The Next Frontier: Islamic Finance, exciting Fintech possibilities, latest Theodora Lau podcast

Islamic financeor Sharia-compliant financeis banking or financingactivity that complies with Sharia (Islamiclaw) and its practical application through the development of Islamiceconomics. According to the latest report from TheCityUK and Trowers & Hamlins LLP:

• The UK is currently the top western center for Islamic finance, with five fully sharia-compliant banks are licensed in the region. Assets of UK-based institutions that offer Islamic finance services totaled around $6 billion (equivalent to £4.7bn) in 2017.
• Sharia-compliant banking assets make up 6% of the world’s banking assets. With Muslims accounting for a quarter of the world’s population and 80% of Muslims are not financially included , there are considerable opportunities to explore.

The industry is projected to grow at 7.7% CAGR to reach $3.8 trillion in 2022. Interestingly, Sharia-compliant retail banks have been attracting quite a following from non-Muslims as well. 55 percent of all UK’s Al Rayan’s new customers since 2014 and 90 percent of its fixed-term deposit customers last year were non-Muslim. Maybank Islamic, Maylasia’s largest high street bank that offers both Shariah-compliant and conventional accounts, reported having “close to half” and almost two-thirds of their affluent customers as non-Muslim.

The Fundamentals of Islamic Finance

The origin of Islamic finance dates back to the beginning of Islam in the seventh century. It includes a wide range of services from banking and sukuk (alternative to conventional bonds), to funds and takaful (similar to mutual insurance). Such financial products must be certified Sharia-compliant, and adhere to the following key principles:

• Paying or charging Interests are prohibited as such practices are considered exploitative.
• Profit/loss and risks associated with the transaction are to be shared among participants.
• Financing for prohibited activities (such as sale of alcohol and tobacco) are not allowed.
• Speculation or gambling are not allowed. Derivative contracts and short-selling are therefore prohibited in Islamic finance.
• Each transaction must be related to a real underlying economic transaction

Profits are generated through equity participation, where borrowers give the bank a share in their profits (rather than paying interest).

State of Islamic FinTech

The Islamic FinTech ecosystem is rapidly developing. It has the potential to grow substantially as the Muslim consumers trend younger with high smartphone penetration. Global efforts from Singapore to Turkey and UAE promise to catalyze funding and promote innovation in the sector. For now, Indonesia, with the world’s largest Muslim population, has the most Islamic fintech startups, followed by the UK.

As in conventional fintech markets, engaging with established Islamic financial institutions will be key to the success of Islamic fintechs, which will in turn provide new approaches to drive change and innovation in the industry. The next phase of the evolution will be dependent on regulatory efforts (such as sand box support), consumer awareness, and availability of private funding. As Maybank has demonstrated, perhaps one of the keys to success is a laser focus on delivering customer value. After all, technology should be agnostic to religion, and it is up to us to decide how technology can be deployed to benefit humanity and our society at large.

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Listen in to our conversation with Umar Munshi, on our new episode of The Red Envelope on iTunesand Spotify, as we talk about the future of banking.

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