Just one year ago, we reported on how the world was charting a course out of the COVID-19 pandemic with a keen desire to get ‘back to business as usual’. In 2022, we have seen the Islamic finance sector make good on that desire and witnessed the crucial role of fintech companies in facilitating digital access to financial products and services. With the global Muslim demographic getting younger and more tech-savvy, we can expect the pendulum to swing even more sharply toward digitization in 2023. But while the Islamic fintech sector is showing signs of maturing, in many ways it is still embryonic. Collaboration, capital and consumer education will be key to ensuring the sector thrives in the next phase of its development.
Review of 2022
The past year has seen the indomitable rise of Islamic fintech. There are currently 375 fintechs worldwide and more countries are seeing Islamic fintech activity or are well-placed to facilitate it. Some players have exited, but there are also new market entrants. Demand for Shariah compliant products is high and fintechs are positioned to offer more cost-effective models.
Leading the charge are Malaysia and Saudi Arabia, which top the Global Islamic Fintech (GIFT) index 2022. Bolstered by support from government and regulators, Malaysia has seen a dramatic increase in the digitization of banking services and earned a reputation for being a leading Islamic financial technology hub, ready to captain the entire global Islamic fintech industry.
Digital banking services have grown in sophistication. Unlike traditional banks, fintechs operate in an ‘ecosystemic’ way, implementing and building on customer feedback to update and improve on their applications, add new features and remain responsive to cyberattacks.
We have also seen more active collaborations between fintechs and established banks. One of Kuwait’s leading Islamic banks, Boubyan Bank Group, led the way back in 2021 when it launched Nomo, its new fully-licensed UK digital bank. Now Simplifi has partnered with Abu Dhabi Islamic Bank (ADIB) to bring Simplifi’s cards-as-a-service model to Egypt and help companies issue scheme-enabled prepaid cards by reducing the cost to launch and time to market.
Fintechs and tech firms have embraced the spirit of collaboration. A joint venture between Ethis and IBF DigiLabs will see the development of ‘Islamic Value Analytics’, an artificial intelligence-driven data-powered technology to measure and monitor positive social and environmental impact against goals.
In line with our 2021 predictions, banks have taken action to address the heightened cybersecurity risks of the evolution of digital banking. ADIB has become an official member of UAE Trade Connect, which uses blockchain to detect suspicious transactions and prevent fraud.
Preview of 2023
Fintechs are thriving and the forecast is bright. The Islamic fintech market size is predicted to reach US$179 billion by 2026 and it is not just Muslim-majority countries that stand to gain as we can also expect the rise of Islamic platforms in non-Islamic jurisdictions.
Seven out of the top 10 countries for Islamic fintech activity are OIC Muslim-majority countries, but the list also includes the UK, Singapore and Hong Kong. The UK has 27 Islamic fintechs, outstripping the UAE’s 15, and is listed in GIFT Index 2022 as among the top five conducive ecosystems to Islamic fintech in the world.
The coming year will see fintechs unlock access to savings and financing products for both retail and SMEs. SMEs have traditionally experienced difficulty obtaining access to financial services but industry participants predict the fund-raising sector will see tremendous growth in 2022–3. Islamic fintechs will offer Shariah compliant solutions such as Islamic crowdfunding platforms like EthisX, the first-of-its-kind cross-border ethical private capital marketplace.
Islamic fintech has a bright future, but it won’t get there without the right conditions to nurture its growth. To ensure the sector reaches full maturity, banks, governments and regulators would do well to remember the following:
Collaboration — banks and fintechs need to continue to work hand in hand. Islamic banks need to participate in Islamic fintechs in order for subsectors like capital markets and insurance to flourish.
Capital — investment capital is scarce. We need to scale up investment in Islamic fintechs and develop Shariah compliant venture capital funds to provide early seed funding for innovative fintech start-ups to make the most of the opportunities available.
Consumer education — this is considered the number one hurdle to growth. Low financial literacy impedes the progress of financial inclusion and the 2030 Sustainable Development Goals. We need to ensure future generations are prepped to take advantage of fintech innovations and create a pipeline of talent by identifying and scaling up innovative fintech solutions via accelerator programs such as FIKRA.
Conclusion
The COVID-19 pandemic might seem like a distant memory but we are still seeing the after-effects through the rapid uptake of digital financial products and services. Demand for fintech is surging and with the right backing, fintech start-ups will be poised to meet it. But to make the most of these opportunities and foster sustainable growth, the sector still needs help to learn to walk before it can run.
Lingxi Wang is the managing associate at Foot Anstey. He can be contacted at [email protected].