{"id":5442,"date":"2022-04-15T11:33:50","date_gmt":"2022-04-15T11:33:50","guid":{"rendered":"https:\/\/ethis.co\/blog\/?p=5442"},"modified":"2022-10-20T07:53:01","modified_gmt":"2022-10-20T07:53:01","slug":"shariah-compliant-p2p-lending-challenges","status":"publish","type":"post","link":"https:\/\/ethis.co\/blog\/shariah-compliant-p2p-lending-challenges\/","title":{"rendered":"Shariah-Compliant Investments: The Challenges to Peer to Peer (P2P) Lending Solutions"},"content":{"rendered":"\n

Islamic banking has been recognised for its ability to provide ‘innovative financial solutions to an underserved market.’ However, due to its relatively young age and strong religious grounding, a particular concern might be the scarcity of shariah-compliant investment instruments. Additionally, shariah banks are particularly strict in that they typically refuse personal loans. They also tend to be unwilling to lend to businesses:<\/p>\n\n\n\n

According to the World Bank<\/a>, \u201cDespite the fact that 76 percent of enterprises in MENA has a bank account, only 26 percent reported having a credit from a financial institution. Given this low credit penetration at the corporate level in Muslim countries, some solutions have been implemented to narrow the credit gap which is estimated to be more than US$140 billion<\/em>.\u201d<\/p>\n\n\n\n

Instead of making personal loans, Islamic banks prefer to invest directly in the targeted asset or business using shariah-compliant musharakah<\/em> and mudarabah<\/a><\/em> products. Although this strategy has advantages, it may limit the options available to its clients.<\/p>\n\n\n\n

Furthermore, one of the issues that Islamic finance has had to cope with in the past, and much more so in the present, is the huge credit gap. According to Syakir Hashim from Wahed Invest, a large portion of the Muslim community is underserved in the area of financial services. This is not only discriminatory, unjust, and contrary to shariah values (which aim for fairness, social inclusion, and the equitable distribution of wealth in society), but it is also short-sighted in terms of effectively building the shariah-based financial services system.<\/p>\n\n\n\n

\"Shariah-Compliant
Islamic banking has been praised for its capacity to give “new financial solutions to an underserved market.”<\/em><\/figcaption><\/figure>\n\n\n\n

Furthermore, failing to embrace Fintech may result in the loss of the under-30s demographic in Muslim countries. Given that the majority of this tech-savvy generation possesses a smartphone, it is difficult to assume that they will not take advantage of the ability to handle their financial needs online, such as paying bills, getting loans, or even opening a bank account.<\/p>\n\n\n\n

One key consequence of Islamic banking practices as they currently exist is an increase in the cost of banking under the shariah banking framework. To that end, it is suggested that shariah banks could build shariah-compliant and cost-effective investment products by embracing Fintech-based solutions (which clearly provide for quicker, consumer-oriented, and cheaper transactions).<\/p>\n\n\n\n

As a result, it makes sense to try to find Fintech tools that might be used by Islamic finance professionals. Although most FinTech instruments are adaptable enough to meet the demands of the shariah market, it has been proposed that P2P lending and Robo advising are two of the most suited. P2P lending will be covered in further detail:<\/p>\n\n\n\n

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