Fintech can enable Islamic finance to attract more customers, increase efficiency, reduce costs and offer a wider range of products, helping the sector become more competitive against conventional finance without compromising on profit margins.

Islamic finance has taken great strides this century, with sharia-compliant financial assets forecast to total $3.8 trillion by 2022, according to a Thomson Reuters report. That’s up from $2.2 trillion in 2016, with around 1,400 Islamic financial institutions now operating across 80 countries.

Yet financial inclusion in Organisation of Islamic Cooperation (OIC) member states lags global norms. Less than 30 percent of households in OIC countries have an account at a financial institution. That compares with more than 50 percent in non-OIC nations, a 2015 IMF report reveals.

Expanding sharia-compliant financial services through fintech could lessen this gap, with 34 percent of Afghan adults, for example, citing religious reasons for not having a bank account. Around 27 percent of Iraqis and Tunisians gave the same response, while religious concerns over financial services were negligible in the majority of wealthy Islamic countries with well-developed Islamic banking sectors.

“From a Fintech perspective, the opportunity in Islamic Finance continues to grow. Successful deployment of a blockchain-based Fintech solutions by Islamic banks would greatly expand the number of SMEs that could be financed,” said Yousuf Mohamed Al-Jaida, Chief Executive of Qatar Financial Centre.

High transaction costs make it uneconomical for Islamic banks to offer fully-fledged bank accounts to low income groups, which make up a large part of the population in most developing countries.

Instead, lenders should capitalise on high mobile phone penetration across the Muslim world to attract new customers through digital channels, with the requirements to open a digital wallet – which typically allows for money transfers, micro credit and bill and goods payments – vastly lower than a normal bank account. Customers can usually complete the process in a few minutes.

Phone-based biometric identity applications – via the likes of eye scans, fingerprints and voice or facial recognition – can provide a digital identity for unbanked and undocumented people. Embedded in the blockchain, this digital identity can include immutable birth, education and health records, as well as voter registration and property titles, bringing holders into the financial system.

“Banking is about data and its management. Artificial Intelligence and blockchain will re-engineer Islamic finance,” said Rushdi Siddiqui, Mentor, Islamic Economy, Quest Ventures (Singapore).

He predicts virtual assistants will replace call centres and many branches, with technology empowering customers to make better financial decisions, while fintech could provide a global fatwa database available in multiple languages.

“RegTech could help the industry achieve more compliance with general banking regulations and sharia-specific rules, assuming there are globally or regionally agreed sharia standards,” said Dr. Mohamed Damak, Senior Director and Global Head of Islamic Finance (Financial Services Research) at S&P Global Ratings.

“Using RegTech could minimise the reputation risk related to potential breaches of sharia requirements. It would also free up time for sharia scholars to innovate.”

He forecasts fintech can make transactions quicker and easier, improve traceability and security, expand Islamic finance penetration and enhance governance.

Islamic banks are typically smaller than their conventional rivals, with the industry’s high fixed costs putting sharia-compliant lenders at a disadvantage due to their relative lack of scale. This gap is reducing, however, and fintech can level the competitive field further by lowering Islamic banks’ administrative costs and enhancing security.

For example, data mining techniques can enable the unbanked to more easily obtain credit by providing sophisticated means to analyse risk. Where once a long-standing bank account and a regular salary were prerequisites to borrow, Islamic banks can now assess a person’s credit worthiness by analysing spending patterns on their digital wallets.

That allows Islamic banks to lend small amounts to lower income groups, increasing financial inclusion, while initiatives such as crowdfunding enable retail customers to invest in sukuk and other sharia-compliant instruments that deliver better returns than savings accounts.

Other innovations include sharia-compliant robo-adviser platforms that provide financial services to retail investors. Once such platform, New York’s Wahed Invest, in September launched two sharia compliant index-tracking funds. U.S. firm Blossom Finance, meanwhile, will launch what it claims will be the first digital sukuk in late 2018. Using the Ethereum blockchain, retail investors will be able to invest in the sukuk, which will then use the proceeds to fund sharia-compliant microfinance initiatives in Indonesia. Using a profit- and risk-sharing model, Blossom aims to provide an annual return of about 9% to investors.

As of December 2017, there were 116 fintech companies offering sharia-compliant products, according to industry body IFN FinTech. Of these, 21 were in Malaysia, 18 in Britain, 15 in Indonesia and 14 in the United States. Around two-thirds focus on providing financial services such as payments, remittances and crowdfunding.

“It’s very difficult to compare the development of Islamic and conventional fintech at this stage,” added Damak. “But Islamic fintech is growing and attracting a lot of interest.”

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