More than half of the global population under the age of 34 is Muslim, according to a recent World Bank report on Leveraging Islamic Fintech to Improve Financial Inclusion. As all of those young Muslims come of age, they will use online services. So what role will Islamic fintech play in the global economy?
What makes Islamic finance different?
“Islamic finance is designed to ensure that money is linked to real assets and not to financial engineering,” says Mohamed Iqbal Asaria, a Visiting Professor at the London Institute of Banking & Finance. That is why, as Islamic finance grows, it could be a force for more value-added intermediation, Asaria says.
The World Bank report estimates that Zakat (obligatory charity donations made by Muslims) could put as much as US$1 trillion a year into easing global poverty. Voluntary donations and Islamic endowments on top could make Islamic finance even more influential.
But Asaria is not sure that fintech itself is a magic ingredient. “Fintech is often just a buzzword for online banking. You need to validate the objectives of Islamic fintech, or it will be just like the ordinary finance sector,” says Asaria.
The objectives of Islamic finance
The question that Shariah-compliant fintechs need to address, Asaria says is: “what is our objective?”.
Asaria sees an immediate role for Shariah-compliant fintechs in boosting financial inclusion and in reducing poverty.
He also believes that Islamic fintech can attract a client base that goes beyond the faith community. “Particularly if Islamic finance highlights its ESG credentials,” says Asaria. He points out that some banks in Malaysia do just that and that around 40% of their clients can be non-Muslim.
Being online obviously makes it easier for an Islamic bank to increase its reach, but it also brings other benefits. In particular, there is the potential for increased transparency.
Asaria expects blockchain to be a first step in demonstrating that Islamic financial standards are being met by fintech products.
Financial inclusion as an opportunity for banks
Around half of the world’s 1.7 billion unbanked people are in Muslim countries, the World Bank estimates.
Providing those 1.7 billion retail customers with banking services, and tapping into a market of around 200 million unbanked micro, small and medium enterprises (MSMEs), could generate revenues of around US$200 billion for financial services providers. It would also have clear benefits for individuals and their communities.
In the first instance, the poor are unlikely to be offered – or to want – full banking services. They are, however, likely to welcome charitable donations and low-cost remittances.
“People used to think that the poor, who are possibly illiterate as well, couldn’t take part in banking,” says Asaria. “But the majority of them have mobiles and they have adopted to using mobile money well.”
One of the advantages of using fintech to distribute Zakat donations is that the money will not go astray. A fintech platform can also widen the donor base. The World Bank report says that the National Zakat Board (BAZNAS) in Indonesia, for example, launched a smartphone app to manage collections and payments.
Once the unbanked have started receiving money online, they can graduate to other financial services. Asaria notes that M-PESA in Kenya, which was the first provider of mobile remittances, now offers small-scale credit. “But I don’t think banks have woken up to the opportunities and problems associated with this customer base,” says Asaria. “It is quite different.”
Cutting the cost of remittances
He points out banks can be slow to provide affordable services to the poor. Remittances in 2020, for example, cost on average 6.7% of the amount sent, according to the World Bank. The Bank says that cutting that by 5 percentage points would save the world’s poor up to US$16 billion a year.
“Online transfers shouldn’t cost anything,” says Asaria. “There is no cash handling risk and no credit risk. That is where fintech can help.”
What can Islamic fintechs bring that others do not?
“I would like to see them evaluate their impact with an assessment of how their objectives were fulfilled,” says Asaria. “So, how are they doing in terms of equity, fairness and in cutting costs? They should be able to show ‘if you put in so and so much money, this is what will happen to it’.”
If Islamic fintechs can demonstrate how they uphold the core values of Islamic finance, using tools like blockchain, they could be formidable force for good across financial services.
Find out more about our Executive Postgraduate Certificate in Fintech