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Islamic Finance

Financial inclusion through digitalisation

Despite global pandemics and geo-political turbulence, the past few years has seen the Islamic financial and banking industry experience significant levels of growth across the globe. In its report released in October last year, ratings agency Standard & Poor’s (S&P) highlighted this continued growth through 2024, with total industry assets expecting to reach USD 4.4 trillion. Whilst Islamic finance continues to be seen as a niche market, it is worth noting that recent analysis of over 3,000 hedge funds indicates that industry tipping the scales at just under USD 3 trillion.

This ‘niche’ market is one where the synergies between Islamic finance and sustainable finance have been widely discussed and actively explored for a number of years now. This momentum will continue, given not only the significant strategic initiatives under way in the global hubs for Islamic finance, but also evidenced by the scheduling of COP27 in Egypt in 2022 followed in 2023 by COP28 in the UAE.

One area, however, which has received particular attention from policymakers is the role Islamic finance can play as a viable means by which financial inclusion, especially amongst the Muslim populations in rural areas, can be increased. Numerous research papers have flagged the common theme amongst nations with a large Islamic population whereby a significant share of the population would be categorized as currently being ‘excluded’ from the financial system as they are not using bank accounts, often citing religious reasons as the primary reason for this.

A key point of reasoning for the push of financial inclusion, which integrates into many of the seventeen United Nations’ Sustainable Development Goals, is that better rates of inclusion would result in populations, particularly in both rural and less developed locations, being better equipped to navigate day-to-day living as well as planning for long term objectives.

Another key aspect that clearly highlighted the need for increased fintech supported financial inclusion was the COVID-19 pandemic. During the global pandemic, families in regions with lower rates of inclusion struggled to access finance and other financial products in an efficient and timely manner. This reiterated the need for digital financial inclusion, whereby through measures such as Shariah-compliant Islamic mobile banking or electronic payment solutions, people have access to finance even in the most unprecedented of times.

As a greater proportion of the Islamic population globally have access to financial instruments that are in line with their moral principles through the use of Shariah- compliant Fintech offerings, these individuals and groups will generate increased levels of growth and development as these once “financially excluded” populations now have access to capital which can be used to invest in new businesses.

At DDCAP, development of our award- winning asset facilitation platform, ETHOS AFPTM, and its functionality is integrated within our corporate policy formation, including our Sustainable and Responsible Actions (SRA) programme and the review processes and procedures of our esteemed Shariah Supervisory Board. Our continuous investment in, and development of ETHOS AFPTM is just one example of the Islamic finance industry’s current reinvention and regeneration by digital means, whether in the Fintech space or the digitalisation of existing institutions.

In a recent paper, the Islamic Financial Services Board (IFSB) highlighted the positive implication of digital Islamic banking for financial inclusion. The IFSB noted the median age of Muslims worldwide being 24 years compared to 32 years globally and the opportunity of reaching the unbanked population through new technologies, now including not only the ever-increasing use of smartphones but also the increasing number of Fintech disruptors, alongside the digitalisation of systems, products and services from established players.

The further development and digitalisation of Islamic finance products and solutions is accordingly strategically important for the Shariah-compliant finance industry, as it seeks to improve its operationality and market competitiveness. With the right financing structures and a supportive regulatory and operational environment, Islamic digitalisation will play its part in the future success of the Islamic finance industry, not least by helping to create a better platform for responsible and ethical financing, including the industry’s current heightened and accelerating development of outreach solutions for social and financial inclusion.

Lawrence Oliver is Deputy CEO, DDCAP GroupTM 

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Lawrence Oliver