In a relatively short amount of time, Fintech has become a major presence across the global banking system. In both developed and emerging markets, the unique benefits of Fintech products have been a central driver in the high adoption rates it has enjoyed. One of the most interesting and fast-growing areas of Fintech is the Islamic finance market.
According to research by Dinar Standard and Elipses, the Islamic fintech market size in the 57 member states of the Organization for Islamic Cooperation (OIC) totalled $49 billion in 2020. This figure may only represent less than 1% of the global fintech market size, but it is forecast to grow at a fast rate of 21% to reach $128 billion by 2025, compared to a growth rate of 15% for the conventional Fintech sector.
So why is the Islamic fintech market on the rise? The combination of a growing customer base, due to the increasing number of Muslims around the world and in countries that are now ready to embrace fintech-backed products, and a growing awareness of Fintech products that are Sharia-compliant, are responsible for the strength of this market.
A number of regulators are also working to facilitate the development of players in the Islamic fintech sector, with the Refinitiv Islamic Finance Development Report 2021 stating that Islamic fintech firms were some of the leading performers in the total market due in part to the years spent building foundations for growth.
As of 2022, just five countries account for around 75% of the global Islamic fintech market. The largest markets are Saudi Arabia ($17.9 billion), Iran ($9.2 billion), the United Arab Emirates ($3.7 billion), Malaysia ($3 billion) and Indonesia ($2.9 billion).
Before the Islamic finance sector can reach its true potential, several issues need to be addressed. As this sector continues to develop, more attention will need to be paid to how these transactions are taxed. When it comes to cross-border transactions between non-Islamic nations and Islamic countries, there remains a lack of a comprehensive global approach that can lead to compliance issues.
While Islamic financial issues are usually well known by finance professionals in Muslim-majority nations, there is less in-depth knowledge in non-Muslim countries, leading to challenges in creating products that are Sharia-compliant.
The development of Sharia-compliant products will especially appeal to young, digital-native Muslims living in non-Muslim majority nations who are not able to access most conventional Fintech products due to them not being Sharia-compliant. The growing Islamic fintech market will enable more Muslims to gain access to saving and banking products that meet their needs.
Perhaps the biggest challenge to the success of the Islamic fintech market in non-Muslim countries is the lack of knowledge of both regulators and finance experts, with a number of Islamic finance experts saying that countries like the UK would benefit from following the model presented by countries like Malaysia, which is actively promoting the Islamic fintech market.
Written by Finbarr Toesland, Editorial Contributor, VC Innovations
The conversation continues at the Fintech Talents Festival 2022, taking place 14th – 15th November, at The Brewery, London.