Digitalization has changed the structure of the Islamic moral economy and spurred the development of the overall Islamic digital sphere, which includes Islamic financial services. Automation, disintermediation, decentralization and blockchain brought by technological advancements have specifically participated in the establishment of strong and resilient financial technology (fintech). However, despite the great changes and opportunities that Islamic fintech brings to the Islamic economic and financial systems, mismanagement of this nascent area may hinder the growth of the overall ecosystem. This article examines some issues and challenges facing Islamic fintech and its prospects.
Islamic Fintech: Growth Opportunities
Fintech is the technology used to automate the delivery of financial services. It allows financial institutions, companies and businesses to develop services using software, algorithms and technologies, automating, disintermediating and decentralizing data to provide better financial solutions and thus enhancing user experience. Islamic fintech, on the other hand, refers to the use of financial technology in offering financial services that comply with the Shariah principles and in line with the ethos of the Islamic moral economy. The ‘Islamicity’ of fintech depends on the objectives of its usage as technology is a tool or a means that is neutral in nature.
According to the Global Islamic Fintech Report 2019 published by Elipses, The UK Islamic Fintech Panel and Salaam Gateway, the industry expects growth that will reach USD3.5 trillion in assets by 2024. There are five key growth areas for Islamic fintech in 2020:
This is specifically interesting as Gen Y and Gen Z are tech savvy cohorts and constitute a large part of the Muslim population. According to Islamic Fintech Report 2018 issued by DinarStandard, the median age of Muslims worldwide is 24 years old. Hence, this tech savvy population, who is familiar with online services and technologies, will not only appreciate technology driven services but will start asking for more of these convenient services. Moreover, the COVID-19 pandemic has forced users to find new ways of doing things and to adapt to a new normal that leverages more on technologies than ever before. Hence, the importance of the digital sphere and its necessity for the financial sector has been proven.
Issues and Challenges Faced by Islamic Fintech
Although Islamic fintech has a great potential to spur the growth of the Islamic finance industry, many issues and challenges are still lingering around this new way of doing business. There are several challenges, but we will give priority to discussing the legal and regulatory framework and security issues.
Regulatory frameworks should be developed to cover the industry in a comprehensive manner to meet the needs of the technology advancements with adequate reforms. Many countries lack strong regulatory frameworks that can pave the way for the development of the fintech ecosystem before even considering the development of the Islamic fintech industry. As a matter of fact, for many developing economies, both the fintech and Islamic finance industry are at nascent phases. Regulatory frameworks are still in development and their practical implementations in regard to the local realities are still to be assessed. In Morocco, for example, the law allowing crowdfunding has only been issued recently, and the implementation of crowdfunding is at its initial phases. Its House of Representatives unanimously adopted the bill on collaborative financing this past February. The bill aims to define the legal framework for the different forms of collaborative financing and the operations of collaborative finance companies (CFS).
Moreover, security issues appear as a serious threat to the ecosystem. Technologies such as artificial intelligence (AI) and blockchain bring up risks and need urgent security and technology crimes reforms. Attention should be paid to cybersecurity and consumer protection efforts as they are the key factors that will either spur or block the development of the industry. Efforts should be deployed to identify and assess money laundering and know-your-customer (KYC) risks of fintech firms and technology providers as a whole. Moreover, consumer protection policies and regulations should follow the framework of the General Data Protection Regulation (GDPR), and additional relevant compliance factors should be added to the equation. Countries have to develop the right capacities for the development of the industry. This comes with adequate technology infrastructures for integration and connection as well as the adequate training and education to have highly skilled human resources. That being said, are local human resources equipped to provide adequate services and supervise their implementation? If not, are governments developing the right curriculums to create the profiles needed to overcome such issues?
Beyond these challenges, the question of the readiness of the use of fintech technologies is to be discussed as it differs from a country to another. We discussed the institutional needs, and financial/ human resources to implement such elements; however, in some countries additional questions may arise: first, are people really willing to use fintech? This question is to be asked further for countries with nascent Islamic finance ecosystems where the populations are still sceptical about the industry. It is to be asked even more in cases where sceptical populations also do not trust technology in spite of the prevalent global digital trends. That being said, what are the roles of governments in these cases? To what extent should marketing and branding efforts be undertaken to raise awareness on the importance of Islamic finance, security of technology and efficiency of fintech? Are the efforts in place related to such matters sufficient?
Islamic fintech: A Catalyst for a More Sustainable Future
With Islamic finance being seen as a catalyst for the implementation of the UN’s Sustainable Development Goals (SDGs) particularly to promote inclusive growth, reduce inequalities and accelerate poverty reduction, the use of Islamic fintech could facilitate realising these goals. Islamic fintech provides more efficient Islamic financial services, reaches larger populations—particularly the unbanked—allows for greater synergies between private and public sectors, and promotes the effective use of different Islamic social finance tools such as zakat, waqf and qard hasan.
Several Islamic fintech companies have leveraged on Islamic social finance instruments to serve the most vulnerable populations. For example, Finterra, headquartered in Singapore, has created a blockchain solution to support the development and crowdfunding of waqf and endowment assets. Ethis Crowd provides funding for social housing development projects in Indonesia. Another example is MadCash, working to enable financial access to B40 women in Malaysia in order to improve their household income via micro-businesses. MadCash provides micro-loans to the targeted population as it gathers zakat and charitable funds from interested donors through a mobile application.
Islamic fintech appears to provide an unprecedented opportunity to spur the development of the Islamic finance industry. The use of technology allows for the application of several instruments, targeting even unbanked groups and other vulnerable populations that the traditional methods of banking and financial services offerings have failed to serve. Nevertheless, a strong regulatory framework is needed to frame the ecosystem, as are concerted security efforts to protect both institutions and consumers.
Ibn Zohr University, Morocco