Consolidate and do it right

As the Islamic Fintech space matures, consolidation is both healthy and natural.

Innate Capital, an investor in 10 Fintech firms, ranging from wealth management to real estate financing and beyond, welcomes the strategic combination of companies. Innate has witnessed – and been party to – multiple discussions regarding mergers and acquisitions within our portfolio and in the industry at large. Some proposed mergers have been fruitful; others have not.

Experience gives us perspective on ways to consolidate right and pitfalls to avoid. 

Flowers bloomed 

The period 2019-21 witnessed the blooming of hundreds of Fintech companies addressing Muslim clients. Financial technology enabled efficient new business models, the market was under-served, and the field was open to pioneers.

From 2022 onwards came a new stage of evolution. Leaders emerged, VC funding markets cooled, and most companies fell short of their ambitions. Such is expected in nascent and entrepreneurial industries.

Case for consolidation

The case for consolidation in the Islamic Fintech industry is compelling. The most powerful reason is that the customer base is largely shared: the same customer who wants investment products also needs a home and auto financing, a stock screener, education finance, and more.

Having separate companies pursue the same customer base is inefficient and potentially overwhelming. As an Innate investment associate aptly commented: “How many Islamic finance apps do you expect me to have on my phone?”

Consolidation done right

Three elements that we have seen lead to successful merger discussions are; equity-based consideration, fairness to minority investors, and integration of talent.

• Equity-based consideration: Stock-based transactions enable founders and other shareholders to participate in future growth of the consolidated enterprise. Cash-based transactions are often viewed as undervaluing the acquired firm, especially when the firm is in financial distress.
• Fairness to minority investors: Minority investors should be entitled to roll over equity into the consolidated entity, even if there is also an option to receive cash for their shares. Remember that early investors have subscribed to a vision which can still be pursued and Islamic investors generally do not include clauses in their investment terms that give them interest, dividends, or preference in capital events. Do not penalize early investors: treat them fairly and welcome them on the next stage of the journey. This is especially important when founders of the acquired company will stay on and earn equity upside in a combined entity to which minority investors do not have access.
• Integration of talent: Integrating talent both strengthens the combined entity and makes acquisitions more palatable to sellers. Management teams are passionate about their mission. Including them in the combined entity is usually advisable. Successful Islamic Fintech firms are still in high growth mode, making revenue growth and talent a higher priority than cost-cutting.

Consolidation can lead to stronger firms and a more resilient Islamic Fintech industry. More companies should consolidate and do it right.

The Global Islamic Fintech Report 2024/25 can be downloaded here.