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15 December 2022 –The ongoing digital transformation is shaping the Islamic financial services industry and the impact on the faith-based financial model has been multifaceted. This has raised a host of existential questions. Islamic Finance New (IFN) speaks to Krish Narayanaswami, the Managing Director of Banking, Financial Services, and Insurance at Azentio Software, to examine the impact of financial technology on Islamic finance, and help clarify our concerns. 

What is the degree of penetration of Islamic finance in the fintech industry?
Till date, Islamic finance has not grown significantly in the fintech industry when compared to the actual size of the market. In fact, out of the worldwide 2 billion Muslim population, we still notice a high percentage of unbanked individuals. The real obstacle for fintechs to flourish in Islamic finance remains the low financial literacy and sometimes, the lack of local legal frameworks or their weaknesses, in the event they ever existed. 

How far have Islamic financial institutions progressed in embracing fintech?
Muslims make up around 25% of the world population – with an outlook for increase, and as a young population with a median age not exceeding 25 years old, the target customers of Islamic financial institutions are mainly millennials succeeded by Generation Z. This situation augurs the great potential ahead for the Islamic finance sector, but it also highlights the challenges it imposes as this generation expects to be digitally served. As a result, we have seen the number of Shariah compliant fintechs on the rise over the last decade and this new model is poised to expand rapidly in the future.

The technological revolution is disrupting Islamic finance’s operating framework. What are the available opportunities for Islamic financial institutions to enhance their market advantage?
In a constantly dynamic technological environment and the disruption fintechs bring to the business model, operation model and the focus on customer experience, it is mandatory for Islamic banks to adapt quickly and benefit from new technologies like cloud, mobility, artificial intelligence, blockchain, etc and to use the data strategically to unlock innovation and create a better customer experience by empowering individuals.

 How do practices of a faith-based financial ecosystem cater to the community’s interests and digital needs in implementing competitive and inclusive finance?
A faith-based financial ecosystem like Islamic finance by design generates economic activities be it sale, purchase, production or renting of goods and services. It is considered a catalyst for shared prosperity. The system brings transparency, enables stakeholders to make informed decisions, and mainly promotes the principle of equity and wealth distribution in the society. One of the benefits of digital finance is that it gives low-income groups, who may not be considered ‘bankable’ by financial institutions due to their risk or regulatory policies, a chance to build savings and get access to financing.

 The prohibition of interest payments on deposits in Islamic finance requires Islamic banks to ensure profit payouts are conducted in accordance with Shariah principles. This process of calculating actual profits generated and efficiently managing the distribution still poses several challenges to Islamic banks. Can technology manage the entire profit calculation and distribution cycle to ensure compliance?
This process still poses several challenges to Islamic banks which impacts their reputation and market share. It requires complex calculations and financial postings which, if not automated, becomes a stressful and error-prone activity. Azentio understands the current business challenges faced by Islamic banks and has conceptualized a best-fit technology solution that effectively addresses the complex profit sharing and distribution requirements of Islamic banking. Our Islamic Profit Calculation System makes profit distribution highly efficient. Islamic financial institutions will be able to compete with both their counterparts and conventional banks in interest pay-outs.

Will technology and innovation narrow the gap between Islamic and conventional finance in the future?
Technology and innovation will serve both Islamic and conventional finance and will pave the way for growth and expansion. While assessing the gap between conventional and Islamic practices, it is pertinent to note that it is firmly impossible for Islamic finance to deviate from the norms, the Shariah principles that govern it. On the other hand, it is more probable to see conventional finance slightly shift to more conservative finance practices that are sustainable in nature and in full compliance with the UN SDGs, thereby, narrowing the gap between the two currents of finance.

Read the interview in Islamic Finance News (IFN)

About Islamic Finance news
Islamic Finance news from REDmoney is a digital, subscription-based publication of trusted news, insights and project updates from the APAC, GCC, Levant and North Africa regions covering all aspects of Islamic finance, Sharia-compliant investments, microfinance and Islamic Fintech.

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