“FinTech is the backbone of the Islamic banking growth story”

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).

Aiming to drive digital innovation, Islamic banks are increasingly building partnerships with FinTech companies, both in the Middle East and around the world.

However, in the process of collaborating with FinTechs, banks face a number of challenges. Most FinTech companies usually target the more significant segment of conventional banking and therefore the number of tailor-made Islamic FinTech solution providers is limited. After this, knowledge of Islamic banking and Sharia compliance is still in its infancy in the FinTech scene.

Meanwhile, from a demand perspective, demand for Islamic banking fintech services and solutions continues to grow. In recent years, traditional demand for core banking services 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 has come to increase investment in Islamic products and services and Sharia-compliant solutions.

With both banks and FinTechs increasing their investments, Islamic banking will benefit across the board. Ten reasons:

Customer experience
FinTechs are key drivers to improve customer experience as most of the solutions proposed are agile and constantly improve the experience of Islamic banking customers. With the advent of ‘fingertip banking’ and the transformation of digital channels, customers are striving for a seamless experience.

Time to market
Changing customer expectations have led banks to launch newer or improved versions of digital applications and focus on reducing time-to-market. Partnerships with specialist Islamic FinTechs enable banks to deliver faster and stay relevant to meet best-in-class customer experience standards.

Shariah Compliance
Islamic banks are financial institutions willing to invest in establishing partnerships; However, many small to mid-sized banks do not have the resources to train their FinTech partners on Sharia compliance. The expectation is that Fintech partners understand and comply with Sharia rules and that the proposed technology solutions follow the principles of Islamic banking.

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

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

Since the inclusion of a larger population is necessary for the development of the economy, FinTech has helped various banks to accelerate this agenda by innovating more digital solutions like digital onboarding.

For example, one of the banks in Oman recently prioritized 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, and the community is relatively younger and growing faster. Banks need to meet the needs of this growing segment and their best strategy is to invest heavily in mobile banking applications. Many Islamic banks are working to improve the overall digital experience by integrating their applications with various third-party apps to meet the needs of this non-banking segment.

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

R&D investments
Specialized Islamic fintechs should focus their research and development investments on the areas of priority for Islamic banking customers and banks. Currently, a limited number of players have pure Islamic FinTech solutions, and most of the FinTech players develop a solution that considers conventional banks as primary drivers and then modify their solutions based on Islamic banking needs.

A greater focus on Islamic requirements will help drive a “first principles” approach in the design of Islamic banking products and services.

Islamic FinTech Ecosystem
As the number of Islamic FinTechs increases, banks can take advantage of the ecosystem’s synergies. Islamic banks are also positioned to fully utilize the potential of new technologies such as open banking, blockchain and artificial intelligence.

A regional FinTech ecosystem is essential as customer needs vary based on local culture. For example, Malaysia, Iran, Saudi Arabia, UAE, Germany, UK and other Islamic banking countries may have similar innovation requirements, which will ultimately be adapted based on local needs.

Continuous innovation
Specialized Islamic Fintech players with access to better capital will be able to invest continuously in innovation. In addition, Islamic banks may be interested in partnering or investing with some of these FinTechs in the long term.

Outlook

The demand for Islamic banking will continue to increase and the role of specialist in Islamic fine techniques 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 does not need to offer an end-to-end solution in a digital onboarding journey. Instead, it may be a combination of FinTech actors participating in the value chain to fulfill the journey. Therefore, FinTechs should consider participating in a larger ecosystem and regional building interconnections.

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

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