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Opportunities Galore for Fintech Development in Islamic Finance

by internationalbanker

By Nicholas Larsen, International Banker


With our planet being home to almost two billion Muslims and Islam being one of the world’s fastest-growing religions, it should come as no surprise that Islamic finance has become a powerhouse sector in recent years. Indeed, at more than $2.7 trillion in assets, one recent estimate put the Islamic-finance market at 6 percent of the world’s total. And yet fintech (financial technology) solutions within this sector continue to lag in funding and innovation. As such, the next few years could see a multitude of opportunities for disruption dramatically transform the Islamic-finance space.  

Deloitte’s June 2020 Middle East-focused fintech study gathered input from 1,500 banking customers and more than 50 digital leaders from Saudi Arabia (KSA), the United Arab Emirates (UAE), Qatar, Kuwait, Bahrain, Oman, Egypt, Lebanon and Jordan. The study found limited alignment between customer expectations and bank offerings and that the region’s fintech ecosystem was characterised by some degree of contradiction and dichotomy. Although customer behaviour across the Middle East, especially in KSA, showed a clear willingness to adopt innovative solutions offered by banks, such as peer-to-peer money transfers, account aggregation and automated investment advice, Deloitte found that banks were not leveraging the full suite of fintech solutions to address customers’ needs and requirements to enhance daily banking journeys and experiences.

While 82 percent of Middle East banking customers surveyed were willing to start using fintech solutions, only 22 percent of Middle East banking customers were actually using fintech solutions, thus implying the emergence of a significant gap. Given the high concentration of followers of the Islamic faith within this region, it would be reasonable to assume that there is a significant opportunity for growth in Islamic-fintech solutions, as Muslims seek to access convenient digital solutions that follow the principles of Shariah finance.

Much of the recent research into this subject seems to concur with this outlook, moreover. The “Global Islamic Fintech Report 2021” published by advisory firm DinarStandard (DS) and digital structured-finance firm Elipses found that the Islamic-fintech transaction volume for 2020 within the 57 member countries of the Organisation of Islamic Cooperation (OIC) was just $49 billion, or 0.7 percent of global fintech transaction volume. That said, the report also found that Islamic fintechs were projected to grow to $128 billion by 2025 at a compound annual growth rate (CAGR) of 21 percent, which is higher than the 15 percent CAGR expected for the conventional fintech market over the same period. Again, this shows the widespread recognition of both the underdevelopment of Islamic-fintech solutions thus far as well as the tremendous opportunities for rapid growth presented by such a shortfall.

The report, which identified 241 Islamic-fintech companies globally, found that the top five OIC fintech markets by transaction volume for Islamic fintech were Saudi Arabia, the UAE, Malaysia, Turkey and Kuwait, thus indicating a strong dominance by MENAT (Middle East, North Africa and Turkey) region countries. Collectively, those five markets accounted for a hefty 75 percent of the OIC’s Islamic-fintech market size, which, in turn, means that there are clear regions of underdevelopment within the sector at this stage. “Facilitating automated Shariah-compliant products is an ambitious endeavour that can bring financial stability and financial inclusion to the segments of the populace that is financially deprived,” according to Alif Bank’s co-founders, Abdullo Kurbanov and Zuhursho Rahmatulloev, and chairman, Khofiz Shakhidi, who jointly wrote a piece for the Financial Timesin December 2021. “With Islamic fintech enhancing awareness and accessibility of Sharia-compliant products for consumers, investors and businesses, Islamic finance is poised for years of significant consolidation and expansion.”

Malaysia represents one of the brightest hopes for Islamic fintech to thrive over the coming years, along with the wider Islamic financial market as a whole. Indeed, thanks in no small part to its developed Islamic-finance market, the Southeast Asian country ranked first among 81 countries in the Global Islamic Economy Indicator (GIEI) for the ninth straight year. The indicator, published in DinarStandard’s annual “State of the Global Islamic Economy Report”, compares economies worldwide in their efforts to support the global Islamic economy.

And recent comments from Sharifatul Hanizah Said Ali underline the country’s commitment to fintech development at all levels. The Malaysian Securities Commission’s (SC’s) Islamic capital market development executive director acknowledged the pivotal role fintech will play in enabling the introduction of innovative solutions to support the halal economy, socially responsible investing (SRI) and Islamic social finance to grow the Malaysian Islamic Capital Market (ICM) further. And she also confirmed that the SC expects greater adoption of digitisation to enhance the Islamic-finance ecosystem. “The digital solutions would facilitate connectivity by allowing issuers, investors and intermediaries to access existing and new markets in a more efficient and cost-effective manner, thereby accelerating the industry’s growth,” Ali told the Malaysian National News Agency on April 13.

Financial inclusion also seems to be high on the priority list as far as Malaysia’s fintech-development objectives are concerned, with Ali identifying both small businesses and the bottom 40 percent of household-income earners, youth and underprivileged as being ripe for leveraging Islamic fintech to generate new income-earning opportunities, ensure continuous operationalisation of business activities and gain more financial control and financial literacy skills. “Raising capital through syariah-compliant means is especially essential for SMEs in the halal industry, which comprise[s] a large percentage of SMEs in Malaysia,” she said, adding that fintech would be key in expanding Islamic Capital Market offerings to enable greater connectivity, accessibility and inclusivity for all, including the underprivileged. “To achieve this, the SC will increase its efforts in the development of the Islamic social finance sector, which has been instrumental in addressing poverty alleviation and socio-economic development.”

And regarding Malaysia’s third “Capital Market Masterplan for 2021-2025” launched in September 2021, Ali highlighted innovation and fintech as key areas within this five-year plan. “To enable further growth and expand ICM offerings, fintech will be leveraged as an enabler of innovative solutions. Awareness and active participation from both the demand and supply sides of the market are also crucial to ensure growth and expansion of the ICM through fintech and digital channels.”

Arguably the most persistent long-running hindrance to further growth in both Islamic finance and Islamic fintech, however, is the lack of a cohesive set of rules and standards governing the industry. There is also no universally acknowledged regulatory body for the industry, which makes development decidedly challenging. As the “Global Islamic Fintech Report” observed, the regulators involved in establishing regulatory frameworks are found only where there is already significant activity—such as Bank Negara Malaysia and Securities Commission (Malaysia), Financial Services Authority (Indonesia) and Saudi Central Bank (Saudi Arabia) as well as regulators such as the United Kingdom’s Financial Conduct Authority (FCA) in Western markets—and use conventional regulatory systems to authorise Islamic fintechs.

“The way forward for the Middle East FinTech Ecosystem to reach its full potential goes through regulatory harmonisation and development of strategic partnership between Banks and FinTechs,” Anthony Yazitzis, financial services and fintech partner of Deloitte Middle East, concluded in the June 2020 “Deloitte Middle East FinTech Study.” Thankfully, some progress has been made, with the “Global Islamic Fintech Report” identifying the Bahrain-based AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) as particularly important at the supra-national level. The AAOIFI has been compiling voluntary Shariah standards for certain segments of Islamic-fintech activity, such as crowdfunding and cryptocurrency.

And it seems likely that the Islamic-finance sector will end up adopting the AAOIFI Standards, especially given that they are already being followed in 21 Muslim-majority countries. “Over the next 12 months, we could see progress on a unified global legal and regulatory framework for Islamic finance,” S&P Global Ratings stated in May 2021. “We believe that such a framework could help resolve the lack of standardisation and harmonisation that the Islamic finance industry has faced for decades.”


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