Fintechs And Islamic Finance

By Myles Bertrand

Globally, there are around 1.9 billion Muslims seeking Shariah-compliant solutions to manage their finances, whether that is to save, transact, borrow or invest. To meet the demands of this significant market, Islamic banks around the world are looking at ways to transform their financial offerings – with a particular focus on employing cloud-native solutions and API-driven architecture.

What is Islamic Finance?

Islamic finance – also known as Shariah-compliant finance or banking – refers to financial services that comply with the rules and tenets prescribed by the Islamic faith. Two fundamental principles of Shariah-compliant finance are the prohibition of the collection and payment of interest by lenders and investors, and the sharing of profit and loss. Certain industries such as gambling, speculation and usury are also forbidden under Shariah law.

Islamic banks make their profit via equity participation rather than charging interest, which sees borrowers required to give the bank a portion of their profits, rather than paying interest. Islamic finance is not restricted to people of Islamic faith – anyone looking for ethical and equitable financial solutions may be interested in investigating Islamic finance products and services.

Islamic Finance plays a significant role in the global economy, with its impact felt across many parts of the world, particularly in the Asia Pacific and Middle East regions. Africa also has a growing Islamic Finance industry, as does Europe. In Asia, Malaysia is considered the Islamic Finance ‘hub’, with its model seen as one of the most advanced Islamic banking systems in the world.  

Myles Bertrand
Myles Bertrand. Supplied.

The impact of fintech innovation on Islamic finance

Fintech innovation has been accelerating rapidly in recent years – with no signs of slowing any time soon – which has had an incredible impact on financial services globally. The increase in smartphone ownership and internet access around the world has seen a swift uptake in new digital financial services, with consumers now expecting to be able to manage their entire financial lives from the comfort of their living rooms.

Banks of all sizes have had to quickly adapt, pivot, adopt new technologies, design apps and roll out new products and services as customer demands change, and digital becomes the new norm.

The Islamic Finance industry, which had remained relatively static for many decades, has been somewhat slower to adapt to the new digital era, with one primary roadblock to digital adoption being the low rates of financial inclusion of Muslims around the world. In 2019, it was estimated that approximately 71 per cent of the world’s Muslim population did not own a bank account, resulting in a slow rate of digital innovation in this sector. However, in the last few years in particular, innovation by fintechs in the Islamic finance space has seen enormous changes made within the industry, while ever-increasing internet and mobile phone penetration have also helped to boost access to financial services.

Digital Islamic Banking in Action

One example of an Islamic Bank leading the way in the new digital banking space is Malaysia’s Bank Islam, which is currently undergoing an ambitious digital transformation project to launch a 100 per cent digital Shariah-compliant bank. Bank Islam aims to create a platform-based solution which will enable access to Islamic financial products that are based on risk-sharing and fairness, while improving access to financial services for millions.

Utilising Mambu’s cloud-native, API-first composable banking architecture, Bank Islam is well positioned to fully realise the benefits of cloud, with the ability to flexibly assemble individual components and services while ensuring their customer offerings are Shariah-compliant.

Mambu’s Shariah-compliant cloud banking platform

Mambu was first-to-market with a fully Shariah-compliant version of its platform in early 2021, with a goal of helping to improve financial inclusion around the world and provide better access to culturally appropriate financial services. The new Shariah-compliant platform enables Islamic financial service providers the opportunity to leverage the power and agility of cloud banking while still complying with the tenets of Islamic finance. It also offers an ethical alternative to conventional banking.

About the Author: Myles Bertrand is the Asia Pacific Managing Director for Mambu, a market leading SaaS banking and financial services platform headquartered in Germany. This is an opinion column. The thoughts expressed here are those of the author.

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