Fintech and the rise of Islamic finance

  • Describe the significance of Sharia finance
  • Explain the drivers affecting the growth of Sharia finance
  • Identify the impact of fintech
Fintech and the rise of Islamic finance

When it comes to fintech innovation, most conversations typically revolve around the diversification of a sector once dominated by legacy institutions.

In the past decade, a new wave of high-growth companies has applied technology to digitally transform the financial sector for investors, businesses and consumers.

More recently, established banks have also been changing the way they compete for market share by launching challenger brands that essentially position their services to a new generation of potential customers.

Fintech is entering what commentators are now deeming to be the third phase of its evolution. With technology firmly embedded into existing financial frameworks, attention is turning to the advantages blockchain could offer in improving the way different financial institutions operate, from operational efficiency to cost savings.

The financial services sector has an exciting future, enabled because of fintech innovations. Importantly, fintech is also empowering certain segments of investors and consumers who have yet been unable to take full advantage of 21st century banking. Of these, one area primed for digital disruption is Islamic finance.

According to Refinitiv's Islamic Finance Development Indicator, the Islamic finance sector is projected to reach $4.9tn (£3.7tn) in 2025. S&P Global Ratings also projects the industry to grow by 10 to 12 per cent over 2021 and 2022. And the UK is on a mission to become a global hub for Sharia-compliant finance.

With 2022 set to be the year of expansion for Islamic finance, it is important for financial professionals to understand its basic principles as well as the impact that technology is having in fuelling a new rise of Islamic fintech companies.

The rise of Islamic finance

While Islamic finance has been part of banking systems for more than 50 years, only recently has it experienced significant growth. There are three main reasons for this.

The first is linked to population growth. As a demographic, the total number of followers of the Islamic faith is expected to reach 3bn by 2060. Naturally, this will increase demand for financial instruments that are Sharia-compliant.

The second factor is linked to the digital disruption of the financial services sector. Five years ago, Western economies experienced a surge in fintech start-ups offering more effective and efficient services through the creative application of software. Consequently, traditional finance institutions are now competing with challenger brands and neobanks to appeal to consumers, investors, and businesses.

In the UK, fintech challenger brands like Monzo and Revolut have become part of the banking landscape. Established banks like JPMorgan have responded by launching their own challenger brands to rival the new competition.

The scale and pace of digital disruption led by startups initially focused on the delivery of traditional financial services. The success of this first fintech wave has encouraged a new generation of start-ups, which are applying technology to deliver products and services designed specifically for certain demographics.

The creation of tech-enabled Sharia compliant banks is on the rise in both Western and Islamic jurisdictions. Particularly in regions like Central Asia where countries are undergoing economic modernisation, fintech companies are playing an important role in giving consumers and investors the digital tools needed to effectively manage their finances. As more investment is directed into these Islamic fintech companies we are likely to see the sector grow.