Islamic Fintech

The vast arena of Islamic finance is steadily coming round to the digital advantages of fintech solutions leveraged by conventional finance, proving that what’s good for the goose is good for the gander.

The relentless march of digitalization is particularly resonant in the financial arena, where fintech’s remote solutions expedite commercial processes, while appealing to a tech-savvy general public, and increasingly tapping the un- or under-banked. Digital finance is also witnessing the rise and rise of Islamic fintech, an industry globally worth around USD2 trillion. North of 250 Islamic fintechs are in business worldwide in Organization of Islamic Cooperation (OIC) and non-OIC nations. The total Islamic fintech market size for OIC countries alone is estimated at around USD50 billion.

What’s the appeal?

From a purely technical perspective it follows that the merits of fintech solutions for conventional banking apply to its sharia counterpart, Islamic finance. A hammer is a hammer, after all. Yet Islamic fintech goes beyond improving efficiency while saving cost. Sharia places stock in social finance, itself a multibillion-dollar financial dimension that fintech is actively tapping. This includes core tenets such as Zakat (obligatory charity), Sadaqah (voluntary charity), and Waqf (endowments). Islamic fintech, thus, marries sharia compliance with digitally delivered financial solutions for services ranging from savings and investment to insurance (Takaful) and home loans for the rising middle class. Interest charges, known as riba, are forbidden, as are investments in businesses deemed impure such as gambling and alcohol. The perception, therefore, is that Islamic fintech is inherently in step with today’s much-valued commitment to environmental, social, and corporate governance (ESG).

Wide areas of application

Islamic finance has huge ramifications for financial education in matters such as insurance and saving, and by extension for the wider economy in terms of boosting diversified financial participation. According to the Global Islamic Fintech (GIFT) Report, authored by DinarStandard and Elipses, globally, the top-three sectors catered to by Islamic fintechs in 2020 were P2P crowdfunding, deposits and lending, and payments/remittances. The above three are familiar territory to Amer Siddiki, Co-founder & CEO of Saudi company THEMAR, a peer-to-peer purchase finance fintech startup for SMEs. THEMAR, operating early on in the value chain, supports MSMEs by delaying their payments for goods, and enabling installment payments. According to The Small and Medium Enterprises General Authority (Monsha’at), such enterprises in Saudi Arabia numbered 599,800 at end-1Q2022, at around 79% of total businesses. As Siddiki explained to TBY, THEMAR, a recent winner of the Islamic fintech changemakers competition by the Islamic Development Bank (IsDB), works to a 100% sharia compliant business model with a Murabaha financing structure. “Our product supports all the three parties involved: it supports the MSMEs, the vendors, and the peer investors.” THEMAR, he continued, is “not industry agnostic, although we are looking specifically at companies and enterprises with sales from SAR1 million to SAR15 million. [This] segment of micro enterprises is completely unfinanced, as it does not have credit facilities with banks.” Inevitably, the word “blockchain” has also appeared in Islamic finance circles. In 2019, Indonesian micro-finance enterprise BMT Bina Ummah made use of a platform created by startup Blossom Finance to raise USD50,000. It claimed the transaction was no less than the world’s first blockchain shariah-compliant bond (sukuk).

Saudi Arabia’s potential

2020 data places Saudi Arabia first among the top-five Islamic fintech markets on USD17.9 billion, followed by Iran (USD9.2 billion), the UAE (USD3.7 billion), Singapore (USD3.3 billion), and Indonesia (USD 2.9 billion). Meanwhile, Riyadh-based economic development agency Fintech Saudi, established in 2018, is determined to maintain the Kingdom’s ranking. A partnership of the Saudi Central Bank and Capital Market Authority, its remit is to galvanize the local fintech ecosystem, rendering the Kingdom a fintech hub. And while Islamic fintech accounts for less than 1% of the global fintech industry, sector data points to Islamic fintech growth among OIC countries at a 21% CAGR to USD128 billion by 2025, compared to a CAGR of 15% for conventional fintech. The GIFT report index scoped 64 countries based upon 32 criteria across five categories for each country, namely: talent, regulation, infrastructure, Islamic fintech market and ecosystem, and capital. The study confirmed steady growth of Islamic fintech. The Saudi fintech market, the world’s largest and ranked second by GIFT criteria, is projected to be worth USD47.5 billion by 2025, and all evidence points to it scaling such heady heights.

The potential, after all, is clear

In brief then, the rollout on digital channels of ever-more creative fintech solutions marks the next phase of Islamic finance. A phase populated by a young Muslim population keen to balance financial planning with instruments compatible with their faith. All with the convenience of a few clicks. 6