The Impact of Technology in Islamic Finance
Posted: August 26th, 2021
The Impact of Technology in Islamic Finance
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The Impact of Technology in Islamic Finance
Abstract
The impacts of Technology in Islamic Finance affect a few participants directly but have disrupted the traditional methods of financial operations and management. Consumers are the greatest beneficiaries as they have options to choose from, which they do according to their individual needs and preferences. The consumers also benefit from competitive financial services at an affordable cost. Technology has ensured that monetary transactions are more user friendly, automated, and more convenient that enhances the customers’ experience. Internet penetration has assured that customers can access financial services more conveniently and from any location without necessarily going to the physical bank.
Table of Contents
Overview of Financial Technologies and Applications. 4
Current and Potential Applications of Fintech in Islamic Finance. 8
Islamic FinTech Opportunities and Challenges. 10
The Impact of Technology in Islamic Finance
Introduction
Islamic banking has revolutionized over the last decade, with the demand for Islamic compliant products increasing as a result of the population growth of Muslims. The population of Muslims in the world is approximately two billion people, which is projected to have doubled by the year 2040 (Lipka and Hackett 2017). High demography translates tohigh demand for products that comply with Islamic laws, Quran, and hadith. Islamic financial institutions offer products and services which adhere to the fundamental doctrines of Sharia or Islamic law. They are among the fast-growing segments in the world’s finance industry (Johan, Dali, Suki & Hafit, 2017). One of the significant developments in the innovation and advancement of Technology inIslamic financial institutions. Financial Technology is the application of Technology in the financial sector, which includes payments infrastructure, operations, and risk management (Zhang & Yang, 2019, January). It also provides financing, data security, and monetization as well as customer interface. Technology has disrupted the way the Islamic banking financial sector operates through disrupting mobile payment systems and loan application and disbursement processes. Thus, it has continued to affect financial asset management operations and money transfers methods.
Overview of Financial Technologies and Applications
Financial Technology(FinTech) provides a solution for financial inclusiveness to reach as many individuals as possible, especially among the unbanked people insociety. Islamic Financial technology is different from the conventional commercial service providers as it is sharia-compliant, beneficial to both the customer and financial provider, transparent, and easy to use (Rabbani et al., 2020). The FinTech applications are categorized according to their demand in the target market and the solutions they offer in the financial market. For instance, in the payment services, clearing, forwarding, and settlements, one may use the internet, mobile, digital currencies, contactless payments, and circulated ledger technologies. While for borrowing and deposit services, customers adopt crowdfunding, market lending, or peer-to-peer borrowing applications. FinTech can also be classified as small contracts, big data, e-aggregators, and digital identity according to market provision. Lastly, in investment management, group applications can be electronic trading or machine or robot advisors.
Islamic Finance Principles
Islamic finance principles were initially applied in Bahrain, the Middle East, and Malaysia, as well as in parts of southeast Asia. However, they have now been expanded in other parts around the globe (Lacasse, Lambert & Khan, 2017). The services are found in all corners of the world, including developing economies, which are either almost entirely Islamic such as Iran or where both the Islamic and conventional financial methods exist, such as Pakistan (Johan, Dali, Suki & Hafit, 2017). Islamic FinTech is also available in the developed economies such as the United States and Europe, where big conventional banks have adopted Islamic financing and establishment of Islamic financial institutions (Johan, Dali, Suki & Hafit, 2017). Islamic products and services also manifest as mutual funds offered in Sharia-compliant equity, Islamic insurance (Takaful), Islamic bonds (Sukuk), and Islamic leasing (Ijarah), all who adopt the Islamic principles.
Literature Review
Extensive scholarly work has been done regarding the impact of Technology on Islamic Finance. Recently, two studies were conductedto give an overview of the effect of Technology on Islamic Finance by concentrating on the utilization of Blockchaintechnology and its impact on the Islamic finance industry (Binti Kasri & Muhammad, 2019). The studies by Lajis (2019) established that Technology accelerates the acceptance of risk-sharing in the application of Islamic Finance. The study also focused on the potential of Blockchain in enhancing the adoption of risk-sharing, improving the use of Islamic Finance. Subsequently,Lacasse et al. (2017) analyzed the effects of using Blockchain technology in Islamic banking. The study stated that Blockchain technology, when utilized appropriately, can enhance compliance to Islamic finance sharia principles that are the basis of Islamic banking (Rabbani, Khan & Thalassinos, 2020). Hence, both studies gave an overall indication that financial Technology, including a focus on the most recent technologies such as Blockchain technology and its capability,can be a success in the Islamic finance industry.
Accordingly, Thaker et al. (2019) researched the impact of the application of financial innovation in the development of Islamic Finance. The study noted that with the development of Finance, Technology is critical as it has become a crucial enabler in offering future financial products. The report noted that in Malaysia, one of the most innovative Islamic finance products in use is the Investment Account Platform (Stremlau, 2018). The platform is crucial in providing investors in the country with direct, quick access, and opportunities to better investment opportunities. It also provides businesses and Islamic banks with several innovative ways and approaches to getting funding. Further, Lajis (2019) observed that the application of Technology in Islamic banking would change the way Islamic Finance is done as it will provide more opportunities through the promotion of risk-sharing (Rabbani, Khan & Thalassinos, 2020). Another study by Alaabed and Mirakhor (2017) reviewed the role of Technology in accelerating the adoption of risk-sharing systems in Islamic finance systems. Both researchers observed that financial Technology is a crucial element in the growth of Islamic Finance. It is because it eliminates critical risks in a particular financial industry, which are leverage and uneven in maturity. According to another study by Firmansyah and Anwar (2018) on Islamic Fintech firm in Indonesia, the Angsur, it is shown that Angsur is innovatively offering solutions for solving different social problems, thus encouraging financial inclusion.
Moreover, the growth in financial Technology is resulting in an improvement in the access rate to information. The impact has been felt in the banking sector, which is part of the financial system of the country (Rabbani, Khan & Thalassinos, 2020). Technology has assisted in the establishment of Non-Resident External Banking Services in Islamic nations (Abid et al., 2018). It is helping transfer of funds by non-residents from their home countries. At the same time, technology is improving in the transfer of money while strictly complying with the sharia law amongst the Islamic banks (Abid et al., 2018). Equally, the continued access to technology is promoting access to banking services by enhancing the scope of banking activities, thus reducing the challenges that existed with banking services operating mostly in urban centers of Muslim nations (Lacasse, Lambert & Khan, 2017). Therefore, improvements in financial technology have led to the introduction and adoption of the concept of rural banking. Hence, it has resulted in improved access to banking services besides easing transactions much faster through the use of portable services on phones and personal computers.
Subsequently,the Hawaala Mobile Banking system is an excellent example of a sharia-compliant system in rural Somalia in Africa. The Hawaala system has been critical in facilitating financial inclusion in the war-torn country, as many unbanked people have access to some form of banking services (Lacasse, Lambert & Khan, 2017). Equally, the introduction of plastic money in the form of credit cards has increased the flexibility of the banking industry in Muslim countries. The credit cards have played a significant role in ensuring business continuity and wealth creation by financial institutionsmainly through the profit-sharing method of banking (Johan et al., 2018; Rabbani, Khan & Thalassinos, 2020). As such, the adoption of Technologyhas affected the level of competition among financial institutions in the majority of Muslim nations. The reason is that financial institutions can easily access information that could result in the improvement of their services (Lacasse, Lambert & Khan, 2017). In this case, it results in ensuring that the commercial products are differentiated, which gives the customers a more comprehensive range of options to select (Alaa Alaabed & Mirakhor, 2017). Therefore, consumers of such financial products can benefit from affordable banking services due to improved efficiency in the industry.
Currentand Potential Applications of Fintech in Islamic Finance
Technology is crucial for the future application of financial services regardless of the type and nature of such services. In Islamic Finance, the app includes the use of traditional aspects with special features for ethical screening (Alaa Alaabed & Mirakhor, 2017). It also includes Sharia advisory and the structuring of partnership products and services, which are exclusively Sharia-compliant. The application of Technology consists of the information and communications elements in Islamic Finance, which starts from the negotiation phase and ends up with the post-execution matters such as litigation (Firmansyah & Anwar, 2019). Besides, the application of Technology in Islamic Finance nowadays consists of innovative and disruptive application aspects such as the controversial use of cryptocurrencies. Some of the cryptocurrencies in use are E-Dinar Coins that are generating regulatory uncertainty and debates within the Islamic finance industry (Mulatsih et al., 2018). For a disruptive technology to be considered compliant with Sharia should have sharia parameters that go beyond mere halal or permissibility and haram or prohibition from the firm sharia viewpoint. The cryptocurrencies will also need Sharī‘ah public policy considerations and the government regulatory aspects, thus preventthe associated misuse and abuse of such innovations.
Another innovative application includes services and products such as the Investment Account Platform in Malaysia. It works as a consortium composed of several Islamic banks that assist financial intermediaries in channeling the resources to deserving business ventures (Binti & Muhammad, 2019). The platform was introduced as a cross border multi-currency platform to assist in the facilitation of regional financing opportunities mostly relating to emerging business ventures. Technologies are also being applied toliquidity management. For example, the introduction of the Bursa Suq Al-Sila has been critical in managing liquidity in Islamic financing. Bursa Suq Al-Sila is an online platform applied in the management of commodity murabahah transactions and dealings (Abid, Goaied & Ammar, 2019). Bursa is essential in providing sharia-compliant trading and business dealing mechanisms to assist in the facilitation of murabahah and tawarruq online transactions (Abid, Goaied & Ammar, 2019). The pioneering end to end sharia-compliant service was introduced in 2009, and it is a seamless process of closing the applicable transaction strings (Mulatsih et al., 2018). Thus, as a commodity trading platform, it has won international attention due to the increasing application in many countries bordering Malaysia and in the Middle East.
Besides, the Dubai Multi Commodities Centre is another innovative technology products widely used in the United Arab Emirates. It is a sharia-compliant electronic platform that deals with commodity murābahah transactions (Jaradt, 2019). The platform is crucial in providing forverifying the existence of underlying commodities and inspection by the transacting parties before the conclusion of the trade. The verification exercise ensures that the parties are using legally recognized documents. It also confirms the existence of a retrievable document trail that contains standard audit competencies and capabilities for both shariah and conventional audit functions (Jaradt, 2019). Further, crowdfunding platforms are extensively influencing Islamic Finance through particularly in the funding of Sharia-compliant developments mostly for SMEs and MMES businesses financing (Baber, 2020). Through crowdfunding, business owners have access to required funds to finance their operations and activities (Abid, Goaied & Ammar, 2019). Hence, the introduction of financial technologies has been essential in Islamic Finance through the promotion of the economic welfare of Muslims, providing several applications suitable to members.
Islamic FinTech Opportunities and Challenges
Islamic FinTech is founded on the ethics of Sharia. The development of smartphones has created better opportunities for the growth of FinTech in Muslim dominated countries and other parts of the world. The main challenge is regulation and inadequate authentic research conducted concerning the Islamic Fintech sector (Firmansyah and Anwar, 2019). Table 1 below summarizes the opportunities and challenges of Islamic FinTech.
Table 1: Islamic FinTech Opportunities and Challenges (Firmansyah and Anwar, 2019).
| Opportunities | Challenges |
| Islamic FinTech is critical for enabling startup entrepreneursto get capital to fund their businesses. | Inadequate authentic research about the Islamic FinTech remains a critical challenge in the Islamic financial sector. |
| It offers a variety of innovative financial products and services to its customers. | There is a lack of skilled human resource personnel in the development of Islamic FinTech as well as unclear policy formulation on the government’s regulations. |
| It provides the customers with an option to adopt both the traditional financial services systems and the new ones. | Financial services are exposed and at high risk from emerging cyber-related crimes such as hacking and data manipulation. |
| It offers cost-effective solutions through the adoption of digital services at a lower cost than the traditional methods. | Islamic FinTech should be more innovative to keep in pace with the ever-growing famous financial world. |
| Islamic FinTech is transparent and easy to adopt and accessible to customers. | Islamic FinTech is yet to adopt stringent data security measures against the threat of data fidelity through changing technologies. |
| The system can be interlinked to other financial services such as cryptocurrencies, cross border payments, and Blockchain, offering the customers more productive and better financial services. | Islamic FinTech is still a new concept to investors. Thus they are not sure if it is worth investing in it or not. |
| It is sharia-compliant, thus easily used by Muslims around the globe. | More funds should be channeled to the education and training of researchers on Islamic FinTech. |
Conclusion
FinTech applications have widely been acknowledged in both banking and the capital market sectors. Still, there is little focus on takāful or Taktech Technology, which is a sharia-compliant variant equal to Banca-assurance technology in conventional banking. However, the limited studies in the Islamic Fintech seek for extensive studies on how Taktech should innovate and relate to the existing FinTech to provide insurance solutions to the underinsured Muslim population. Taktech should complement the Islamic financial principles by enhancing financial inclusion. It can achieve this by serving the underinsured and promoting best practices to policyholders. More attention should also be drawn to the financial components of FinTech rather than concentrating only on the technical aspects. As such, therefore, this will ensure unbanked masses in both the Muslim dominated countries and reached, thus offering an inclusive financial platform.
Recommendation
Islamic FinTech should be appropriately regulated in the rules of different jurisdictions and also emphasized the development of adequate sharia governance. Regardless of the many benefits of FinTech applications, it has significant regulatory challenges in the world’s Islamic financial services. Finally, more research should be done on Islamic FinTech to provide adequate authentic research in the financial sector, which will enable learners and industry to innovate new ways to meet the ever-changing consumer needs. It will also gain the investors’ confidence allowing them to invest more in Islamic FinTech to stabilize the financial gap between convection financial sector and Islamic banking. Financial Technologies in Islamic Finance such as Blockchain and Cryptocurrencies have growth opportunities among the Muslim users of the financial services due to its innovation, inclusion, and financial services.
References
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Alaa Alaabed, F., & Mirakhor, A. (2017). Accelerating Risk Sharing Finance via FinTech: NextGen Islamic Finance. The 1st International Colloquium on Islamic banking and Finance (pp. 1-10).
Baber, H. (2020). Crowdfunding Framework in Islamic Finance. In Handbook of Research on Theory and Practice of Global Islamic Finance (pp. 307-320). IGI Global.
Binti Kasri, N. S., & Muhammad, M. (2019). The investment account platform: A practical application of fintech in Malaysia. In Fintech in Islamic Finance (pp. 249-264). Routledge.
Firmansyah, E. A., & Anwar, M. (2019, January). Islamic financial Technology (FINTECH): its challenges and prospects. In Achieving and Sustaining SDGs 2018 Conference: Harnessing the Power of Frontier Technology to Achieve the Sustainable Development Goals (ASSDG 2018). Atlantis Press.
Jaradt, N. (2019). Securities markets and protection of small investors in public shareholding companies of the United Arab Emirates. Qualitative Research in Financial Markets.
Johan, Z. J., Dali, N. R. S. M., Suki, A. A., & Hafit, N. I. A. (2017). Customers’ intention towards Shariah-compliant credit cards: A pilot study. International Journal of Academic Research in Business and Social Sciences, 7(4), 772-779.
Lacasse, R. M., Lambert, B., & Khan, N. (2017). Blockchain technology-Arsenal for a Shariah-compliant financial ecosystem. Journal of Business and Economics.
Lajis, S. M. (2019). Fintech and Risk-Sharing: A Catalyst for Islamic Finance. In Islamic Finance, Risk-Sharing and Macroeconomic Stability (pp. 237-254). Palgrave Macmillan, Cham.
Lipka, M., & Hackett, C. (2017). Why Muslims Are the World’s Fastest-Growing Religious Group, Fact Tank, Pew Research Centre.
Mulatsih, S. N., Ratnasari, A., & Saepuloh, D. (2019). The Role of Gold Dinar And Silver Dirham User Entrepreneurship Community in Dinar-Dirham Replacement Equipment As a Medium of Exchange. KnE Social Sciences, 549-558.
Rabbani, M. R., Khan, S., & Thalassinos, E. I. (2020). FinTech, Blockchain, and Islamic Finance: An Extensive Literature Review. International Journal of Economics & Business Administration (IJEBA), 8(2), 65-86.
Zhang, M., & Yang, J. (2019). Research on financial Technology and inclusive finance development. In 2018 6th International Education, Economics, Social Science, Arts, Sports, and Management Engineering Conference (IEESASM 2018). Atlantis Press.
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