Whether you call it fintech, insure-tech or Takaful-tech, fintech has become a buzzword in the Islamic finance industry. And it is evolving rapidly.
Innovation is a cornerstone in the development of Islamic finance. Fintech has the potential to play a major role, primarily to improve processes and cost effectiveness while maintaining Sharia compliance.
Fintech is necessary for Islamic finance to maintain and grow its market share – a failure to keep pace would weaken the players’ competitiveness. Fintech could help in promoting standardisation, harmonisation of Islamic finance products and integration.
With financial inclusion a major issue in many of the countries where Islamic finance is active, fintech may have an embedded edge in helping to balance out the “disproportionate pyramid”, wherein Islamic finance is still serving the top of the pyramid.
This could be supported by the emergence of tech-savvy middle classes in countries where Islamic finance is active. The need for more agile and simpler financial services, the growing usage of mobile devices and the shift towards technological and mobile financial services could underpin growth in the industry.
Much has been made of the potential of fintech in Islamic finance. However, the challenges have not been discussed at length yet and could present as a sizeable impediment to growth.
The principal challenge could be the regulatory environment. The Islamic finance industry already has moving targets, be it standardisation, developing regulation and innovating new products. Regulatory limitations and concerns could hinder the ability of Islamic finance institutions to forge ahead in adopting new models linked to various fintech themes such as P2P, crowdfunding and big data.
Already the industry is struggling to keep pace with the rapidly changing regulatory environment. This is not to say that regulators are not treating fintech as a necessity for Islamic finance in some areas of the world, including many countries in the Middle East and Africa, with Malaysia being a pioneer in fintech.
The global insurance sector, for example, has had an established regulatory blueprint in place that companies have been following for years. By contrast, the regulations that Takaful companies are required to adhere to are much more complex to adapt to because of the sector’s rapidly evolving nature. Time and a lack of history could be a formidable adversary for fintech’s imprint in Islamic finance.
Fintech has its own cost and integration requirements to consider as well. This could push fintech to the backburner, which in time could turn into a significant hindrance to growth. Accordingly, it will be vital for the industry to carefully identify what aspects of fintech are most suitable and necessary, prioritise and manage such initiatives, and finalise how to use fintech to its advantage. Another significant challenge for the industry is access to technology skills and infrastructure. These are early days and this may yet become either a key success or notable failure.
In conclusion, there is little argument among Islamic finance market participants that fintech is essential to the growth of the sector. Indeed it may be disruptive and damaging for Islamic finance not to capitalise on new technology. Uncertainty lies in whether existing Islamic finance institutions succeed in transforming their operating models to incorporate the necessary changes with fintech analytics before disruptors like innovation, standardisation and the changing regulatory environment get a foothold in the market. A notable irony in a sector that continues to rapidly evolve, this could put Islamic finance at a competitive disadvantage over conventional institutions and forms of finance.
Regulators and institutions have a significant challenge ahead in balancing the use of new technology to provide better services while controlling new operational risks.
Bashar Al Natoo is global head of Islamic finance at Fitch Ratings in Dubai.
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