Islamic financial institutions are focusing on FinTech and digital transformation, with more than 70 per cent viewing these as being highly or extremely important in strategic decisions.

The findings are from a survey of 103 managers by the General Council for Islamic Banks and Financial Institutions (CIBAFI). Many banks in the Middle East and Africa are launching technology departments and forming joint ventures with FinTech firms, with almost 45 per cent of respondents planning to increase or launch digital branches in the future.

Technology-related risks are now the biggest perceived risks for banks in the region, meaning they must ramp up innovation and tackle how new developments adhere to Islamic finance principles, according to CIBAFI.

“The Islamic financial industry, which has seen little change since 1975, is suddenly undergoing enormous shifts that can be challenging for Islamic finance institutions to mitigate,” the research stated. “Crowdfunding, P2P and payments platforms will be a major focus in the medium term.”

Technology that improves the customer experience was seen as the most important, with more than a quarter of respondents indicating current or imminent use of automated financial advice tools such a robo-advisers.

Meanwhile, CIBAFI also revealed the results of its first Islamic insurance (takaful) survey, covering 55 institutions from 24 countries. It showed a mixed view on technology, with concerns more around operational efficiency rather than innovation.

Respondents noted difficulties in finding suitable investments in Islamic bonds and Sharia-compliant equities, with allocations often influenced by regulatory requirements. Takaful firms therefore intend to increase investments in areas such as property, primarily to seek higher yields.

InsureTech avenues may be limited by Shariah issues, particularly around smart contracts - lawyers are likely to argue that computer code cannot be legally binding - though it is likely that broadly similar issues would exist from the point of view of conventional law.

“Clearly business models, as opposed to technologies themselves, will raise issues of Shariah compliance,” the research explained. “For example, an apparently peer-to-peer model may be heavily dependent on being supported by conventional insurance; an on-demand model may raise questions about how potentially very short-term participants can properly be said to have any kind of ‘ownership’ of the risk pool.”

EY recently predicted that Sharia compliant FinTech could help attract 150 million new banking customers in the next three years alone, with several countries around the world looking to become hubs for such activity.

Bloomberg Intelligence analysis suggested Malaysia, the UK and Indonesia are leading in terms of the number of Islamic FinTech startups, but several Middle Eastern countries are not far behind.

In January, Bahraini banks created a consortium to back 15 FinTech firms in five years, and last year, the Dubai International Finance Centre launched the FinTech Hive accelerator with a similar aim. Both countries’ regulatory authorities have also collaborated on FinTech sandboxes.

Last March, crowdfunded property investment platform Yielders became the first Islamic FinTech to receive Financial Conduct Authority direct regulation, while the UK government also set up an Islamic Fintech Panel this January.

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