Collaboration between Islamic finance incumbents and Islamic fintech challengers

Ashar Nazim is the CEO of Aion Digital.

Presently, financial inclusion is a primary objective of the banking sector. Naturally, Islamic finance is continuously increasing in global relevance as it pertains to a defining demographic of 1.8 billion Muslims worldwide and a broader global ethical finance community (World Bank, 2020). It is important to consider that Fintechs have created a space for enablement and innovation which is disrupting the banking industry, and on the other hand incumbents are hampered by siloed processes and legacy systems. Hence, collaboration is the key to mutually benefit both parties and achieve the intersection of a Venn diagram.

Islamic Fintechs are largely targeting a new customer base that is the younger Muslim population around the world that have been highlighted as a critical determinant of Islamic Fintech prospects as they account for 29% of the global population that are under 30 (Religion Information Data Explorer | GRF, 2022) (United Nations - Population Division, 2019). This younger demographic is highly technologically adept, due to their high-level access and usage of mobile and internet services in comparison to the world average. Further, Incumbents powered by Fintechs have also enabled people who are unbanked or underbanked. Temenos is an excellent illustration of this, as they deliver 8 million new users to the STCpay clientele in the Saudi region (Temenos, 2022).

Innovation is a key emphasis for Islamic Fintechs. A major prospect is the facilitation of Zakat (obligatory donation) and Sadaqah (voluntary donation) which can accumulate $200 Bn to 1 trillion globally, and this could play a tremendous role to alleviate global poverty (World Bank, 2020). Last Ramadan, Saudi’s national charity foundation ‘Ehsan’ generated approximately $493 million in the span of a month via 24 million voluntary donations. Ehsan’s donations were made exclusively through digital channels (ArabNews, 2022).

Fintechs must tackle a complex set of requirements to guarantee compliance with Shariah law. Interest, or riba, is not tolerated. Investments in the stocks of companies benefitting from alcohol, guns, cigarettes, and gambling are also unacceptable. For instance, ‘Wahed’ is an Islamic Fintech that offers Halal investing options to 200,000 clients globally. Currently, they are also partnering with other Fintechs such as ‘Niyah’ to promote their investment pathways. Considering, Ethical and Sustainable investing is a by-product of the Shariah law which creates the principles of Islamic Fintechs, it is garnering interest from Western societies that are eager to join into this endeavour.

The future demands innovation and Incumbents know that in order to stay ahead of the curve and provide the best banking services to customers, they need to select the right vendors and partners. It is impossible for them to innovate on every front and partnering with Fintechs is the only quick way to provide a new feature or service without reinventing the wheel which costs time and money.