Interest And Inflation
WHAT ARE INTEREST RATES?
Interest and inflation rates are linked and affect our daily lives from the cost of our weekly shop to how much money we can borrow. Interest rates are essentially the amount borrowers are charged for borrowing money. Most banks will show the interest rate as a percentage of the total loan amount. This means that the higher the percentage, the more interest you will pay back over the term of your loan.
If you are not a borrower and you are a saver, then the interest rate will inform you how much money you will accrue in your account. the higher the interest savings rate you have the more money you will be paid into your bank account.
Interest rates vary depending on who you are borrowing from, the amount of your borrowing, the level of risk involved, and the terms of your loan.
If a lender thinks lending you money is high-risk then it is likely they will charge you a higher interest rate. In this way, the economics of a country are impacted by the interest rates.
HOW CHANGES IN THE INTEREST RATE AFFECT US?
One of the most obvious impacts of a changing interest rate is that it affects the amount of interest we are paid (as savers) or pay (as borrowers).
Any time there are changes in interest rates you should examine your savings and lending to see if you will be affected.
For those looking to borrow money, whether that is to buy a house, invest in business, or even just for the purposes of education (such as a student loan), the cost of borrowing will increase when interest rates are raised.
Current economic uncertainty means that businesses, individuals, corporations, and almost everyone in society are impacted.
For homeowners, an increase in interest rates means an increase in repayments (unless the mortgage is based on a fixed rate). Ultimately, this will result in a squeeze on household income and budgets at a time when the UK is dealing with an energy bills crisis and an increase in fuel costs.
To summarize the main effects of rising interest rates:
- increase in mortgage repayments
- increase in the cost of borrowing
- reduced consumer and business confidence
- increased incentive to save more to take advantage of the improved interest rates (but this depends on the rate being offered by banks on savings accounts)
- slower economic growth
- possible rise in unemployment
WHAT IS A BANK RATE?
A bank rate is set by the Bank of England. Arguably, it is the most crucial interest rate and is also sometimes known as the base rate.
The base rate is controlled by the Bank of England and is the rate paid by the Bank of England to businesses and banks that borrow from it.
The Bank of England is known as the central bank of the United Kingdom. They not only set the bank rate, which is currently 1.25%, but they also undertake the regulation of the banking industry, and financial business services, and they oversee the country's monetary policy. This then goes on to affect the economy including employment, wages, spending, and borrowing.
When banks set an interest rate they consider many factors in addition to the bank rate.
However, if the Bank of England changes the bank rate, then banks will also change their interest rate for both borrowers and savers in the market.
WHAT IS INFLATION?
The word inflation describes rising prices. If prices of goods and services are rising quickly then this is referred to as the rate of inflation.
Currently, in the United Kingdom the rate of inflation is 9.4%.
The rate of inflation is worked out by comparing the cost of products today and comparing the price against what the same products cost a year ago. The Office for National Statistics is the organization that is responsible for checking the price of goods and services.
If the price of production, imports, and raw materials increases then it is very likely that the rate of inflation will also increase. In addition, any increase in demand from consumers also causes the inflation rate to increase.
This is what is currently happening in the UK with the cost of living crisis.
WHAT CAUSES INFLATION?
As mentioned above, inflation is caused by various factors. The main drivers of inflation rates going up are the increased cost of production, and increases in raw materials and wages.
If inflation rates begin to increase it means that the cost of basic necessities including food and household items also rises. This can adversely affect society as many people will struggle to afford the basics and fall into debt. Inflation rates could also affect employment rates as employers also face cuts to their budgets and increased costs of operating.
Inflation does not only affect the basic necessities such as food. As we have seen recently in the UK, inflation also affects utilities, fuel costs, clothing, luxury goods, and cars.
Some of the main factors causing the rising prices in the UK, and thereby affecting the rate of inflation, include the following:
- increase in energy bills
- high fuel prices
- the war in Ukraine
- the rising cost of car prices (according to the Office for National Statistics)
- increased costs of household goods and furniture
- increased costs of food
- higher interest rates impacting homeowners
Whilst the cost of goods is rising, the wage increases are not rising in line with the cost of living.
HOW ARE INTEREST RATES AND INFLATION CONNECTED?
Theoretically, interest rates and inflation rates have what is considered to be an inverse relationship. This means that when interest rates are low, inflation is expected to rise, and when interest rates are high inflation rates should go down.
When interest rates are lower, the borrowing power of consumers is increased.
If consumers are spending but the prices of goods are going up faster than wages are increasing, then inflation rates increase. In order to encourage borrowers to borrow less and encourage them to save more the Bank of England increased the interest rate.
The aim is to slow the economy down enough to decrease inflation.
WHY HAVE INTEREST RATES GONE UP?
The Bank of England has increased interest rates so that it can reduce the rate of inflation. If the rate of inflation continues to go up in the UK then this can have many negative effects on UK residents. Currently, the inflation rate in the UK is at a 40 year high.
For example, people will have to pay more and more for goods and services. Property could lose some of its value, and fuel prices could continue to rise.
If inflation rises too high then this is called hyperinflation. This can result in a full economic collapse and devalue the currency.
WHY DID THE BANK OF ENGLAND RAISE INTEREST RATES?
The general view is that if the Bank of England raises interest rates they want people to spend less money.
When interest rates increase the Bank of England hopes that people begin to spend less and save more.
The Role Of The Bank Of England In The Economy
The Bank of England was established in 1694 as a private bank that lent the UK government money.
In 1997, the Bank of England was granted independence so that it could set the interest rates without any form of political affiliation.
The Bank of England is not connected to the Chancellor of the Exchequer as it it is important for it to base its interest rates on economic factors rather than political ones.
Not only does the Bank of England set the base rate, but they also:
- forecast the inflation rates
- issue coins and bank notes
- act as a lender of last resort for UK banks
The Current State Of The Uk Economy
According to PWC, the UK economy was recovering well from the global pandemic.
Unemployment rates were low and the labour market and service industry was recovering well.
However, the war in Ukraine was a shock to the UK economy (and economics globally), impacting it in many different ways including:
- disrupting supplies and services for all industries including retail and construction,
- leading to higher commodity prices and less revenue for businesses
- lower trade levels
- less investment flow
News agencies and websites are reporting that the UK growth outlook for the next 12 months does not look promising.
KPMG has agreed with this analysis stating that the GDP growth this year will halve and slow further in 2023 (UK Economic Outlook Report, KPMG, 2022).
According to KPMG, they predict further interest rate increases from the Bank of England. This is based on data from economic forecasts, consumer spending, interest rates, and the unemployment rates.
WHAT IS HAPPENING IN OTHER COUNTRIES?
Many other countries around the world are dealing with similar problems that the UK economy is dealing with.
According to the Office for National Statistics, the European Union is facing similar rates of inflation as the UK.
The United States is reporting inflation levels of 9.1%.
DO INTEREST RATE AND INFLATION RISES AFFECT INVESTOR BEHAVIOR?
The basic answer to this question is yes. Interest rates and inflation rates affect investor behavior. In fact, changes in inflation and interest rates affect everyone.
What it means in real terms is that any money you have saved could be worth less today than it was yesterday. High inflation rates impact the purchasing power and confidence of consumers and their spending.
Inflation rates and interest rates affect investment portfolios. If investors are finding it more expensive to borrow funds to invest then it is very likely that investments overall will reduce.
Investor Risk
Investors aim to increase their wealth and minimize their risk and tax liabilities. In an economy where interest rates and inflation are rising, there is normally an impact on portfolios and investments.
Rising inflation not only affects stocks and bonds it also affects property prices. Of course, all investment comes with a risk of losses.
Any investor with inflation-indexed assets or liabilities needs to be particularly aware of the changes in their portfolio.
Also, as interest rates rise this affects borrowing. As borrowing becomes more expensive, this leads to investors having less money available to invest.
Rises in interest rates also affect the stock market and the impact of the rise is usually felt quicker than in the general economy.
Normally, when interest rates fluctuate investors should expect the market rate of their bonds to also fluctuate. However, not all bonds are equally affected. Bonds that have short maturities may not be as impacted as bonds with longer maturities.
For investors who have a long-term outlook and planning when it comes to their portfolio, short-term changes to the interest rate should not significantly impact them.
For an investor who is looking at the long-term goal and who has a mix of assets, the long-term outlook of their portfolio should be fine.
To summarize, when interest rates increase the impact on investments includes the following:
- a rise in mortgage rates
- affect on the price of commodities
- Fall in bond prices
- Potential losses in the stock market
- fluctuations in real estate values
- increases competition between banks
Interest Rates And Islamic Finance Customers
For many borrowers, any increase in interest rates will affect how much they pay back to the bank they have borrowed from. The exception to this is those with fixed rate loans or mortgages. As the interest rate on these loans has effectively been 'fixed' for a specific period, then interest hikes or drops will not affect the repayments. Make sure to check when your fixed rate period comes to an end so you can plan accordingly.
In theory, for customers of banks who want Islamic Finance and Sharia compliant services, changes in the interest rate should not adversely affect borrowers or savers. This is because banking services based on Islamic Finance principles do not rely on interest or include any form of interest payment.
Conceptually, Islamic banking customers are not motivated by profits or gains. Therefore, changes to the interest rate should not affect them.
However, on a wider scale, any changes to the interest rates and inflation will affect all lending institutions in some way. Many Islamic Finance lenders use the base rate of the country to benchmark their repayment calculations. This means any increase to the base rate could affect the repayments for customers of Islamic finance products.
However, for economies where the interest and inflation rates and subject to fluctuation, this could lead to more people being interested in the interest-free products offered by financial institutions that offer Sharia compliant services. A research study in Malaysia found that any increase in base rates increased consumer interest in Islamic mortgages.
Ultimately, how you are affected by increased interest rates and inflation rates depends entirely on your financial circumstances and the management of your investment portfolio.
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Crowdfunding
Crowdfunding is a process of raising money for a business or idea. Unlike traditional methods of raising finance, crowdfunding is innovative and based on the concept of raising funding via crowds of people.
Some crowdfunding contributors will donate funds entirely altruistically, simply to support the business. Other crowdfunders will see their funding contribution as an investment into the business venture. In return, these investors will be rewarded with a return on their investment. The reason crowdfunding is so popular is that is has become a great way of raising money quickly. This means that no matter how ambitious or how small your project, there is a way to raise finance without resorting to asking financial institutions.
How Crowdfunding Works
Crowdfunding enables businesses and individuals to attract investors in the business through the practice of funding a project by raising sums of money from a crowd of people who are willing to invest in the business. Some of those offering funds will do so altruistically, expecting nothing in return, but for many of the donors they will expect a return on their investment. In order to start a crowdfunding campaign there needs to be a specific cause or project, and a specific goal amount in place. Businesses and entrepreneurs can then ask or invite a number of people to donate various sums of money (small and large) until the crowdfunding goal is achieved.
The unique part of crowdfunding is that it mainly takes place online. The digital revolution over the last decade, coupled with the increase in social media exposure and marketing means that crowdfunding campaigns can be widely shared and marketed. As crowdfunding tends to take place online, the use of social networks is key and makes it inherently easy for supporters of a crowdfunding campaign to share it widely, ensuring the project gains widespread exposure and funding.
Crowdfunding is used for all manner of projects, including charity projects, creative projects, start up businesses, entrepreneur ideas and small businesses. Crowdfunding is a great way for non-traditional businesses such as those businesses following Islamic finance principles, to raise funding in a Sharia compliant way.
Types Of Crowdfunding
The main types of crowdfunding models are as follows:
Investment Based Crowdfunding
This type of crowdfunding is often used by businesses looking to raise capital. Businesses will offer to sell ownership shares and stakes in return for a crowdfunding investment. Businesses will promise to use the funding to develop their business idea or product and in return the investor will receive a share of the business in return for the finance they provided. In this way, donors ultimately become shareholders of the company, with the possibility of owning some of the business equity. Often, these shareholders may also be provided with rights to be involved in the business process and project.
Donation Based Crowdfunding
Donation based crowdfunding is essentially a model where donors are asked to contribute to the project by way of a donation. Individuals will essentially donate funds with the aim of meeting the project finance goal, and in return the donors do not expect anything in terms of shares or financial returns. People who donate rather than invest are not backers of the business, they just offer finance on a not-for-profit basis.
Advantages Of Crowdfunding
For anyone looking to raise finance for their business or idea via crowdfunding, there are some important advantages you should be mindful of.Advantages:
- There are often minimal upfront fees or costs and this means there is some protection from risk when starting out
- There is little financial risk with almost no start up debt
- It's a great form of market testing and marketing research, seeking the opinion of your target audience
- Money can be raised quickly and campaigns can go viral
- Social networks, websites, and online platforms can result in speedy and widespread exposure
- You can use the crowdfunding campaign to gauge public perception, generate interest, and obtain feedback
- Investors and donors can become personally invested in campaigns and this will help you build loyalty programs and interest in your idea
- Crowdfunding enables start-ups, small businesses and innovative ideas to get financial backing
- It is a great way of raising finance and covering costs for those businesses without access to traditional forms of bank lending or in a difficult economy
- You can create community support for your project and build on these important relationships and customer loyalty
- Crowdfunding enables more effective risk management as there is often less risk for smaller businesses
Crowdfunding Tips
For a successful approach to crowdfunding you need to make sure you have a clear and strategic approach to the campaigns. The advice and tips will help you create a successful crowdfunding campaign:
- Pre launch: make sure you do your research, collate all the information you need, build email marketing lists and think of ideas for your campaign content
- Create compelling content: this could include a campaign video, written information relating to your goals and graphics/videos
- Tailor your PR: before your campaign goes live research your audience, find out where they hang out virtually (Twitter, Instagram, Facebook) and target them
- Strategic social media and influencer use: the greater your reach and the reach of the platforms you use the greater your chances of exposure and success. You don't have to limit your audience to the United Kingdom.
- Engagement: encouraging others to comment, share and post about your campaign will deliver your message to a wider audience
- Donations: don't ask for money immediately but do make sure you ask family, friends, colleagues to donate. Share your passion for your project and draw the reader in. Remember to also ask the right people for donations.
Crowdfunding Platforms
Some of the most popular crowdfunding platforms include the following:
- Kiva
- Kickstarter
- Patreon
- GofundMe
- Indiegogo
- Seedrs
All these platforms enable users to share the campaign and spread the word about your project on various social media platforms and via email.
WHAT IS ISLAMIC FINANCE?
Islamic finance is a financial system based on Sharia principles - the religious law enshrined within Islam. Islamic finance offers an alternative financial system to the conventional systems, and is based on fairness, transparency, and social justice.
WHO USES ISLAMIC FINANCE?
Islamic finance is a growing industry and is used extensively by Muslims throughout the world. However, more and more non Muslims are also looking at Islamic finance services as they want to operate in a more ethical way.
DO MUSLIMS PAY INTEREST IN THE UK?
Whilst Muslims are discouraged from paying or earning interest in any form under Islamic finance rules, many Muslims in the West do pay interest. However, more and more Muslims are becoming aware of alternative financial systems and products that enable them to access loans and financial services that are compliant with Sharia law.
CAN MUSLIMS TAKE LOANS?
Yes, of course. Taking a loan is not prohibited in Islam. However, it is important to ensure that the loan terms are compliant with Sharia rules.
HOW DO ISLAMIC LOANS WORK?
Islamic loans are structured and developed to ensure they are halal - that is they do not contravene any rules in Islam relating to finances. For example, an Islamic loan will not have any element of interest attached to it.
WHY CAN'T MUSLIMS EARN INTEREST?
In Islam, interest is seen as exploitative as it leads to the lender making a profit at the expense of the borrower. Islam views interest as the unfair accumulation of the wealthy and this can lead to financial distress for those who need to borrow money. Interest is viewed as being against the promotion of social justice and economic fairness which are key concepts underpinning Islamic finance.
WHAT IS HARAM IN ISLAMIC FINANCE?
The following are deemed haram in Islam: riba/interest, gambling, excessive uncertainty, investment in haram industries or practices.
WHAT IS ETHICAL FINANCE?
While there is no universally accepted definition of ethical finance, the Ethical Finance Hub describes it as "A system of financial management or investment that seeks qualitative outcomes other than purely the management of returns. Outcomes sought may reflect ideas from faith, social, environmental and governance theories."
IS ISLAMIC OR SHARIA-COMPLIANT FINANCE ETHICAL?
The World Bank mentions that Islamic finance is ethical, sustainable, environmentally and socially responsible finance. It promotes risk sharing, connects the financial sector with the real economy, and emphasizes financial inclusion and social welfare.
While there is no universally accepted definition of ethical finance, the Ethical Finance Hub describes it as "A system of financial management or investment that seeks qualitative outcomes other than purely the management of returns. Outcomes sought may reflect ideas from faith, social, environmental and governance theories."
Introduction
Progressing at pace, the already flourishing Islamic fintech (financial technology) sector, itself the embodiment of the evolution of existing Islamic financial services, now has a clear opportunity to further embed itself within the world of global finance. Islamic fintech can be defined as an offshoot of financial technology that is built on Sharia principles, prohibiting profiting from debt, interest payments and investing in businesses related to alcohol, tobacco and gambling amongst others.
With the socio-economic upheaval and geo-political changes brought about by the global COVID-19 pandemic and the ongoing war in Ukraine, Islamic fintech currently has the chance to become not only a game changing, disruptive force within global finance, but an influential driver of global financial inclusion.
2020 was a landmark year for Islamic fintech as it was the first time that a standalone Islamic fintech company purchased another, with the New York based ethical investment platform and global robo adviser Wahed acquiring the UK based, Sharia compliant digital banking operator, Niyah.
So if Islamic fintech continues along the same path of rapid growth that it has been travelling along on for some time, the sector will unquestionably emerge as a competitive selection of Sharia compliant alternatives to the wide range of innovative fintech startups and established fintech giants that have been a mainstay of Western, Asian and more recently African economies over the last quarter century.
This article explores the latest in Islamic fintech as well as forecasts of the sector’s huge future potential.
The Development Of Islamic Fintech
Islamic finance is one of the fastest growing sectors of the global finance industry. Catering to the financial needs of the 1.8 billion Muslims across the planet and a broader, international ‘ethical finance’ audience, Islamic fintech’s role holds greater significance now more than ever before, where the need for global investment and financing has never been greater, especially in terms of financing SDGs (Sustainable Development Goals) and ESG (Ethical, Social, and Governance) investments, both of which align closely with the Islamic concepts of social justice and zakat (charity).
(consultancy-me.com, jan2022)
The global fintech revolution is having a similar impact on Islamic finance through the evolution of a progressive, forward-thinking Islamic fintech ecosystem, with many Islamic fintech startups using existing, successful fintechs as loose models upon which to base their own, Sharia compliant fintech organisations on.
With the appropriate modification, many of the hugely successful fintech companies across the world could be used as a blueprint to help spawn their Sharia compliant counterparts.
Statistics On The Islamic Fintech Industry
Standard & Poor’s Head of Islamic finance stated that he believes the market will expand by approximately 10% in 2022-2023 after it expanded with a 10.2% growth in total assets in 2021. In 2020, the total combined asset value of the global Islamic finance market amounted to approximately 2.88 trillion U.S. dollars, with more than 200 million micro, small and medium-sized businesses that still require banking assistance.
Over three quarters of Islamic fintechs are active in more traditional areas related to raising funds, deposits and lending, wealth management, payments and alternative finance, meaning that the digital banking space is somewhat up for grabs.
(Global Islamic Fintech Report 2022)
Based on the 2022 Global Islamic fintech report from Dinar Standard and Elipses, the size of the global Islamic fintech market was $79 billion in 2021, although accounting for just 0.8% of the entire global fintech market. The Islamic fintech market size is expected to reach $179 billion by 2026 at a CAGR of 17.9% relative to the overall global fintech industry, which is expected to grow over the same period at a CAGR of 13.5%. The report also estimated that Saudi Arabia, the world's largest Islamic fintech market, is currently worth around $26bn and is projected to more than double in value in the next five years to $52.3bn.
75% of young Muslims want their banks to make investments that ‘do good in the world’, with 62% opposed to their bank lending to tobacco companies and 69% against their bank lending to gambling institutions. 74% of young Muslims said it’s important they can access their bank’s services via a mobile app and 80% said it’s critical they can access banking services anywhere, at any time.
Islamic Finance is currently estimated to be worth $2 trillion globally, at the very least. This figure is set to hit $3.8 trillion by 2023, as driven by high demand from millennial and Gen Z Muslims, who are confidently expected to account for upwards of 75% of Islamic banking revenue within the coming decade. Furthermore, with data from the ONS (Office of National Statistics) showing that by 2019 more than 90% of 16-24-year-olds were already managing their money online, it looks as if the Islamic fintech space will be a blessing for both consumers and providers.
In the UK, 4 million Muslims make up the second largest religious group in the country and according to the Muslim Council of Britain (MCB) contribute £31 billion to the UK economy and wield a spending power of £20.5 billion.
The UK had the third-largest number of Islamic finance education providers, only trailing behind Islamic finance powerhouses Indonesia and Malaysia. Furthermore, the UK leads the way with 27 Islamic fintechs, predominantly catering to the needs of British Muslims that want to bank with ethical financial institutions, which is more than the United Arab Emirates with its 15 Sharia-compliant fintechs.
(Global Islamic Fintech Report 2022)
Examples Of Leading Islamic Fintech Companies
Below is a selection of the most innovative and successful Islamic Fintechs currently operating around the globe:
- Qardus- The UK’s first ethical and Sharia compliant SME financing marketplace that offers up to £200,000 in working capital financing to eligible small businesses.
- Islamic Finance Guru - An online hub assisting Muslims with their investment, personal finance and entrepreneurial journeys.
- Path Solutions- Provider of Digital Banking, Risk Management/Compliance, and Banking software, serving over 150 Islamic institutions across 40 countries.
- Wahed- Ethical investment platform and the world's first global Islamic finance robo advisor. Launched the first exchange-traded fund in the United States that was compliant with Sharia law in 2019.
- P2P financier Amartha Mikro Fintek & Bank Sumut - Empowering women micro entrepreneurs through inclusive financial services including Islamic facilities to develop women-owned MSMEs in the region.
- Global Sadaqah - Award-winning, Kuala Lumpur based philanthropic fundraising finance platform, featuring CSR, Zakat and Waqf Management services.
- Yielders -UK based Islamic fintech and leading peer-to-peer property investment platform.
- PayHalal
- -
- World's first Sharia compliant e-commerce payments gateway and online ewallet issuance market. Owned by Souqa Fintech, PayHalal launched the world's first Islamic buy-now-pay-later (BNPL) platform in 2021
- MRHB DeFi Network - World’s First online, ethical / Halal DeFi Solutions platform for passive crypto Income, commodity exchange & staking. Blockchain services provider based in Sydney, Australia.
- coinMENA- One of the world’s first Sharia-compliant crypto-assets trading platforms offering non-traditional investment options in the MENA region. Licensed and regulated by the Central Bank of Bahrain (CBB).
Challenges For The Islamic Fintech Industry
- Investment capital for Islamic fintech is for now still typically scarce, and there is a need for a new generation of stakeholders aligned with the principles of Islamic finance. Although these realities are starting to change, many sources of venture capital are still far from Sharia-compliant, making it difficult for the up-and-coming entrepreneurs to fund the development and execution of their ideas.
- The Islamic fintech sector is arguably held back by inherent structural weaknesses within Islamic finance such as the complexity of transactions. This is especially true for those in the general public as well as those within the fintech/finance industry who are acquainted with the form of Islamic financial transactions or the processes involved in carrying them out.
- A barrier to the proliferation of Islamic fintech products comes from regulatory miscommunication. While the regulatory frameworks in the Middle-East and much of Asia manage to provide for Islamic fintech, those in charge of setting the rules (and in some cases, drafting the law) around the rest of the world are often poorly acquainted with Sharia compliant products and services, let alone the principles that underpin them all. Not to mention the fact that those regulatory systems were not designed with such principle-bound products and services in mind. As such, many of these countries have yet to make much effort to accommodate for Islamic fintech. This means that those in charge of building and applying the regulatory frameworks in countries on continents such as Europe and the US will need to implement what is necessary to make their markets both receptive and accommodating to such products and services. Although expert assistance is available through professional financial organisations such as the FCA in the UK, some of the most influential actors within finance such as academics, gatekeepers, and those in authority, frequently lack the necessary knowledge about Sharia compliance.
- A further challenge facing Islamic fintech products and services and another barrier to their more widespread use is a lack of awareness of their existence amongst the non Muslim global general public, along with a lack of the requisite knowledge surrounding the basic principles that are the foundation of Sharia compliant finance. This issue is frequently raised and not just in non-Muslim jurisdictions such as the UK, but also in many majority Muslim countries.
- Performing an unquestionably essential function in musharakah, takaful, and sukuk, the concept of profit and loss sharing looms large in Islamic finance, and is a concept that may be hard to align with traditional western financial and investment philosophy.
(Global Islamic Fintech Report 2022)
Adding Value And Innovation To The Global Finance Industry With Islamic Fintech
With a customer base not far short of 2 billion people, projected to reach around 3 billion people by 2060, Islamic finance and fintech has the opportunity to take the global finance industry beyond the time-honoured bottom line of profit, and offer both ethical and sustainable alternatives in terms of investment methodology and investment products. The increasing focus on sustainable/regenerative financial models and goals, along with the recent progression in financial digitalisation and e-commerce, provides the perfect foundation for Islamic fintech to positively influence the sphere of global finance and investment.
- Global financial inclusion
- Through promoting risk-sharing contracts that provide a viable alternative to conventional debt-based financing, and also through specific instruments of redistribution of the wealth among the society based on Islamic principles such as zakat (charity).
- Addressing financial risk
- The 2008 financial crash was brought about by fund managers and financial speculators making risky investments. Islamic investments by their nature mitigate much of this danger through the prohibition of riba (interest) and ghahar (risk), thereby eliminating any opportunities for short selling or uncertain contracts.
- Offering alternatives to traditional investments
- The fact that Islamic fintech and finance are Sharia compliant does not just mean that they are acceptable to muslims across the globe, but that they offer a different choice in terms of the ethical and moral implications that come with investment choices.
- Reframing the corporate landscape
- Islamic FinTech follows Sharia principles and is hence a type of technology that is ethical and religiously acceptable. Through its very nature, it embraces environmental, social, and corporate governance (ESG) elements. The alignment of certain Islamic financial products and environmental, social, and governance factors along with recent strides in digitalisation may allow Islamic fintech to makes a strong foothold in the market, perhaps even bringing about re-alignment of strict shareholder interest through increased focus on SDGs, ESG investments, and genuine, far reaching programs of CSR.
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