Fintech, Digital Currency and the Future of Islamic Finance

The banking and financial landscape in the last decade has been inundated with ‘technology’. Financial Technology (FinTech), Insurance Technology (InsurTech) and Regulatory Technology (RegTech) are just some of the new buzzwords. Close to 80% of Fintech investments happen in the US, while it is growing rapidly in Europe, Asia-Pacific and the rest of the world. In the Gulf Cooperation Council (GCC), Fintech development is gaining ground with the support of the regional governments in the UAE, Saudi Arabia and Bahrain. In comparison to conventional finance, Fintech’s penetration into Islamic finance institutions (IFIs) in the GCC is still in its very early stages. This chapter aims to highlight the development of Fintech in general and GCC in particular.

Digital currencies are unregulated and potentially have a destabilizing effect coupled with increased concerns over capital gains and losses in a high volatility environment. When added to a portfolio, this currency may have certain driving factors in terms of return and risks in the case of portfolio diversification. In this study, from the Sharia angle, we follow the position of Monzer Kahf (Fatwa on Bitcoin (by Monzer Kahf). http://​lightuponlight.​com/​blog/​fatwa-on-bitcoin-by-monzer-kahf/​. Accessed 03 Feb 2020, 2017) who explained that Bitcoin is considered “Like any other currency”. It should be used under the “same conditions of exchanging currencies”. Therefore, we explore the effects of adding digital currencies to an Islamic portfolio by relying on a mean-variance efficient frontier and comparing the risk-return of portfolios with and without digital currencies for different scenarios. The results show that by adding digital currencies to Shariah-compliant portfolios, its performance improves; but this depends more or less on the increase in returns than in the reduction of total risk. Specifically, digital currencies may have a big role in bringing high risks with speculative effect in portfolio diversification. Therefore, we provide some recommendations to investors and regulators to secure these currencies in Islamic capital markets.

The Islamic finance industry has witnessed an increasing interest in the FinTech wave. While progress has relatively been made in the areas of Robo-advisory, sandbox, payment system and investment, among others, the applications of these Islamic finance FinTech business models have been in isolation. They lack the depth of using the power of FinTech to harness their relationships. Yet the literature remains silent on this important gap. This chapter tries to develop a Smart Contract model for the Islamic banking FinTech industry, using home financing as a case study. The study validates the model through interviews. The majority of experts opine that the model is viable and acceptable, and has great potential in future. The findings are expected to set a new research direction for integrated FinTech models that can be instrumental in further enhancing the efficiency of the Islamic banking and finance industry.

The combination of Fintech and microtakaful can achieve financial inclusion at a massive level. Additionally, this combination offers other benefits like innovation, formalization of the economy, cost and time efficiency, and consumer protection, to mention a few. These challenges include, inter alia, privacy concerns, data protection challenges, fraud and cyber threats, as well as specific regulatory challenges that will be faced in the process of digital financial inclusion via microtakaful. The research also highlights a unique relationship between Islamic banking and takaful, on the one hand, and Islamic microfinance and microtakaful, on the other hand, thereby highlighting which countries can potentially become leaders in the sphere of microtakaful. The application of the value-based concept of microtakaful has the potential to develop, diversify, and support the real economy. This research proposes Fintech as an alternative mechanism of Islamic finance in the GCC region for the sustainable and real development of the economy. This study also finds that in the GCC, Fintech will bring disruption to several segments of the financial industry including banking and payments, credit and lending, insurance, investment management and pensions, just to mention few. The research has important implication for regulatory, microtakaful providers and other stakeholders of the industry in GCC.

ReBittance can be defined as remittance backed by Blockchain technology instead of a traditional model based on a centralized network. Blockchain technology facilitates the use of digital assets such as cryptocurrency to process payments using a unique, secured shared electronic ledger. This unique feature of blockchain technology eliminates gharar (uncertainty) and makes transaction processing cost-effective (low fees—ujr) and facilitates financial inclusion for unbanked such as migrant worker remittance to their home country. Another advantage is impenetrability, making it difficult to compromise as everything is tracked on a ledger, which stops people from spoofing it or creating fake data. Blockchain strengthens the payment ecosystem by providing limitless opportunities in the usage of digital assets, payments, remittance and implementation of smart contracts. Islamic Banks globally are embracing digitizing the user experience for banking to achieve accuracy, security, speed in-process and cheaper processing cost for remittance, that is, P2P (Peer to Peer), B2B (Business to Business), B2I (Business to Individual) and eCommerce transactions. The objective is to achieve low-cost remittance and payment intermediation ecosystem using open and transparent blockchain technology. This chapter analyses the traditional remittance, rebittance platform, perform a comparison with traditional models and models practised for processing remittance transactions in compliance with Shariah (Islamic Law) principles. It also provides a viewpoint on opportunities available for Islamic banks and FinTech companies to explore and embrace.

Cryptocurrency has emerged as a new form of digital currency based on blockchain technology, but it is still in its infancy. There is a need for effective regulation surrounding cryptocurrency to have a quicker maturity and wide accessibility to everyone which could result in more efficiency in its usage. This chapter explores cryptocurrencies’ emergence and acceptance in line with its regulatory challenges. This chapter will help to better understand benefits, challenges and existing regulations behind cryptocurrencies. Besides, the chapter pinpoints other economic promises drawing from cryptocurrency advancement.

Digital currencies have received a mixed response from the Islamic banking and finance (IB&F) industry. As Shariah permissibility (or ‘compliance’) strongly influences the demand for and supply of products in the IF&B industry, the verdicts reached by Shariah scholars on digital currencies have a strong bearing on their adoption amongst users. However, the degree of divergence in verdicts (fatwas) on cryptocurrencies—ranging from impermissibility to permissibility—has added to uncertainty regarding the viability of digital currencies within the industry. Nevertheless, actors within the industry are trying to find ways in which digital currencies and the underlying technology may be applied successfully to promote the principles and objectives of Islamic economics and finance that seek to promote the holistic wellbeing of humankind. This chapter analyses pertinent regulatory issues surrounding digital currencies in general, and for Islamic economics and finance in particular.

This paper aims to examine the impact of financial technology (Fintech) on Islamic banks’ income from perspective of the theory of financial intermediation. This study argues that the existence of banks as intermediaries due to transaction cost and asymmetrical information. In Islamic banking operation, fee-based income is a significant component of income derivation of providing services. The study postulates that Fintech has made access to financial services at a lower cost; hence reduce potential fee-based income for Islamic banks. This study applied panel data models from 2009 to 2016 on the dataset for Malaysia. The results provide empirical evidences on the impact of financial technology revolution on the banks’ income in Malaysia. The findings also indicated that different evidences on impact of financial technology revolution on the Islamic banks’ income and conventional banks for dual banking system. Islamic banks appear to significantly affect by the Fintech revolution due low penetration of online banking and larger banks are relatively invest more on the technology which result in cost saving and increase efficiency. However, Islamic banks should embrace with the paradigm shift and emergence of financial technology revolution promptly to prevent financial disintermediation and create value to their stakeholders. This study provides empirical evidences on the impact of financial technology and Islamic banks in a dual banking system. The study will extend the current body of knowledge in the field of financial technology and Islamic banking by providing insights into regulators and operators of the Islamic banking sector.

Financial digital innovations have attracted the attention of millions. Over decades, innovations have contributed significantly to the evolution and development of financial markets changing the ways how financial institutions interact with each other. Currently, market players predict that new technology such as blockchain could change the market and particularly the securities market. This study presents a framework for post-trade securities settlement utilizing blockchain technology for the GCC region with particular reference to the Islamic capital markets. To achieve this goal, the qualitative research design was adopted to specifically examine the challenges in the current post-trade securities settlement in Islamic capital markets with two unique case studies from Saudi Arabia and Bahrain. The study finds that the main issues are limitation in operating hours, the involvement of unintegrated multiple intermediaries, and associated high costs. From the Sharı̄‘ah perspective, the current practice of contra trade is considered unlawful and therefore the profit generated from such activities is not acceptable. Further, the research finds that blockchain based on the distributed ledger technology (DLT) with no centralized authority could enhance the speed of current securities clearing and settlement process by cutting down the number of intermediaries and improving the reconciliation process. Apart from that, blockchain technology will provide a unique database of recorded listed securities and will allow for real-time tracking of the chains of ownership and successive ownerships of listed securities. Additionally, the system enables the immediate, final and simultaneous transfer of funds and securities without limitation in working hours, thus solving the Sharı̄‘ah issue of the current practice of contra trade. From the legal perspective, the research finds that the technology will fit into the current legal structure of the GCC region with little amendments. With the political will on the part of the GCC governments for digitization, particularly the two jurisdictions considered in this study, it is expected that the region would adopt blockchain technology for post-trade securities settlement to enhance market practices.

Bitcoin has been trending worldwide as a revolutionary digital currency and a potential alternative monetary payment method that does not need a central authority. Several vendors, merchants and companies around the globe have accepted the Bitcoin as a valid encrypted currency for trading and investment purposes. However, relatively few Saudi and non-Saudi people have heard of Bitcoin and are unconscious of this financial phenomenon as its legality and legitimacy is still vague. According to the survey, we found that 67% out of 80 people who participated in the survey are aware of digital currency in general, 85% are aware of Bitcoin in particular and only 3% owned Bitcoin. The demographic characteristics are strongly associated with the awareness, adoption and utilization of Bitcoin in daily life activities of selling and buying conducted online as well as investment. Majority of sample survey has limited knowledge about the digital currencies including, but not limited to, Bitcoin. On the other hand, few people, mainly the younger generation, have adopted such electronic currency. Finally, we conclude with some useful suggestions to improve future surveys about this mysterious subject to achieve precise estimates about Bitcoin users.

Recent innovations that the Banking sector has witnessed are in the areas of Financial Technologies, Cryptocurrencies and Blockchain. The real investment opportunity for GCC countries is in the underlying innovative applications of Blockchain. The coming years could be pivotal in accelerating the transformation into more strategically focused, technologically modern, and operationally agile Islamic banking so that all stakeholders remain healthy in a rapidly evolving ecosystem. It is high time Islamic banks embrace disruptive technologies and accelerate their digitization efforts in a manner that would be difficult to achieve with a legacy, centralized approach. It is an open question for the Islamic finance industry as to whether the current practice of central authorities is desirable in the future or whether distributed systems using mathematics and cryptography to guarantee integrity are a better alternative. There is also a chance that a future state may evolve which requires both forms of processing.