5 Years in Islamic FinTech: Navigating Important Issues and Beyond

It's been 5 years since I started working in the FinTech scene and specifically in the Islamic Social Finance arena. We've had countless events, talks, webinars, and discussions on how we can enhance and improve our work in the industry and I hope this small article is a small step in the same direction.

To begin, we first need to recognize the importance of education in the field be it among the industry people themselves or even the common masses along with understanding why it's critical to embrace emerging technologies to expand and improve our Islamic social finance products and services.

What is the difference between Digitization and Digitalization?

Digitization refers to the conversion of analog information or processes into digital format. It involves the transformation of physical or paper-based data, records, or activities into digital or electronic form. This is also known as digital enablement.

Digitalization is a broader concept that focuses on moving existing processes into digital technologies. It encompasses the use of digital technology and tools to optimize processes, create efficiencies, and transform business practices.

In other words, digitization is for information, whereas digitalization is for processes. In the context of Islamic social finance Sadaqah, Zakat, and Waqf, it entails the strategic use of technology to enhance efficiency, accessibility, transparency, and user experience.

Why Embrace Change and Technology?

Just like water, being stagnant is never a good choice. We have seen what happened to the likes of Nokia, Blackberry, and others who did not recognize the market changing aptly and did not embrace the changes happening in the industry.

Likewise in the field of Islamic social finance, we observe that there are many organizations that might have been around for quite some time but because of excessive bureaucracy, lack of knowledge of the latest trends, and an unhealthy want to stick to only what they know from the 'olden golden days' has hampered their growth and maybe even done a major disservice to the legacies of these organizations.

I remember reaching out to a renowned organization to provide a fintech solution to their social finance needs. We spent 6 months grueling with their legal, tech, data, shariah, and many other teams every other week. After getting a green light from all departments, we found out that the CEO refused to proceed despite his own team pushing for the solution just because it didn't make sense to him why people would want to give charity online when we can just drop it in our local masajid directly. Ajeeb.

As Muslims, we should not always be playing catchup. We need to actively invest in research so that we can come up with tech solutions for our needs. Where's the money to support all this? Hint: Waqf. Yes, we have had awqaf in the past, the money from which supported full-time research. We need such awqaf even more now instead of splurging the hard-earned money of the Muslims on random bling bling initiatives.

As Product Managers, we focus on the PPP Framework or the 3Ps which are People, Process, and Product. From my little experience, I can conclude from my observations that one can have the best product and processes in place but if the people department is not sorted, everything will come crumbling down. The biggest point to focus on in this area is continuous education and awareness.

The Issues

We will touch more on the 3P's in a bit. But first, I want to bring the focus on the 4T's. Overall, in the Islamic Social Finance industry, some of the key issues that I have observed can be brought under the umbrella of:

1. Time: Time is often a challenge, as it takes time to build trust in new digital platforms and processes. People need to become comfortable with the technology and have faith in its effectiveness. Add to that, in the fast-paced world that we live in today, people want everything to happen in one click, and happen: NOW!
2. Trust: Trust is the foundation of any social finance initiative. Ensuring that digital platforms are secure and transparent and that funds are used as intended is paramount. With the rise in online scams and mismanagement of funds, we see the trust of the general public shaking when it comes to the organized collection of social finance funds.
3. Transparency: Transparency goes hand in hand with trust. Utilizing technology and providing real-time updates on the utilization of social finance funds is the first step in addressing concerns. Donors don't have visibility into how their contributions are being used or even what percentage is actually reaching the end beneficiary.
4. Technology: This is the core focus for us today. We see many organizations having good ideas and no tech to support them and also organizations that have good tech solutions but no access or the funding to spread their solution. When it comes to Islamic social finance, the key is to see each other (different organizations) as team members and not competition. There is so much untapped potential and liquidity in the market that worrying about market share should be the least of our worries honestly. There's enough cake and more for everyone.

The Need for Education

As we are on the topic of Islamic Social Finance, a very important piece of advice from one of my teachers comes to mind. The Sheikh said, "Education is one of the most powerful forms of sadaqah jariyah. A well might dry up, a copy of the Quran might get damaged, and a masjid might collapse. This is why it is said:

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'Beneficial knowledge is an endowment which doesn’t end."

The Messenger of Allah ? said, “Whoever guides someone to goodness will have a reward like one who did it.” [Muslim]

Education is the backbone of our entire discussion. This is the 'People' aspect of the 3Ps that we mentioned before. If this is sorted, the other 2Ps of 'Processes' and 'Product' will follow smoothly InshaAllah. We need to super focus and work on educational drives on major two fronts.

1. Providing comprehensive education on Islamic social finance principles especially zakat since it is a pillar of Islam. We need to explain just how much potential for change is there with these funds at hand if used properly.
2. Education on the various digital tools that we have available to make sure the people can tap into the immense potential of these funds. Educational initiatives can take the form of workshops, online courses, or mobile apps that provide guidance. People are already used to online banking, social media apps, and so many similar apps. Our product development teams need to make sure the Islamic Finance products are informative as well as super easy to use.

Building on the importance of education we also need to work towards a mindset change when it comes to Waqf specially. For many that we spoke to or worked with, waqf is just building a well or a masjid. We need to educate people on how awqaf can be and should be revenue-generating and how we should not limit it to just 2-3 things. There is still an aversion or some form of baggage in the minds of people when it comes to revenue being generated from awqaf. They want everything to be free and yet at the same time be top-notch quality. This is impractical and mere wishful thinking. The potential for awqaf is insane if tapped into properly.

Independence and self-sufficiency are some of the most praised traits taught by the Sunnah. We have enough masajid already. As the scholars say, "We need to focus on building the Sajid and then the Masajid." This is a very deep statement that one can make only after years of dealing with the community on the ground.

Sheikh Ibrahim Nuhu ???? ???? said, "If we actually focus and implement the system of Zakat and Waqf as it is prescribed to us by Allah and His Messenger then there hardly would be a person around to even accept sadaqah like during the time of Umar Ibn al-Khattab and Umar Ibn Abdul Azeez. Allah has already given us the blue-print of a successful society. It's now up to us to implement it.

Till today we have people who have to sell their bodies just to have some food to eat. Allah has given us facilities like waqf and zakat, but how much of it is actually being implemented?

How much zakat money actually reaches the intended people?

How much of the waqf is actually serving its true purpose?

Nowadays our masajid have to depend on donations of a few personalities and boxes going around in the masjid. Waqf removes this dependency and restores honour to the masjid. It is said that the first waqf in Islam was the Masjid of the Prophet ?."

Digitalisation in Zakat Collection

Zakat is one of the pillars of Islam. Allah has coupled its mention in the Quran with Salah 20+ times just to show its importance. Most of the time when the dangers and ills of Riba are mentioned, it is followed by the benefits and beauty of Zakat.

Going back to the issue of education, it is key that the pillar of zakat is taught and clarified at every level of our education system till we know the basics like the back of our hand.

There was a zakat advisory case that I handled for a businessman in the UAE. He had been living there for years and had amassed millions in wealth. Alhamdulilah Allah Guided him to start learning about Zakat but till that point, he had thought that just because he was giving charity every month, that would be enough and there was no need to pay Zakat. He didn't even understand the concepts of Nisab and Hawl. SubahnAllah. There is so much work for us to do. We have beautiful people in the community with golden intentions to help. We just need to help, enable, and empower them.

So how can digitalization help in Zakat Collection?

In the traditional manual system, we had:

1. Paper-Based Records: Zakat collection often relied on paper records, making it cumbersome to track and manage contributions accurately.
2. Manual Calculations: Donors and administrators had to manually calculate the Zakat amount based on financial transactions, which was prone to errors and delays.
3. Limited Accessibility: People had to physically visit collection centers, such as mosques or charity offices, to make Zakat contributions, which could be inconvenient and time-consuming.

Disbursement: The process of disbursing Zakat funds also faced challenges:

1. Manual Verification: The eligibility of the recipients (asnaf) had to be manually verified, involving extensive paperwork and an added administrative burden and cost.
2. Delay in Distribution: The manual verification process and administrative bottlenecks often resulted in delayed disbursements, causing hardship for beneficiaries. Money sitting idle also opens doors for its mismanagement by bad actors.
3. Transparency Concerns: Donors had limited visibility into how their Zakat contributions were used, leading to trust and transparency issues.

After: Digitalized and Automated Zakat Collection and Disbursement

Collection: With digitalization and automation tools in place:

1. Digital Records: Contributions are recorded electronically, ensuring accuracy and ease of tracking. A secure database or blockchain ledger can be employed for this purpose.
2. Automated Calculations: Digital platforms automatically calculate Zakat based on financial transactions, reducing errors and providing donors with instant clarity on their obligations.
3. Online Accessibility: Donors can conveniently contribute their due Zakat online through secure mobile apps or websites, eliminating the need for physical visits and promoting broader participation in charitable giving. GlobalSadaqah.com is one such example among many of the platforms that facilitate it.

Disbursement: The digitalized and automated approach streamlines Zakat fund disbursement:

1. Automated Verification: Eligibility checks can be automated, cross-referencing recipient data against predefined criteria. This reduces the administrative burden, costs, and expedites the process.
2. Real-Time Distribution: Digitalisation and Automation tools ensure that Zakat funds are disbursed promptly and minimize delays. It significantly reduces administrative overhead, ensuring that a larger portion of Zakat contributions go directly to those in need. It also helps make sure that the zakat reaches beneficiaries swiftly, addressing their needs promptly.
3. Accuracy: Automation minimizes human errors in calculations and eligibility verification, ensuring that Zakat funds are distributed accurately and fairly.
4. Enhanced Transparency: Beneficiaries and donors have access to real-time, transparent records of Zakat disbursements. Blockchain technology can provide an immutable ledger of transactions, offering complete transparency.

Benefits of Digitalization and Automation for Zakat Collection:

1. Efficiency
2. Accuracy
3. Accessibility
4. Timeliness
5. Trust and Transparency

Watch This Masterclass on The A-Z of Zakat

Digitalisation in Waqf Management

In the traditional manual system, we had:

1. Paper Records: Waqf assets, such as land, properties, and investments, were often documented on paper, making record-keeping cumbersome and prone to damage or loss.
2. Manual Transfers: Transferring ownership or management of Waqf assets required extensive paperwork and legal processes, causing delays and administrative complexities.
3. Limited Visibility: Donors and beneficiaries had limited visibility into the status and utilization of Waqf assets, leading to uncertainty and trust issues.

Income Distribution: The process of generating income from Waqf assets and distributing it faced challenges:

1. Manual Management: Property rental income, for example, was managed manually, involving rent collection, accounting, and distribution, which could be error-prone and time-consuming.
2. Inefficiencies: The manual approach often resulted in inefficiencies, including delays in income distribution and disputes over asset management.

After: Digitalization and Automated Waqf Management

Creation and Record-Keeping: With digitalization and automation tools:

1. Digital Records: Waqf assets are recorded electronically in a secure database or blockchain ledger, ensuring the integrity and accessibility of records. These immutable records of Awqaf can help prevent so many disagreements that happen down the line after establishment and it can also help make sure that the intended intention of the Waqif for the Waqf is taken care of.
2. Automated Transfers: Digital platforms enable the streamlined transfer of ownership or management of Waqf assets, reducing paperwork, delays, and administrative burdens. There have also been discussions on the tokenization of Waqf assets that is really interesting.
3. Online Visibility: Donors and beneficiaries supporting the Waqf can access real-time information about the status and utilization of Waqf assets through secure online portals or mobile apps. The digital system provides donors and beneficiaries with transparent, tamper-proof records of Waqf asset management and income distribution, enhancing trust in the process.

Income of Benefit Distribution: Awqaf should be set up to also generate income or some kind of benefit. The digitalized and automated approach optimizes income and benefit generation and distribution:

1. Automated Income or Benefit Management: Income or Benefit generated from Waqf assets, such as rent, can be managed through automation, including rent collection, accounting, and distribution, reducing human errors and delays.
2. Efficient Processes: Automation ensures timely and accurate income distribution to beneficiaries, minimizing disputes and maximizing the impact of Waqf assets.

Benefits of Digitalization and Automation:

1. Efficiency
2. Accuracy
3. Accessibility
4. Timeliness
5. Trust and Transparency

Watch This Masterclass on The A-Z of Waqf

Food For Thought

Here are a few ideas that we can explore and research to ensure we maximize the impact of our Islamic Social Finance Funds:

1. How we can enhance the Collection and Disbursement of Zakat al-Maal?
2. How we can enhance the Collection and Disbursement of Zakat al-Fitr?
3. How we can use CSR or Purification Funds from financial institutions and use them for a rolling Qard Hasan Fund instead of a single donation?
4. How we can use Waqf to build revenue-generating assets that contribute to a Qard Hasan fund? A rolling Qard Hasan fund can help launch or sustain SMEs, empower single mothers, help prevent Muslims from falling into riba-based loans, provide Takaful instead of mainstream insurance, fund scholarships for bright students, and so much more. The main idea with a rolling fund is that instead of one-off donations, we can reuse the funds again and again to help tens and thousands of people. The aim should be to turn beneficiaries into benefactors who in turn then contribute back to such funds to keep the cycle going.
5. How we can use Sadaqah or Zakat funds with the permission of the Asnaf to buy cattle for them? They benefit from its milk etc for a few months and the animal can then be sold for a marked-up price during the Qurban season. This plants seeds of entrepreneurship into the minds of the asnaf which can hopefully break the cycle of dependency on charity funds that they live on.
6. How we can utilize Waqf to generate funds to support and foster Imam Development across our masajid and Islamic centers? Imams are community leaders who need to be empowered with the latest education, research, and tech so that they can benefit the community in a more holistic manner.
7. How we can use technology to build and monitor a Halal Supply Chain for our communities?