Jakarta in Indonesia is identified as a potential hub for the growing Islamic fintech market. (Photo by Bay Ismoyo/AFP via Getty Images)

Islamic fintech looks set to experience robust growth, especially across the 57 Organisation of Islamic Cooperation (OIC) member states, given how it could positively impact on increasing the reach of Islamic financial services, improve financial inclusion and promote the UN’s Sustainable Development Goals (SDGs).

Indeed, according to the Global Islamic Fintech Report 2021 produced by DinarStandard and Elipses, the volume of transactions in the Islamic fintech sector within OIC countries is expected to grow to $128bn by 2025, at a 21%  compound annual growth rate (CARG). The CARG in conventional fintechs over the same period is expected to rise by only 15%. The report also estimates that the Islamic fintech transaction volume within OIC countries was $49bn in 2020, which represents only 0.7% of the global figure.

What is Islamic fintech?

Islamic fintech is defined as a segment of financial technology that follows shariah principles, which prohibits the profiting from debt, interest payments and investing in businesses related to alcohol, tobacco and gambling, among restrictions.

Therefore Islamic fintech is a type of ethical investment, which embraces environmental, social and corporate governance (ESG) factors. Some would argue that there is a little difference between an ESG-compliant fintech and an Islamic fintech, as both have similar ethics. This highlights that Islamic fintech is a type of ESG fintech that also carries an extra label, a faith-related one that can be key for addressing the Muslim market. However, Islamic fintech is also viewed as a preferable type of investment for anyone interested in ethical or ESG-compliant investing.

Nevertheless, there is still mixed sentiment around the ongoing definition of Islamic fintech, as is highlighted in the Global Islamic Fintech Report.

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Where are the Islamic fintech hubs?

"The rise of Islamic fintech is driven by the growth of technology and the fact that Islamic fintechs tend to operate in extremely high-growth markets with young populations," says Daniel Ahmed, co-founder and head of operations at Fasset, a venture capital-funded crypto and blockchain start-up. "This combination, along with a focus on ESG investing, provides a great environment for the industry to grow quickly over the coming years."

The Global Islamic Fintech Report states that Saudi Arabia, Iran, the United Arab Emirates, Malaysia and Indonesia are leading countries in terms of Islamic fintech transaction volumes within the OIC countries.

“I believe Indonesia presents a huge opportunity given the policy push to become the leader in the Islamic fintech space," says Wajahat Azmi, the co-founder and CEO at Tamweel, an Islamic crowdfunding platform designed to serve small and medium-sized enterprises (SMEs). "Africa is another region that can be a big market for Islamic fintech given the vast Muslim population and so many underlying issues that can be tackled using an innovative Islamic finance approach,” he adds.

Syed Musheer Ahmed, founder and managing director at advisory company FinStep Asia, believes that apart from the Islamic fintech hubs based in Islamic countries, there is also a strong presence of Islamic fintech in the UK and North America. “The UK is seen as one of the leaders, because there has been a lot of innovation in fintech there, which was later extended in Islamic fintech,” he says.

Indeed, the Global Islamic Fintech Index in the Global Islamic Fintech Report shows that there are opportunities in the Islamic fintech field across the world, and not only in OIC member states. On top of that, the index shows OIC countries dominating the top ten while non-OIC countries dominate the next 20.

"Fintech firms need [the right demographics] to grow and prosper," says Sharjeel Ahmed, co-founder and CEO of Cykube, a UK-headquartered fintech advisor. "A fintech company will become bigger if it operates in a country of 50 million compared with five million, which explains why there is a good scope for Islamic fintech to grow in OIC countries such as Saudi Arabia, Indonesia, Malaysia, Pakistan, Egypt and India, although a large number of Islamic fintechs are also based in the UK."

Determining the right location in which to launch a new Islamic fintech is important for investors, as there are several factors impacting this decision. The Global Islamic Fintech Report states that many of the factors that affect the choice of headquarter location by Islamic fintechs “can be positively impacted by progressive policy decisions and enabling regulatory initiatives, a trend seen in many ecosystem hubs over the past 12 months, paving the way for further growth in the Islamic fintech sector”.

What are the key areas for Islamic fintech?

The report goes on to reveal that the Islamic fintech landscape is still young and fragmented. The data shows that the majority of Islamic fintechs are active in fields related to raising funds, deposits and lending, wealth management, payments and alternative finance.

“Lending is a key area for Islamic fintech firms," says says Ahmed of FinStep Asia. "Wealth management is also growing, but it comes with a lot of shariah components and there are a lot of finer elements to it. Digital banking is also gaining popularity, due to the launch of neobanks.”

On top of that, the Global Islamic Fintech Report adds that other active areas for Islamic fintech include insurance, digital assets, capital markets, operations and social finance.

Social finance is a significant area for Islamic fintech. A World Bank report on Islamic fintech states: “A key area of opportunity is the role of Islamic fintech in galvanising the multibillion-dollar Islamic social finance pool from zakat (obligatory charity), sadaqah (voluntary charity), and waqf (Islamic endowments). Zakat can potentially contribute between $200bn and $1trn towards poverty alleviation, according to the UN Development Programme.”

Gbenle Habeeb, co-founder of non-interest lending platform Wefundmatch, says that the trio of zakat, sadaqah and waqf have a positive impact on improving the welfare of the poor, and can help to achieve the targets of SDG1 and SDG2, respectively, concerning eradicating poverty and hunger.

Why financial inclusion matters

The World Bank report states that globally there are 1.7 billion unbanked people who are potential customers for retail banking, and more than 200 million micro, small and medium-sized enterprises (MSME), where the “the potential revenue in tapping this unbanked retail and MSME market is estimated to be $200bn”.

The journey towards accessing or providing Islamic fintech platforms is much steeper for anyone who is Muslim, black, female and domiciled in sub-Saharan Africa. Wahida Mohamed, Islamic Fintech Hub of sub-Saharan Africa

This presents an enticing business opportunity for Islamic fintechs, as the report states that “the unbanked population is dominated by Muslim-populated countries that comprise almost 50% of the world’s unbanked population”.

By providing access to financial services, fintech companies of all kinds, including Islamic, can bring financial inclusion to a large part of the world. What is more, financial inclusion is also significant for promoting gender equality and reducing the gender gap.

“Special attention must be paid to bridging the gender gap as Islamic fintech gains traction in Africa,” says Wahida Mohamed, founder of the Islamic Fintech Hub of sub-Saharan Africa. "Otherwise, the chances of women and girls being excluded from this sector as employers and employees will be very high, with dire consequences as the fast-moving Islamic finance world becomes more digitalised. As of now the journey towards accessing or providing Islamic fintech platforms is much steeper for anyone who is Muslim, black, female and domiciled in sub-Saharan Africa."

The rise of Islamic fintech can play a crucial role in providing access to financial services across unbanked populations, it can help countries to become hubs for financial services, and it can also help when it comes to reducing gender inequality and promoting the SDGs. For investors seeking ESG-rich opportunities, it cannot be ignored.