Islamic FinTech (Financial Technology) is a major segment of global finance, serving 1.8 billion Muslims and fulfilling social financing needs of ethical finance audiences around the world.The Islamic FinTech ecosystem is making positive headway alongside global developments in the area of FinTech solutions, impacting financial inclusion within its core customer segments.
Cutting-edge technologies such as blockchain, artificial intelligence, and IoT are catalyzing disruptive changes in the financial services sector. They are not only raising the bar for the FinTech revolution but also reshaping the landscape for Islamic FinTech, which strictly adheres to Sharia law in its financial services business models.
The integration of these technologies, with the assistance of ai software development and custom iot development, is propelling the financial industry into a new era of innovation and compliance with Islamic financial principles.
In fact, Sharia-compliant finance is registering its unmistakable presence in both Islamic and non-Islamic nations, captivating millions of young Muslims for its intriguing financial services to the unbanked populations.
The technology-enabled disruption in the global financial services industry is giving a new shape to the financial services business and operational models. They help in building new avenues for better customer experience in the evolving financial needs of consumers.
Islamic FinTech functions with the core purpose of simplifying recondite banking processes into a transparent and seamless consumer experience. It unleashes noticeable impacts by operating within the ambit of global FinTech trends.
Islamic FinTech effectively serves evolving financial needs of customers and investors who appreciate ethical banking coupled with transparency and security, in total compliance with Islamic law.
Islamic FinTech – Evaluating The Impacts On Global Financial Inclusion
Statista reports that the global Islamic finance markets had a total assets value of nearly $3.95 trillion, as of 2021. Now the expected value for the same is $5.9 trillion by 2026.
According to the Islamic Financial Services Board (IFSB), a large percentage of Islamic finance assets is geographically saturated in Asia, the GCC (Gulf Cooperation Council) and MENA (Middle East and North Africa) regions.
These regions, as a collective force, contribute 95.5% of global Islamic finance assets, in 2017, as per the report by IFSB, adding further that the Islamic banking has a lion’s share in the total asset base.
However, it doesn’t belie the fact that the global presence of Islamic banking is not much concentrated. It is portraying a diminutive figure in the overall baking assets in most countries.
For example, Pakistan and Indonesia both have large Muslim populations, say 96% and 87%, respectively. However, when it comes to determining their respective contributions in the Islamic finance products or assets, it stands just 15% and 5.8% each.
Obviously, if you see the report from the eyes of an expert or analyst, you gather that Islamic banking doesn’t give out much clout on its global presence that is less concentrated, given the nascent stage of its development.
The impact of FinTech on Islamic banking industry has been indisputable, based on certain parameters. These parameters include efficient delivery of financial services, constructive interaction of consumers with banks, and the distinction it has maintained in the competitive FinTech landscape.
How FinTech Has Impacted Banking Services, Including Islamic Banking?
Faster And Easily Accessible
One of the key impacts of technology on has been making them faster and more accessible for customers. In fact, they are more accessible today, in terms of helping customers with easy access to their bank accounts, facilitating money transfer, bills payment, and other banking activities in a matter of seconds.
Innovations in mobile banking apps and digital wallets also accentuate FinTech significance. Banks can now efficiently exercise replacement of time-consuming and labor-intensive banking processes, including lending and investments.
Security Improvement
Islamic banking systems function under Sariah law. Still, it is leaving no stone unturned to ensure enforcement of robust and unbreachable security standards in its banking practices. FinTech involves application of cutting-edge technologies, such as blockchain and biometrics coupled with other security measures to protect the sensitive data of customers from fraudsters.
More Healthy Competitions In The Market
FinTech is also responsible for increasing competition among banks, with emerging FinTech startups who offer innovative products and services better than their traditional counterparts.
As a result, consumers have more options to pick based on their comforts and discretion. For example, they can comfortably choose a bank that they find conducive to their needs.
A transformation of this magnitude facilitated by FinTech innovations has its positive repercussions. For example, it has compelled financial institutions to innovate themselves more to serve consumers better and keep up with the competition.
An Overview Of Islamic FinTech Landscape
A report by Dinar Standard reveals the presence of 93 Islamic FinTech companies in the field of financial services. In addition, P2P (Peer-to-peer) platforms are rising as popular Islamic FinTech platforms portraying the essence of Islamic finance. It directly connects a capital provider with its users.
Indonesia is taking the lead with most companies providing Islamic FinTech. It is worth noting that expertise in development of FinTech warrants a sound technological base that culture of innovation supports.
In fact, government and regulatory support are also contributory factors toward the increasing growth of Islamic finance. It takes cognizance of younger and tech-savvy customers, state-sponsored startup incubators and accelerators.
Governments of respective countries are trying their best to leverage Islamic FinTech and support its development by building centers for startups that would allow frictionless interaction and collaboration.
Steps like that eventually drive a far-reaching effect of ensuring early-stage funds and engagement of FinTech companies with investors.
Islamic FinTech – Potential Challenges
Islamic FinTech has been witnessing a cyclic progression of its growth on global growth trajectory parameters. Support from governments and its own vibrant ecosystem constitute an unmistakable identity of its increasing global presence.
However, there are still some challenges to be addressed for Islamic finance to maintain its pace of growth. Being discussed in the following are some pointers indicating key challenges in Islamic FinTech.
Regulatory Problems
Absence of a unified regulatory framework is one of the main challenges in Islamic FinTech. In fact, a patchwork of regulations from different religious regulatory bodies imposed on its functionalities seem to drive its growth on a downward trajectory.
As a result, financial institutions working under Sharia law find it difficult to operate across borders to serve the unbanked people looking for ethical and Sharia-compliant banking services. Meaning, they have to go through a major obstacle to grow themselves.
Technological Challenges
Technological challenges that Islamic financial industry goes through create hurdles for their growth in today’s rapidly evolving financial landscape. In fact, banks operating under Islamic law must opt for technological innovations by investing in new-age technologies.
Innovative solutions such as Cloud computing, artificial intelligence, IoT, and blockchain technology can help financial institutions become successful and stay relevant in their niche. Unfortunately, many Islamic financial institutions lack skilled resources or expertise to implement technological innovations in their business processes.
Financial Challenges
The financial institutions under Sharia law face financial problems largely due to civic understanding of not confiding their trust to Islamic finance. As a result, the Islamic financial sector is not witnessing a healthy financing or investment flow. Moreover, liquidity shortage in the market has also forced these institutions to pay a hefty premium for their financing.
These are some challenges which need to be addressed effectively to help Islamic financial sector grow. However, the industry exerts tremendous potential for growth. It just needs the right infrastructure and support to grow in the future.
Lack Of Data Access And Awareness
Islamic financial institutions (IFI) also encounter a sheer lack of data accessibility and availability of the right tools and technologies. Since it is a niche sector, finding the quality data and right technology to build innovative solutions is quite a herculean task. Also, available data, most of the time, casts an aura of dubious authenticity, thus being not conducive to building complex algorithms.
Lack of awareness of products and services offered by Islamic FinTech companies is also one of the major challenges hindering its growth. The reason is when civic awareness of banking products and services is not enthusiastic, it results in poor demand for the same. As a result, problems in attracting investors and venture capital for FinTechs are bound to surface.
Islamic FinTech – Potential Solutions
Implement AI and Big Data Analytics
Islamic finance should make use of cutting-edge technologies, like artificial intelligence and big data analytics to improve productivity, and reduce operational errors. Big data analytics helps in identification of customers as to whether they stand qualified for certain financial services or products.
Recommended by LinkedIn
In addition, leveraging new-age technology can also pronounce better handling of KYC process, making it easy for financial institutions to reduce customer onboarding times. An effective use of machine learning capabilities, data analytics or AI-powered software solutions would help Islamic financial institutions increase their competitiveness to serve their customers better and seamlessly.
Involve Blockchain Technology
Blockchain or distributed ledger technology is known for engineering robust security, transparency, and tamper-proof transactions. Therefore, Islamic FinTech using blockchain technology drives productivity results, like transparency, accountability, reduction of risks and errors, improved efficiency, and so on.
Implementing blockchain and other Distributed ledger technology (DLT)-based technologies could catalyst the surge in the growth of Islamic financing, resulting in efficiency and speed.
Strengthening Global Financial Inclusion Through FinTech
Taping The Unbanked Population
The World Bank estimates that around 1.7 billion people, out of the world's current population of 7.6 billion, don’t have access to banking facilities or they are unbanked. The Global Findex report indicates that the number of bank account ownership in high-income economies is measurably higher, say, at 94%, compared to 37% in developing countries.
In addition, around 75% of the unbanked population of the world lives in developing economies. Out of it, the highest number lives in Asia, where the contribution of India is 20.8% followed by China, at 11.6%.
Countries with the highest Muslim population dominate the unbanked population that involves almost 50% of the unbanked people worldwide. It is believed that if these retail and MSME market segments are utilized, it will generate expected revenue of $200 billion.
The Role Of FinTech Innovation And Governments
To increase financial inclusion growth, each aspect of FinTech and the government’s policies needs to play their role differently. This involves bringing change in mobile payments to rural areas, ensuring digitally-verified customer identification, and making use of crypto assets to rule out expensive transaction costs.
Local governments can introduce credit protection programs and ensure that cybersecurity measures are in place, alongside investing in digital modes of education. Governments can also roll out incentives for banks encouraging them to cater to the unbanked population to build a healthy financial ecosystem featuring multiple access points.
Mobile Payment Systems
Mobile payments are said to have contributed a considerable surge in the growth of global financial inclusion.
Good news is – a major population out of 1.8 billion unbanked population owns a phone, either a basic phone or a smartphone. So, they are already in a position to take part in mobile payments.
In addition, most Islamic FinTech companies are already under those top 50 nations with mobile phone penetration. It pretty much says that FinTech can have access to the unbanked population, if strategies to leverage the mobile phone penetration, new technologies, and government support are put into practice.
An example of how Web 3.0 in the online payment business is revolutionizing financing service is M-PESA, a mobile phone-based service of money transfer, payments, and micro-financing in Kenya.
How is Islamic FinTech Serving The Unbanked Population In OIC Countries?
Problems to resolve most SDGs (sustainable development goals) challenges can be handled with FinTech and financial inclusion. However, what matters a lot is people who don’t allow themselves to use financial services because of certain religious and other reasons in OIC countries.
These people can avail the provision of usury-free financial transactions based on the mutual risk-sharing partnership approach to increase wealth of involved partiers, like individuals or SMEs.
Islamic FinTech services enable easy accessibility to financial services, like Islamic insurance or takaful, payment systems, and banking dedicated to unbanked or hard-to-reach populations at more affordable costs.
Most importantly, Islamic FinTech is also contributing a lot to fueling the aspirations related to financial inclusion, alongside accelerating global sustainability.
Impacts of Islamic Financial Services
Closing Statements
Islamic FinTech is a fast-growing segment in global finance today, serving 1.8 billion Muslims and fulfilling social financing needs of ethical finance audiences around the world. It aims to address financial inclusion gaps with digital transformation services for SMEs and unbanked population, at reduced costs.
Islamic FinTech innovates payment solutions for more improved market expansion. It also exerts potential to serve global social funding needs.
Though Islamic FinTech is making inroads to global success in financing services, lack of a cohesive set of rules and compliances governing the industry is throttling its growth in its bid to drive global market expansion.
Absence of a universally acknowledged regulatory body that can govern the Islamic FinTech also poses a challenge on its path to achieve growth on a global stage.
Reasons?
One of the reasons could be the regulators who enforce regulatory frameworks for banks. In fact, the presence of these regulators is more where there is already significant activity. For example, regulators, such as the United Kingdom’s Financial Conduct Authority (FCA) in Western markets.
Also, Islamic FinTech needs to embrace cutting-edge technologies, like blockchain, IoT, artificial intelligence, etc. to bring forth transformative changes in their banking processes.
For example, they can bring automated efficiency in handling repetitive and mundane tasks in their banking process. So, they can utilize their in-house resources on more crucial tasks at hand.
Using the latest technologies could also ensure robust cybersecurity in place that would protect sensitive and confidential data of customers, as well as bringing transparency in the overall banking systems.
What’s your idea of global Islamic FinTech? What do you think it should do more to enhance its global presence extensively? What, according to you, are factors stalling its growth on global market expansion?
