Dawn of Islamic FinTech: Revolutionizing Islamic Finance

Rise of Islamic Finance

Islamic finance has taken great leaps in the 21^st century. Islamic financial assets are forecast to total USD 3.8 trillion by 2023, up from USD 2.3 trillion in 2017, according to a Thomson Reuters report published in December 2018. Around 1,400 institutions were operating in the global Islamic finance eco-system across 80 countries, as of 2017.

The establishment of the Islamic Financial Services Board (based in Kuala Lumpur) in 2002, with a mandate to develop prudential standards for Islamic banking and financial products, was a key milestone in the development of industry standards worldwide.

Financial Inclusion in the Islamic World

The Organization of Islamic Cooperation (OIC) is a group of 57 countries with significant or majority Muslim populations. Less than 30 percent of households in the OIC countries had an account at a financial institution, according to a 2015 IMF report. That compared with more than 50 percent households in non-OIC countries. This gap in financial inclusion across the Islamic world, particularly in the MENA region, may be attributed to a few reasons.

The MENA countries can be broadly categorized according to their average income levels. The oil-rich Gulf Cooperation Council (GCC) nations have average per capita GDP ranging from USD 15,000 (Oman) to over USD 63,500 (Qatar). Per capita GDP in the rest of the MENA region are typically well below USD 10,000.

High transaction costs make it uneconomical for banks to offer fully-fledged bank accounts to low income groups, which make up a large part of the population in the less wealthy MENA countries. This is also true for large blue-collar expat worker populations in the wealthy GCC countries, which rely mostly on cash or prepaid cards to receive and spend their income.

Another factor is a lack of enough Islamic financial service offerings in these countries. As per an IMF research paper from 2015 on financial inclusion, 34 percent of Afghan adults cited religious reasons for not having a bank account. Around 27 percent of Iraqis and Tunisians, and 23 percent of Saudis shared the same concerns, though these were negligible in wealthier countries such as the UAE with well-developed Islamic banking sectors

How Fintech can Help Islamic Finance

Seeking a scalable solution to attract these customers, Fintech firms are trying to capitalize on high mobile phone penetration across the Islamic world. Requirements to open a digital wallet – which can provide basic banking services such as money transfers, micro credit and payments – are usually much lower than a normal bank account. Service providers can take advantage of phone-based biometric identity applications, such as eye scans, fingerprints, voice or facial recognition, and customers can complete the onboarding process in a few minutes. Fintech startups can enable traditional Islamic financial institutions to attract more customers, increase efficiency, reduce costs and offer a wider range of products, helping them become more competitive against conventional finance without compromising on profit margins.

Impact of Fintech on financial inclusion can be best witnessed in Kenya. M-PESA, a mobile money platform, was launched by Safaricom in 2007. By 2017, 96% of households outside Nairobi had at least one M-PESA account, as reported by CNBC Africa. Furthermore, mobile money helped lift an estimated 2% of Kenyans out of extreme poverty and enabled 185,000 women to move out of subsistence farming and into business or sales occupations.

Fintech Landscape in Middle East

The Fintech sector in the Middle East is growing at a rapid pace, fueled by high mobile and internet penetration rates. Several Fintech hubs have emerged all over the Middle East, and three of them have developed relatively mature eco-systems comprising of entrepreneurs, investors and regulations. These are Fintech Bay (Bahrain), DIFC Fintech Hive (Dubai) and ADGM (Abu Dhabi). Fintech hubs provide various facilities to promote startups, including incubators, regulatory sandboxes, co-working spaces, and access to mentors and investors. Islamic Fintech is a relatively new segment within the broader Fintech space, but it is gaining steam.

UAE was the 4^th largest market in terms of the number of Islamic Fintech startups globally, only behind Malaysia, Indonesia and the UK, as reported by IFN Fintech. Out of the 300 startup applications that DIFC Fintech Hive received in its accelerator round in 2018, about 15% were Islamic Fintech startups. In the 2019 round, 4 out of 31 finalists were in the Islamic Fintech space.

Bahrain has been actively promoting Fintech startups through its Fintech Bay hub. Bahrain was also one of the first GCC markets to compile cryptocurrency regulations. Furthermore, Bahrain’s Shariyah Review Board has reviewed and issued Sharia compliance certificates to a number of Fintech startups, including Stellar (both the blockchain and native cryptocurrency Stellar Lumens), Rain Financial (cryptocurrency exchange), Beehive P2P (peer to peer lending platform) and Ovamba (SME lender). About half of the startups registered in Bahrain’s sandbox are related to blockchain and cryptocurrencies.

Evolution of Islamic Fintech in MENA Region

Two waves of startups have been observed in the regional Islamic Fintech sector. The first comprised of conventional Fintech startups, that eventually obtained Sharia compliance to be able to partner with Islamic financial institutions. These include the likes of Stellar, Beehive P2P, and Ovamba. This has allowed Islamic financial institutions to leverage the same technological innovations as conventional financial institutions and remain on competitive footing.

In the last couple of years, an increasing number of Fintech startups have been built with a Sharia mindset, focusing on the needs of customers that prefer or require Islamic financial services. Examples include Wahed, one of the first Sharia-compliant robo-advisors. Haseed is an Islamic robo-advisor coming out of Saudi Arabia, which got enlisted in DIFC Fintech Hive in 2018. UAE-based OneGram, which was one of the first Sharia-compliant cryptocurrencies, is backed by gold.

A Digital Approach to Service Customers

The appeal of digitally reaching large swathes of previously untapped Islamic population has resulted in entrepreneurs and established financial institutions to work on mobile-first products and services catering to their needs. A few Fintech ventures gaining traction in the Islamic Finance space are discussed below.

Wahed Invest

New York-based Wahed Invest launched the first Islamic robo-advisor, catering to the Islamic population seeking Sharia compliant investment options. The company launched its mobile-app in March 2018, and subsequently launched two sharia compliant index-tracking funds in September 2018. As per some reports, the Fintech firm is valued at over USD 100 million, and their services are now available to customers in over 130 countries.

Yielders

Yielders is a UK-based property crowd investment platform launched in 2016. The company claims to be the first UK-based Fintech company to become Sharia certified, with the intention of providing Halal investment offerings to retail investors. Investors can purchase shares of a property, for as little as USD 100, and potentially earn rental income and capital gains. As per management, the platform conforms to Sharia principles and does not use interest bearing bank loans to fund purchases.

Blossom Finance

Indonesia-based Blossom Finance is a Sharia compliant microfinance provider. The company introduced its Smart Sukuk platform in May 2018, using Ethereum smart contracts so that Sukuks (Islamic Bonds) can be issued globally in an efficient manner. Using the Ethereum blockchain, retail investors will be able to invest in the Sukuk, the proceeds from which will be used to fund Sharia compliant microfinance initiatives in Indonesia. Using a profit- and risk-sharing model, Blossom Finance aims to provide an annual return of about 9% to investors.

Ovamba

Ovamba is a Cameroon-based Fintech platform, focusing on Trade Finance activities. Ovamba’s strategic focus is to offer businesses in the formal and informal sectors short-term capital for trade of commodities such as coffee, cocoa, and cashews. The platform also helps institutions invest in African trade by funding trade finance activities. Ovamba obtained Sharia compliance certificate, allowing them to provide Halal product offerings to Islamic businesses seeking trade financing.

Insha

Bahrain-based Al Baraka Banking Group launched Insha, a digital banking service in Germany in September 2018. The group aimed to focus on the Muslim communities in Germany, and subsequently roll out financial services across Europe. The digital bank will initially offer basic banking services such as account management, online payments and money transfers, with plans to include a wider range of Islamic banking services at a later stage.