The global Islamic fintech banking market: trends and outlook (2024)

The global Islamic FinTech market isprojected to grow strongly in the coming years, as a growing number of Muslims seek to tap into digital finance and banking services that follows Sharia principles. Experts from Cedar Management Consulting map out some of the key developments in the sector and the outlook for the coming years.

According to the ‘Global Islamic Fintech Report’ (produced by DinarStandard and Elipses), Saudi Arabia, Iran, United Arab Emirates, Malaysia and Indonesia are the leading countries in terms of Islamic FinTech transaction volumes within the Organisation of Islamic Cooperation (OIC) countries.

The report estimates that 250+ Islamic FinTechs are operating globally spread across OIC and non-OIC countries. Overall, the Islamic FinTech market size for OIC countries is estimated to be worth $49 billion.

However, the report is quick to add that this amount represents only 0.72% of the current global FinTech market size (based on transaction volumes).

Looking ahead, the segment is set for a bright future – the Islamic FinTech market within OIC countries is projected to grow at 21% CAGR to $128 billion by 2025, compared to a CAGR of 15% for the conventional FinTech sector. In other words, Islamic FinTech represents a significant growth opportunity for banks and financial technology companies.

Inherently ESG?

The term ‘FinTech’ is a merger of the two terms ‘finance’ and ‘technology’ and refers to businesses that use technology to enhance, automate and improve financial services processes and propositions. Islamic FinTech follows Sharia principles and is hence a type of technology that is ethical, religiously acceptable and one which embraces environmental, social, and corporate governance (ESG) elements.

As both have similar ideologies, there may be little to separate an ESG-compliant FinTech with an Islamic FinTech, however, Islamic FinTechs typically also have an additional faith-related label that can be appealing to the Islamic population/ regions around the world.

The Islamic FinTech ecosystem guarantees users that their assets won’t be invested in prohibited industries thereby addressing a wider need for alternative investments.

Well-known Islamic FinTechs include Wahed, the Islamic online wealth manager, and the UK’s Niyah and Germany’s Insha – which are Islamic banks focused on mobile banking. Some of the more innovative and recent Islamic FinTechs include Malaysia-based HelloGold, which is working on the world’s first Sharia-compliant gold mobile application.

Elsewhere, IslamiChain is looking to create transparent and accountable delivery mechanisms for philanthropy and compassionate giving, using blockchain technology and decentralised digital identity.

Hakbah claims to be the ‘first cooperative saving platform’ in Saudi Arabia (Hakbah and IslamiChain both are ventures that emerged from the DIFC Fintech Accelerator Programme). Hakbah has a strategic partnership agreement with Visa, operates through SAMA’s Sandbox and, in January last year, raised $1.2 million in seed funding.

Saudi-based Wethaq has been working since 2018 to bring FinTech innovation to the Islamic capital market, working to develop a platform that is focused on the structuring and distribution of Sukuk (Islamic bonds).

The key areas for Islamic FinTech

The Islamic FinTech landscape is still in its early stages. Over 75% of Islamic FinTechs are active in more traditional areas related to raising funds, deposits and lending, wealth management, payments and alternative finance. However, the digital banking space is gaining increased importance due to the launch of neobanks/digital-only banks.

Social finance is considered a significant opportunity area for Islamic FinTech. This means potentially tapping into the multibillion-dollar Islamic social finance pool that comprises Zakat (obligatory charity), Sadaqah (voluntary charity) and Waqf (endowments). This itself has the potential to contribute anywhere upwards of $200 billion towards social programmes and projects internationally.

Several key countries have recently introduced regulatory initiatives in Islamic FinTech that will help provide impetus to the growth of their national Islamic FinTech sector. For example, Saudi Arabia has onboarded another nine FinTechs into its regulatory sandbox, a sign of its commitment to grow Saudi Islamic FinTech.

Meanwhile, Egypt’s Financial Regulatory Authority (FRA) has seen its legislative framework take a step closer with parliamentary committee approval in October of a draft law regulating FinTech in non-banking financial activities. The law also includes provisions for the establishment of a ‘lab’ to test new FinTech products. Being a significant market for Islamic FinTech, the codification of this framework should spur growth in Egypt amid increasing public interest in Islamic finance solutions.

Financial inclusion matters

The World Bank’s report ‘The Global Findex Database’ stated that globally there are almost 1.7 billion unbanked people who can be potential customers for retail banking and more than 200 million micro, small and medium-sized businesses that required banking assistance.

This presents an enticing business opportunity for Islamic FinTechs, as the report also pointed out that the unbanked population is dominated by Muslim-populated countries / regions that comprise almost 50% of the world’s unbanked population. While much of this population is spread across poorerregions of Sub-Saharan Africa and Asia, recent gains by telecom and mobile networks across these regions should help FinTechs tap into populations in economically remote areas.

Further reading:Oliver Wyman proposes Dubai innovation hub to aid regional financial inclusion.

FinTechs strive to provide cost-effective solutions for companies looking to reduce overall costs, improve customer experience and automate business processes. The financial services industry is a critical sector in every society and hence is one sector that is heavily regulated. The introduction of FinTechs, including Islamic FinTechs, especially in developing countries can help boost economic growth but this also increases the scope for the local regulators.

Local regulators need to understand the FinTech implications and take steps towards ensuring the stability of the financial system and protecting it from new-age issues related to cyber-attacks, data leakages, data thefts, and more.

At present, there is no globally accepted regulatory body for Islamic FinTech. In common with the regulation of conventional financial services, the regulation of Islamic financial institutions and Islamic FinTechs is carried out in each country individually. Examples of local regulators include Bank Negara Malaysia and Securities Commission (Malaysia), Financial Services Authority (Indonesia), SAMA – the Saudi Central Bank, as well as their counterparts in Western markets, such as the Financial Conduct Authority (FCA) in the UK, which regulate Islamic FinTechs within their existing framework.

However, standards promulgated by AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) are followed in 20+ Muslim-majority countries/jurisdictions. We may reasonably expect that these standards, including those relating to Islamic FinTech segments, will continue to gain acceptance with local regulators looking for consistency and acceptability of standards internationally.

With a global focus on alternative investments and ESG, Islamic FinTechs have the necessary framework and impetus to improve the sector’s global footprint and market share. As far as the immediate future is concerned, Muslim countries and regions should remain a priority as acceptability and education barriers are low.

However, in the end, it is the innovation, offering and customer benefit which will eventually make the Islamic FinTech successful along with the right environment – both in financial regulatory and Sharia terms to ensure they have the necessary oversight and direction needed for continued sustenance and growth.