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Achieving Financial Inclusion & Ethical Investing through i-Fintech

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FINTECH HAS BROUGHT TO THE FOREFRONT A SIGNIFICANT OPPORTUNITY TO ATTRACT NEW UNEXPLORED SEGMENTS, WITH THE KEY BEING DIGITAL-SAVVY MILLENNIALS.

The last century was all about introducing technology and automation to the world of finance with huge mainframe computers, digital stock exchanges and online payments being all the rage. We have come a long way since then and experienced enormous growth not only in the sophistication of technology itself but also in the way in which it is deployed. Enter FinTech!

The advent of a new breed of technology enablers and disruptors brought about the recent FinTech revolution resulting in a complete reshaping of the financial services industry. These disruptive technological advancements are forcing a shift in the financial services business model worldwide as well as how banking institutions operate and serve their customers. It has provided a huge impetus for the sector to streamline its offering as well as target new segments and focus on a much broader and “previously-considered-uneconomical” customer base thus opening up new avenues of serving the world’s evolving financial needs.

FinTech’s ability to maintain consistently high growth rates demonstrates the long-term scalability of the sector. As has already been demonstrated by challenger banks, an enhanced customer experience and extended service offering can be delivered by leveraging new technology. The pie is not limited to new market entrants, however, as existing larger institutions also move towards digitisation to keep up. Another contributing factor in the success of FinTech so far has been the fact that its adoption has not been confined to any particular region or sector; adoption rates have been notably high with uptake being impressive not only in advanced economies but also in the emerging markets with an average global adoption rate of 64% in 2020. FinTech has brought to the forefront a significant opportunity to attract new unexplored segments, with the key being digital-savvy millennials.

Islamic FinTech or i-FinTech is also a discernible segment of these developing global FinTech trends and the wider FinTech sector. i-FinTech has managed to adopt disruptive technologies including the use of blockchain technology, crowdfunding, digital currency as well as peer-to-peer lending. Globally, there are now around 278 FinTech companies that operate under Shari’a rules and further growth in the number and diversity of activities is anticipated. According to the Global Islamic FinTech Report 2021, the value of i-FinTech transactions will reach US$128 billion by 2025 growing from the current US$49 billion at a 21% compounded annual growth rate – this is 6% higher than the projected 15% CAGR for conventional FinTech.

Evidently, the majority of FinTech adoption has taken place amongst the under-40 demographic who embrace FinTech for its ease of use, convenience, cost-effectiveness, better quality service, faster transaction processing, and enhanced overall user experience. This under-40 tech-savvy demographic represents the future customers of financial services and is a key driver of change in the industry. This digitally literate population that is highly responsive to FinTech has also seen the emergence of young entrepreneurs founding and creating challengers built around digital solutions appealing to the needs of their millennial and Gen Z peers.

Another trait of this key demographic is the fact that as consumers they are considered to be one of the most ethically inclined and sustainability-focused generations ever. Couple this with the general global rise of impact investing (an all-inclusive term that includes various principles from existing movements like socially responsible investment (SRI) to environmental, social, and (corporate) governance (ESG)), Individuals are seeking to make investments that are aligned with their values and it becomes obvious that the ethical and sustainability movement has become a very real focal point for many. Consumers and investors are increasingly looking to invest their money in initiatives supporting diversity, inclusion, gender equality, renewable energy, climate action, sustainable agriculture, and various other causes that produce social or environmental benefits. So, what do we have here? A fast-growing global FinTech industry ripe with innovation, expanding reach, and extended services on one hand. On the other hand, we have an even faster-growing Islamic FinTech sector leveraging the same innovation and serving a growing global Muslim population that makes up more than half the global population of under 34-year-olds. At the same time, we have a new generation of consumers and investors who are driven by social consciousness and are in search of moral and responsible solutions to financial services as well as investing in alignment with their environmental, social, and ethical values. Add to this entire mix the fact that Islamic finance is inherently ethically driven (albeit with some added religious parameters), and we can easily conclude that there is an enormous opportunity here for Islamic FinTech to play a leading role in fostering and innovating toward financial inclusion and ethical/impact investing.

Islamic finance has much in common with ethical finance even though, until recently, this has not been recognised nor appreciated in all its glory (and still requires awareness before it truly is). Shari’a compliant investing focuses on growth opportunities that align with its fundamental tenets of fairness, equity, and transparency, as well as an emphasis on risk-sharing, which are principles and concepts that encourage and support inclusion and sustainability. It also has restrictions on investing in certain sectors such as gambling, conventional banking and insurance, adult entertainment, weapons, tobacco, and alcohol alongside avoiding companies with excessive debt. Hence, there is no reason Shari’a-compliant offerings cannot be a serious contender for ethical investors, Muslim or not.

As a new generation of socially mindful consumers and investors look for moral and responsible solutions to banking, investments, and debt, we can only hope that Islamic finance will exert its influence and at the same time develop progressively innovative services for an increasingly wider user base. The Islamic finance industry should certainly focus on fostering and promoting its natural alignment with environmental, social, and ethical ideals.

Islamic finance on the whole is now a global industry worth over US$2.4 trillion (2019) and is forecasted to reach US$3.69 trillion by 20241. The industry currently aims to service a population of 1.8 billion Muslims worldwide and is expected to continue growing in importance not only due to the rising number of Muslims around the world but increasingly due to its appeal to the wider global ethical finance audience. We are already seeing a higher demand for Islamic products from non-Muslim investors as a result of this global trend of ethical consumerism, but ideally, we should try to actively participate in vying for a share of this broader capital base rather than leaving it to achieve passive, unattended, incidental growth. After all, many of the principles of current ESG/SRI initiatives have existed in the Islamic finance space for decades already, so it should come as no surprise that the knock-on effect of an uptick in this trend has led to an increased demand for Shari’a compliant products and services.

Undeniably, the i-FinTech sector is in a pole position to spearhead the next phase of growth in Islamic finance in a big way if participants play their cards right. The sector is already expanding rapidly and given its natural compliance with several ESG causes it should be on the radar of any ethically inclined investor. If we consider the current market size in the Organization for Islamic Cooperation (OIC), Islamic FinTech reached US$49 billion in 2020. This is merely 0.72% of the global FinTech market size – so clearly there is room for growth in market share. Perhaps i-FinTech will accelerate the rate at which Islamic finance, in general, increases its overall share of financial markets which is still relatively small if we compare it to the number of potential participants.

Another area where Islamic FinTech is equally well placed is around improving financial inclusion. If we look at the demographics again, the number of Muslims is projected to reach around 3 billion by 2060. What makes this even more of an obvious target area is the fact that not only is half of the global under 34-year-olds situated in Muslim-populated countries, but the global unbanked population is also heavily skewed towards the same – almost 50% of the world’s unbanked population is in Muslim-populated countries. Furthermore, younger customers are expected to contribute up to 75% of Islamic banking revenues by 2030 and so will play a crucial role in the growth of Islamic finance and in expanding its future customer base. This young demographic will come mainly from the highly underbanked Middle East, Africa, and South Asian markets where there is high mobile and internet penetration relative to the global average and where i-FinTech is perfectly positioned to increase the reach of Islamic financial services to bring about greater financial inclusion through continued digital innovation.

ISLAMIC FINANCE ON
THE WHOLE IS NOW
A GLOBAL INDUSTRY
WORTH OVER US$2.4
TRILLION (2019) AND
IS FORECASTED TO
REACH US$3.69
TRILLION BY 2024.

In that light, Islamic FinTech has a crucial role to play in the drive toward Sustainable Development Goals (SDGs) by providing access to financial services across unbanked populations. The case for financial inclusion is a key element of social inclusion and is particularly effective in combating poverty and income inequality. By developing apps and services that facilitate inclusion and enable easy access to both ethical finance and investing, Islamic finance can continue to serve both Muslims and non-Muslims and help contribute significantly to a sustainable economic recovery as the global economy emerges from the COVID-19 pandemic.

Social finance is another significant area where Islamic FinTech can add significant value. A recent World Bank report2 on Islamic FinTech cited an opportunity for Islamic FinTech in: “galvanising the multibillion-dollar Islamic social finance pool from zakat (obligatory charity), sadaqa (voluntary charity), and waqf (Islamic endowments).” According to the same report, zakat can potentially contribute between US$200 billion and US$ 1 trillion towards poverty alleviation. The message is essentially that i-FinTech can innovate to develop robust systems and processes for the collection and delivery of Islamic social financing to better support global Sustainable Development Goals (SDGs) and needs.

Zakat, sadaqa and waqf together have the capacity to significantly improve the welfare of the poor and can help towards the achievement of the United Nations sustainability and development targets relating to the eradication of poverty and hunger (SDG1 and SDG2). One of the biggest challenges when it comes to social funding is in the collection and disbursement of funds as with cash there is always a risk of misappropriation, fraud and embezzlement. Islamic FinTech can develop integrated solutions for incorporating everything from collection, distribution, and intermediation of funds to better precision in the identification of beneficiaries. Concurrently, there should be an emphasis on attracting more donors to the global network for Islamic social finance by offering easy-to-use and credible platforms. Further, the use of blockchain technology to direct payments of donations or aid could help reduce the incidence of fraud, while further improving financial inclusion.

Concluding Remarks

One of the key trends in FinTech for 2022 will be further disruption of the Islamic finance industry. With the rising Islamic FinTech sector, we see increasing empowerment of a younger generation that is ready to embrace this change.

  1. FinTech can increase access to Islamic financial services, improve financial inclusion, supply greater ethical and socially rich investment opportunities, and help countries better support and promote sustainable development goals.

There is a clear opportunity to support and even strengthen the drive towards global Sustainable Development Goals (SDGs) through technology-enabled expansion as well as innovative solutions simplifying responsible finance and investing whilst simultaneously increasing accessibility for all.

However, amid the progress, certain risks and dangers remain. As we witness a huge global shift to digital and although it brings with it great opportunities, it can simultaneously pose a threat to the drive towards inclusion by exacerbating inequality if not managed correctly. Hence it is important to realise that the concept of inequality is not limited to access, opportunity, and income but the idea of digital inequality must be considered too.

Lastly, it is ever more important that the advisers, gatekeepers, and intermediaries of the industry ensure they are well-versed in the principles governing Shari’a solutions as well as the impact and potential of new and adaptive technology. They must also identify policy, regulatory and institutional challenges that are to be addressed to maximise the use of digital technology in Islamic finance.

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