Islamic Fintech has a potentially transformative impact on the economy, and as such, authorities and regulators need to carefully nurture a policy regime that promotes innovation and growth of Islamic Fintech companies and startups. In this era of digitalisation, traditional rules and regulations will not be sufficient for the existing and new entrants in the financial industry. Increasing commoditisation of technologies such as artificial intelligence and machine learning produce new pandora boxes for regulators. Smart regulations are fundamental to the future of the Islamic Fintech sector.
Smart regulations minimise the obstacles to Islamic financial markets including Islamic Fintech while maintaining control. Regulators through smart regulations can test and experiment with the new service providers. They can also monitor their performance and be flexible in issuing them with a license, which should be improved subsequently. Innovation office, regulatory sandboxes and RegTech can together be very supportive for regulators instead of depending on only one approach that may leave pitfalls and room for inaccuracy.
In formulating an effective regulatory framework for Islamic Fintech, regulators have to comply with fundamentals such as standardisation, financial stability, innovation with Maqasid al-Shari’a, cyber-security, consumers’ protection and capacity building. These essential features are indispensable for the growth, development and sustainability of Islamic Fintech given the unique nature of Islamic finance itself. These features are discussed below.
- Standardisation
A prerequisite for the rapid growth of Islamic finance in general and Islamic Fintech in particular, is standardisation of Shari’a interpretations and legal documentations. This would fuel growth by streamlining the whole process, which is still complicated and time-consuming. This is also one of the critical reasons for the lack of Islamic Fintech as compared with conventional Fintech companies.
In this context, standardisation means the establishment of universal Shari’a standards by the flexible codification of Shari’a principles, which would ultimately reduce the shortage of Shari’a scholars and also help promote unity among the different schools of fiqh. This signifies that a universally recognised Islamic manuscript or standard should be issued to harmonise differences in fiqh opinions concerning Islamic finance in order to further enhance product development and reduce Shari’a non-compliance risk.
The best solution provided in the matter of standardisation is by Dr. Muhammad Tahir ul Qadri. He suggested that the solution to this problem lays in the adoption of the theory of Taqlid-al-Madhahib “Neo-Juristic approach of inclusive accommodation and flexibility”, which is based on strong Islamic legal foundations. He is of the view that, with the application of this approach, the uncertainty in post-default resolution mechanism in Islamic finance matters will be eliminated. This will subsequently enhance investors’ confidence, resulting in transparency and appropriate risk management.
- Innovation with Maqasid Al-Shari’a
Standardisation without innovation does not guarantee the sustainability of Islamic Fintech. Without a doubt, innovation is imperative for the development of the Islamic Fintech sector. But at the same time, achieving Maqasid al-Shari’a should be the primary objective. Without attaining this goal, Islamic Fintech cannot compensate and fill the gaps left by the Islamic finance industry. Financial innovation in Islamic finance must be within the Shari’a parameters and tested against the Maqasid al-Shari’a, both in form and substance, where the primary objective is the realisation of benefits to the people.5 When formulating regulations for the Islamic Fintech sector, authorities and regulators should aim to fulfil Maqasid al-Shari’a through two main objectives: financial stability and sustainable development.
- Financial Stability
Fintech is changing the landscape of financial services, providing more opportunities to seek financing and increasing financial inclusion. Regulators are responsible to provide a framework that supports the sustainable development of the industry while protecting consumers and ensuring financial stability. The Financial Stability Board (FSB) recently published a report on Fintech and its implications and the risk to financial stability. The report concludes that, while there are no irresistible financial stability hazards and risks from emerging Fintech innovations given the relatively small size of the Fintech industry relative to the global financial system, experience depicts that they can flourish quickly if left neglected. It also underscores the demand for international bodies and national authorities to pay attention to Fintech in their risk assessments, monitoring and regulatory frameworks.
The mixture of greater efficiency and better use of big data could give essential support to financial stability if the linked risks are appropriately managed, especially those related to pro-cyclicality and excess volatility. Fintech has enormous potential to expand access to financial services for both businesses and individual households. This could increase sustainable and inclusive growth, provided that the associated risks are managed to keep trust in the system and to avoid a build-up of risks that could result in financial instability.
- Cyber Security and Customers’ Protection
Although there are many opportunities connected with Fintech, the risks and potential vulnerabilities emerging from new Fintech solutions cannot be overlooked. New risks emerging from Fintech include risk of cyber-crimes, data breaching, data theft, etc. These risks may be due to uncertainties in regulation, lack of required technological skills, smart workers, heavy compliance costs and issues of scalability in handling the massive volume of unstructured and structured data. In this scenario, customers’ protection is an important point that has to be considered appropriately while enforcing regulations.
The combined use of blockchain, big data and artificial intelligence can lead to a better, more sophisticated and integrated cybersecurity system, which are adaptable and effective. In addition, one of the major challenges from the end users is lack of awareness of cyber or digital risks or also their negligence in taking precautionary measures while accessing financial services through digital channels. Awareness programmes to educate users may be helpful to manage the cybersecurity risks. Another big challenge for policymakers and regulators is protecting customers from cyber risks and at the same time allowing them the usage of digital channel to access financial services.
- Capacity Building
Islamic Fintech is still at its infancy with only 93 Islamic Fintech established world over. One of the factors behind the slow growth and meagre number of Islamic Fintech is the lack of skilled human resources. Regulators have to play their role in this vital element of capacity building to ensure the sustainable growth of the Islamic Fintech sector. Regulators in different countries are adopting the approach of integration and collaboration with new entrants in Fintech in terms of their trainings, especially on regulatory matters. Different hackathon programmes have been developed by regulators to enhance awareness among the new entrants.
Conclusion
Digital transformation of the Islamic Fintech sector is vital in this era of digitalisation and smart regulations are essential to enhance its development. Islamic Fintech can be a tool to reach out to the masses, which are not currently served by the Islamic finance industry, especially Islamic banks. The numerous opportunities provided by Islamic Fintech such as financial inclusion, empowerment of underserved consumers and the achievement of Maqasid al-Shari’a; will become apparent when regulators’ concern for financial stability, consumers’ protection, innovation and capacity building are assured. Standardisation and harmonisation in regulations have great significance and act as catalysts in the growth and sustainability of the Islamic finance industry.
This article is an excerpt of Chapter 10 on The Emerging Landscape of Islamic FinTech Regulation from the Global Islamic Finance Report 2019. Chapter 10 was contributed by Dr. Hussain Mohi-ud-Din Qadri, President of Minhaj-ul-Quran International (MQI) and Deputy Chairman of the Board of Governors, Minhaj University Lahore.
