Islamic banks raise fintech integration concerns

Islamic banks are making their voices heard at an international level on the unique challenges they face when it comes to fintech integration as a result of their business model and operating environment.

From essentially no change in customer relationships driven by the smooth adoption of new technology to banks completely losing their relevance, the Basel Committee on Banking and Supervision (BCBS) has identified five possible scenarios in which banks would be affected by fintech developments; and Islamic banks from over 32 jurisdictions, speaking through the General Council for Islamic Banks and Financial Institutions (CIBAFI), have responded by highlighting the unique obstacles encountered due to their lack of economies of scale and generally more challenging operating climate.

“CIBAFI believes that while major banks in most developed countries may be able to adapt to most of these scenarios, and will have themselves a role in determining which will occur, this is less obvious for smaller banks in less-developed countries. Most Islamic banks are of this kind, and there are certainly challenges in the way they need to adapt their knowledge and resources for such changes,” the Bahrain-based umbrella body noted, adding that further support from bank supervisors would be welcome.

Interestingly, CIBAFI believes fintech entrants pose a relatively smaller threat to Islamic banks as compared to their conventional peers in more mature markets.

“The BCBS implicitly recognizes that fintech firms may have a greater impact in some markets than others. The suggestion is that in less-developed banking markets, and particularly where financial inclusion is relatively low, new entrants may be able to reach consumers who have no, or limited, existing banking relationships,” CIBAFI explained. And while it is true that many Islamic banks generally operate in less-developed jurisdictions where financial inclusion is low, the organization is of the opinion that the threat of new entrants is smaller for Islamic banks due to Shariah compliance requirements.

“It is thus an opportunity for Islamic banks to collaborate with fintech firms to enhance financial inclusion,” it said.

Anti-money laundering (AML) and combating the financing of terrorism (CFT) were another area of focus.

“CIBAFI believes that the AML/CFT issues may be of greater importance to Islamic banks that intend to use fintech solutions, since many Islamic banks are in countries that are regarded as sensitive from an AML/CFT standpoint. The technology to manage AML/CFT will thus be particularly important to these banks,” it highlighted.


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