DUBAI – By 2025, Islamic fintech assets are projected to surpass 1 percent of the global fintech industry, up from the current 0.8 percent. This growth is driven by the demand for ethically acceptable digital financial services from the predominantly young Muslim population and a regulatory environment that increasingly supports fintech innovation, as per Moody’s.
Since its inception, the Islamic fintech sector has seen rapid growth. In 2021, the global Islamic fintech sector grew by 61 percent, yet it represents only 0.8 percent of the traditional financial fintech sector. Islamic banking systems, especially in the Middle East and parts of Asia, lean towards “open” banking. These trends promote advances in digital finance, and Moody’s expects the sector to continue its upward trajectory.
Fintechs adhering to Shari’ah principles accounted for just US$79 billion in transaction volume at the end of 2021.
A thriving Islamic fintech sector can boost economic growth by increasing the global Muslim youth’s familiarity with Islamic financial services and enhancing financial inclusion in certain countries. Moody’s foresees sustained activity in non-core Islamic markets like the UK, where the Muslim population amplifies demand. However, growth will predominantly occur in countries with robust Islamic banking foundations.
News in numbers * Islamic fintech assets to grow from 0.8% to 1% of the global fintech industry by 2025. * In 2021, the Islamic fintech sector saw a growth of 61%. * Shari'ah-compliant fintechs represented US$79 billion in transaction volume in 2021. * The UK houses 45 Islamic fintech firms, leading in non-Muslim-majority countries. * 59% of global Islamic fintechs are based in Indonesia, the UK, the UAE, Saudi Arabia, and Malaysia. * Indonesia boasts 61 fintech firms, with Hijra raising US$67.5 million in 2021 and 2022. * Islamic banks in March 2023 held an 83% market share in Saudi Arabia and 69% in Bahrain. * In the UAE, Islamic banks have a 28% share, 31% in Qatar, and 19% in Oman. * In 2022, the return on assets for Islamic banks exceeded pre-pandemic levels. * Moody's predicts Shari'ah-compliant banks will outperform traditional banks in profitability in 2024.
The UK boasts the highest penetration rate of Islamic banking outside Muslim-majority countries, housing 45 Islamic fintech firms. These firms offer services like microcredit for the unbanked, low-cost peer-to-peer money transfers, and crowdfunding for sukuk and other Shari’ah-compliant instruments. With its comprehensive regulatory sandbox and open banking regulations, the UK has emerged as a leading fintech hub in the West.
Countries with the highest concentration of Islamic fintechs include Indonesia, the UK, the UAE, Saudi Arabia, and Malaysia. Around 59 percent of global Islamic fintechs are based in these countries. Except for the UK, these markets share common traits, such as:
- A longstanding regulatory focus on expanding the Islamic economy.
- A significant or majority Muslim demographic.
- Mature Islamic banking sectors.
- A pool of talent eager to advance Islamic finance.
Indonesia is home to 61 fintech firms. Hijra (previously known as Alami), a digital bank and peer-to-peer lending platform, raised US$67.5 million across nine fundraising rounds in 2021 and 2022. Other notable firms include Bank Aladin, LinkAja, and Tanamduit.
While high inflation and economic slowdown have made investors more selective, countries in the GCC, like Saudi Arabia and the UAE, continue to have robust investment capacities due to ample liquidity supported by favorable oil prices. This sector also requires fewer financial resources due to its smaller size.
Given the large Muslim populations, established Islamic finance sectors, and low financial inclusion rates in countries like Indonesia and Bangladesh, Islamic fintech innovation can enhance the efficiency of the Islamic finance sector and foster financial inclusion.
Authorities in major Islamic financial markets remain committed to enhancing the skills needed for Islamic fintech projects through educational initiatives. A shortage of digital and Islamic financial expertise has hindered the sector’s growth.
Islamic banks
In March 2023, Islamic banks’ average market share reached 83 percent in Saudi Arabia and 69 percent in Bahrain, as reported by Moody’s. There’s more room for growth in the UAE, where their share is a mere 28 percent, followed by Qatar at 31 percent and Oman at 19 percent.
Islamic banks’ asset growth is expected to outpace their conventional counterparts. This is due to regional governments’ continued support for Islamic finance products and the strong demand for Shari’ah-compliant products, which will propel the growth of Islamic banking assets.
Saudi Arabia is anticipated to lead this growth, with other Gulf countries also showing high growth potential.
In 2022, the return on assets for most Islamic banks surpassed pre-pandemic levels, partly because of reduced provisions as economies rebounded and net profit margins increased more than those of conventional banks. Moody’s report predicts that the profitability of Shari’ah-compliant banks in the region will continue to outperform traditional banks in 2024. This is largely because the growth of Gulf countries’ economies strengthens the quality of these banks’ assets, coupled with their strong liquidity, enabling them to capitalize on the rising demand for financial services in the region.