Middle East

Why Islamic Finance Could Lose Ground in Fintech Footrace

Whether you call it Fintech, Insure-tech or Takaful-tech, Fintech has become a buzzword in the Islamic finance industry. Though not a sudden development, the evolution of Fintech in the industry has evolved rather rapidly.

Innovation is a cornerstone in the development of Islamic finance itself. As such, the general consensus among market participants is that Fintech has the potential to play a major role in the Islamic finance industry primarily to improve processes and cost effectiveness while maintaining Sharia compliance.

Fintech is necessary for Islamic finance to maintain and grow its market share as failure to keep pace with such developments could impact the competitiveness of its players. Fintech could help in promoting standardization, harmonization of Islamic finance products and integration.

With financial inclusion a major issue in many of the countries where Islamic finance is active, Fintech may already have an embedded edge in helping to balance out the disproportionate pyramid we spoke about in an earlier column — ‘Islamic finance still serving the top of the pyramid’. This could be supported by the emergence of tech-savvy middle classes in many of the countries where Islamic finance is active. The need for more agile and simpler financial services, the described growing usage of mobile devices and the shift toward technological and mobile financial services could underpin growth in the industry in the foreseeable future.

Much has been made of the potential of Fintech in Islamic finance. However, the challenges have not been discussed at length yet and could present itself as a sizeable impediment to the growth of the industry.

The principal challenge could be the regulatory environment. The industry already has moving targets, be it standardisation, developing Islamic finance regulation and innovating new products. Regulatory limitations and concerns could hinder the ability of Islamic finance institutions like Islamic banks, Takaful and Fintech companies to forge ahead in adopting new models linked to various Fintech themes such as P2P, crowdfunding and big data.

The industry is already struggling to keep pace with the rapidly changing regulatory environment. This is not to say that regulators are not treating Fintech as a necessity for Islamic finance in some areas of the world. But the global insurance sector, for example, has had an established regulatory blueprint in place that companies have been following for years. By contrast, the regulations that Takaful companies are required to adhere to are much more complex to adapt to because of the sector’s rapidly evolving nature. Time and a lack of history could be a formidable adversary for Fintech’s imprint in Islamic finance.

Fintech has its own cost and integration requirements to consider as well. This could push Fintech to the backburner, which in time could turn into a significant hindrance to future growth. Accordingly, it will be vital for the industry to carefully identify what aspects of Fintech are most suitable and necessary, prioritize and manage such initiatives, and finalize how to use Fintech to its advantage.

Another significant challenge for the industry is having access to relevant technology skills and infrastructure. The need for a more technology-adept personnel and investment in suitable technology may become either a key success or notable failure.

Two open questions remain; “How is Fintech shaping the future of global finance?” and “Would Islamic banks will be able to keep up and embrace and incorporate Fintech solutions in their day to day business?” This does not take away the other risks that institutions face when considering Fintech like regulatory risks, balancing innovation and security, infrastructure capabilities and limitations.

There is little argument among Islamic finance market participants that Fintech is an essential component to the growth of the sector over time and indeed may be disruptive and damaging for Islamic finance not to capitalize on new technology.

Uncertainty lies in whether existing Islamic finance institutions succeed in transforming their operating models to incorporate the necessary changes with Fintech analytics before disruptors like innovation, standardisation and the changing regulatory environment get a foothold in the market. A notable irony in a sector that continues to rapidly evolve, this could put Islamic finance at a competitive disadvantage over conventional institutions and forms of finance in the foreseeable future.

Regulators and institutions have a significant challenge ahead of them in balancing the use of new technology to provide better services while controlling new operational risks.

Middle East Islamic Finance

Bashar Al Natoor is Fitch Rating’s Global Head Islamic Finance. Mr Al Natoor is responsible for coordinating all Islamic Finance activities across Fitch’s Sovereign, Financial Institutions, Corporate, Structured Finance, Infrastructure and Insurance teams, bringing together dedicated analytical and industry expertise into a centralised and focused Islamic finance group.

Mr Al Natoor has more than 16 years' experience in the Islamic Finance market. Since joining Fitch in 2007, he has overseen Fitch's Sukuk criteria and Islamic Finance practices, undertaken research and written numerous published articles on Islamic Finance. Mr Al Natoor Joined Fitch as a director in the EMEA Corporates group based in Dubai. He was responsible for analysing EMEA issuers, with focus on Middle East and Turkish issuers in the construction, property and Telecommunication sectors. Prior to joining Fitch, Mr. Al Natoor spent seven years at the Islamic Development Bank (IDB) in key roles including Investment Officer in the Treasury Department, a Senior Credit Analyst in Risk Management and Senior Technical Assistant to the Vice President of Finance & Administration. Before working with IDB, Mr Al Natoor was a senior auditor for four years in Arthur Andersen.

Mr Al Natoor graduated with an MSc in banking and financial studies from the Arab Academy for Finance and Banking Science and a BS in finance and banking from Amman University. Bashar is also a Certified Bank Auditor (CBA), a Certified Risk Professional (CRP), a Chartered Market Analyst (FAD-CMA), and a Certified Risk Analyst (CRA).

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