Beyond Brexit, UK Islamic fintechs face persistent longstanding industry challenges
UK Islamic fintech companies are unlikely to be significantly impacted by Brexit but face more inherent challenges, various stakeholders told Salaam Gateway.
Funding for growth remains a key issue. According to the Global Islamic Fintech report 2019, respondents identified the lack of access to capital as the biggest barrier to scaling for Islamic fintechs worldwide.
Harris Irfan, chairperson of the UK Islamic Fintech Panel that produced the report with digital finance firm Elipses, argues that Islamic finance has so far been concentrated within the Islamic banking sector and Shariah-sensitive investors seeking to invest in the financial services industry remain traditional in outlook.
He adds that early-stage fintechs require a more sophisticated venture capital style investment process and tech in general requires its own expertise to understand the sector.
“I would not be surprised if the first Islamic fintech unicorn is funded by a conventional private equity or venture capital investor rather than an Islamic financial institution,” Harris Irfan told Salaam Gateway.
Despite significant wealth in Muslim-majority jurisdictions like the Arabian Gulf, part of the reason why Islamic fintechs struggle to attract investment from Islamic investors is because of a lack of private equity and venture capital industry.
Hussein Kanji, partner at venture capital fund Hoxton Ventures, said Islamic fintechs remain a niche of a niche which makes it difficult to attract investment from traditional Islamic investors.
“There aren't that many venture firms in the Muslim-majority world. I'm not sure what an Islamic VC is,” he said.
Others like Harris Irfan explain that the private equity and venture capital industry is not well represented in traditional Islamic markets.
“Much of what passes for private equity in, for example, the Gulf, is centred around real estate funds,” he said.
“Even when large sovereign and quasi-sovereign funds invest in tech, they often look at large, blue chip, well-established brands. Investment in early-stage Islamic fintech requires deep understanding of tech, sophisticated analysis and a bold, risk-quantified approach,” he added.
Anum Siddiqi, Co-founder and director of product development at Connectif Technology, a fintech solutions provider to the Islamic finance industry, argues that the potential investor pool is narrow as Islamic finance is still niche in the UK and is not widely accessible or understood by the general population.
“Fintech initiatives also take time to develop and achieve their full potential, particularly in this industry, so patience and understanding is key; these are not common traits, with many investors looking for a quick return,” Anum added.
The founder and CEO of social enterprise crowdfunder UpEffect, Sheeza Shah, agrees.
“Islamic banks and investors have traditionally invested in low-risk businesses and sectors to maximise on returns,” Sheeza told Salaam Gateway.
“This means that new and innovative businesses are having to turn to conventional investors that are known for primarily investing in white male founders. A Muslim business catered specifically to Muslim consumers is unlikely to attract capital from this pool,” she said.
Islamic fintechs must address real consumer needs and also appeal to a wider population, according to some of the participants.
“It is not good enough to just claim to be Islamic and hope that is enough to win over the customers,” said Safdar Alam, co-founder of Niyah, a new digital Islamic banking platform.
Apart from providing Islamic mortgages, Muslims in the UK have had little to no choice for services and products, he notes. “As such, there is definitely unmet demand for high quality products that meet the needs of Muslim customers.”
These products may also appeal to non-Muslim customers, and one way to reach beyond Muslims appears to be as simple as picking a name that is not overtly Islamic or Arabic.
“Whilst a lot of the fintechs have an underlying Shariah-compliant component, a lot of them like Yielders are choosing non-Muslim or non-Arabic brand names,” said Abdul Haseeb Basit, chairperson of Yielders, the Shariah-compliant property crowdfunding platform.
“This is to appeal not only to Muslims but to the mass market,” said Abdul Haseeb, who is also Co-Founder and Principal of Elipses.
Of course, developing a product the British Muslim population of 3.4 million genuinely needs and that also appeals to the wider market is easier said than done.
“[The] broader challenge is that there needs to be unique selling point that makes an Islamic fintech appear more attractive than non-Islamic fintech, too,” said Ibrahim Khan, co-founder at Islamic Finance Guru.
Entrepreneurs echoed this sentiment saying it was important to offer something different.
“To compete in this space and overcome biases, Islamic fintechs need to rapidly demonstrate how they’re truly different from those that came before them,” said Areeb Siddiqui, Founder and CEO of Kestrl, an ethical and interest-free payments and wealth management platform set to launch in the second quarter.
Remaining fiercely Islamic as a British fintech could be the way to go. Sheeza Shah suggests Islamic fintechs find their own way, saying that “much of the Islamic economy has replicated Western businesses”.
“Ethics, justice and fair trade are some of the core tenets of the Islamic finance model and for the economy to survive, it needs to go back to the original teachings of Islam which dictates prioritising communities above transactions,” said the UpEffect founder.
This in itself would be a disruption to institutional Islamic banking, which Khalid Howladar, Head of Credit and Sukuk at R.J. Fleming and Co characterised as being “not nimble enough”.
“Banks already are not nimble enough and there is definitely a space in smaller ticket SME financing and offering more ‘genuine’ investment choices to the affluent Shariah sensitive customer,” he said.
Sheeza Shah agreed and said there needs to be a “shift in the deployment of capital as Islamic finance has done very little for SMEs.”
But others say the scope for Islamic fintech to disrupt banking in the UK is limited because of the size of the market.
“The sector here in the UK is fairly small, so disruption is going to be limited,” said Stuart Hutton, chief investment officer at Simply Ethical. “What it could do is provide the opportunity to allow growth into areas that are not being serviced and also seek to improve financial inclusion and social impact.”
As the UK builds new trade links with individual countries, some practitioners said that all fintech companies face uncertainty of whether the passporting scheme will remain available to them post-Brexit.
The passporting scheme allows financial institutions in the EU to operate and sell financial products and services in member states without having to apply directly to specific regulators.
“With Brexit and the uncertainty around financial services passporting, this will add a legal cost on to these fintechs as they consider having to set up a separate legal structure in Europe in order to operate there,” said Ibrahim Khan.
He added that while the European Commission (EC) has historically funded start-ups, recently they are insisting that any start-up they fund has to establish in Europe and is not allowed to set up even a subsidiary in the UK.
However, Harris Irfan downplays Brexit’s impact as limited because most UK Islamic fintechs are domestic focused.
“They [Islamic fintechs] are mostly at a relatively early stage and therefore most are currently focused on the UK market,” he said.
“For those with global ambitions, tech can be licensed through platform banking and banking as a service (BAAS) to overseas regulated institutions and this is a structural solution to seeking separate regulatory permissions in each market.”
Apart from understanding their geographical limits, the UK’s exit from the EU also hinders the free flow of human capital. The supply of talent remains another challenge, notes Anum Siddiqi.
“Finding the right personnel to fit your company – it’s hard to discover the top talent with both an aptitude and interest in the industry,” she said.
INCLUSION OF WOMEN
Islamic fintechs have a long way to go to bring more women into their fold. According to the Global Islamic Fintech 2019 report, only 26% of Islamic fintechs globally have at least one female founder.
The challenge of underrepresentation of women holding senior roles remains a challenge in most industries, according to Anum Siddiqi.
“I believe the number of women actively involved in the Islamic finance industry will increase as the industry as a whole evolves,” she said.
She added that as general awareness of the industry grows, so too will the number of women working within it.
The Islamic finance industry is heavily male-dominated, making it challenging for women to enter the sector, said Sheeza Shah.
“The system seems to be working to the benefit of Islamic finance leaders therefore they have no incentive to pave a way for women to join,” she said. “This results in women being afraid to contribute to conversations, build businesses or tackle the resistance from male leaders as lack of support from the community can be hugely demoralising.”
Both said Islamic fintech can disrupt the status quo and provide opportunities for women.
“Today’s technological advances, coupled with the widespread inefficiencies generally associated with Shariah-compliant processes, make the industry ripe for disruption,” said Anum Siddiqi. “Given that the industry as a whole is still evolving, there are more opportunities available – these should be no bias as to who these are offered to.”
Sheeza Shah said more needs to be done, pointing out as well the limited funding options for women across all sectors.
“Instead of constantly pushing women to the modest fashion sector, we need to create opportunities for women in Islamic fintech by hiring them, putting them on panels, funding them, connecting them and amplifying their work,” she said.
In a post-Brexit environment it is likely that Islamic fintech will continue to grow but they still face the same challenges in funding and winning over consumers.
“The UK is going to continue being a good place for Islamic finance and Islamic fintech because of the talent pool available,” said Abdul Haseeb Basit. “However, how quickly Islamic fintechs will be able to scale and appeal to the critical mass, without greater funding into the sector will be a challenge.”
Others like Bashar Al Natoor, global head of Islamic finance at Fitch Ratings, said that it is too early at this stage to say if fintech will be successful in disrupting the traditional Islamic banking sector.
Nevertheless, the general feeling is one of optimism.
“There is a good number of Islamic financial institutions in the market who can collaborate to help those fintechs (both Islamic and non-Islamic) to grow their business and to expand their reach in the market,” said Ashraf Ammar senior director of financial services at PwC.
“The creation of iE5, the first UK accelerator for Islamic ecosystem is a good example for the way forward for the future and for the Islamic fintech in UK.”
(Reporting by Hassan Jivraj; Editing by Emmy Abdul Alim [email protected])
Brexit brings risks and opportunities for UK Islamic finance but unlikely to revolutionise domestic industry, say experts
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