relatively small size
of the Fintech industry relative to the global financial system,
experience depicts that they can flourish quickly if left
neglected.6 It also underscores the demand for international
bodies and national authorities to pay attention to Fintech in
their risk assessments, monitoring and regulatory frameworks.

The mixture of greater efficiency and better use of big data
could give essential support to financial stability if the linked
risks are appropriately managed, especially those related to
pro- cyclicality and excess volatility. Fintech has enormous
potential to expand access to financial services for both
businesses and individual households. This could increase
sustainable and inclusive growth, provided that the associated
risks are managed to keep trust in the system and to avoid a
build-up of risks that could result in financial instability.

4. Cyber Security and Customers’ Protection

Although there are many opportunities connected with
Fintech, the risks and potential vulnerabilities emerging
from new Fintech solutions cannot be overlooked. New
risks emerging from Fintech include risk of cyber-crimes,
data breaching, data theft, etc. These risks may be due to
uncertainties in regulation, lack of required technological
skills, smart workers, heavy compliance costs and issues of
scalability in handling the massive volume of unstructured
and structured data. In this scenario, customers’ protection
is an important point that has to be considered appropriately
while enforcing regulations.7

The combined use of blockchain, big data and artificial intelligence can lead to a better, more sophisticated and
integrated cyber security system, which are adaptable and
effective. In addition, one of the major challenges from
the end users is lack of awareness of cyber or digital risks
or also their negligence in taking precautionary measures
while accessing financial services through digital channels.
Awareness programmes to educate users may be helpful to
manage the cybersecurity risks. Another big challenge for
policymakers and regulators is protecting customers from
cyber risks and at the same time allowing them the usage of
digital channel to access financial services.

5. Capacity Building

Islamic Fintech is still at its infancy with only 93 Islamic
Fintech established world over. One of the factors behind
the slow growth and meagre number of Islamic Fintech is the
lack of skilled human resources.8 Regulators have to play their
role in this vital element of capacity building to ensure the
sustainable growth of the Islamic Fintech sector. Regulators in
different countries are adopting the approach of integration
and collaboration with new entrants in Fintech in terms of
their trainings, especially on regulatory matters. Different
hackathon programmes have been developed by regulators
to enhance awareness among the new entrants.


Digital transformation of the Islamic Fintech sector is vital in
this era of digitalisation and smart regulations are essential
to enhance its development. Islamic Fintech can be a tool
to reach out to the masses, which are not currently served
by the Islamic finance industry, especially Islamic banks. The
numerous opportunities provided by Islamic Fintech such as
financial inclusion, empowerment of underserved consumers
and the achievement of Maqasid al-Shari’a; will become
apparent when regulators’ concern for financial stability,
consumers’ protection, innovation and capacity building are
assured. Standardisation and harmonisation in regulations
have great significance and act as catalysts in the growth and
sustainability of the Islamic finance industry.

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