Salman Ahmed Shaikh
Islamic finance can help in enabling access to financial services for people who want Islamic financial services. The key question is that can Islamic finance also provide access to financial services to the bottom of the pyramid population. Financial inclusion of the poor requires a different approach in product design, pricing and delivery. This requires innovation, flexibility, efficiency and committed leadership.
Islamic microfinance is yet to take big strides even though Islamic finance gives due emphasis to egalitarian financial structures and products in the Islamic economics and finance literature. Fintech offers an opportunity for Islamic financial institutions to efficiently reach the potential clients. Fintech can help in increasing Islamic finance outreach in regions where brick-and-mortar model of delivery will not be financially sustainable.
In the product structures, Fintech can assist in organizing completion of different steps involved in a typical Islamic finance transaction. A key issue is that whether Fintech would be welcome in Islamic banking institutions where the Shari’ah Compliance Auditors prefer more control and personal oversight in order to reduce the Shari’ah non-compliance risk. It remains to be seen whether Fintech increases or decreases Shari’ah non-compliance risk. To materialize the benefits of Fintech, it is important that there should be standardization in Shari’ah rules so that the scope of automation increases for integrating Fintech in product design and delivery.
If Shari’ah compliance can be done more efficiently with Fintech without requiring the day-to-day approval of the Shari’ah advisors, then it will be a welcome development and it will bring cost-efficiencies in Islamic banking. Furthermore, Fintech can help in cross-selling of financial products in Islamic banking and which can lead to economies of scope through integrated service delivery assisted by technology.
Fintech offers no choice as it will disrupt the traditional way of doing things by default. The best approach is to embrace it to withstand competition. Islamic banks need to cope up with the competition as Fintech would make the financial markets more competitive by enabling peer comparison and performance analysis at the fingertip of the consumer. Fintech might increase commercial displacement risk for Islamic banks which fall behind in integrating Fintech in their operations due to high cost or small scale of operations.
Islamic banking has made biggest penetration in Muslim majority regions which are not all well developed and which lack access to both financial services as well as telecommunication services. The key concern is that whether the increased use of Fintech would follow the advances in telecommunication services or could Islamic banks steer the growth by taking the first steps.
Around more than 400 million people in Africa are not banking clients. Fintech provides an opportunity to reach them cost-effectively. Same is the case in many Muslim majority countries where financial exclusion is significant. In Pakistan, less than 20% population has bank accounts. Thus, a great potential of the untapped market can be served with Islamic banking first and foremost by Islamic banks. Hence, Fintech can be a key catalyst in increasing the penetration and outreach of Islamic banking in Muslim majority countries.