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Fintech Advances Islamic Finance

by Mohd Sedek

Islamic fintech industry started almost a decade ago and has an imminent role in the evolution of Islamic finance products and services offering, writes Mohd Sedek. This was an article features in In Focus magazine issue 5.

Advancement of technology has led to the rapid development of new and innovative financial services. The infusion of technology into financial services is commonly referred to as financial technology or fintech. Fintech’s a portmanteau that integrates ‘finance’ and ‘technology’ fuelled by the combination of finance and emerging technologies – for instance, algorithm, Big Data, cloud computing and machine learning – with the objectives of competing, enabling or collaborating with financial institutions.

The concept of fintech has emerged and developed since the past six decades through the introduction of credit card in 1950 to mobile wallet and payment apps in 2000. Technology progression with proliferation of mobile and wireless devices, along with widespread penetration of the internet, has shaped the way consumers spend, save, borrow and make other financial decisions.

Islamic Fintech
From the stance of sharia, technology is neutral and only serves as an enabler. One of the developments in the field of Islamic finance refers to Islamic financial technology or ‘Islamic fintech’. Islamic fintech differs from its conventional counterpart as it is transparent, beneficial for both parties and sharia-compliant – Islamic law that deals, particularly, with monetary transactions.

The Islamic fintech industry has been established since 2010, reflecting the development of global fintech ecosystem. Fintech, within the Islamic finance domain, has an imminent role in the evolution of Islamic finance products and services offering. Advancement of technology functions as a catalyst that spurs the growth of Islamic finance in becoming competitive against conventional finance without compromising on profit margins.

The core impact theme in fintech can be classified into three: greater automation from insights to activity, reduction in the use of intermediaries, as well as decentralisation and security. In order to stay competitive in this thriving industry, fintech companies are required to have at least a combination of two core impacts.

Islamic Fintech and Financial Inclusion
The 2030 Agenda for Sustainable Development has been established and adopted by the world leaders since 2015, wherein 17 Sustainable Development Goals (SDGs) have been drawn for the sake of people, planet, prosperity, peace and partnership. Being a prominent enabler of other SDGs, the aspect of financial inclusion is highlighted specifically in the eighth goal.

Academic evidence has verified the fact that financial inclusion can support the achievement of broader SDGs. The Islamic fintech appears to be a perfect medium to achieving the SDGs via financial inclusion. The dynamic amalgamation of fintech and digital technology offers a strong enabler for Islamic finance to reach clients rapidly without the need to build a physical presence or distribution channel.

Data from World Bank Global Findex 2017 reveals that 1.7 billion of the world population remains unbanked, while the International Monetary Fund (IMF) in 2015 reported that less than 30 per cent households of Organisation of Islamic Cooperation (OIC) member countries had an account at a financial institution. As such, fintech enhances access to financial services, apart from reinforcing the role of Islamic finance in promoting the financial inclusion agenda.

Evolution in Islamic Fintech
Despite the focus on the development of shariah-compliant businesses and consumer financing in the early years, the Islamic fintech has advanced rapidly since 2015. The positive impacts of fintech, from the stance of Islamic finance consumers, are due to the choices offered by the fintech innovation that meet the needs of consumers. Additional options are beneficial to consumers due to the competitive costs in providing financial services.

One of the successful Islamic fintech establishments, Wahed Invest, is a US-based halal-focused investment firm and also the world’s first shariah-compliant robo-advisory platform. Parallel to the Ernst & Young definition of fintech, Wahed Invest integrated technology with innovative business frameworks in order to provide and improve financial services. In their automated financial planning, their investment decisions and processes are algorithm and technology-driven, respectively, with either minimal or nil human interference.

As for the business models, a minimum investment of USD200 per month can indirectly generate possibilities for a low-income earner to have a robo-adviser investment portfolio. In providing more efficient shariah-compliant investments, the function of intermediaries is completely discarded, which allows lower chargers to clients.

As far as fintech is concerned, the integration of technology results in operational efficiency, cost effectiveness, as well as the capacity to support the escalating demand of sharia-compliant products and services. According to ICD-Thomson Reuters 2017, Islamic banking assets stood at USD1.7 trillion in 2017 and have been set to hit a whopping USD3.8 trillion by 2023 with 1,400 Islamic institutions established across 80 countries.

Fintech is an innovative approach for asset managers to manage investment capitals. A number of asset managers have pursued analytics-driven quantitative or systematic investing. To date, Big Data refers to a highly sought and a new approach for executing analyses, primarily to offer crucial insights in making accurate investment decisions.

Through the effective use of Big Data that creates information edge, investment managers can be significantly ahead in their trade and exchange, apart from reaping profits due to the ‘information arbitrage’ gained from their advanced models, in comparison to those who adhere to outdated and traditional analytic approaches.

A success story pertaining to effective implementation of technology approach in managing investments refers to Arabesque. Arabesque is an established firm that manages global asset by executing the self-learning quant models and Big Data to analyse both the performance and the sustainability of globally listed companies. Arabesque’s S-Ray tool, which is integrated with Big Data, environment, social and governance (ESG) factors, as well as Islamic finance principles, has been reckoned to generate a massive range of stocks that satisfy the sustainability and performance metrics.

S-Ray tool has combined more than 200 ESG metrics in a systematic manner with news signals from over 50,000 sources in 15 languages to enable the monitoring of sustainability for over 7,000 world’s largest corporations and firms across 70 nations. Additionally, the preference filter embedded in S-Ray possesses the ability to filter the trade and exchanges of companies in accordance to Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) sharia rulebook. Thus, generating a multitude of stocks that isn’t only sustainable financially, but more importantly, ethical and Islamic-compliant.

As mentioned earlier, fintech has fundamentally transformed the payment system from usage of credit cards to online banking, and to date, payment apps. In order to remain relevant amidst the continuous cutting-edge innovations that transform both technology and financial terrains, it’s essential for Islamic philanthropies, particularly those involved in zakat, waqf and sedeqah (charity), to manoeuvre and reinvent themselves in light of compliancy to regulations and governance. From zakat calculation to collection, innovative payment technologies have introduced new speed and convenience to charitable organisations by enabling people to contribute to their communities, as easy as they tap for e-hailing service.

Blockchain technology provides a massive opportunity for financial progression due to several reasons, as follows: uncompromised quality assurance, elimination of human error, cost efficiency, high traceability, permissible peer-to-peer transactions and protection of data from potential tampering activities. Hence, charity organisations can easily prove their donors that their money is used both wisely and honestly. Aid:Tech and Finterra are two companies that offer services for the Muslim community to perform sedeqah, zakat and waqf using payment apps as well as blockchain technology.

Last Words
The Islamic finance industry assets, as a whole, have been projected to reach a staggering figure of USD3.8 trillion by 2023, as reported by Thomson Reuters. This offers a bright prospect for Islamic fintech. The rapid growth of fintech is driven by the increasing interest in Islamic fintech, as well as the availability of funding and regulatory support. Islamic fintech promotes ethical and responsible finance, apart from presenting an opportunity that leads and influences all forms of finance globally.

The next progressive phase of Islamic banking isn’t only driven by shariah-compliant offerings and its position that’s on par with conventional banking, but also distinguished in light of innovation-driven advancement. Islamic fintech innovations can be further enhanced with encouragement offered by monetary authority, strong awareness amidst Islamic finance stakeholders and facilitative regulatory settings across Islamic financial markets.


Main photo by Edi Kurniawan on Unsplash.

20 Jan 2020
Last modified: 20 Jan 2020
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