Islamic fintechs ‘gaining foothold after slow start’

Bahrain and Türkiye are the only countries that have adopted a standardised open banking framework and are seeing a strong pick-up in Islamic fintech development, Moody’s said in a new report published yesterday.

Other Islamic countries are either still drafting guidelines or just beginning to introduce the legal framework, the report adds.

Once in place, the regulations will bring new opportunities for both conventional and Islamic fintech firms to flourish.

Noting that the Islamic fintech sector is growing fast from a low base, Moody’s said the sector grew by 61 per cent in 2021 but comprises just 0.8pc of the global fintech sector for conventional finance.

The ratings agency expects the sector to continue to grow as predominantly Islamic banking systems in the Middle East and parts of Asia increasingly lean towards ‘open’ banking rules that facilitate innovations in digital finance.

Moody’s expects Islamic fintech assets to exceed 1pc of the global fintech industry by 2025 from the current level of 0.8pc.

“Regulators in countries where Islamic finance is firmly ingrained are increasingly focused on developing their Islamic fintech industries. Fintechs following Sharia principles represented just $79 billion in transaction volume at the end of 2021, around 0.8pc of the global fintech industry, according to the Global Islamic Fintech Report 20225. But the sector’s growth was strong, up 61pc in 2021 from a year earlier,” said Moody’s analyst Berke Batman.

Islamic fintech innovation has the potential to increase the efficiency of the Islamic finance sector and promote financial inclusion in some predominantly Muslim countries like Indonesia and Bangladesh given the two country’s considerably established Islamic finance sectors.

Islamic fintechs are small and lack the economies of the scale to serve large corporates in terms of providing funding.

Hence the sector predominantly serves retail consumers and SMEs. Islamic fintech development to date has focused on two main areas: fund-raising and digital banking.

Countries with the greatest numbers of Islamic fintechs are Indonesia, the UK, the UAE, Saudi Arabia and Malaysia. These countries host 59pc of Islamic fintechs currently in operation globally.

The UK is the largest non-Muslim country with the highest Islamic banking penetration rate. There are 45 Islamic fintechs operating in the UK.

Islamic fintechs that are providing financing solutions, along with digital-only banks are competing directly against the established bricks and mortar Islamic banks.

There are already 34 Islamic digital challenger banks and 163 Islamic fintechs offering financing services.

Moody’s expects competition to intensify in line with our expectation of growth in the Islamic fintech sector, particularly given the regulatory shift towards digitalisation of financial services and evolving open banking regulations.




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