Can Islamic finance take advantage of open banking?

Banks are working with FinTechs to develop APIs and payment gateways with high security to handle sensitive financial data

Millennial and Gen Z banking customers expect banking transactions to be quick and easy. Coroimage

Customers today want online and app-based transactions to be quick, easy and efficient. Whether paying a telecoms bill, buying goods or services or even trading shares, millennial and Gen Z customers expect the process to be almost instantaneous.

Enter open banking, where third-party service providers can directly input a user's financial details to speed up the process and make it smooth.

The concept of open banking uses a technology called application programming interface (API) to enable third-party providers to access a customer's banking credentials directly through the app or platform being used, without the user themselves having to input sensitive account data. In practice, this means that if an app uses open banking, the transaction can be carried out quickly, easily and efficiently.

Recent statistics published by Juniper Research suggest that the value of open banking transactions will grow from $57 billion globally in 2023 to $300 billion by 2027 – a sizeable market indeed.

Banks across the globe are, although in a nascent stage, gearing up for faster adoption of open banking platforms. This trend is seen equally in conventional and Islamic banking, with lenders working alongside FinTechs to develop APIs and payment gateways that offer the levels of security needed to enable third-party providers to access sensitive financial data.

As with legacy banking, regulatory oversight and infrastructure exist for open banking. A framework for the governance of open banking platforms in the UAE has recently been established, which banks are gearing up to comply with. They are also using payment gateways to enable clients to pay utilities and services bills.

Why open banking?

Today’s customer demands agility when undertaking transactions, and siloed operations can negatively affect an organisation’s ability to meet that demand.

The key objective of integrating open banking is to provide efficient and complete financial services to customers without the need to shuffle between different apps to complete a single transaction. Open banking is used by many service providers, such as telecoms operators, utility providers and online trading platforms, as well as online and app-based retailers.

Beyond streamlining payments, open banking can also be used to amplify the customer experience in other ways. The technology behind the payment capability can be used to analyse data in order to personalise banking services.

Open banking creates opportunities for lenders to vastly improve the customer experience, to expand, and to generate new revenue streams as opportunities to collaborate with more third-party provider partners grow. By partnering with such providers, banks can have considerable impact on their customers’ experiences across more than just payments. In enabling access to data and data-sharing, banks can ensure customers can enjoy speed, convenience and efficiency when undertaking a number of tasks online and in-app.

Open banking and Islamic finance

So, is open banking compatible with Islamic finance? It is indeed. Open banking emphasises transparency, clarity and secure data sharing, as well as detailed disclosure. Islamic banking, with its focus on ethical, transparent financial practices, is poised to be the perfect partner.

Customers must acknowledge that their data will be shared with the third-party providers and agree for their bank to share such data, creating transparency and clarity for all parties. Banks must take every precaution to ensure that all shared data is subject to the highest levels of protection and security. All elements of open banking align with the principles of Islamic finance.

Of course, Islamic banks must also ensure that the third-party providers align with the tenets of Islamic finance. To assure compliance with Sharia principles for customers who wish to use open banking, Islamic banks must make sure all products, services and providers are strictly monitored and approved by Sharia governance units that are supervised by experienced boards comprising eminent scholars.

As with traditional banking, adopting open banking in Islamic finance has potentially far-reaching consequences. Open banking can enhance many products, services and solutions designed for Muslim customers, from Sharia-compliant FinTech and investment apps to those offering fulfilment of Zakat obligations. Furthermore, integrating open banking into Islamic finance can help drive inclusivity in the banking sector, particularly in areas with large unbanked or underbanked populations, which is a key priority for the Islamic finance sector.

With the value of open banking set to increase exponentially in the coming years, it is clear that Islamic banks must join traditional banks in partnering with third-party providers to expand its adoption.

It is a win-win situation for banks and customers. In adopting open banking, we can contribute immensely to the growth of Islamic banking and create far-reaching impact across both our customer base and the Islamic finance ecosystem itself.

Ibrahim Al Mheiri is head of Islamic banking at Mashreq