How Fintech and Open Banking could help boost UK Islamic finance

Islamic finance is likely to remain a very small player in the UK for years to come, but can fintech and open banking help grow the sector?

At the end of last year, UK-based Islamic banks had combined assets of £5.7 billion, equivalent to less than
0.1 percent of domestic wealth. Globally, British banks own almost 0.5 percent of total Islamic banking assets.

The two Sukuk issues (the Islamic equivalent of a bond) by the British government amount to £750 million and Birmingham-based Al Rayan Bank‘s mortgage-backed sukuk issued £250m. There are three other Islamic banks in the UK, incl Bank of London and the Middle East plc, Gatehouse Bank and QIB-UK.

In accordance S&P Global assessments‘ latest report Islamic finance in the UK is still learning to crawl, Islamic finance is unlikely to make significant inroads into the UK financial services industry over the next few years.

The report does not expect greater traction until the industry shows a “real economic added value”.
compared to conventional banking solutions and beyond compliance with Sharia principles.

Damped performance

Dr Mohamed Damaksaid senior director and S&P global head of Islamic finance Fintech Times: “Islamic finance remains an emerging segment in the UK. The total assets of Islamic banks in the UK contributed less than 0.1 per cent of UK bank assets at the end of 2021 and there were only three sukuk issuances despite the cumulative number of sukuk listed in the UK over the last the two decades reached 68 sukuks (including overdue transactions) for a nominal amount exceeding $50 billion.”

S&P suggests that this subdued performance is explained by the limited financial added value offered by Islamic finance, apart from its compliance with Sharia. Nevertheless, it believes that fintech can help by unlocking some economic added value.

“Fintech can offer the opportunity to simplify the process of sukuk issuance via digital sukuk issuance platforms for example,” explains Damak. “It could also open up the market to smaller issuers and investors, as the entry fee on both sides remains onerous.

“Islamic fintech can also help by unlocking access to various savings and financing products for both retail and SMEs in a more cost-effective way. We believe that the presence of young, tech-savvy Muslim customers may provide some growth opportunities.”

S&P reports on a few Islamic fintech entities, one of which is affiliated with a UK-based Islamic bank, with activities ranging from start-up banking to money management or crowdfunding.

Open bank

Separate research IslamicMarkets.com suggests that most leading Islamic finance professionals expect the sector to move rapidly towards increased adoption of open banking over the next three years.

The August 2022 study of 346 leading Islamic finance professionals identified that 90 percent of Islamic finance professionals believe that adoption of open banking by financial institutions, governments, fintechs and other stakeholders will increase by 2025, with nearly two in five expecting a significant increase in adoption.

The growth of open banking in this sector will be partly driven by more and better regulations and will mean greater use of fintech innovations in Islamic finance such as Waqf, Zakat and Sadaqah.

Islamic finance professionals surveyed believe that the main advantage of open banking in the industry is to meet strong customer demand and offer more choice with banks’ ability to offer more innovative products.

Other benefits include being able to manage the rising costs of launching new digital services at scale and developing strategies to monetize customer data to generate new revenue streams. The growth of open banking will also enable institutions to meet regulatory requirements to provide greater transparency in reporting data.

“Increased adoption of open banking in Islamic finance brings a wide range of benefits to the sector, and research shows that Islamic finance professionals expect rapid development in the sector over the next three years,” says Arsalaan Ahmedchairman of the board i Global Islamic Finance Forum 2022 (GIFF2022).

“There is a clear need for more and better regulation around open banking and open finance in Islamic finance, and that is recognized by Islamic finance professionals who expect strong progress.”

GIFF2022

The Association of Islamic Banking and Financial Institutions Malaysia (AIBIM), in partnership with Central Bank of Malaysiais hosting the Global Islamic Finance Forum 2022 (GIFF2022) on October 5 and 6 in Kuala Lumpur.

GIFF2022 aims to generate active discourse on the work required to strengthen Islamic finance’s global leadership position. Central discussions will revolve around topics such as fintech, digitalisation, open banking and embedded finance.