Fintech

Islamic Banking Fintech – Threat or Opportunity?

There is no doubt that fintech is a hot topic, particularly from an Islamic banking perspective.  According to Ernst & Young, fintech products have the potential to attract 150 million customers to the Islamic banking sector by 2021.  A recent appetite for innovation is evident within the Middle East with the formation of innovation centres in recent months.

The region has seen the formation of the Dubai International Financial Centre (DIFC), Accentures’ Fintech Hive in the ME, the Kingdom of Bahrain in talks with Singapore’s central bank to establish a fintech ecosystem and blockchain regulatory framework and the Central Bank of the UAE acknowledging the possible significance of cryptocurrencies, to name but a few this year.

However, a recent report from FinTech Week stated that less than 0.1% of fintech investment overall originates from the Middle East. Why?

State of Fintech: Unbundling the financial service sector in MENA, Wamda and Payfort  states that a number of reforms and new regulations point to increased awareness on a policymaker level. These include new mobile money regulations in Egypt and a special jurisdiction in the UAE (called a fintech sandbox) to allow fintech startups to test their ideas without having to comply with all regulatory bodies.

The fintech challenge

According to a recent market report, fintech startups in the Middle East and North Africa have raised $100-million over the last decade, but 28% fail in their initial years.  Although the biggest challenge faced by fintech startups historically is dealing with financial regulations, this is something that fintechs are now starting to address. However, fintech startups in the region are still thought to face a battle; the issue of instilling trust, gaining understanding among the banked population and a preference by those residing there for cash over other forms of payment.  Add to this concerns around Shari’ah compliance, and the challenges are obvious.  But fintechs can offer innovative, agile products without the cumbersome technological constraints that some Islamic banks fail to deliver quickly and efficiently.  So surely the answer to leveraging the fintech revolution is partnership?

The fintech opportunity for banks 

Disruptive financial technologies can really address the demand for Islamic finance products.   Not only can the availability of these solutions increase the influx of customers to Islamic banks and financial institutions, but they can also dramatically boost the volume of investable assets very quickly. This is especially important in the light of the current decline in government revenues and the urgent need to develop the regional and global economy.

Fintechs also offer Islamic banks an opportunity to move into new markets easily and efficiently.  They remove the need for banks to outlay additional investment or the risk associated with expansion.  The solutions that fintechs offer cover a broad range of banking, and many support Shari’ah compliance specifically.  In particular, areas such as attract funding and dealing with SMEs or expanding the banking community via financial inclusion, for example through gender or through income levels, or with innovative payment and remittance solutions using social media etc. are appealing.

The fintech threat to banks

So fintechs can offer Islamic banks huge opportunities, however, despite their history of limited success without banks, this is already starting to change within certain markets.  Peer-to-peer financing (P2P) and crowd funding through restricted modarabah investment are two forms of online lending platforms which have gained considerable momentum in the past few months in developed markets.   Companies such as Beehive and Blossom Finance, based in UAE and Indonesia respectively, both provide Shariah compliant platforms.  These two companies aim to provide low cost alternative financing to small and medium enterprises. Each company focuses on connecting creditworthy business looking for funding with smart investors to build mutually beneficial partnerships of growth, by applying the innovative technology of crowd funding to eliminate the costs and complexity associated historically with banks.

Enabling banks to partner with fintechs

It is clear that local banks need to embrace fintech and start building a plan to capitalise on new technology developments, rather than trying to compete with them.  But how?

Before partnering, it is essential that banks have a sufficiently agile, Shari’ah compliant, robust core banking platform to fully utilize the functionality that new fintech can offer.  Whether it be a digital solution or blockchain technology, banks must ensure their back office is truly real-time and adaptable. Breadth and depth of functionality as well as flexibility through configuration, saving time, reducing risk and providing quick time to market is also key to fully benefit from all that these new technologies can offer.

In terms of accessing partners, APIs provide an easy source to 3rd party products and there are several service providers that offer easy access to fintechs through dedicated platforms.  But however banks choose to expand their service offering in this ever changing environment, there is no doubt that using fintech solutions will become the norm for customers seeking Shari’ah compliant, innovative solutions.  The estimates speak for themselves; the volume of collective funding generated through finTech is expected to reach US$90 billion by 2020.  And with 63% of banks stating that they want to partner with fintechs, Islamic banks now need to ask if their core is sufficient to access these new solutions and start to work with fintechs, or risk missing out on easy access to innovation.

State of Fintech: Unbundling the financial service sector in MENA, Wamda and Payfort The region was home to 105 fintech startups by the end of 2015 (see featured image), with half of these having been launched since 2012. In all 30 firms are situated in North Africa. The UAE leads with 30 fintech startups, followed by Egypt with 17 and Jordan and Lebanon with 15 each.

State of Fintech: Unbundling the financial service sector in MENA, Wamda and Payfort  states that a number of reforms and new regulations point to increased awareness on a policymaker level. These include new mobile money regulations in Egypt and a special jurisdiction in the UAE (called a fintech sandbox) to allow fintech startups to test their ideas without having to comply with all regulatory bodies.

Temenos have a community of over 100 fintech companies through the Temenos MarketPlace platform