A new term is born: Shariah fintech, and it has quite some potential

Indonesia’s Deputy Finance Minister Mardiasmo at the country’s third Annual Islamic Finance Conference in Makassar on July 4 in his opening speech was using a relatively new term that will play an important role in Islamic finance: “Shariah fintech,” meaning financial technology compliant with Islamic laws and beliefs.Mardiasmo, who like many Indonesians goes by only one name, told the audience that “to accelerate the process of strengthening the role of Islamic finance, we need to think out of the box, including by taking recent technological advancement into consideration,” and added that he believed that “harnessing Shariah fintech would have a positive impact on this issue.”Shariah fintech is clearly a new buzzword to describe the venture of financial technology into Islamic finance. It came into gear in the second half of last year, with a handful of Shariah fintech events held mainly in Malaysia to introduce the Islamic finance community to this new development.The status quo is that few Islamic banks have been open to adapt new technologies, pointing out that even though technology is neutral from Shariah perspective in general, fintech applications would still require sensitivity in that aspect. Furthermore, many scholars in Shariah boards of established Islamic financial institution are possibly a bit challenged in this particular case of progress meeting tradition.The result is that not Islamic banks are the drivers for Shariah fintech; but startups, entrepreneurs and inventive enterprises. In Indonesia, for example, and in other Asian countries with growing Muslim populations and expanding economies, online microfinance services are part of this new wave of Shariah fintech and mostly startups are rushing to ride it, like BTPN Syariah and Blossom Finance in Indonesia or FINTQ in the southern Philippines, just to name a few.Other Shariah fintech startups are focusing on agri-finance platforms, Islamic crowdfunding, peer-to-peer lending and mobile payment applications, while others are developing blockchain solutions for Islamic finance services, automated halal investment and trading platforms, robo-advisers for Islamic investments and Shariah-compliant cryptocurrencies and initial coin offerings.Among Islamic banks, just a few so far are explicitly looking for talent and setting up research and development centres for Shariah fintech, for example CIMB and Maybank in Malaysia, a number of banks in the UAE, as well as Bank Mandiri and Bank Rakyat in Indonesia, among others.And there is also the question which country will take the lead in Shariah fintech. Last December, a consortium of three Bahraini banks as a first announced the establishment of a company dedicated to research and development in the Shariah fintech sector, ALGO Bahrain.In addition, in February 2018, the largest dedicated fintech hub in the Middle East and Africa, Bahrain FinTech Bay, operated by Singapore-based fintech incubator FinTech Consortium, opened in Manama.However, US-based business intelligence firm Pew Research Center found in a recent study that fintech firms that comply with Shariah laws can be found in their highest number in Malaysia, the UK and Indonesia, in that order, and are followed by the UAE, the US, India and Egypt.Islamic finance advisors agree that there is an urgent need to push for necessary legislation and regulation, infrastructure support and technology enablement for Shariah fintech. So far, Islamic startups are on their own, presenting complex explanations why their fintech innovations are halal, while other fintechs are endorsed by specific fatwas. The common stance seems to be that innovations in fintech become impermissible only if there is clear evidence that they are in conflict against the basic finance rules of Shariah. In Indonesia’s case, Mardiasmo came to the conclusion that “we need to deepen understanding of Shariah knowledge among fintech players so that they can comply with Shariah-based regulations.” That way, growth of Shariah fintech would become “the catalyst to increase the share of Islamic banks in the country’s financial services,” he concluded.