In this age of disruption and digitisation, Islamic fintech, built on Sharia-embedded ethical values of fairness, justice and equity, is poised to drive the global finance industry to its next phase of evolution and opportunity.

With more customers demanding ethical banking practices, Islamic fintech offers an attractive alternative for a younger, technologically-minded customer base.

As governments implement forward-leaning policies to support their development, it is also imperative that regulations continue to evolve in tandem, safeguarding the sector as it continues to grow.

Realising the potential benefits, together with active support, has led to substantial growth in the Islamic fintech sector. According to S&P Global Ratings, the $2.4 trillion Sharia-compliant finance industry is expected to register “low to mid-single-digit growth” in 2021 and is forecasted to grow 40 percent by 2024.

GCC Islamic fintech ecosystem

While the GCC is catching up with developed markets in terms of financial inclusion, the young, digitally-equipped Muslim demographic is pushing for innovation in Islamic finance. And governments, especially those with broader Islamic economy strategies, are leading the response.

The Global Islamic Fintech Report (GIFR) 2021 estimated that last year’s volume of Islamic fintech transactions within Organisation of Islamic Cooperation (OIC) countries was at $49 billion, with the UAE and Saudi Arabia leading in transaction volume.

While the Islamic banking and finance sector surpassed 100 million customers worldwide, the future holds great demand, given the growing number of Muslims worldwide.

Saudi Arabia will remain the world’s largest Islamic banking market, according to Moody’s Investors Service. And its push towards a cashless economy is a key factor in motivating fintech companies to invest and innovate in the kingdom.

The Islamic banking and finance sector has surpassed 100 million customers worldwide.

The Fintech Saudi Initiative, launched in 2018 by the Saudi Central Bank, previously known as the Saudi Arabian Monetary Authority (SAMA), in partnership with the Capital Markets Authority (CMA), has played a pivotal role in this leap forward. Notably, in 2020, the kingdom spent around $4.5bn on industrial support.

Notably, also in 2020, Islamic banks accounted for about 18 percent of total banking sector assets in the country, according to the Central Bank of the UAE (CBUAE).

Government regulations

This past year, the Islamic finance sector saw an enhancement of regulations to drive trust and growth in the sector as firms grapple with pandemic-related risks and continue to adapt their business models accordingly. It’s also encouraging to see regional governments are realising the potential benefit of Islamic fintech and actively supporting its development.

In January 2021, the Saudi Central Bank (SAMA) established a regulatory sandbox, which allows financial institutions and fintechs to test and launch their products and services in an innovative and safe environment. The kingdom also introduced an “Open Banking Policy”, in line with the Saudi Arabia Vision 2030 investment plan, to support entrepreneurship and promote financial services technology.

Islamic fintech offers an attractive alternative for a younger, technologically-minded customer base.

Despite rapid growth, support from governments and a vibrant ecosystem, proactive regulation, which provides guidelines for Islamic fintech and facilitates access to funding, is imperative for Islamic fintech’s sustained growth.

While countries like Saudi Arabia do not have a written constitutional law, since the Holy Qur’an and Sunna have been accepted as the constitution, there is no nationwide Sharia board in the kingdom.

However, as Islamic fintech institutions and bodies go about setting standards in addition to regulations, Sharia advisory committees can help create standards for certain Islamic fintech use cases, such as sukuk bonds, Islamic robo-advisors, to ensure compliance with Sharia laws. Their main objectives will be to:

• Review the structure of Islamic products, related documents, records, contracts, agreements, forms, and opinions and recommend amendments if any.
• Contribute to the innovation and development of products in light of the provisions of Sharia and in accordance with best international practices.
• Set framework for Islamic products, dividend/income purification and past due penalties (monitor spending of such amounts to charity).
• Implementing Shariah audit.

The outbreak of Covid-19 disrupted global financial markets at an unprecedented scale. However, it was also a wake-up call to switch from traditionally deployed financial services to more sustainable finance and technology.

Islamic finance and the principles that guide it will continue to play a significant role in supporting sustainable growth and stability within the regional financial services sector.

This will require a concerted effort across government entities, financial investors and financial institutions to develop a conducive ecosystem that nurtures innovation and promotes market transparency and trust.

Dr. Adli Hammad, founding partner and head of corporate department, Hammad & Al-Mehdar.