Islamic Savings Accounts

The COVID-19 pandemic has not only resulted in a public health crisis, but has also increased poverty levels and accelerated inequalities across the world. According to a recent survey of 37 countries[1], since the start of the pandemic:

• 3 in 4 households suffered a reduction in income with 82% of poorer households affected.
• Gender inequalities are on the rise due to consumer-facing industries being hit the hardest.
• Minorities in high income countries have been hit hardest as they live in areas that have been most vulnerable to the health and economic impacts of the pandemic.
• Inequality is also rising between countries as high-income countries have been better placed to provide financial & social safety nets to counter the crisis relative to poorer countries.

On the other end, the wealth gap is also widening as billionaires saw their wealth rise 27.5% to £7.9trn between April to July this year with their total numbers increasing to a record 2,189 (2,158 in 2017)[2]. This generally reflects the strong performance in global stock markets since the start of the pandemic.

As nations across the world attempt to cope with the crisis, they might be able to draw upon mechanisms that were used historically in the Muslim world in order to reduce poverty and income inequalities. Some of these mechanisms highlighted below, when used correctly, might serve to soften the blow by allowing for the systematic redistribution of wealth in society. These include amongst others access to a unique financing type as well as well as other mechanisms for income redistribution:

• Qard Hasan (benevolent loan) is a loan that is extended from a lender to a borrower for social welfare purposes. Through this mechanism the rich are encouraged to extend loans to the needy. The lender has no right to demand any amount in excess of the original principal amount as that would violate the prohibition on Riba (interest or usury). When used on a broad scale, this type of financing serves as a tool to not only reduce income inequality and alleviate poverty but also promote financial inclusion.
• Zakat and al-Khums (compulsory charity) and Sadaqa (voluntary charity) are mechanisms for income redistribution from the rich to the poor. Zakat, for example, a mandatory almsgiving that requires Muslims who own wealth at or above a certain threshold to donate a portion of it, typically 2.5%, to those who are eligible.[3]
• Historically, Awqaf (endowments) or the waqf (singular) played a pivotal role in socio-economic development across the Muslim world. They were important Islamic financial institutions that mobilized and facilitated the flow of funds towards philanthropic causes such as in order to fund education, health & libraries amongst others.

To varying degrees, some of these mechanisms are currently being used in various parts of the world, whereas others (ex. Waqf) are no longer as prevalent as they once were. Having said that, more has to be done as nearly all economic indicators suggest we have reached a tipping point with high levels of poverty and income inequality across the world. Efforts by policy makers to address these issues by preempting them could involve integrating such mechanisms as well as others in order to allow for a more equitable distribution of wealth and income. This in turn would create the foundations for resilient systems that are better able to cope with shocks as they appear.

[1]https://www.weforum.org/agenda/2020/10/covid-19-is-increasing-multiple-kinds-of-inequality-here-s-wh...[2]https://www.bbc.co.uk/news/business-54446285[3]https://nzf.org.uk/about-zakat/purpose-of-zakat/

The growth of Sharia-compliant finance services has led to a similar growth in technology that is advancing and supporting sharia compliancy for businesses. Sharia-compliant fintech has emerged as driver of innovation and ensuring businesses can operate efficiently and within the rules of Islamic finance.

By leveraging technology, Sharia-compliant businesses are able to operate in a compliant way whilst also ensuring they are not left behind in the fintech revolution.

In addition, businesses can use technology to offer their clients and customers opportunities to become more engaged in socially responsible and ethical financial activities.

Technology that supports Sharia-compliant businesses to operate also supports Islamic finance principles relating to money, financial transactions, and any form of investment.

WHAT IS SHARIA-COMPLIANT TECHNOLOGY?

When we talk about Sharia-compliant financial technology (fintech), we refer to technological solutions that adhere to Islamic finance rules relating to Sharia-compliant transactions and services.

The fintech can take the form of online tools or cutting edge technology that includes artificial intelligence, blockchain, online banking, Sharia compliant banking, and apps that support Muslim businesses.

Sharia-compliant technology needs to ensure it is:

• Compliant
• Transparent
• In accordance with Islamic finance rules
• Accessible

Technology that is Sharia-compliant plays a critical role in ensuring that Muslim businesses can expand their reach and continue to grow. For many years, Muslim entrepreneurs and SMEs in the West had no alternative to the conventional form of finance structures offered by Western banking services.

These services and products were mainly not compliant with Sharia rules as they relied heavily on interest based lending (riba) which is strictly prohibited in Islam.

With the advent and growth of Islamic finance, the fintech industry has developed many different types of technology to support businesses and customers who want to carry out business transactions whilst remaining true to their Islamic principles.

The Intersection Of Ethics And Fintech

The combination of technology and ethics is a key component of Sharia compliant finance. Islamic finance rules are underpinned by concepts of social justice and ethics, and it therefore follows that technology must also play its role in implementing and amplifying ethics.

Leveraging technology within Islamic finance via fintech platforms and services means that businesses are increasing their ethical standing and social responsibility.

Sharia compliant fintech platforms and products needs to ensure that interest is prohibited, excessive uncertainty or ambiguity is avoided, and there is complete transparency. What technology facilitates within the Islamic finance sector, is efficiency, broader accessibility, and transparency. These are all key ethical concepts within the Islamic finance framework.

Smart contracts and decentralised platforms lead to greater accessibility and efficiency. They take the control away from large organisations and ensure that previously excluded financial groups can partake in business, whether as owners or customers.

Fintech Solutions

Technological solutions enable automated compliance, increased monitoring, reporting, real time tracking, and enhanced risk assessment and mitigation. These all align with the ethical values of Islamic finance and Sharia rules.

As technology and fintech solutions continue to evolve and come to the market, they are playing a crucial role in the accessibility of Sharia-compliant business finance. This is done through technology that enhances transparency, accessibility and offers innovation.

Let's have a look at some of the solutions that enable businesses to operate in a Sharia-compliant way:

• Smart contracts: smart contracts facilitate automation and transparency for all parties and therefore reducing any risk of exploitation and future disputes.
• Blockchain: blockchain technology is centralised this means control moves away from the conventional bank model and market. Blockchain also reduces the risk of fraud.
• Digital banking: online banking platforms have not only introduced global audiences to more finance options, but these platforms are often user friendly and Sharia compliant. Customers and businesses are able to access current accounts, business accounts and financial solutions at the press of a few buttons.
• Crowdfunding: these platforms are fast emerging as a Sharia compliant form of raising capital and investment. Many Muslim businesses and ventures across the world have created crowdfunding campaigns when they have not been able to find Sharia-compliant funding options for their project.
• AI: the future is definitely becoming more automated and managed. When it comes to the financial services economy, it is fair to say AI has the potential to revolutionise the products and services that already exist.
• Regulation tech (Regtech): for many Muslim businesses including those in the healthtech sector (dentists, pharmaceutical companies, health centres) regtech is critical. Not only does it ensure regulatory compliance, but is also essential for monitoring and maintaining Sharia compliancy.

Islamic Fintech And Social Innovation

The basic principles that underpin Islamic finance are rooted in financial stability and security. For businesses, this includes an element of corporate social responsibility. The advances in technology mean that fintech has provided businesses with the ability to compete on equal or better ground than those operating in the conventional banking system.

Technological innovations including online banking platforms have enhanced compliance with Sharia law. For example, online platforms have led to increased:

• Transparency
• Accessibility of Sharia compliant products
• Automation of compliance monitoring and reporting
• Secure transactions
• Educational information
• Customised Sharia-compliant solutions

Technology For Businesses And Individuals

It's not only businesses that are benefiting from compliant fintech solutions.

Consumers and customers are also becoming deeply ingrained in new and innovative digital ecosystems. Just consider how many people use online banking apps to monitor their spending, make obligatory payments such as zakat and sadaqa online, or donate their accrued interest payments in halal ways.

For businesses within the health sector such as dentists and pharmaceutical organisations, technology has enabled them to operate in a Sharia compliant way.

Technology aids businesses to plan their strategy whilst also ensuring they continue to adhere to Islamic finance principles.Technology is used to improve accuracy and efficiency by providing real time data. Sharia compliance can often be automated within the technological systems those in the health sector use.

Written by Ruby Hinchliffe on 5th August 2020

The UK is now home to a growing 27 Islamic fintechs, ahead of Malaysia, Indonesia and the United Arab Emirates (UAE).As of July 2020, IFN FinTech – a global network representing fintech’s Islamic segment – says it’s recorded 142 Islamic fintechs around the world.

Malaysia has 19 fintech start-ups, followed by the UAE with 15, Indonesia with 13, and Saudi Arabia and the US with nine.

The UK's Islamic fintech scene

The UK’s fintech start-up scene has seen some significant traction from Islamic-friendly – as well as focused – firms.My Ahmed, a sharia-compliant e-money platform, was accepted onto the Financial Conduct Authority’s (FCA) regulatory sandbox in July.

In the same month, Islamic peer-to-peer (P2P) lending platform Qardus launched its services in the UK. So did sharia-complaint gold trading platform Minted, which plans to launch a digital bank in 2021. As did Kestrl, a sharia-compliant ethical banking alternative.
Since January, Islamic banking app Niyah and sharia-complaint digital bank Rizq have also launched in the UK.

Capital at Risk. Returns are not guaranteed

August 5 2020, read the full article at Fintech Futures: https://www.fintechfutures.com/2020/08/uk-leads-the-way-in-islamic-fintech-ahead-of-malaysia-and-uae...