Islamic fintech – road to 2024, the golden year?

This article was first published in IFN Volume 21 Issue 01 dated 3 January 2024.

In an age of digitalization and artificial intelligence the growth of Islamic fintech is on an upwards trajectory. We reported a year ago that with the user demographic getting younger and more tech-savvy, in 2024 we can expect further advancements towards digitalisation.

There is now a deeper need to plug financing gaps as traditional lenders, such as Al Rayan and Gatehouse, transition more towards big ticket deals. The gap needs to be plugged and the needs of curious young minds and small borrowers serviced.

At the end of 2022 there were 375 fintechs worldwide with growing activity globally. The 2022 Global Islamic Fintech (GIFT) Index Scores show that Malaysia and Saud Arabia lead the way with the number of fintechs present in each country. Globally the five dominant hubs are Malaysia, Saudi Arabia, Indonesia, UAE and the UK.

2023 seen a similar trend to 2022 with new market entrants, with some players having exited with there being a healthy demand for Shariah compliant products with fintechs positioned to offer more cost-efficient and time efficient models.

Digital banking services continue to grow in sophistication as we reported in 2022, operating in an 'ecosystemic' manner, flexing to client needs and demand, improving their technology and customer experience. They remain responsive to cyberattacks but with volumes of transaction increasing and fintechs becoming more prominent the risks will grow.

The US, as a key growth market, has seen a new ethical and faith-based wealth management platform based in Southern California, Nama Private Wealth, offering wealth management services and digital asset investing for millennials, Gen Z and Gen Y members. There are currently 25 other Islamic fintech firms operating in the US.

As 2023 ends there is a strong appetite to finance start-ups. Capifly of Jordan has raised funds from several corporate investors and angel investors to provide budding Islamic entrepreneurs with Murabahah-based financing based on recurring revenue. Capifly has also expanded its reach beyond Jordan to Saudi Arabia and Malaysia.

Aggressive inorganic growth by Wahed has seen the purchase of a digital Islamic wills provider and a legal firm specialising in estate planning for Muslims. These acquisitions were followed by Wahed also acquiring Maydan Capital, which was relaunched as WahedX. This is just the start for Wahed as it looks to increase its presence and remain as one of the most active Islamic fintech start-ups and capture young minds with innovation, opportunity, and easy access.

Foot Anstey's fourth roundtable, held at the end of 2022, was optimistic about the current state of the market. Imam Qazi, partner and head of Footy Anstey's Islamic finance team commented that there is a collective feeling in which we are arriving at a pivotal moment in the evolution of Islamic fintech, when a new wave of energetic young start-ups are entering the UK market and may challenge the current landscape.

Collaboration between fintechs and banks remain strong as well as between the public through education and engagement with investors.

The Global Islamic Fintech Report 2022 estimates that Islamic fintech market is projected to grow to $179 billion (transaction volume) by 2026 at 17.9% CAGR.

Heading into 2024, it is believed that higher commodity prices will underpin a strong growth for Islamic fintechs. Generally speaking, most of these countries which are leaders in the Islamic fintech world are relatively resilient to macroeconomic shocks resulting from on-going global conflicts.

There are growing opportunities in the alignment of certain Islamic fintech products and ESG factors and recent strides in digitalisation. We expect to see a higher volume of green and sustainability linked financing and funds with the EU's 2024 Carbon Border Adjustment Mechanism creating urgency to ensure businesses align themselves with sustainability standards and practices. Islamic fintechs can do their part by offering accessible, affordable and no-fuss financing to help those businesses – MSMEs – implement change and not be in the firing line of traditional financing channels.

Digital sukuk could generate significant market interest and growth of the interest once all necessary prerequisites have been implemented.

In the global race amongst the Islamic fintech heavyweights it seems that Saudi Arabia will be delivering the knockout punch to be crowned the King. The Fintech Strategy Implementation Plan initially targeted to grow its fintech sector to 2030; now the target has increased to 525 by 2030. These are staggering numbers as in 2021 there were only 51 fintechs in operation. Today Saudi houses 200 fintechs (as at the end of August 2023) which is a meteoric growth of 300% in only two years.

It is predicted that the coming year will see the further banking products for the general population and MSMEs to align with their flexibility and growth ambitions and ESG credentials. Saudi Arabia have laid down the gauntlet with its target to raise the share of digital payment transactions to 70% by 2025.

Islamic fintechs are also predicted to further branch out into wealth management and investment solutions.

Are the 'golden years' just around the corner? Yes. Foot Anstey have never seen the Islamic fintech industry being so daring, dynamic and adaptive. Rewind back the last couple of years and there was a spanner in the works temporarily halting the growth trajectory of fintechs, investors and structural weaknesses.

Ensuring consistent tax treatment and accommodating regulatory frameworks across different jurisdictions is a challenge that require careful navigation. But these challenges are a part of the journey and are there to be met head on through:

Education – championing learning and the acceptance to change.

Sustainability – creating an Islamic fintech ecosystem that in return creates longevity, trust and stability.

Investors – lack of private investments and public backed investments/grants. Without investment and backing fintechs have a short life spam. They fail at the embryonic stage.

Regulation – expanding the use of sandboxes allowing a controlled environment for risk and innovation. Sandboxes already exist for conventional fintechs (Financial Conduct Authority (FCA) sandbox). Saudi Arabia is a leader in using sandboxes as part of its fintech ecosystem that allows for innovation, capital opportunities and positive risk taking.