Throughout June to August 2020, IFN surveyed 142 founders and CEOs of fintech start-ups providing Shariah compliant services and products. Opinions and data from Asia, Europe, the GCC, North America and Africa on growth potential, opportunities and market gaps were collated and analyzed.
Key findings
Top five fastest-growing Islamic fintech verticals in 2021
- P2P & Crowdfunding
- Payment & Remittance
- Personal Finance Management
- Challenger Banking
- Robo Advisory
Biggest challenges to growth
- Regulatory barriers
- Limited access to capital
- Poor Islamic finance and digital literacy
Southeast Asia viewed as biggest market with Islamic fintech growth potential
Malaysia seen as the most welcoming Islamic fintech jurisdiction, followed by the UK and the UAE
78% of start-ups surveyed are looking to raise funds over the next 12 months; more than half are aiming to raise at least US$2 million
Despite 78% of start-ups being certified Shariah compliant, only 46% view an official Shariah compliance certification as necessary to business
A quarter of respondents believe enhancing Islamic finance and digital literacy as vital to improving Shariah fintech adoption
14% of CEOs attribute negative perception toward Islam as biggest barrier to growth
Opinions are divided when it comes to whether Islamic fintech firms are disadvantaged against their conventional peers
Growth areas
Peer-to-peer (P2P) financing and crowdfunding are expected to outpace all other Islamic fintech verticals in 2021, continuing a consistent growth trend seen over the last few years as reflected by the IFN Islamic Fintech Landscape. As at the end of August 2020, more than a quarter of the 145 constituents of the IFN Islamic Fintech Landscape belonged to the P2P and crowdfunding business, dominating the landscape. The next growth area is payments and remittance, on the back of projections for global digital remittance (conventional and Islamic) to hit US$74.54 billion by 2026. Verified market research calculations place the sector’s cumulative annual growth rate at 2.38% from 2019 to 2026.
Market potential
All the Islamic fintech founders and CEOs surveyed were almost unanimous voicing their optimism about the growth potential for Islamic fintech, although not all were able to quantify their three-year market growth projections. Reliable data on market size is not yet available; however, about 40% believed that the market would expand at least 20% by 2023, with the most optimistic believing that the Shariah compliant fintech transactions could at least quadruple over the next three years.
“There is huge potential and market opportunity. With the right collaboration between the private and public sectors, the growth rate for Islamic fintech is exponential,” opined one respondent.
This sentiment is largely echoed by the rest of the respondents.
“The potential for growth is enormous as traditional banks in Muslim markets have been very slow at going digital, while the young tech-savvy Muslims demand that. At the same time, there have been very few Islamic fintechs that offer products that can be scaled globally. I expect this to change and market to grow at 20–25% per year over the next three years,” shared another respondent.
Some are more cautious about the momentum of expansion.
“It will grow, but at a slow pace. There is more that needs to be done and a unified approach to Islamic finance across the regions will help accelerate this. Also, a lot of involvement from regulatory bodies and the government would help this,” explained another.
Southeast Asia to lead
While western markets of Europe and North America may be on the radar as top fintech hubs, technopreneurs believe the potential for Islamic fintech lies in Southeast Asia. This is largely supported by the region’s favorable Muslim demographics, sophisticated Islamic finance industry and familiarity with the religion, although such potential is likely concentrated in Malaysia and Indonesia. The GCC and Europe are the next top destinations for Islamic fintech growth opportunities.
More than one-third of respondents now see Malaysia as housing the most conducive and supportive environment for Islamic fintech to flourish. This is an improvement from anecdotal feedback and empirical data in previous years which favored the UAE over the Southeast Asian Islamic finance giant as far as Islamic fintech is concerned. The shift toward Malaysia takes place in the backdrop of a more cohesive and coordinated approach by Malaysian stakeholders, led by a stronger direction by the government in pushing the Islamic fintech agenda.
Funding needs An overwhelming majority of Islamic fintech start-ups are looking to raise funding over the next 12 months, with only 15% not going to market and 7% unsure, depending on market conditions. From the 78% actively seeking investments, a majority are eyeing relatively smaller ticket funding, with 26% looking to raise at least US$5 million.
Challenges
Access to capital and unsupportive regulatory infrastructure are the two biggest barriers to scaling up, according to the Islamic fintech founders surveyed. Poor Islamic finance understanding — among consumers and regulators — as well as low levels of digital literacy are the next biggest challenges.
“The problem is not with Islamic fintech, but with limited knowledge from the regulators who want to make sure nothing happens on their watch. Hence, it creates no opportunities for risk takers to develop any new solutions and invest own time and capital,” lamented one respondent. Another, like many, commented on the difficulty in securing financing, including innovative start-up financing unique to the Islamic community such as the conditional use of Waqf funds.
Shariah compliance
A majority of the respondents are certified Shariah compliant by Islamic scholars. Out of the 22% whose operations and business models have not been officially evaluated, 44% are being held back by unfavorable market conditions while 11% do not have the financial resources to secure a certification. The remaining 45% are of the view that a Shariah scholar’s stamp of approval is not necessary for the business as their models are naturally Shariah compliant. This view on the necessity of a Fatwa is echoed by 54% of all survey respondents, although some admit that official recognition of their Shariah integrity would ease with market expansion and adoption.
An Islamic advantage?
Half of the respondents believe that pursuing Shariah compliance renders them at a disadvantage against their conventional peers. They face additional challenges when it comes to cost, product development, navigating regulatory complexities and dissociating from inherent negative connotations from being aligned with Islam.
“Product structuring and product management are more complex, and it is almost impossible to outcompete traditional fintech firms purely based on cost,” explained one respondent, with another echoing: “There are not a lot of vendors who are willing to support Islamic fintech firms due to legacy operational models.”
One respondent alluded to the market awareness barrier: “I believe Islamic fintech is the right way to go for marketing of fintech services in Islamic markets, but it does not change the fact, nor make it easier for us to introduce and launch new solutions.”
Almost half see being Islamic as an added advantage, a unique proposition and differentiation factor giving them an opportunity to disrupt a relatively untapped market. A small minority are caught in the middle, believing that while targeting the Muslim market with Shariah compliant products may limit start-ups’ capital access and impose additional challenges in product engineering and scalability, it is nonetheless a niche market with relatively less competition compared to the ‘overcrowded’ conventional sphere.
What next?
To ensure the continued growth and acceptance of Shariah compliant fintech-enabled solutions, 25% of respondents see Islamic finance education and digital literacy — not only among consumers, but also regulators as well as decision-makers — as instrumental in driving adoption.
Many believe enabling regulatory policies and standardization in Islamic fintech oversight are much needed to facilitate growth. Meaningful partnership and access to other stakeholders of the Islamic fintech ecosystem including fellow start-ups, financial institutions, regulators, scholars and Islamic bodies, are also vital.
“With better information circulation around the world, the potential for Islamic fintech will be huge. How big would depend on what sort of ecosystems are put in place to facilitate innovation inside Shariah compliance and Islamic governance,” according to one respondent.
What would you like to see change/improve to further encourage Islamic fintech firms in your market?
| Greater Islamic finance and digital literacy among consumers and regulators | 25% |
| More accommodative and supportive regulatory environment | 22.5% |
| Stronger collaboration between start-ups, regulators and incumbents | 17.5% |
| Greater access to capital | 12.5% |
| Customized accelerator and incubation programs for Shariah fintech | 7.5% |
| Start-ups to understand market needs and offer compelling propositions | 7.5% |
| Better use of latest technology by start-ups | 5% |
| Reduced regulatory costs particularly for Shariah compliance certification | 2.5% |
| Enhanced access to Islamic finance scholars | 2.5% |
| Change of mindset among stakeholders | 2.5% |