Islamic fintech – the dawn of Islamic finance 2.0?

Welcome to the launch issue of IFN Fintech, a new bespoke publication serving as your source to learn, explore and keep up-to-date with the global fintech developments relevant to the Islamic finance industry.

The (Islamic) financial landscape is changing: with the rapid growth of fintech, boundaries are being broken and preconceptions challenged. This disruption in status quo is raising new questions, new concerns but also new exciting opportunities. While ‘disruption’ may carry negative undertones, the Islamic financial community has been embracing the innovation and potential revolution technology could offer.

In this issue, IFN Fintech spoke to market players from the banking sector, asset management space, legal fraternity and fintech scene, to bring you first-hand insight into where market participants are seeing opportunities and why Islamic fintech makes sense.

Cheaper, faster, better

The appeal of employing fintech solutions into financial operations is compelling and if it could be summed up in one word, it would be: efficiency.
“Fintech has the potential to play a major role in the Islamic finance industry specifically to improve processes efficiencies, cost effectiveness, increase distribution, Shariah and other compliances and financial inclusion,” explains Othman Abdulla, the managing director of Islamic banking at Silverlake Group.

Bashar Al Natoor, the global head of Islamic finance at Fitch Ratings, agrees: “It is worth highlighting two key angles for the industry.  The first is that it is necessary for the industry to maintain and grow its market share, as failure to keep pace with such developments, although it has its specific  cost and challenges, could impact the competitiveness of its players. The second is that it could help with financial inclusion, which is a big issue in many of the countries where Islamic finance is active.”

While these are benefits to all financial institutions in general, the significance of fintech for the Islamic finance sector is greater as compared to its more established conventional peer due to the dynamics of this relatively young sector – which builds the case for Islamic financial institutions to be more agile and receptive to adapting and adopting fintech solutions.

“The Islamic finance industry should embrace fintech and digital technology even more aggressively than its conventional counterparts because Islamic finance does not have the breadth or footprint as conventional finance does,” believes Raja Teh Maimunah, CEO of AmInvestment Bank. “Fintech and digital technology allows Islamic finance to reach out further and quicker (and possibly cheaper) without having to build a physical presence and distribution channels.”

Raja Teh’s sentiments are echoed by Alex Armstrong, the founder of UK-based TrustExec, who adds: “With the ever-growing cost of compliance and record-keeping requirements, anything that removes the amount of paper that is generated from the manual process and stores data allows banks to reduce their back office cost and improve their ability to keep up with compliance requirements.”

Data-storing is one element continuously brought up by market players.

“The Islamic banking sector has embraced innovation in financial structuring and we have advised on various innovative Shariah compliant products; that innovation mindset also lends itself to exploring blockchain applications in Islamic banking and Islamic insurance. The requirements around transparency, integrity and diligence on assets in Islamic finance work lend itself to key characteristics of distributor ledger technologies,” shares Muneer Khan, a partner and head of Middle East financial markets, regulatory and international Islamic finance at legal firm Simmons & Simmons.
In addition to that, the interesting thing about blockchain technologies, according to Mark Smalley, the co-founder and CEO of blockchain infrastructure provider Neuroware, is that they fit the mold of Sunnah money for they not only hold intrinsic value from the energy used to produce them, but in most cases, most notably Bitcoin, they are often inflation-proof unlike government-based currencies.

“Until now, Islamic finance was usually constrained by the problematic nature of gold and silver, which are difficult to transfer and hard to verify when tucked away in someone else’s vault,” Smalley elaborates. “With a digital alternative to gold now available that allows for instantaneous real-time direct peer-to-peer payments, in which the transfer and settlement of value happen together as a single event; technology is going to play the leading role. The ability to enable a transparent market with tamper-proof data is going to revolutionize finance in ways that we cannot fully comprehend yet.”

New doors

Blockchain is one of the many areas industry players have highlighted as an instrument with strong potential to catalyze the growth of the Shariah finance industry.

Shakeel Adli, a partner and the head of Islamic finance at CMS, agrees, pointing out that Murabahah transactions could benefit from blockchain which could be used to reduce costs. “We have begun to see the evolution of blockchain-based products which are Shariah compliant, for example HelloGold in Malaysia. We see that trend continuing,” he adds.

Armstrong concurs: “Digitizing the Murabahah offer and acceptance process and the marketplace itself which is currently over-the-counter would be positive developments as well as automating anything that allows people to transact faster and removes the administration cost.”

The payments industry is also one industry players are keeping an eye on.
“Payments and trade are the two areas I am keen on,” shares Raja Teh: “Payments also include remittance, merchant solutions and cash management. My dream is to see paper money in only museums. Trade finance today is very manually managed hence digitization of its record-keeping and processes is much welcome to enhance efficiency and fraud prevention.”

And of course, there’s crowdfunding and peer-to-peer (P2P) financing – a sector which has seen great participation from the Islamic finance industry. Nasir Zubairi, CEO of the Luxembourg House of Financial Technology, is one of the many who sees opportunities for fintech and Islamic finance in the field of P2P financing and crowdfunding.

Over the last few years, the Shariah finance industry has welcomed an explosion of Shariah compliant crowdfunding platforms, including London-based Yielders.

“We ourselves have identified the business-to-business market as a great opportunity to share our hard work and research and development, therefore we have some exciting news to share: In the third quarter this year, we will be looking for collaboration partners and opportunities to share our bespoke technology in new geographical markets,” reveals Irfan Khan, the founder of Yielders.

In the fund management space – artificial intelligence (AI) seems to be the keyword.

“What we have seen in the market in the last decade, volatility has intensified and more frequent, economies are becoming more integrated, information and data are easily accessible and are more current, movements of goods and services are faster – this dynamic would make it challenging to be ahead of the curve, to consistently and constantly deliver superior performance if you are a traditional active fund manager,” Najmuddin Lutfi, CEO of BIMB Investment Management, opines.

BIMB Invest has recently started to incorporate AI and big data analytics into its strategy. “Technology can assist us to make more accurate decisions based on facts and figures and eliminates any biases and intuition in the decision-making process.”

From AI to blockchain to P2P, the prospects for fintech for the Islamic finance industry seems almost limitless. And the general consensus is that, Islamic fintech will revolutionize the way Islamic finance is viewed and used in the future.


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