Fintech promises to open up global Islamic finance markets

Sharia-compliant financial technology (fintech) provides opportunities for global growth if regulators and banks can get their heads around the concepts on the table.

London: Sharia-compliant fintech is poised for explosive growth across both Islamic and western jurisdictions with Refinitiv expecting the market to reach $4.9 trillion within three years.

The American-British global provider of financial market data owned by the London Stock Exchange (LSE) forecast the growth figures in its Refinitiv Islamic Finance Development Report 2021. The report states Islamic fintech providers were among the standout performers in the sector during 2020 “as regulators have moved fast to facilitate Islamic fintech players and digital banking after years of ‘sandboxing’ and building foundations”.

The Islamic Global Connect Forum Report 2022, published in March 2022 by Malaysian bank Maybank, stated 89% of respondents believe fintech has already accelerated digitalisation of Islamic finance products. They also believe fintech has made them more accessible globally, while improving client experiences.

A month earlier the bank conducted research among 143 Islamic finance professionals across banking, insurance, asset management, asset ownership, private equity, regulation and fintechs.

Zaakira Allana, a Birmingham, UK-based dispute resolution director at international law firm Fieldfisher, said this was important given consumer demand was accelerating Islamic finance fintech from mobile banking to digital lending, trading and cryptocurrency.

She said fintech expansion varied by sub-sector, “but the direction of travel is towards a broader, more inclusive market for Islamic consumers, of which there is a huge global untapped reserve”.

Perhaps unsurprisingly, Middle East and south-east Asian countries with mature international financial systems sport the most Islamic fintech.

According to the 2021 Global Islamic Fintech Report produced by DinarStandard (the parent company of Salaam Gateway) and London-headquartered digital structured finance firm Elipses, Saudi Arabia, Iran, United Arab Emirates (UAE), Malaysia and Indonesia are the leading countries in terms of Islamic fintech transaction volumes within Organisation of Islamic Cooperation (OIC) countries.

The report estimates 241 Islamic fintechs operated globally across OIC and non-OIC countries and that the market for fintech in OIC countries was worth $49 billion. Outside the Islamic finance hotspots, countries with less developed financial systems could be significant drivers for the Islamic finance market if fintechs successfully mobilised their customer bases.

Central Asian fintech

Central Asian countries with large Muslim populations, such as Kazakhstan where around 70% of the population practices Islam, are among those with the greatest potential for Sharia-compliant fintech products to take off, said Marina Kahiani, an Almaty, Kazakhstan-based partner at GRATA International, a law firm with a special focus in central Asia and eastern Europe.

“Kazakh companies are trying to develop Sharia-compliant fintech products. However, they are just at the beginning of the process,” she explained.

In 2019 Kazakhstan unveiled its Islamic Finance Master Plan 2020-2025 complete with developing a fintech hub to support industry innovation. It was coordinated by the Astana International Financial Centre (AIFC), based in the country’s capital Nur-Sultan (formerly Astana).

The AIFC was established in 2018 as a special zone to foster growth in Kazakh financial services companies. Its legal system is based on English law principles rather than Kazakh law – a significant move as the former is less restrictive and has wider international application for transactional rules.

In its fintech section, the Master Plan acknowledges that Kazakhstan financial inclusion is “relatively low” with one key reason being the country’s financial service providers focusing on business and wholesale work rather than consumer products.

According to the plan and data reported by the World Bank in 2017, only 59% of adults (aged 15 years and older) in Kazakhstan hold an account at a formal financial institution. Some of the reasons included a “lack of awareness and understanding on fintech and Islamic finance; lack of funds and disposable income; trust deficit towards the financial system and currency accessibility”.

However, Kahiani notes the stagnation was lifting with fintech products aimed directly at Islamic consumers now being launched in the country. She said successful early movers were those with international partners who had more fintech experience.

“The first digital Islamic card was recently launched in Kazakhstan by Islamic fintech company Tayyab in cooperation with Kazakhstan’s RBK Bank and Visa with Dubai Fintech Ventures as an investor”, said Kahiani.

The Tayyab card, issued to users’ mobile phones when they download the Tayyab mobile app, is fully Sharia-compliant, a status confirmed by the Shariyah Review Bureau of Saudi Arabia. It does not charge interest on customer card balances (haram under Sharia law) and allows users to make contactless payments and instant transfers via Apple Pay and Samsung Pay. Plastic Visa cards can be issued to users on request.

The Tayyab card also allows customers to store funds in four currencies (Kazakh tenge, US dollars, Russian roubles and euros) and withdraw cash from any ATM worldwide. It was also set up to prevent it being used for haram activities such as in casinos and other gambling outlets, alcohol and tobacco stores, bars and nightclubs, through restrictions built into the technology that recognise such transactions.

African fintech

African countries with large populations of young Muslims are also embracing Sharia-compliant fintech. The 2021 Global Islamic Fintech Report noted sub-Saharan Africa and Middle East and north African (MENA) countries (excluding Gulf states) “have gaps” across the nine key fintech services of social finance, insurance, wealth management, deposits and lending, raising funds, payments, capital markets, digital assets and alternative finance.

This indicates “ample opportunities for growth”, said the report.

In July 2021 Nigeria launched eTijar, a Sharia-compliant fintech platform delivering Islamic investment and saving services to Muslims and non-Muslims. According to Bashir Yusuf, founder and CEO of eTijar, when his team began working on the platform in 2018, they identified a major vacuum in the country’s consumer finance market.

“Many young Muslims who are on a good income are not even saving or investing. We had to build the technology infrastructure to allow the younger demographic accessible ways to save and invest their money,” he said, adding the problem was more acute in rural areas, where most people were excluded from financial systems through a lack of knowledge and physical access.

The platform allows users to build investment portfolios from funds screened by eTijar and approved as Sharia-compliant. The platform takes a management fee rather than charging interest on users’ funds.

Yusuf said by cooperating rather than competing with Sharia-compliant fund managers and Islamic banks, eTijar was expanding the market for all Islamic financial service providers.

However, despite generally positive growth, Islamic finance fintech still faces challenges including regulatory barriers especially in Muslim-minority countries. Lingxi Wang, managing associate at UK law firm Foot Anstey, said during an Islamic finance roundtable the firm hosted in 2021, the general consensus was that a significant amount of time and resources were being spent trying to explain to the UK’s Financial Conduct Authority (FCA) how their products fitted into the current regulatory regime.

“This pushes back the initial launch dates. They also found even when being referred to an FCA specialist function, those experts did not have the requisite knowledge and understanding of Islamic finance to provide our panellists with immediate effective solutions,” said Wang.

He said while the FCA accommodated Islamic finance through its current regulatory regimes, creating a bespoke product in the UK required a lengthy statutory consultation process. He contrasted the UK’s approach to Malaysia, a country proactively promoting a strong Islamic fintech ecosystem.

Islamic fintech in Malaysia and the Middle East

In August 2020 the Securities Commission Malaysia announced a collaboration agreement with the Financial Services Authority of Indonesia (Otoritas Jasa Keuangan – OJK) on sharing knowledge about on fintech trends and regulatory developments.

“The UK could learn lessons ... from Malaysia in their proactive approach in creating a regulatory background for Islamic fintech. Also, some aspects of new Islamic fintech may run into problems, especially in non-Islamic jurisdictions,” Wang said.

For example new Sharia-compliant challenger banks and services may not have full banking licences and may need services and funds from conventional banks, thus creating a grey area when it comes to their regulatory and Sharia-compliance obligations.

Another area of confusion is the Sharia-compliant status of cryptocurrency, the lifeblood of some fintechs. In May 2022 Qatar Central Bank released a statement warning the country’s financial services from dealing with unlicensed financial institution or service providers, stressing Qatar currently has not licensed any virtual asset service providers (VASPS) including cryptocurrency operators.

The Maybank report said innovation may provide answers to these problems with regulatory technology being created to deliver robust digital tools certifying compliance with both Sharia and national government requirements through smart contracts on blockchain.

In a 2019 lecture, Fahad Yateem, director, Islamic financial institutions supervision for the Central Bank of Bahrain, explained essentially, regulatory technology and supervisory technology in Islamic finance aimed to enhance the transparency, consistency and standardisation of regulatory processes to promote a proper interpretation of regulatory standards at a lower cost and ensure risk-based supervision for Islamic banks’ regulators.

Examples of Sharia-compliant regulatory technology developers include UK and Jordan-based ICS Financial Systems (ICSFS), an Islamic banking and finance software provider. ICSFS' Islamic software suite is designed to cover all Islamic banking requirements including Sharia law compliance.

In February 2022 Hassan Baan, a member of the International Committee at the Iranian Association of Islamic Finance wrote a blog stating Islamic regulatory technology was “not about regulatory reporting, risk management, identity management and control or transaction monitoring”, but rather about finding “a solution for Sharia-compliance that includes real-time monitoring and tracking of the current state of Sharia-compliance and upcoming regulations in Islamic banks and fintech platforms”.

According to the Maybank report, 34% of respondents believed the impact of regulatory technology on growth would increase dramatically over the next three years, while 47% predicted it would increase slightly.

Should Islamic fintech and regulatory technology combine forces, this important Islamic finance segment may grow even more robustly than projected.

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