Islamic Fintech and sustainable development

During the last 50 years, the Islamic Finance industry has witnessed remarkable growth with around S2.3 trillion assets across banking, insurance and capital markets in more than a hundred countries and Islamic banking is categorized as systemically important in 12 jurisdictions where the market shares have reached 15% (IFSB 2016). Today, not only specialized players but also international financial groups provide Islamic Finance services to Muslims and non-Muslims alike (Thomson Reuters 2014).

From a competitive advantage standpoint, Islamic financial institutions rely heavily on debt-based instruments, perceived as similar to conventional financial products (Ayub 2007), and usually lack economies of scale to enable pricing differentiation. As a result, Islamic financial institutions value proposition remains centred around Sharia compliance, which is insufficient to attract on a non-reli-gious customer (Haniffa & Hudaib 2007).

On the sustainability side, many Islamic Financial Institutions (‘IFIs’) undertake several social initiatives ranging from qard hassan and energy conservation to zakat payment and charities support. Yet, on average, these institutions’ social and environmental initiatives have been below customers’ expectations (Asutay 2007). Furthermore, IFIs underperform their conventional counterparts (Mohd Nor 2012) with low levels of disclosures on ethics and sustainability (Nobanee & Ellili 2016).

Islamic Finance has the legitimacy to lead the impact finance industry globally and to bring new perspectives into responsible finance. First, Islamic Finance is already well established in many OIC countries and as such can address the immense economic, social and environmental challenges faced by these countries as presented in earlier paragraphs. Second, the ethical perspective is natively built into the DNA of Islamic Finance (Ayub 2007). Third, the Islamic Finance business model is inherently embedded into the real economy and can be easily integrated into different sectorial ecosystems (Ayub 2007). Fourth, awqaf (Islamic endowment funds) and zakat institutions (compulsory charity funds) have the necessary levers to channel capital to ‘below-market return’ projects through subsidizing or guaranteeing schemes (Chaker & Aaminou 2018). Fifth, customers are expecting IFIs to be very active on the sustainability front (Maali et al. 2006) and finally, impact finance can provide IFIs with a competitive advantage beyond 'Sharia compliance’ value proposition.

Despite the abundant literature on the fit between sustainable development and Islamic Finance as well as some successful impact finance initiatives, especially

Role of Fintech to achieve the SDGs 9 in Southeast Asia, the market has not yet seen the potential of the Islamic Finance industry in driving sustainable development with positive environmental, social and governance outcomes (Aaminou 2019).

Taking the Islamic impact industry to the next level requires combined and coordinated efforts from asset owners (IFIs, awqaf and zakat funds, institutional investors, etc.), asset managers (investment advisors, IFIs, government investment programmes), demand-side actors (social enterprises, micro-entrepreneurs, Islamic microfinance institutions) and service providers (technology companies, research institutions, standards-setting bodies, consultants, etc.). Most importantly, these efforts have to converge towards a clear impact investing vision that the industry still needs to clarify (Aaminou 2018). In this context, it is hard to imagine the emergence of Islamic impact finance without leveraging technology. Today, technology (smartphones, peer-to-peer platforms, blockchain, artificial intelligence, etc.) provides tremendous possibilities to make financial services affordable, scalable, customizable and effective.

Although Fintech start-ups operating in the Islamic Finance sphere are relatively small in scale, they are growing and developing rapidly (IFSB 2019). In 2018, there were 93 Islamic Fintech start-ups globally, of which 65 focused on peer-to-peer finance and 15 focused on wealth management (DinarStandard 2018). In 2017, ‘Innovate Finance’ identified 103 Islamic Fintech companies across 24 countries (Islamic Finance News 2017). Therefore, Islamic Fintech represents a tiny proportion of the massive amounts raised globally in the Fintech industry. Total Fintech start-ups valuation in the Middle East and North Africa, for instance, was only US$66.6 million as of December 2017. However, the Fintech market in the MENA region can grow to US$2.5 billion by 2022 (Clifford Chance 2019).

As far as sustainability is concerned, several Islamic Fintech business models address social and environmental issues. For instance, in donation-based crowdfunding, the Global Saqaqh platform matches sadaqah, zakat and waqf donors with credible charity partners internationally (Global Sadaqah 2019). In investment-based crowdfunding, EthisCrowd’s platform allows investment directly in real estate development and construction projects, with a special focus on social housing in Indonesia (Ethis 2019). In blockchain, Finterra provides a blockchain ecosystem to improve the performance and efficacy of waqf management (Finterra 2019). Despite these achievements, Islamic Fintech have only scratched the surface of tackling sustainability issues so far. There remains substantial room for progress by scaling and diversifying existing initiatives centred on peer-to-peer finance and leveraging other Fintech verticals such as cryptocurrencies and artificial intelligence in sustainable development.

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