Islamic fintech: Reaching the next generation of Muslims is the second paper in a series by The EIU on "Innovation in the Islamic Economy." (A blog post about Ms. Noronha's first paper may be read here.) Supported by the Dubai Islamic Economy Development Center, Ms. Noronha notes: "Muslims make up about a quarter of the world's population and are said to be the fastest growing religious cohort. As such, the potential market for Islamic financial services is enormous. The median age for Muslims globally is just 24 years old, making a majority of them 'digital natives' ready for digital Islamic financial solutions."
"Islamic fintech marries sharia compliance with digitally-delivered financial solutions," Ms. Noronha explains. "This makes it easier for Muslims to access savings, investments, insurance and mortgages that are in line with the principles of their faith."
What is more, "Businesses offering Islamic investment solutions digitally must deliver on two fronts: compliance and access.
"To ensure compliance with sharia law, fintechs have to navigate an intricate set of rules. Interest charges, or riba, are prohibited. So too are investments in 'sin stocks' of businesses profiting from alcohol, arms, tobacco and gambling. The rules also prohibit profiting from debt and require investments to be backed by real assets. This has led to the creation of sukuk—sharia-compliant financial certificates, similar to bonds, which give an investor part-ownership of an underlying asset. ... There are also detailed investment criteria surrounding a company's leverage and interest income."
As for access to Islamic fintech, "selecting the right technologies is key. Fintechs are deploying a growing array of halal payment platforms, e-wallets, insurtech and remittance services through mobile phone apps. New digital Islamic banks such as the UK's Niyah and Germany's Insha are offering interest-free products through similar channels," notes Ms. Noronha.
She adds that "[b]eyond product delivery, technologies used by fintech firms promise to bolster Islamic finance by driving efficiencies and reducing costs. In turn this could cut costs of payment services and transactions says Mohamed Damak, global head of Islamic finance at ratings agency S&P Global Ratings. Technologies such as artificial intelligence might also help to improve compliance."
For example, "Blockchain, if deployed at scale, has the potential to reduce the risk of fraudulent transactions according to Mr Damak. Emirates Islamic Bank is already using the technology to authenticate paper checks in the United Arab Emirates."
Blockchain, which is loosely defined as a distributed ledger, or database, shared across a public or private computing network, could have an important use in Islamic finance:
To address high costs and a lack of transparency within the sukuk market, "blockchain could literally be the missing link" according to Mr Damak of S&P Global Ratings.
He expects blockchain technologies will open the market to smaller companies by cutting the cost of issuing a sukuk. In 2019 an Indonesian microfinance institution, BMT Bina Ummah, used a platform created by startup company Blossom Finance to raise US$50,000 in what it claimed to be the first blockchain sukuk.
With respect to transparency, Mr Damak explains: "At present an issuer can substitute one underlying asset with another without informing investors, even though it can completely change the risk profile of the transaction. Blockchain will resolve that by documenting every change." In addition, in instances where there are dozens of assets underlying a single certificate, he predicts that the technology will show investors in real time which ones are underperforming.Looking into the future, Ms. Noronha encouragingly says: "Deploying sharia-compliant financial solutions through digital channels could drive the next wave of growth for Islamic finance. Islamic fintech is poised to deliver financial services sought by a young, middle-class Muslim community that has largely been ignored as well as those seeking ethical financial solutions at the speed and cost of modern finance."
Which sharia-compliant financial solutions do you think will be of value to a growing young, middle-class Muslim community?
Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of Solutions for a Sustainable World.
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