FinTech could boost sluggish Islamic finance industry growth, S&P says

The Islamic finance industry, which is set for a relatively slower growth over the next two years, could tap new opportunities by turning to financial technology, or FinTech, said S&P Global Ratings in a report issued yesterday.

Global Islamic financing will grow by an average of five per cent in 2018 and 2019, unchanged from last year and dampened by weak economic growth in core markets including the oil-rich Arabian Gulf states, the rating agency said. FinTech may stimulate the industry in the short to medium term.

“FinTech could help unlock new growth opportunities through faster execution and better traceability of transactions,” S&P Global said.

The low single-digit growth expected in the industry stems from “mild” economic recovery in the GCC due to the mega Islamic bond issuances that were announced in 2017 and uncertainty around the performance of the sukuk market this year. Islamic banks have been slower than their conventional peers in the digital race.

FinTech start-ups have been on the rise in the region and are expected to more than double by 2020 from 2015, according to Wamda Research Lab. Islamic banks have to develop a clear digital strategy to upgrade their capabilities and take advantage of the technology.

FinTech start-ups are emerging in the Gulf after governments launched initiatives to boost their growth.

The Dubai International Financial Centre, the emirate’s financial free zone, launched a $100 million fund in November to encourage the growth of FinTech start-ups in the city.

FinTech opens up possibilities that the Islamic financing industry can benefit from to enhance its client services and competitiveness compared to conventional lenders, the S&P report said.

The technology provides easier and faster transactions in payment services and money transfers, cuts costs and allows banks to redeploy staff to more value-added operations. Using blockchain can also help reduce the Islamic financing industry’s exposure to transaction security and identity theft risks, it said.

FinTech can broaden the industry’s reach and allow it to offer Islamic finance services to new customer segments that aren’t part of the banking system, according to S&P. Mobile banking for clients in remote areas, crowdfunding for affordable housing or to small and medium-sized businesses are some new growth opportunities to be unlocked.

Before it can tap into these possibilities, the industry needs to establish regulations and necessary supervision to ensure that FinTech complies with Sharia law requirements, the report said.

However, FinTech also has the potential to disrupt the market, specifically in payment services, it said.

Another growth booster for the Islamic finance market will come with establishing a uniform standard for Sharia interpretation and legal documents, according to S&P.

This would help simplify the sukuk issuance process and ease investors’ concerns about the complexity of assessing risk when they invest in Islamic bonds.

“Standardised Sharia requirements could prevent potential uncertainty on compliance after a transaction closes and is therefore key in helping investors better understand the risks involved,” it said.

Last year, Sharjah energy producer Dana Gas shocked the Islamic finance industry when it said it no longer considered its sukuk Sharia compliant, a move that became a wake-up call for the industry.

FinTech could unlock growth opportunities through faster execution and better traceability of transactions