Islamic finance embraces fintech

By Michael McCaw | 6 April 2018

While banking and financial institutions in many corners of the globe have embraced the benefits technology has brought to the sector in recent years, Sharia-compliant fintech solutions are quickly catching up.

That’s according to a report published last year by research firm Wamda Research Lab, which states that in the Middle East and North Africa (MENA) region alone – home to a quarter of the world’s Muslim population – fintech start-ups were up from 43 in 2013 to 105 in 2015. That figure is expected to increase to 250 by 2020.

In recent years, fintech hubs have sprouted up in countries where Islamic finance is prominent: last year the Dubai International Financial Centre (DFIC) launched FinTech Hive, which listed Emirates Islamic Bank, Dubai Islamic Bank, and Abu Dhabi Islamic Bank and a range of start-ups aimed to boost Sharia-compliant fintech solutions. The Fintech Association of Malaysia is encouraging greater developments in the area, and fintech startups are rapidly springing up across the United Arab Emirate (UAE), Lebanon, Jordan and Egypt. On top of that, Sharia compliant fintech initiatives and firms are popping up across Europe, according to Wamda’s report.

However, there are hurdles, of which one in four fintech startups fail to clear, according to the report, with around 28% sectoral firms in the MENA region shutting down. Of the challenges facing fintech’s growth, dealing with financial regulations was the greatest concern to fintech entrepreneurs, with hiring and retaining talent, raising funds from investors, acquiring customers and expanding into other countries following closely behind.

But according to an EY report into Islamic finance, banks operating in the sector fully recognise the benefits new technologies – such as in-memory computing, the cloud, big data analytics, mobility, blockchain, artificial intelligence and robotic analysis - can offer, both to internal banking mechanisms and customer engagement. However, specifically within the Gulf Cooperation Council (GCC), says the report, banks do not expect fintech disruption in the short term, and expect limited business loss to stand-alone fintech firms in the medium term.

The Middle East, Africa, and south Asian financial and banking markets are among the fastest growing in the world, with 70% of the populations still unbanked. That represents large opportunity for banks to utilise fintech mechanisms to unlock the market with digital, low cost Sharia-compliant products.

Within Islamic finance, money in and of itself cannot be used to generate profit. That is, those involved in Islamic banking cannot lend or borrow money primarily for the purposes of earning interest. While the objective of Islamic finance is not profit maximization, but rather purely to facilitate Sharia-compliant trading, leasing, fee-based transactions and investment activities, Islamic fintech is rapidly growing in significance and scale.

Across the globe, fintech sandboxes instigated by regulatory bodies have helped bring new players into regulatory scope while making regulators aware of growing trends within the industry. In the US, the Commodity Futures Trading Commission’s Lab CFTC works closely with fintech innovators, while the UK’s Financial Conduct Authority’s FCA Innovate offers support to market participants.

Across the MENA region, the Abu Dhabi Global Market has launched a regulatory sandbox that allows companies to live-test innovative fintech products in collaboration with the regulator. Elsewhere many have argued for fintech sandboxes in Lebanon, Jordan and Egypt, to help encourage and accelerate Islamic finance technological advances. Should those countries’ regulators adopt an approach that would greater promote fintech advances within Islamic finance, no doubt wider acceptance of Sharia-compliant fintech developments would be even better.

And the growth with which fintech is spreading across wider markets continue, as well as the pace of Islamic finance expansion across the world, sharia-compliant fintech seems likely to become part of the mainstream global fintech revolution.

Become a bobsguide member to access the following

1. Unrestricted access to bobsguide
2. Send a proposal request
3. Insights delivered daily to your inbox
4. Career development