Editor’s Note: This post was originally published in March 2018 and has been edited and updated for relevancy and comprehensiveness.
Will you believe me if I say any Tom, Dick or Harry (or Ali, Abu or Hassan) can easily understand what Islamic Fintech is? Besides, a person who already understands Fintech will also very easily understand Islamic Fintech.
What is Fintech?
Fintech, which derives from the contraction of the words finance and technology, is new technology applications and innovations that aim to provide new and improved methods in the delivery of financial services. Another way of describing Fintech is; it is a business that aims to provide financial services by making use of software and modern technology. With Fintech tools, companies are now pushing the payment industry to the next level. Examples are the recent usage of smartphones for mobile banking, online international money transfer, credit scoring services that leverages social media etc. Furthermore, through Fintech, various opportunities are created. For example, financial transactions will become more automated, user-friendly, and more convenient leading to a better customer experience and wider reach to more segments of society, including even the unbanked or under-banked.
How Fintech is different from Islamic Fintech?
Both Fintech and Islamic Fintech share similar definition, but the main point of departure is that Shariah (Islamic Law, specifically the branch dealing with transaction in the economy) guidelines must be observed in the latter. For example, Fintech is permissible and accepted in Islam, and only becomes impermissible if there is clear evidence that they are against the basic rules of the Shariah. It is noteworthy to highlight that from an Islamic perspective, any business activities including Fintech are deemed as permissible, except when there is a clear text which prohibits it.
A summarised working definition of Islamic Fintech can be understood as below:-
- Digital Delivery of Islamic Finance
- Usage of Fintech utilities: KYC / AML, Blockchain and DLT, Cyber, Payments, Big Data & Machine Learning in Islamic Finance
- Any FinTech in a Muslim market demography that delivers an unmet financial need and or financial inclusion objective
- Any Shariah compliant FinTech fund investing in digital infrastructure or economic development anywhere in the world.
Moreover, according to IFSB secretary-general Jaseem Ahmad, “There are tremendous opportunities for Islamic Fintech and Islamic banking institutions (IBIs) are taking up Islamic Fintech to reach out and improve the attractiveness of their products at a lower cost”. Also, the Islamic banking and finance (IBF) industry currently reaches approximately 100 million customers worldwide, however, the potential market is six times that, and this gap can also be tapped through Fintech. Overall with Islamic Fintech services, it can help the unbanked to create a new form of credit history and moving from there, at the next phase they can then be served by the larger IBF industry.
Types of Fintech Services and Selected Examples of Islamic Fintech Companies
The main types of services offered in Islamic Fintech are peer-to-peer (P2P) lending, crowdfunding, money transfer, mobile payments and trading platforms. In addition, there are also Fintech services for other sub-segments such as wealth management, insurance, etc.
In the Islamic finance landscape, there are a few prominent Islamic Fintech companies among others include Singapore-based Ethis.co& KapitalBoost.com, US-based Wahed Invest LLC and UK-based Yielders in the segments of P2P lending, crowdfunding and investment robo-advisory. Other newer Islamic Fintech companies that are worth noting are US-based Ovamba, an Islamic trade finance platform, which is launching a Shariah compliant Initial Coin Offering (ICO) which allows for fees and risk-sharing backed by halal instruments using a token and CBX Unit which is a Shariah compliant universal payment system backed by grains.
Islamic Fintech Helps to Address Financial Inclusion
According to the World Bank, with the presence of Fintech, approximately two billion adults who are currently unbanked will now have access to financial solutions. In the Southeast Asian (SEA) region, currently only 27% of the region’s 600 million people have a bank account and approximately 40% of the unbanked are Muslims.This serves as an impetus for Islamic Fintech in addressing financial inclusion. With the availability of Shariah-compliant crowdfunding and P2P financing tools, this creates opportunities for individuals and SMEs who require financing but thus far do not qualify for financing from traditional IBIs. For example in the case of Singapore-based Islamic Fintech Company KapitalBoost, it offers SMEs, who are often disadvantaged in their access to funds for business expansion, short-term financing alternatives with fast and friendly approval process and at competitive rates. Financing is provided through Shariah-compliant structures such as Murabaha, Qard, Wakalah etc. Moving to US-based Ovamba, it helps to empower fellow entrepreneurs in Africa and the Middle East by providing them with the access to finance needed in order to flourish their businesses. The problem they are solving is twofold; firstly, banks are slow and ill-equipped to adapt to meet the demands of fast moving African small businesses; and secondly, banks’ limited due diligence procedures make it hard for entrepreneurs with no previous track record to get started.
Islamic Fintech serves many advantages. For example, apart from providing access to financial solutions for the roughly 2 billion adults who are currently unbanked as highlighted above, it also provides choices which are more aligned to individual needs. Moreover with the available range of Islamic fintech services, customers will have more options to choose. This will also help customers to enjoy more competitive financial services cost. Finally, this short article cannot fully appreciate the nuances found in Islamic Fintech; and attempts to give a brief understanding on Islamic Fintech overall.