Islamic FinTechs: ethical, acceptable, and embracing ESG

The term ‘FinTech’ is a merger of the two terms ‘finance’ and ‘technology’ and refers to businesses that use technology to enhance, automate and improve financial services processes and propositions. Islamic FinTech is hence, a type of technology that is ethical, religiously acceptable and one which embraces environmental, social, and corporate governance (ESG) elements. As both have similar ideologies, there may be little to separate an ESG-compliant FinTech and an Islamic FinTech, with, however, the Islamic FinTech also be understood to have an additional faith-related label that can be appealing to the Islamic population/ regions around the world.

The new Islamic FinTech ecosystem guarantees users that their assets won’t be invested in prohibited industries thereby addressing a wider need for alternative investments. It includes Wahed, the Islamic online wealth manager, and the UK’s Niyah and Germany’s Insha – which are Islamic banks focused on mobile banking. Some of the more innovative and recent Islamic FinTechs include Malaysia-based HelloGold, which is working on the world’s first Sharia-compliant gold mobile application.

Elsewhere, IslamiChain, which took part in the DIFC FinTech Hive’s 2019 FinTech Accelerator Programme, is looking to create transparent and accountable delivery mechanisms for philanthropy and compassionate giving, using blockchain technology and decentralised digital identity.

Hakbah claims to be the ‘first cooperative saving platform in Saudi Arabia’. It also graduated from the DIFC Fintech Accelerator Programme 2019. It has a strategic partnership agreement with Visa, operates through SAMA’s Sandbox and, in January 2021, raised $1.2 million in seed funding.

Saudi-based Wethaq has been working since 2018 to bring ‘FinTech innovation’ to the Islamic capital market, working to develop a platform that is focused on the structuring and distribution of Sukuk (Islamic bonds).

The Global Islamic Fintech Report stated that Saudi Arabia, Iran, United Arab Emirates, Malaysia and Indonesia are the leading countries in terms of Islamic FinTech transaction volumes within the Organisation of Islamic Cooperation (OIC) countries.

The report estimates that 250+ Islamic Fintechs are operating globally spread across OIC and non-OIC countries. The estimated Islamic Fintech market size for OIC countries in 2020 was $49 billion. However, this amount only represents 0.72% of the current global FinTech market size, based on transaction volumes. The Islamic FinTech market within OIC countries is projected to grow at 21% CAGR to $128 billion by 2025 compared to the conventional FinTech CAGR of 15%. This represents a significant growth opportunity for Islamic FinTechs over the next 5 years.

The key areas for Islamic FinTech

The Islamic FinTech landscape is still in its early stages. Over 75% of Islamic FinTechs are active in more traditional areas related to raising funds, deposits and lending, wealth management, payments and alternative finance. However, the digital banking space is gaining increased importance due to the launch of neobanks/digital-only banks.

Social finance is considered a significant opportunity area for Islamic FinTech. This means potentially tapping into the multibillion-dollar Islamic social finance pool that comprises Zakat (obligatory charity), Sadaqah (voluntary charity) and Waqf (endowments). This itself has the potential to contribute anywhere upwards of $200 billion towards social programmes and projects internationally.

Several key countries have recently introduced regulatory initiatives in Islamic FinTech that will help provide impetus to the growth of their national Islamic FinTech sector. For example, Saudi Arabia has onboarded another 9 FinTechs into its regulatory sandbox, a sure sign of the swift pace it is moving at to grow Saudi Islamic FinTech. Meanwhile, Egypt’s Financial Regulatory Authority (FRA) has seen its legislative framework take a step closer with parliamentary committee approval in October of a draft law regulating FinTech in non-banking financial activities. The law also includes provisions for the establishment of a ‘lab’ to test new FinTech products. Being a significant market for Islamic FinTech, the codification of this framework should spur growth in Egypt amid increasing public interest in Islamic finance solutions.

Financial inclusion matters

The World Bank’s report 'The Global Findex Database' stated that globally there are almost 1.7 billion unbanked people who can be potential customers for retail banking and more than 200 million micro, small and medium-sized businesses that required banking assistance. This presents an enticing business opportunity for Islamic FinTechs, as the report also pointed out that the unbanked population is dominated by Muslim-populated countries/ regions that comprise almost 50% of the world’s unbanked population. While much of this population is spread across poorer regions of Sub-Saharan Africa and Asia, recent gains by telecom and mobile networks across these regions should help FinTechs tap into populations in economically remote areas.

FinTechs strive to provide cost-effective solutions for companies looking to reduce overall costs, improve customer experience and automate business processes. The financial services industry is a critical sector in every society and hence is one sector that is heavily regulated. The introduction of FinTechs, including Islamic FinTechs, especially in developing countries can help boost economic growth but this also increases the scope for the local regulators. They need to understand the FinTech implications and take steps towards ensuring the stability of the financial system and protecting it from new-age issues related to cyber-attacks, data leakages, data thefts, etc.

At present, there is no globally accepted regulatory body for Islamic FinTech. In common with the regulation of conventional financial services, the regulation of Islamic financial institutions and Islamic FinTechs is carried out in each country individually. Examples of local regulators include Bank Negara Malaysia and Securities Commission (Malaysia), Financial Services Authority (Indonesia), SAMA – the Saudi Central Bank, as well as their counterparts in Western markets, such as the Financial Conduct Authority (FCA) in the UK, which regulate Islamic Fintechs within their overall existing framework.

However, standards promulgated by AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) are followed in 20+ Muslim-majority countries/jurisdictions. We may reasonably expect that these standards, including those relating to Islamic FinTech segments, will continue to gain acceptance with local regulators looking for consistency and acceptability of standards internationally.

With a global focus on alternative investments and ESG, Islamic FinTechs have the necessary framework and impetus to improve the sector’s global footprint and market share. As far as the immediate future is concerned, Muslim countries and regions should remain a priority as acceptability and education barriers are low. However, in the end, it is the innovation, offering and customer benefit which will eventually make the Islamic FinTech successful along with the right environment – both in financial regulatory and Sharia terms to ensure they have the necessary oversight and direction needed for continued sustenance and growth.

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