Demand for Islamic fintech in India to grow amid struggles

India is experiencing a modest increase in demand for Islamic fintech services, as the sector continues to grapple with regulatory and other challenges.  

With over 200 million Muslims, India boasts one of the largest Muslim populations globally. Despite sizeable numbers, the adoption of Islamic banking and financial services has been relatively slow. However, a rise in digital solutions could contribute to the growing momentum of Islamic fintech in the country.

Islamic fintech refers to digital platforms that facilitate the mobilization, provision, and arrangement of finance in accordance with Shariah principles. These platforms must avoid practices such as interest, excessive uncertainty, gambling, and any involvement in sectors deemed socially harmful or ethically questionable.

India is emerging as a major hub for fintech, although Islamic fintech is still in its early stages, says Muhammad Zubair Mughal, CEO of the AlHuda Centre of Islamic Banking and Economics. “At present, there are 14 Islamic fintech companies operating in India.” 

The global Islamic fintech market was valued at about $138 billion in 2022-23 and is expected to grow to $306 billion by 2027, with a compound annual growth rate (CAGR) of 17.3%, in contrast with the global fintech industry which is expected to develop at a CAGR of 12.3% over the same time period, according to the Global Islamic Fintech Report 2023/24.  

Islamic fintech products and services available in India currently include wealth management services tailored to Shariah principles, Shariah screening of stocks to ensure alignment with global Shariah filtering processes, index services that track the performance of Shariah-compliant stocks, crowdfunding platforms aimed at raising funds for ethically compliant ventures, and microfinance services offering interest-free financial support to underserved populations. There is also increasing interest in Shariah-compliant insurance (Takaful) within the community.

Lack of recognition, awareness stifles sector
Islamic finance in India faces several distinct challenges. These include a lack of formal recognition by the country's regulators as well as a dearth of awareness initiatives. 

Dr. Shariq Nisar, a professor at the Rizvi Institute of Management Studies and Research in Mumbai, said that the full potential of Islamic fintech in India remains largely untapped due to the lack of formal recognition. 

“The absence of formal recognition by financial regulators leaves Islamic finance on the fringes of India’s financial system,” said Dr. Nisar.

“Until Islamic finance is incorporated into the broader financial framework, its growth will be impeded. While Islamic finance provides an alternative and inclusive model for financial services, especially for underserved communities, regulatory hesitance continues to be a significant obstacle.” 

Arshad Mirza, an ethical finance entrepreneur also emphasizes the potential of ethical fintech in the country. However, he pointed out that in terms of actual execution on the ground, it is quite limited.

“There are Shariah-compliant stocks’ screening available in India, as service providers operate in this space without falling under any direct regulations or licensing requirements. But options for individuals across verticals such as lending, wealth management and personal finance, are quite limited,” Mirza explained.

Another challenge is that Islamic fintech startups often struggle to secure funding from investors. Mughal pointed towards a lack of clear guidelines for Islamic financial products, but emphasized the potential of engaging with regulators to develop a clear framework for Shariah-compliant services.

Firms in this sector could explore alternative funding sources, such as Shariah-compliant venture capital firms. 

Pockets of opportunity
The country's large and growing Muslim population could shore up demand for Shariah-compliant financial services. Rapid digitalization has also led to a higher adoption of fintech services, which could underpin Islamic fintech. 

Also, a scarcity of Shariah-compliant services offered by traditional banks and financial institutions has opened the door for Islamic fintech startups to step in and meet this rising demand.

“As India's young demographic increasingly engages with technology and financial services, there is a demand for ethical, inclusive, and Shariah-compliant products. The growing awareness of these financial principles is encouraging more individuals to seek alternatives to conventional finance,” Dr. Nisar noted.

These factors are expected to continue shaping the Indian Islamic fintech landscape, providing opportunities for innovation, growth, and financial inclusion.