Islamic Fintech: Nascent and on the Rise

Islamic fintech has emerged as a niche sector within the broader development of Islamic finance, and can be defined as 'technologically enabled financial innovation that could result in new business models, applications, processes or products with an associated material effect on financial markets, institutions, and the provision of Islamic financial services with observation of Shariah requirements' (adapted from the Financial Stability Board's definition of fintech). The prospects for Islamic fintech are encouraging. Several reasons stand out, including the propitious demographics of a young and digitally savvy global Muslim population, potential contribution of digital Islamic social finance towards poverty alleviation, and increasing consumer demand for ethical financial products and services. Globally, more than 200 companies are involved in Islamic fintech, primarily from Asia, the Middle East and Europe. By a measure of collective activity among the Organisation of Islamic Cooperation's (OIC) 57 member countries, Islamic fintech is nascent. At USD 49 billion, its size translates into 0.7% of the total global fintech transaction volume in 2020. However, this is expected to grow to USD 128 billion by 2025 (CAGR: 21%). Meanwhile, a global composite index assessed the Islamic fintech ecosystems of various countries. Jurisdictions from Southeast Asia (Malaysia, Indonesia), the Middle East (Saudi Arabia, the United Arab Emirates), and the United Kingdom were found to have the most favourable conditions. In Malaysia, Islamic finance is a key priority sector. Islamic banking has grown significantly and Malaysia is actively involved in the international issuance of Islamic bonds (Sukuk). In terms of Islamic fintech, technology firms as well as incumbent Islamic commercial banks are involved in providing Islamic digital financial services. Several factors have contributed to the growth of Islamic fintech in Malaysia. These include digital readiness (IT infrastructure, online and mobile banking penetration), clear regulatory arrangements, focused government support for development of the Islamic digital economy, as well as an established Islamic financial community. Emerging opportunities for Islamic fintech in Malaysia are to enable social finance and close financial inclusion gaps. On the other hand, the industry is confronted with key challenges. These include the lack of start-up funding, an inadequate local talent pool, low levels of financial and digital literacy among specific segments of society, and the need for more collaboration between incumbent Islamic banks and fintech companies. For Islamic deposit insurers and resolution authorities, Islamic fintech can help by improving operational efficiency and effectiveness in areas such as the management of Islamic deposit insurance funds, identification of Shariah noncompliance risks for better governance, reimbursement of Islamic deposits, and enhancing resolution processes for Islamic banks. For the broader Islamic financial industry, Islamic fintech is used among others, to support products such as Shariah compliant e-money, and the business of Islamic digital banking. This is essential to provide Islamic depositors and financial consumers with the assurance and availability of end-to-end Shariah compliant digital financial products and services, that meet their expectations concerning religious laws and ethical standards. In summary, this Fintech Brief seeks to raise awareness of Islamic fintech and in turn, foster its growth. The brief provides an overview of the global state of play, and explores Malaysia's experience in the regulation and development of Islamic fintech. It closes by highlighting potential uses of Islamic fintech for deposit insurance and bank resolution.