KEY POINTS

  • For many Muslims, their religious practice requires they use Sharia-compliant financial products. These are products that are approved by Islamic scholars and meet certain requirements like not offering interest or involving any risk. Investments must be made in firms that meet strict financial criteria, and are not involved in certain trades such as alcohol or arms. 
  • The Islamic finance industry reached a value of around $2 trillion in 2015, including banking assets, Islamic funds' assets, and other Islamic financial instruments, according to the Islamic Financial Services Board. And the industry is predicted to grow at a compound annual growth rate (CAGR) of 15% to reach $3 trillion by 2018. Meanwhile, Islam is the fastest-growing world religion, with the global Muslim population expanding in particular in developing nations across Africa and the Asia-Pacific region.
  • The legacy Islamic finance industry hasn't kept up with demand. This is partly due to the complex nature of Sharia-compliant products and the opacity of the Islamic finance market. In addition, the industry has been held back by conflicting schools of thought among scholars as to what constitutes Sharia compliance, as well as a lack of competition that has left legacy players unmotivated to innovate. 
  • This is creating a huge opportunity for fintech. Some fintech concepts such as robo-advisory, marketplace lending, and P2P insurance are well suited to serve the Islamic finance market with little alteration. Fintechs are also more agile than legacy players, enabling them to bring products to market faster. And many automate typically manual processes, which reduces cost and removes the need for expensive physical infrastructure.
  • Fintechs are well positioned to take advantage of broader technological changes. In developed markets, fintechs can capitalize on growing smartphone penetration and the ability of technology to reduce the cost and complexity of creating Sharia-compliant products. Meanwhile, booming mobile phone penetration and the growth of mobile money services in developing nations is providing fintechs with a wider potential market that is welcoming of mobile financial products. 
  • And governments in Islamic states are getting on board. Both Abu Dhabi and Dubai are encouraging fintechs from abroad to relocate to their regions by extending generous tax benefits to startups. And Abu Dhabi has created a sandbox for the exploration of innovative financial services under lenient regulatory conditions. In addition, the central bank of Malaysia has launched its own sandbox and vowed [...]