Peer-to-peer (P2P) lending directly connects small businesses or SMEs with a crowd of investors who can fund finance requests on the P2P platform. P2P lending aims to build a community of investors and businesses where risks are shared and capital is channeled into real economic activity that benefits the community. Essentially, P2P lending follows the basic Islamic principle of sharing risks for profits rather than the model used by banks which is transferring risks for profits.
With roughly 1.9 billion Muslims in the world making up 20% of the population, the opportunity for Islamic fintech models such as P2P lending is huge. As of July 2020, there have been 142 Islamic fintech companies recorded around the world and 27 of these are in the UK, and following close behind are Malaysia, Indonesia and the UAE. Despite the UK being ahead in the Islamic fintech game, Indonesia is in fact home to the world’s largest Muslim community, with a population of more than 230 million. UK-based Islamic fintechs have noticed this and have expressed interest in expansion to the Southeast Asian region as part of their growth strategy.
Review of 2020
In 2019, regulatory sandboxes were highly utilized by Islamic fintechs to design and test processes before bringing them to market, which led us to believe that 2020 would be a year of growth for Islamic fintech, regtech, insuretech, etc. However, we did not foresee the biggest catalyst for digitalization, which was the global COVID-19 pandemic. The contagious virus forced businesses to learn how to operate remotely and it has never been more important to have an online presence.
The shift in the way of working has in turn forced some companies to pivot their business strategies to adapt to changing consumer habits. This has meant that decision-making that would have taken months is fast-tracked to a matter of days as quick decisions and adaption are critical for keeping businesses afloat during these uncertain times.
When COVID-19 hit in March 2020, there was an initial wave of uncertainty for the Islamic P2P sector. Investors lost some confidence in the SME market, which was inevitably negatively affected by global lockdowns and local government restrictions on trading. Islamic P2P companies’ first priority at this time was protecting their investors’ money. They began implementing measures to minimize the impact of COVID-19-related issues.
When assessing SMEs for their eligibility for a loan, Islamic P2P lenders started to check how easy it is for staff to work from home, and they would look at their supply chain to see if products were imported internationally, and they also began to assess how ongoing projects would be affected and the cash conversion risk.
Working capital became important for business continuity, so P2P lending companies started to check for alternative sources for this. P2P lenders have had to remain agile during the pandemic and react to changes in the macroeconomic environment by potentially reducing loan limits and tenors and increasing rates to adjust for the increase in risk. 2020 also saw new partnerships between Islamic fintechs and banks. In July, Islamic fintech Beehive, headquartered in Dubai, joined hands with Gulf International Bank and Social Development Bank in order to improve their product range and support small businesses in the Kingdom of Saudi Arabia. When fintechs and banks come together, they become a great force with improved efficiencies, lots of data and a huge reach.
Preview of 2021
Demand for P2P borrowing from SMEs is back up to pre-COVID-19 levels, and we expect this appetite to grow in 2021 as small businesses get back on their feet as global economies continue to reopen. This will only be accelerated by the introduction of support schemes, such as the launch of Dubai’s new SME stock market which was announced in October 2020. P2P lending will continue to flourish so long as additional measures continue to be made to ensure the security of investors’ money.
We can also expect technologies to rapidly appear in the market which will improve Islamic fintechs’ abilities to operate remotely or digitally. In a recent survey conducted by Beehive, 50% of respondents said they think digital or remote onboarding will be the norm in 10 years’ time. For this to happen, it is important for Islamic fintechs and banks alike to use this period of time to adjust their digital strategy and focus on enabling customers to use their services remotely. Not only does this improve customer experience and efficiency, but it also reduces the costs of running branches for the financial institutions.
This unprecedented year of 2020 brought an opportunity for Islamic fintechs to accelerate their digital transformation strategies. There is a new need for a digital or remote way of working in order to protect the earth’s population. We now have an opportunity to fast-track innovative technologies to improve the financial services available to small businesses and improve financial inclusion among the Muslim community.
With this rapidly accelerating digital strategy, we must also continue to be aware of the increasing risks to cybersecurity, which have increased as employees work remotely.
The future of Islamic fintech and P2P lending looks positive. New bank and fintech partnerships will pave the way to success on a much larger scale and even with continued uncertainty, there is no denying that a digital-first approach is the way of the future.