Scaling up investments in Islamic fintech

Henk Jan Hoogendoorn is the Chief Financial Sector Officer at the Qatar Financial Centre (QFC), and Dr. Dalal Aassouli is Assistant Professor of Islamic Finance at Hamad Bin Khalifa University (HBKU).

Islamic Fintech is an emerging sector that focuses on delivering ethical and fair financial services to its clients and users, based on Islamic finance principles. The target audience can include the Gen Z and Millennial generations, who are attracted to responsible and fair access to their financial needs including in saving, investing, donating and lending. Fintech solutions, through convenient wallets, platforms and Apps services accessible by mobile phones are emerging fast as a convenient solution. Many of the products are available in white label solution for banks, while others like ALGBRA take a Revolut approach by adding more lifestyle elements to its app. 

In Europe, where the Muslim population averages around 3%, there is a growing need for Islamic Finance solutions – including to purchase a home. The classical interest-based mortgages do not work well for everyone and we are progressively witnessing many “rent to own” Fintechs emerging in the UK, France, Germany and the Netherlands. Interestingly this is also of interest to non-Muslims.

Today, numerous UK-born Islamic fintechs that partner with banks in the Middle East and Asia use tokenization as a tool to democratize investing in sukuk and other investment opportunities such as crowdfunding exist.

The other areas where Islamic fintech can play an important role, is to provide financial services to groups that traditionally have difficulties in obtaining access, such as SMEs and migrant workers.

There are two schools of thought: “to be – or not to be “Islamic”. Some fintechs do not want to be labeled as “Islamic” as their focus is ethical and fair financial services. Adding an Islamic label would in their mind not necessarily be readily understood by the wider target group that is attracted to the ethical finance. Others see a great opportunity to offer Islamic finance for a wider and growing Muslim community in Europe.

The challenges to get funding for Islamic fintech are not dissimilar to other fintech propositions. Angel and seed investors are generally found for the early stages. For series A and beyond it becomes more difficult given perceived market limitations, and in general there is a concern that VCs and other professional investors will have more influence on strategy development. This could mean that the “Islamic” element of Islamic fintech needs to be flexible.

At a recent roundtable of Islamic fintechs in London, hosted by QFC, all participants genuinely felt the need for dramatically scaling up worldwide investment in Islamic fintech.

Global fintech investments exceeded $200 billion in 2021 with more than 5,600 deals. With the growing Muslim population, increasing sustainable development challenges and post-pandemic recovery measures, the deployment of innovative Islamic Fintech solutions can support the transition to more sustainable economies while promoting financial inclusion and stability. Three actions areas can scale-up investments in Islamic fintech:

Expanding fintech innovation for sustainability: Fintech can be a key enabler for sustainability and inclusivity. As investment opportunities arise in many Fintech segments, Fintech startups need to develop more innovative technology-based solutions aligning financial performance and impact. Innovations in Islamic fintech have the potential to accelerate the flow of capital to a more sustainable digital economy. It can also help meet global policy objectives, namely when it comes to climate change mitigation as well as achieving the sustainable development agenda for overall societal good. To do so, Islamic fintechs need to work on boosting sustainability innovation in order to attract the growing impact investor base in addition to traditional Islamic investors. According to the Global Sustainable Investment Alliance, global sustainable investment in 2020 reached $35.3 trillion in five major markets (the United States, Canada, Japan, Australasia and Europe), a 15% increase over two years.

Enhancing regulation: A study by the Bank of International Settlements (BIS) finds that Fintechs raise more capital in countries with higher regulatory quality. While more than 60 countries have established regulatory sandboxes to improve fintechs’ access to finance and foster innovation, only very few are located in the OIC region, which creates high regulatory uncertainty and therefore limits fintechs’ capital raising capacity.

Promoting the development of Islamic fintech venture capital funds: Venture capital funds can play a significant role in the development of innovative business models. Their role in providing early seed funding to innovative fintech startups is critical to mitigate their funding gap.

While the availability of Islamic fintech VC funding remains scarce compared to other conventional markets, Islamic fintechs needs to focus on innovation, relevance, and scalability of their solutions to secure VC funding. Simultaneously, government grants as well as partnerships between Fintech acceleration and incubation programs can promote the establishment of more Islamic VC funds.

In Malaysia and Indonesia, both with large Muslim populations, Islamic fintechs have emerged strongly and access is being created for early-stage investments. With the Islamic fintech sector maturing, the time is now for countries with large Islamic banking institutions and wealthy sovereign wealth funds to take the lead and create VCs and funds that can facilitate later stage investing globally in Islamic fintech or the wider Islamic digital economy.