‘FinTech the backbone of the Islamic banking growth story’

01 March 2023 Consultancy-me.com 6 min. read

With Islamic banking and finance in high growth mode, the role of specialist Islamic FinTech players has become more critical than ever, writes Nitin Kanaujiya, an Engagement Manager at Cedar Management Consulting.

Over the last couple of decades, Islamic banking has grown rapidly due to the convergence of several factors – an increase in the number of Islamic banks, an increase in the number of conventional banks offering Islamic (Shariah-compliant) products and services through a ‘dedicated window’ (availability), and changing consumer preferences (adoption of Islamic products).

With the aim of driving digital innovation, Islamic Banks are increasingly forging partnership with FinTech companies, both in the Middle East and worldwide.

FinTech the backbone of the Islamic banking growth story

In the process of collaborating with FinTechs, banks are however encountering a number of challenges. Most FinTech companies usually target the more significant segment of conventional banking, and hence the number of tailor-made Islamic FinTech solution providers is limited. Following this, knowledge of Islamic Banking and Shariah compliance is still in its infancy in the FinTech scene.

Meanwhile, from a demand perspective, the demand for Islamic banking FinTech services and solutions continues to grow. In recent years, traditional demand for core banking and digital channels has expanded further to other services including wealth management, treasury, lending, and risk management.

For FinTechs, the growing commercial opportunity means the time is right to ramp up investments in Islamic products and services and Shariah-compliant solutions.

With both banks and FinTechs upping their investments, the Islamic banking is set to benefit across the board. Ten reasons why:

Customer Experience
FinTechs are key drivers of enhancing customer experience as most of the solutions proposed are agile and constantly enhance the experience of Islamic banking customers. With the advent of ‘banking at your fingertips’ and the transformation of digital channels, customers strive for a seamless experience.

Time to Market
Changing customer expectations have led banks to release newer or enhanced versions of digital applications and focus on reducing time-to-market. Partnerships with specialist Islamic FinTechs allow the banks to deliver faster and stay relevant in meeting best-in-class customer experience standards.

Shariah Compliance
Islamic banks are financial institutions willing to invest in establishing partnerships; however, many small to medium size banks do not have the resources to train their FinTech partners about Shariah compliance. The expectation is that Fintech partners understand and comply with the Shariah rules and that the proposed technology solutions should adhere to the principles of Islamic banking.

Scalability
Islamic FinTechs provide much-required scalability to the increasing volumes of customer transactions. The growth rate of Islamic banking customers is higher than that of conventional banking customers. With the increased adoption of digital banking among Islamic banking customers, the ability to scale has become highly relevant to address the needs of banks and their customers.

Financial Inclusion
Islamic banking has opened wider access to the unbanked/underbanked population. Customers initially hesitant to access banking services via conventional banking routes are now accessing these services, which has significantly improved financial inclusion in various countries.

As the inclusion of a larger population is necessary for the development of the economy, FinTech has helped different banks fast-track this agenda by innovating multiple digital solutions such as digital onboarding.

For example, one of the Banks in Oman recently prioritised the rollout of their digital onboarding solution for their Islamic Banking customers to drive financial inclusion.

NextGen Reach
The average age of Muslims worldwide is 24 years, and the community is comparatively younger and growing faster. Banks need to address the needs of this growing segment, and their best strategy is to invest extensively in mobile applications for banking services. Many Islamic banks are working to improve the overall digital experience by integrating their applications with various third-party apps to address the non-banking needs of this segment.

Investment Access
With the growing demand for Islamic banking products and services, more companies would be willing to invest in Islamic FinTechs, allowing these FinTech firms access to better quality capital. These investments would further drive innovations in Islamic banking.

R&D Investments
Specialist Islamic FinTechs should focus their research & development investments in the areas that are priorities for Islamic banking customers and banks. Currently, a limited number of players have pure-play Islamic FinTech solutions, and most of the FinTech players develop a solution considering conventional banks as primary drivers and then modify their solutions based on Islamic banking needs.

A greater focus on Islamic requirements would help drive a ‘first principles’ approach in designing Islamic banking products and services.

Islamic FinTech Ecosystem
As the number of Islamic FinTechs increases, the banks can leverage the ecosystem's synergies. Islamic banks are also positioned to fully utilise the potential of emerging technologies such as open banking, blockchain, and artificial intelligence, among others.

A regional FinTech ecosystem is vital as the customers' needs vary based on local culture. For example, Malaysia, Iran, Saudi Arabia, UAE, Germany, the UK and other countries with Islamic Banking may have similar innovation requirements, which would eventually get customised based on local needs.

Continuous Innovation
Specialist Islamic Fintech players with access to better capital would be able to invest continuously in innovation. In addition, Islamic Banks could be interested in partnering or investing with some of these FinTechs long-term.

Outlook

The demand for Islamic banking will continue to increase, and the role of specialist Islamic FinTechs is evolving to meet the expectations and needs of customers. Islamic FinTechs must innovate, build a peer network, and offer bundled solutions.

For example, a single player doesn't have to provide an end-to-end solution in a digital onboarding journey. Instead, it could be a combination of FinTech players participating in the value chain to fulfil the journey. Hence, FinTechs should consider participating in a larger ecosystem and regional building tie-ups.

The FinTechs should focus on significant areas such as digital onboarding, digital process automation, digital wealth (including robo advisory), and digital lending. In addition, some specialist areas, such as Islamic treasury, Sukuk, and Takaful, could interest emerging FinTechs. These FinTechs should also focus on investing in capabilities such as SaaS (Software-as-a-Service), open source, low code/no code, cloud computing, and artificial intelligence.

A healthy Islamic FinTech sector could become the backbone of the Islamic banking growth story.