The impact of globalisation and financial innovation has swept through the world in an unprecedented magnitude in recent times, altering the very fabric of financial and economic behaviour.
Automation and mechanisation have already disrupted the traditional financial means to meet the ends. It is difficult to imagine a world without the Internet or mobile devices that are now central to daily routines. Consequently, the digital disruption/revolution has brought a paradigm shift, transforming the way customers access financial products and services. This has not only created user flexibility but reduced transaction costs.
The flexibilities that have consequently called time on the traditional ‘business as usual approaches’, is an outcome of the intersection and constant penetration of technology-driven finance. This could be termed as the ‘New Age innovative/automated financial order’ – or the more common term fintech. World Bank (2016) has predicted that automation is threatening jobs by, for example, 69 per cent in India, 77 per cent and 85 per cent in China and Ethiopia.
What is fintech?
According to PWC Global Fintech Report (2016), “Fintech is a dynamic segment at the intersection of the financial services and technology sectors where technology-focused start-ups and new market entrants innovate the products and services currently provided by the traditional financial services industry”.
As such, fintech is gaining significant momentum and causing disruption to the traditional value chain. In fact, funding of fintech start-ups more than doubled in 2015 reaching US$12.2bn, up from US$5.6bn in 2014. If technology driven financial innovation is set to lead the fundamental changes in economic behaviour/ growth, resorting to novel and adaptive marketplaces become a crucial component.
The following figure highlights those segments of the financial sector that are facing financial disruption. The raison deter for enhanced and affordable financial flexibilities is the possibility of transacting without intermediation. This has helped neutralise the traditional business model frictions between the surplus and deficit units. Consequently, there is a clear orientation from a ‘financer-intermediator-entrepreneur’ towards a ‘financer-entrepreneur’ model. P2P lending, crowd funding, angel investing, mobile banking, airbnb, On Deck, Funding Circle even e-bay are prime examples. These not only have created better opportunities for financial inclusion but have tended to improve the overall social fabric via improved trusteeship and risk sharing.
Fintech, has the potential to play a greater role in the Islamic finance industry specifically to improve processes efficiencies, cost effectiveness, increase distribution, Shari’a and other compliances and financial inclusion. Consequently, this builds the case for Islamic financial institutions to be more agile and receptive to adapting and adopting fintech solutions.
Fintech and digital technology could allow Islamic finance to reach out further and quicker (and possibly cheaper) without having to build a physical presence and distribution channels. Such are inferences for Islamic finance to aggressively adopt fintech.
What is crucially noteworthy is the fact that the fintech driven, new age finance is in complete actuality application of 101 Islamic Finance i.e. a simple resorting to Mudaraba and Musharaka financing. Driven by Shari’a rules, the Islamic financial system is based on Al-Bay (risk sharing) based financing.
The epistemological roots of Al-bay (risk sharing) as essence of Islamic finance can be traced from chapter 2 verse 275 of the Quran. In a typical risk sharing arrangement such as equity finance, parties share the risk as well as the rewards of a contract. Assets are invested in remunerative trade and production activities. The return to assets are not known at the instant assets are invested, akin to Arrow-Debreu securities.
Moreover, based on Quran and Sunnah, the Islamic financial system is necessarily supported by a complimentary institutional framework that further assures the better growth and stability attributes. Number of old and new studies have scientifically shown the efficacy of risk sharing based Islamic finance.
Oman’s welcome adoption of Islamic finance has created a valuable opportunity to help meet its economic diversification needs and brand itself as a ‘New Age Islamic Fintech Finance; that is oriented towards entrepreneurship and financial inclusion, research and technology/innovation. The ‘magic sauce’ could be to rely on innovative capacities of pure experts via structural support, to unbundle to re-bundle a SMART and automated version of Shari’a finance that is cost, user and efficiency friendly. The same could be linked to serve the UN’s SDGs, via a new age Islamic finance.
For example, the adoption of Block Chain and Mobile Technology in Oman’s infant Islamic financial industry could help provide and promote Smart Islamic Banking Contracts (SIBCs) solution (adjustable to fine tune with specificities of regions) and also smart data supply for customer risk profiling and investment risks. Concluding a transparent contract to finance Shari’a based deposits/products could then be a mobile app work, with financial institutions smartly equipped to assess risks.
Until now, Islamic finance is usually constrained by the problematic nature of gold and silver, which are difficult to transfer and hard to verify when tucked away in someone else’s vault. However, with a digital alternative, like the novel application of Bitcoin, instantaneous real-time direct peer-to-peer payments and settlement of value happen together as a single event. Bitcoin along with SIBCs could be an attractive mode to ease international trade deals for Islamic banks via automated payment schemes.
The value and mechanics of the same could be fully chiseled and endorsed/accredited by WTO, World Bank, IFSB, CIBAFI & AAOIFI. Islamic Wealth/Asset Management could be served via marketplaces, driven by robo-advisory/AI and Numerie. This would also transform and lubricate sukuk for public-private partnership, financings institutional investments, Crowd funding, Angle investing, and P2P financings. Promoting the same as 101 Islamic finance, IFSOL immensely contributed to cement a culture of Shari’a complaint entrepreneurship from a ‘financer-intermediator-entrepreneur’ towards a ‘financer-entrepreneur’ model.
Further efforts could utilise the Islamic re-distributive modes of Zakah and Infaq. Marketplace such as ‘Islamic Philanthropy Finance Ventures’ (IPFVs): could well serve Islamic Finance in increasing economic empowerment. The recent new age Waqf Forum (2017) in Oman and other similar preliminary initiatives via CBFS are steps in right direction. Moreover, initiative (WIFE, 2016), of amalgamating waqf with crowd funding via Fintech (see worldwaqf.org) is one for Tanfeed. initiatives.
Nevertheless, few crucial constraints need to be addressed. The first is the complimentary and supplementary regulatory framework for the new age fintech Islamic finance. This has to go in line with cementing public awareness and education about the usage and benefits of the same. The twin and more basic however is the lack of a level playing field between Islamic and conventional finance. There is an edifice of structural, institutional, administrative, fiscal, monetary and legal means favouring debt finance.
Second, relates to finely trained human capital both in Islamic finance and fintech. IFI already lacks long term, low risk/Shari’a compliant liquid instruments/product and service development. This imposes a liquidity and hedging constraint on the ability of IFI to compete. As a result, Islamic financial industry is forced to replicate conventional instruments; polluting its perception. While Fintech would tend to smartly address the same, the required intellect, skill and hence service creation needs focus.
Third, being a closed economy that is tending to open, greater structural reforms is still needed to improve the business environment. This becomes more relevant given the idea of a Fintech Islamic finance. Global Economic Freedom Index, 2017 ranked Oman 82 in the world.
Consequently, to implement the recommended new age brand of Islamic finance and to reap the desired economic benefits, the above constraints needs to be addressed via a cohesive and institutional strategy as national priority. This could be sharply attuned for economic diversification vis-à-vis vision 2020.
Dr Mughees Shaukat, Head of Islamic Finance, College of Banking & Financial Studies, Muscat