| Abstract: |
Islamic fintech has emerged as a niche sector within the broader development
of Islamic finance, and can be defined as 'technologically enabled financial
innovation that could result in new business models, applications, processes
or products with an associated material effect on financial markets,
institutions, and the provision of Islamic financial services with observation
of Shariah requirements' (adapted from the Financial Stability Board’s
definition of fintech). The prospects for Islamic fintech are encouraging.
Several reasons stand out, including the propitious demographics of a young
and digitally savvy global Muslim population, potential contribution of
digital Islamic social finance towards poverty alleviation, and increasing
consumer demand for ethical financial products and services. Globally, more
than 200 companies are involved in Islamic fintech, primarily from Asia, the
Middle East and Europe. By a measure of collective activity among the
Organisation of Islamic Cooperation’s (OIC) 57 member countries, Islamic
fintech is nascent. At USD 49 billion, its size translates into 0.7% of the
total global fintech transaction volume in 2020. However, this is expected to
grow to USD 128 billion by 2025 (CAGR: 21%). Meanwhile, a global composite
index assessed the Islamic fintech ecosystems of various countries.
Jurisdictions from Southeast Asia (Malaysia, Indonesia), the Middle East
(Saudi Arabia, the United Arab Emirates), and the United Kingdom were found to
have the most favourable conditions. In Malaysia, Islamic finance is a key
priority sector. Islamic banking has grown significantly and Malaysia is
actively involved in the international issuance of Islamic bonds (Sukuk). In
terms of Islamic fintech, technology firms as well as incumbent Islamic
commercial banks are involved in providing Islamic digital financial services.
Several factors have contributed to the growth of Islamic fintech in Malaysia.
These include digital readiness (IT infrastructure, online and mobile banking
penetration), clear regulatory arrangements, focused government support for
development of the Islamic digital economy, as well as an established Islamic
financial community. Emerging opportunities for Islamic fintech in Malaysia
are to enable social finance and close financial inclusion gaps. On the other
hand, the industry is confronted with key challenges. These include the lack
of start-up funding, an inadequate local talent pool, low levels of financial
and digital literacy among specific segments of society, and the need for more
collaboration between incumbent Islamic banks and fintech companies. For
Islamic deposit insurers and resolution authorities, Islamic fintech can help
by improving operational efficiency and effectiveness in areas such as the
management of Islamic deposit insurance funds, identification of Shariah
noncompliance risks for better governance, reimbursement of Islamic deposits,
and enhancing resolution processes for Islamic banks. For the broader Islamic
financial industry, Islamic fintech is used among others, to support products
such as Shariah compliant e-money, and the business of Islamic digital
banking. This is essential to provide Islamic depositors and financial
consumers with the assurance and availability of end-to-end Shariah compliant
digital financial products and services, that meet their expectations
concerning religious laws and ethical standards. In summary, this Fintech
Brief seeks to raise awareness of Islamic fintech and in turn, foster its
growth. The brief provides an overview of the global state of play, and
explores Malaysia's experience in the regulation and development of Islamic
fintech. It closes by highlighting potential uses of Islamic fintech for
deposit insurance and bank resolution. |