Islamic Fintech

Sara Sánchez Fernández, Sara Sánchez Fernández

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000367805
• Edition: 1
• Topic: Business
• Subtopic: Islamic Banking & Finance
• Index: Business

The implementation of new technologies is expected to boost the development of Islamic Finance by increasing accessibility to banking and other financial services in Islamic communities and democratizing access to investment opportunities. At the same time, new technologies will increase financing opportunities and facilitate asset management for Sharia -compliant businesses. This collection of essays from selected experts in the field comprise some of the most topical issues on Islamic Fintech, combining a business focus with legal insights.

The book takes as a point of departure the role that Islamic Fintech can play in promoting sustainability. The social vision of welfare improvement and justice is already embedded in Sharia 's economic rules, which makes Islamic Finance particularly well suited to bridge the gap between sustainability and funding. Although it is not without challenges for the industry, technology will help unleash its potential. With a holistic approach to Islamic Fintech, the contributing authors address the application of new technologies to Islamic Finance, including robo-advisory, crowdfunding and digital ledger technology (both in the issuance of bitcoin and the registration of securities in tokenized form) and in certain sectors such as takaful ( takaful -tech) and health (e-health). Finally, they explore the challenges posed by anti-money laundering ('AML') in the specific realm of Islamic Fintech.

The book combines theoretical analysis with a practical focus, both through case studies and directly through the experiences of leading entrepreneurs. In addition, it provides insights on legal and regulatory aspects, which are key in a field that is still in its infancy and needs support from lawmakers and regulators. It is, thus, a reference for academics, legal practitioners, policymakers, entrepreneurs and the Islamic Finance community.

1 Role of Fintech to achieve the SDGs from an Islamic perspective

Houssem eddine Bedoui and Wail Aaminou

Introduction

There is an annual need to mobilize between USD 3.3–4.5 trillion in order to attain the Sustainable Development Agenda 2030 (UN SDG 2018). In particular, the developing countries are facing an average annual financing gap of USD 2.5 trillion of both government and private investment in SDG-related industries (IMF 2019). The Islamic Finance industry is offering opportunities to bridge the sustainability–financing gap. The chapter starts presenting the background of the current study. Then it clarifies the genuine value proposition of the Islamic Finance and Fintech industries. It shows the relationship between religion and sustainability and Islam in particular. The Maqasid Sharia framework is studied as the motive that captures sustainability in the Islamic Finance contribution. Then, the chapter reviews sustainability specifically on six sustainability challenges in Organization of Islamic Cooperation (‘OIC’) countries (gender equality, water, labour market, healthcare, environment and education), and the role that Islamic Fintech should play to capture and solve these issues. The chapter, later, displays Islamic Fintech experiences in sustainability and proposes recommendations to unleash the potential of Fintech in the context of Islamic Finance. For instance, the chapter suggests having (i) a suitable ecosystem and innovation ecology, (ii) an adaptive and evolving regulatory framework and (iii) organizational realignment to capture and retain the required resources with a very complex skillset.

Background

The challenges facing humanity today are, by all measures, exceptional. To illustrate, economic and social inequalities have never been stronger; at least one billion people today live below the poverty line with problems of access to care, inadequate nutrition and substandard housing conditions (Sachs 2015). What is more, the effect of extreme natural disasters causes an annual loss of $520 billion and creates 26 million new poor every year (IFC 2017).

In response to this serious situation, the international community adopted in 2015 the Sustainable Development Goals (‘SDGs’) to end poverty, protect the planet and ensure prosperity for all by 2030 (Bertelsmann Stifung 2017). However, in the light of current trends, countries will widely miss the goals if public and private financial resources needed to finance investments are not mobilized (Schmidt-Traub 2015). The Sustainable Development Solutions Network estimates that 1.5–2.5% of the world’s GDP may be needed to finance the achievement of the SDGs globally. More specifically, incremental spending needs in low- and lower-middle-income countries may amount to at least $1.4 trillion per year to reach SDGs (Schmidt-Traub 2015). On the climate ground, the World Wildlife Fund (‘WWF’) believes that to limit the increase in global temperature to 2°C (or even 1.5°C), an estimated annual investment of about $2 trillion over the next 15 years is needed to transform our energy system, preserve ecosystems and ensure sustainable water use (WWF 2016).

Addressing the above sustainability financing challenges has to take place in a world governed by the influential trends of the fourth industrial revolution, which has been enabled by modern technology advances at the crossroads of the physical, digital and biological worlds (World Economic Forum 2019). Fintech companies exemplify such a mutation in financial markets.

According to the Hong Kong Exchanges and Clearing Company (‘HKEX’) (Cheung 2018), Financial technology, or Fintech, refers to ‘financial innovations driven by technological advancement in the forms of new business models, new financial services, and new software and applications that have a great impact on the provision of financial services and the development of the financial industry’. EY (2016) proposes a slightly different definition by presenting Fintech entities as ‘high-growth organizations combining innovative business models and technology to enable, enhance and disrupt financial services’. This definition is not restricted to start-ups or new entrants; it includes scale-ups, maturing companies and even non-pure finance companies such as telecommunication providers and e-retailers.

The rise of Fintech is underpinned not only by recent technological developments in blockchain (distributed ledger), mobile technologies or artificial intelligence but also by the emergence of the ‘service now’ mentality and the crowdsourcing of information and solutions (Hong Kong Steering Group on Financial and Technologies 2016). While acknowledging that there is no commonly accepted taxonomy for Fintech innovations, the Reserve Bank of India categorizes Fintech innovations into five main groups (Reserve Bank of India 2017).

The financial industry’s landscape is evolving so rapidly due to the technological developments that it is ultimately shifting the world economy (Hayen 2016). Hence, the technology applied to Islamic Finance offers this opportunity to observe sustainability and business ethics in financial transactions (transparency, fairness and justice). Islamic Finance then offers excellent potential to leverage technology as a catalyst to improve operational efficiency. Fintech offers the ability to deliver value-added and customer-focused services by delivering customized solutions using biometric techniques, big data and predictive analysis. Moreover, the potential of blockchain technology empowers transactions to be a cost effective and time-saving implementation (Miskam & Siti Hawa 2018).

The Assistant Governor of Bank Negara Malaysia in his Opening Remarks at Islamic Fintech Dialogue 2017 (Omar 2017a) confirmed that Fintech provides the potential for the following three areas critical to the Islamic Finance: (i) industry players can generate more value and customer-focused services by leveraging technology. By making banking operations more accessible, faster and more convenient, the technology could bring significant advantages to customers (Omar 2017b). (ii) Adopting technology can assist Islamic Finance to reach market segments that otherwise would not be cost effective. This implies an excellent opportunity for untapped markets to be served. (iii) Fintech can help enhance the effectiveness of back-end devices, activities and procedures, including using predictive analytics to conduct real-time risk management.

Henceforth, Fintech products and services need their regulations to supervise their operations in order to preserve the trust of different stakeholders in Islamic Finance, and importantly meet society’s requirements and ultimately achieve sustainable development goals and accomplish Maqasid Sharia.

Relationship between sustainability and Islamic Finance

The role of religion in development has generally been viewed with suspicion and even indifference, especially in the face of institutional concerns about development planning and policies. Though, three decades ago, a growing interest in religion started as a category of developmental studies assessment (Narayanan 2013). Narayanan identified three ways in which religion would play a significant role in empowering sustainability and sustainable development through its: (i) values, (ii) potential for social and ecological activism and (iii) capacity to enable self-development.

Deneulin and Bano confirmed the failure of the secular thesis of religion’s meaninglessness as societies modernize (Deneulin & Bano 2009). In their attempts to attain their shared objectives of humanitarian welfare and ecological conservation, religion and sustainability are of significant significance to each other (Narayanan 2013). Deneulin and Bano highlighted as well the role of religion in humanitarian activities and confirmed the requirement of development’s commitment to religion as well. In fact, it is true that religion has its potential to clarify and develop the determinations of sustainability and sustainable development in order to play a beneficial role in both domestic and international development policy (Deneulin & Bano 2009). On the other hand, the development can as well provide an opportunity for religion to revisit some of its claims and procedures introspectively, and accordingly, religion has habitually been adaptive to changes in the socio-political environment (Deneulin & Bano 2009). Narayanan (2013) concluded that sustainable development as a practice and religion as a belief system are entwined and must be discussed together.

In the 5th International Conference on Sustainable Development (‘ICSD’) of the International Environment Forum (‘IEF’) in the Czech Republic, on October 2001, Arthur Lyon Dahl pointed out the following:

Values, or the application of spiritual principles, have been the missing ingredient in most past approaches to sustainable development. Grand declarations and detailed action plans, even when approved by all the governments, do not go far if people are not motivated to implement them in their own lives, and if institutions are not made responsible to carry them out. The exciting thing about addressing sustainability at the level of values is the potential to create self-generating human systems building a more sustainable and thus ever-advancing civilization. The World Summit on Sustainable Development should include this dimension in its agenda.

This confirms the intricate connexion between religion and social values for sustainability. Although there are steady tendencies in the values promoted by the major religions and some of the values embodied in the theory of universal human values, religion includes much more than the promotion of these specific values (Ives & Kidwell 2019).

To advance study on this intersection of religion and human values, Ives and Kidwell suggested that religion be understood as a multifaceted incarnational institution of substantial social and political significance. This wide-ranging understanding of religion allows, therefore, researchers to study the social values of sustainable development in connection with the theories of social transformation.

The Islamic religion, for instance, does have its economic vision that highlights these social values. In fact, Sharia offers a reflection’s structure favourable to integrate sustainability issues into economics and business. This vision is an integrated characteristic of Maqasid Sharia aimed at encouraging welfare (jalb al-masalih) and avoiding evil (dar’a al-mafasid) (Ibn Ashur 1945). Ibn Ashur offers further specific facets covering the promotion of welfare, the fight against corruption, the cautious use of natural reso...