Islamic Finance and Fintech
15/09/2020 7:03:18 carra
s Shariah-compliant finance grows and institutions embrace mobile and internet
banking, the sector believes it offers strong opportunities with meaningful
steps being taken to develop fintech ecosystems in key markets to grow the industry.
But how does one really define Islamic fintech?1 How does it differ from conventional
fintech for that matter?
Etymologically, Islamic fintech is the amalgamation of technology and
Islamic finance, which means that any product or service that spawns from
fintech must abide by the rules extracted from the Qur’an and Sunnah known as
the Shariah. True to its fintech label, its digital distribution of Shariah-compliant
financial products and services is delivered through innovative digital channels
known as omni-channels. Islamic fintech platforms utilize revolutionary technologies
like artificial intelligence (AI), blockchain, big data, extensive cloud computing
and internet of things (IoT) devices in providing Islamic financial services
in a more sophisticated and transparent way. Its activities will involve deploying
new tech-based business models to promote economic, environmental, financial
and social goals, which include better services across all Islamic financial
services and product performance, and broader benefits like financial inclusion,
poverty alleviation and social justice. Islamic fintech would enable greater access
to Islamic financial services in cheaper, easier and more efficient ways to provide
opportunities for financing, payments, and investment aligned to the intended
objectives of the Islamic Divine Laws (Maqasid Al-Shariah).
Alignment between Islamic Finance and Fintech
The Islamic financial system has an in-built and inherent character of risk sharing
and rule-compliance. In practice, however, Islamic banking and finance is no different
from the conventional finance industry, which relies heavily on risk transfer
and/or the shifting of risk from lender to the borrower. This incongruency does
not sit comfortably on the different sections of the Muslim society with regards to
Islamic banking and financial services. Since the emergence of Islamic banking
in the 1960s and 1970s, this industry has faced much criticism due to its mimicking
of conventional interest-based risk-transfer/shifting modus operandi of
banking. Likewise, the consumers of Islamic banks expect guaranteed or fixed
returns similar to existing conventional banks. This is a poor understanding of the
profit-and-loss-sharing mechanism that an ideal Islamic finance system should
uphold.
The consumers, like the banks, should be willing to undertake the risk
and share the outcome, be it profits or losses. This is the basis of risk-sharing or
having “skin-in the-game.” Both parties have a vested interest in a transaction
or investment and will likely work closely to achieve shared objectives. The core
values of caring, cooperating, preventing possible harm, etc. are then ingrained
in such agreements.
Today, Islamic banking and finance is heavily based on risk transferring and
risk shifting. The balance sheets of Islamic banks show the concentration of two
products, that is, murabahah, which is trade based mark-ups and ijarah, which
is a lease-based product. Islamic banks have very low percentage of truly risk
sharing products on their balance sheets, which are mudarabah (silent partnership)
and musyarakah (joint venture). Also, Islamic banking and finance, which
should have operationalized the ideals of the Shariah to pursue capitalistic goals
alongside social aims, have made little headway in financial inclusion among the
underbanked and unbanked population. The democratization of formal financial
services is indeed crucial for the economic empowerment of the Muslim ummah,
or the general public. The true soul of Islamic finance is to instill inclusivity and
shared prosperity; at this stage, the current Islamic banking model does not seem
fit to the bill. The transformation of Islamic banking institutions from a risk transferring
to risk sharing model, should be built on norms and rules, which are the
essence of a truly Islamic economy. It should not be a system to compete with the
existing interest-based risk-transfer/shifting conventional system. The rhetoric of
Islamic finance literature and conferences are enriched with the discussion of
risk sharing but the real understanding and implementation of the risk sharing
model is very limited and requires a disruption.
Hazik Mohamed and Hassnian Ali
Blockchain, Fintech, and Islamic Finance
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