Scaling up investments in Islamic fintech | Salaam Gateway

Henk Jan Hoogendoorn is Chief Financial Sector Officer at Qatar Financial Center (QFC), and Dr. Dalal Aassouli is Assistant Professor of Islamic Finance at Hamad Bin Khalifa University (HBKU).

Islamic Fintech is an emerging sector that focuses on delivering ethical and fair financial services to its customers and users, based on Islamic financial principles. The target audience may include the Gen Z and Millennial generations, who are attracted to responsible and fair access to their financial needs, including saving, investing, donating and lending. Fintech solutions, through practical wallets, platforms and app services accessible via mobile phones, are quickly emerging as a practical solution. Many of the products are available in white label solutions for banks, while others like ALGBRA take a Revolut approach by adding more lifestyle elements to the app.

In Europe, where the Muslim population averages around 3%, there is a growing need for Islamic finance solutions – including buying a home. The classic interest-based mortgages do not work well for everyone, and we are gradually witnessing the emergence of many “rent to own” Fintechs in the UK, France, Germany and the Netherlands. Interestingly, this is also of interest to non-Muslims.

Today, there are a number of British-born Islamic fintechs working with banks in the Middle East and Asia, using tokenization as a tool to democratize investment in sukuk and other investment opportunities such as crowdfunding.

The other areas where Islamic fintech can play an important role is in providing financial services to groups that traditionally have difficulty accessing, such as SMEs and migrant workers.

There are two schools of thought: “to be – or not to be “Islamic”. Some fintechs do not want to be labeled as “Islamic”, as their focus is ethical and fair financial services. Adding an Islamic label, in their minds, will not necessarily be easily understood by the wider target audience attracted to the ethical finance. Others see a great opportunity to offer Islamic financing for a wider and growing Muslim community in Europe.

The challenges of obtaining funding for Islamic fintech are not unlike other fintech proposals. Angel and seed investors are usually found for the early stages. For Series A and beyond, it becomes more difficult given perceived market constraints, and generally there is a concern that VCs and other professional investors will have more influence on strategy development. This may mean that the “Islamic” element of Islamic fintech needs to be flexible.

At a recent roundtable of Islamic fintechs in London, hosted by the QFC, all participants really felt the need to dramatically scale up global investment in Islamic fintech.

Global fintech investments exceeded $200 billion in 2021 with more than 5,600 deals. With the growing Muslim population, increasing sustainable development challenges and post-pandemic recovery efforts, the deployment of innovative Islamic Fintech solutions can support the transition to more sustainable economies while promoting financial inclusion and stability. Three areas of action can scale up investments in Islamic fintech:

Expanding fintech innovation for sustainability: Fintech can be a key enabler for sustainability and inclusion. As investment opportunities arise in many Fintech segments, Fintech startups must develop more innovative technology-based solutions that align financial performance and impact. Innovations in Islamic fintech have the potential to accelerate the flow of capital into a more sustainable digital economy. It can also contribute to meeting global political goals, namely when it comes to reducing climate change, as well as achieving a sustainable development agenda for an overall societal good. To do so, Islamic fintechs must work on increasing sustainability innovation to attract the growing investor base in addition to traditional Islamic investors. According to the Global Sustainable Investment Alliance, in 2020 global sustainable investment reached $35.3 trillion in five major markets (US, Canada, Japan, Australasia and Europe), an increase of 15% over two years.

Strength regulation: A study by the Bank of International Settlements (BIS) finds that Fintechs raise more capital in countries with higher regulatory quality. While more than 60 countries have established regulatory sandboxes to improve fintech’s access to finance and promote innovation, only very few are located in the OIC region, creating high regulatory uncertainty and therefore limiting fintech’s capital raising capacity.

Promoting the development of Islamic fintech venture capital funds: Venture capital funds can play a significant role in the development of innovative business models. Their role in providing early seed funding to innovative fintech startups is critical to reducing their funding gap.

While the availability of Islamic fintech VC funding remains small compared to other conventional markets, Islamic fintechs must focus on innovation, relevance and scalability of their solutions to secure VC funding. At the same time, public grants as well as partnerships between Fintech acceleration and incubation programs can promote the establishment of more Islamic VC funds.

In Malaysia and Indonesia, both with large Muslim populations, Islamic fintech has emerged strongly and access is being created for early stage investment. With the Islamic fintech sector maturing, the time is now for countries with large Islamic banking institutions and wealthy sovereign wealth funds to take the lead and create VCs and funds that can facilitate subsequent investment globally in Islamic fintech or the wider Islamic digital the economy.