Why collaboration is key to unlocking the future of Islamic finance

Banks and FinTech companies need to join hands to create innovative Sharia-compliant products that help them stay relevant

By eliminating the risk of interest rates, Islamic banking treats customers fairly. Getty Images

Two major factors are challenging the status of today’s banks: digital disruption and changing consumer behaviours.

The former has accelerated the transition to digital financial services, while the latter relates to ethics – a paradigm shift in attitudes towards the environmental, social and governance impact of corporate behaviour.

In short, consumers want to manage their money digitally and in real time – and with the knowledge that their money isn’t damaging the natural world or their communities. These new dynamics provide the world of Sharia-compliant finance with enormous opportunities.

To bring innovative Islamic finance to life – and to a wider audience – banks and FinTech firms need to collaborate. We have seen significant partnerships in Islamic finance in our region over recent years.

Examples include the Ethical Finance Innovation Challenge and Awards (Efica) organised by the Abu Dhabi Islamic Bank. It was launched in 2013 to recognise and reward innovation in ethical and Islamic finance.

A Bahrain-based digital Islamic financing company, Islamic Finance Initiation Network (IFIN), won the top prize in the sixth edition of the awards in 2021. Having beaten off competition from more than 200 applications globally, IFIN won Dh300,000 in prize money for its Sharia-compliant, cloud-based, buy-now-pay-later FinTech solution.

Initiatives like Efica are proof of Islamic finance’s global growth and its ability to resonate with a wider audience due to its underlying ethical principles, according to Manar Abbas, chief operating officer of IFIN.

The IFIN links Islamic banks and finance companies with retailers, small and medium enterprises, corporates and regulators, which is critically important in accelerating and enriching the Islamic FinTech ecosystem, the company’s chief executive Shaher Abbas said.

Benefits of Islamic banking

By doing so, innovators like IFIN are making it easier for Muslims and non-Muslims to access Sharia-compliant financial services, which are inherently inclusive and responsible.

The truth is that all traditional banks – Islamic and non-Islamic – have little choice but to work with others. They must bring innovators into the fold

Osaid Kilani,
global head of internal Sharia control, Abu Dhabi Islamic Bank

For those searching for ethical banking, Islamic finance speaks a very clear purpose. By eliminating the risk of interest based lending (Riba), customers are supposed to be treated fairly. It also prohibits investments in industries that harm the society and guarantees total transparency by avoiding contractual ambiguity.

By leveraging artificial intelligence, analytics, blockchain, biometrics and digital-only banking products, Islamic banks can ethically support customers in all important financial stages in their lives.

But to do that, leading Islamic banks must work hard to future-proof their operations by rigorously simplifying and centralising their operating models and by working together with FinTech innovators and developers to deliver on consumers’ needs – all without compromising Sharia principles.

If they succeed, they have an enormous opportunity to tap into the nearly 90 per cent of consumers in the GCC who said they are more likely to choose digital banking services over visiting a physical branch this year.

The survey, which came from a partnership between the FinTech firm Backbase and the digital polling company YouGov, also showed consumers prefer digital self-service banking solutions that are delivered to them as conveniently as e-commerce, entertainment and transport solutions.

Catering to digitally fluent consumers

For Islamic banks that recognise that digitalisation is an enabler of human potential, the future is bright. Those that lead the digital revolution will reap the rewards by widening access to a form of banking that is as inclusive as it is ethical.

For instance, ADIB was the first bank in the UAE to provide customers with remote account opening services through a government-linked facial recognition system. Doing so enabled it to serve its customers securely, while also streamlining its processes, reducing costs and ensuring that its more than 700,000 digitally-enabled customers received convenient, seamless and uninterrupted banking services.

The truth is that all traditional banks – Islamic and non-Islamic – have little choice but to work with others. They must participate in open banking and bring innovators into the fold.

Those that choose to partner in Islamic finance innovation will have the opportunity to stay relevant and deliver for tomorrow’s digitally fluent, ethically conscious consumers. History will show that only collaboration can unlock the future of Islamic finance.

Osaid Kilani is the global head of internal Sharia control at Abu Dhabi Islamic Bank