The Challenges In The Growth Of Islamic Fintech
Financial technology (fintech) has disrupted the financial sector. The number and size of fintech startups have increased exponentially in recent years to meet the increasing demand for fintech solutions, including Shariah-compliant fintech solutions. COVID19 also has accelerated the digitalisation in all sectors boosting fintech solutions and tech startups. Entrepreneurs have realised this opportunity and started to provide Shariah-compliant fintech solutions, and an increasing number of Islamic fintech startups are noticed in almost all regions. The estimated number of Islamic fintech startups has exceeded 240, serving clients in more than 60 countries, providing Shariah-compliant solutions in many fintech verticals, including alternative finance, capital markets, digital assets, payments, raising funds, deposit and lending, wealth management, Takaful and social finance. Yet, the potential for Islamic fintech is much higher. To achieve this potential, it is necessary to have a comprehensive Islamic fintech startup ecosystem. While such an ecosystem is improving every year, three aspects need special attention and further enhancements. These aspects are the availability of Shariah-compliant funding, friendly regulations including Shariah governance framework, and qualified human capital.
While huge funds and investments have fueled the growth engine of fintech startups, most of the available funds are conventional funds and may not be Shariah-compliant. The growth of Islamic fintech startups needs funding. Currently, there are limited Shariah-compliant funds and no VCs dedicated to Islamic fintech. Establishing dedicated Shariah complaint funds to invest in Islamic fintech startups is crucial at this stage to boost the growth of Islamic fintech and halal business startups to catch the gap with conventional ones. On the other hand, there is also a need for more attention from regulators to the particularity of Islamic fintech solutions. Since making a profit from pure lending of money is prohibited in Shariah, Islamic finance solutions, whether traditional or tech-based, involve additional processes through buy and sale contracts of assets to justify the profits. It also promotes risk-sharing through equity-based contracts such as Musharakah and Mudarbah. The mainstream regulatory framework classifies interest as a tax-deductible expense, providing a shelter on interest payments. This puts Islamic finance instruments at a disadvantage. In order to create a level playing field for conventional and Islamic solutions, there is a need to eliminate the tax shelter on interest payments. Furthermore, regulators are expected to provide the Shariah governance framework to Islamic fintech startups. While most regulators developed such a framework for Islamic banking and capital markets, there are still very limited regulations for Islamic fintechs. It could be argued that Islamic Fintechs are working based on the same principles adopted by Islamic banks; hence, the same Shariah governance frameworks could be applied. However, Fintech startups differ in several aspects such as sizes, maturity levels and cost structure. For instance, requiring Islamic fintech startups to have a Shariah committee similar to Islamic banks would impose heavy cost on startups which will hinder the development of the Islamic fintech sector. Therefore, Islamic finetchs requires different Shariah governance framework, which shall be dynamic and cost-efficient, but at the same time provides sufficient measures to assure Shariah compliance of the products and the trust of the market. There shall be no compromise on Shariah aspects. This requires not only efforts from the regulator but also from the academic institutions and human capital development institutions to produce the necessary human resources. The growth of Islamic fintech requires high talented Shariah scholars and experts that able to deeply understand the technology and Shariah. Muslim entrepreneurs working on fintechs shall be themselves will aver in Shariah.
They shall also have the business acumen and the right entrepreneurship mindset to develop solutions that corresponds to the needs of the Muslim society. This is an opportunity for educational institutions, business incubators, accelerator programmes and supporting institutions to supply the required talent. In a nutshell, there is a high potential for Islamic fintech startups to grow significantly if they are supported by friendly regulations and Sharia governance framework, qualified talents and Shariah-compliant funding dedicated to Islamic fintech startups.
Dr. Kinan Salim, Dr. Moutaz Abujaib