How Islamic fintech can advance Shariah financing solutions   

Islamic finance has segued from a once-nuanced offering into the mainstream, helping unlock access and encourage inclusion for more than two billion Muslims the world over. 

Islamic fintech, in particular, is in a position of infinite potential, holding the cards to draw a vast majority of Muslims into the financial ecosystem, all while spurring innovative business models and unlocking new revenue streams.

Leveraging innovations such as open banking not only helps create new retail offerings such as mobile apps for Zakat calculations, Waqf management and inheritance planning, but also help broaden the product gamut for corporate transactions and business banking.

Open banking enables authorized third-party providers to access customer data in a secure and standardized format, through application programming interfaces (APIs). 

“Islamic financial solutions today require three capabilities: accuracy in Shariah classification, real-time validation of customer profiles, and seamless integration with banks and Shariah auditors. Open banking enables this by automatically mapping all customer bank assets; screening financial activities; creating digital Islamic marketplaces that connect banks, Takaful operators, Islamic wealth advisory firms, regulatory bodies, and Waqf management; and powering Islamic financing models using transparent API integration with core banking and treasury systems,” Faysal Ghauri, founder and CEO of Halal Payments Network, tells Salaam Gateway. 

Islamic fintechs could use open banking and APIs to integrate with Islamic lenders, melding the robustness and legitimacy of banks with the agility and ingenuity of new-world tech.  

“Open banking is not only about digital access to financial data. Its real value lies in how Islamic fintech can use this access to embed Shariah principles in digital services. With secure APIs, Islamic fintechs can deliver financial products in a structured, compliant, and digitally measurable way,” adds Ghauri.

Broadering the product portfolio   
The merits of open banking are visible in its ability to integrate Islamic profit-loss-sharing (PLS) products such as Musharakah and Mudarabah with innovative software that could ease accounting and cash flow management for lenders.

Mudarabah is a profit-and-loss arrangement whereby the investor provides the capital, and the entrepreneur runs the business, with profits shared according to pre-agreed ratios and losses borne solely by the financier. In Musharakah, all parties contribute capital and share in profits and losses. 

Banks gravitate towards Ijarah (rent-based contracts) and Murabahah (purchase-based contracts) primarily due to the high degree of monitoring required for contracts such as Musharakah and Mudarabah. Lenders, in general, find it tedious to maintain consistent oversight to gauge performance markers of a business.   

Islamic fintech can help bridge the gap by connecting business financing with cash flow management software, enabling real-time monitoring of a business’s performance, expenses and cash flows – the degree of oversight necessary for the implementation of profit and loss contracts. 

“Historically, when Islamic banks wanted to do more Musharakah and Mudarabah, the combination of information asymmetry, monitoring cost and accounting complexity has made them look “messy” on the balance sheet compared with Murabahah and Ijarah. Some complained that profit–loss sharing financing can drag on headline profitability metrics, which naturally pushes management back towards debt-like contracts,” Najmul Haque Kawsar, senior consultant at DinarStandard, tells Salaam Gateway. 

“Open banking and API-first architectures change that equation: they turn what used to be opaque, manually monitored PLS exposures into data-rich, continuously observed relationships that can be priced, monitored and reported almost like traded assets.”

Growing trend
The trend is visible - Tarabut partnered with Saudi Arabia’s payment solutions provider Geidea to explore flexible financing solutions to shed barriers such as protracted approval processes or complex credit checks. Bahrain Islamic Bank also inked an agreement with Tarabut to develop a financing solution that helps SMEs and corporates access funding based on their daily point-of-sale transactions.

“Conceptually, that is exactly the type of data backbone a Musharakah working-capital facility would need: the bank’s profit share can be linked to actual turnover and margin patterns, and covenants can be automated around drops in sales, chargebacks or average ticket size,” adds Kawsar.

“Instead of sending auditors into the business once a year, the bank and fintech can watch the health of the venture in real time, making it far more practical to structure the exposure as genuine risk sharing rather than synthetic debt.” 

Modern banking platforms like Mambu and Tuum are offering modules for Islamic funding such as Mudarabah and financing such as Murabaha and Tawarruq, deploying APIs and tools to launch Shariah-compliant accounts, loans and investment products.

Tuum’s cloud-native suite also automates Islamic profit-sharing and Tawarruq contracts to enable real-time compliance with AAOIFI standards. 

“For an Islamic bank, that means you no longer need a bespoke back-office for every PLS product; Musharakah or Mudarabah structures can sit on standardised modules, with APIs exposing profit rates, accrued shares and pool performance into mobile apps, treasury systems and even third-party wealth platforms,” adds Kawsar.