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DIGITAL ECONOMY & TECHNOLOGY

Fintech and the Rise of Islamic Finance

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By Abdullo Kurbanov, Zuhursho Rahmatulloev and Khofiz Shakhidi

When it comes to fintech innovation, most conversations typically revolve around the diversification of a sector once dominated by legacy institutions.  In the past decade, a new wave of high-growth companies has applied technology to digitally transform the financial sector for investors, businesses and consumers. More recently, established banks have also been changing the way they compete for market share by launching challenger brands that essentially position their services to a new generation of potential customers.

Fintech is entering what commentators are now deeming to be the third phase of its evolution. With technology firmly embedded into existing financial frameworks, attention is turning to the advantages blockchain could offer in improving the way different financial institutions operate, from operational efficiency to cost savings.

The financial services sector has an exciting future, enabled because of fintech innovations. Importantly, fintech is also empowering certain segments of investors and consumers who have yet been unable to take full advantage of 21st century banking. Of these, one area primed for digital disruption is Islamic finance.

According to Refinitiv’s Islamic Finance Development Indicator, the Islamic finance sector is projected to reach $4.9tn (£3.7tn) in 2025. S&P Global Ratings also projects the industry to grow by 10 to 12 per cent over 2021 and 2022. And the UK is on a mission to become a global hub for Sharia-compliant finance.

With 2022 set to be the year of expansion for Islamic finance, it is important for financial professionals to understand its basic principles as well as the impact that technology is having in fuelling a new rise of Islamic fintech companies.

The Rise of Islamic Finance

While Islamic finance has been part of banking systems for more than 50 years, only recently has it experienced significant growth. There are three main reasons for this.

The first is linked to population growth. As a demographic, the total number of followers of the Islamic faith is expected to reach 3bn by 2060. Naturally, this will increase demand for financial instruments that are Sharia-compliant.

The second factor is linked to the digital disruption of the financial services sector. Five years ago, Western economies experienced a surge in fintech start-ups offering more effective and efficient services through the creative application of software. Consequently, traditional finance institutions are now competing with challenger brands and neobanks to appeal to consumers, investors, and businesses.

In the UK, fintech challenger brands like Monzo and Revolut have become part of the banking landscape. Established banks like JPMorgan have responded by launching their own challenger brands to rival the new competition.

The scale and pace of digital disruption led by startups initially focused on the delivery of traditional financial services. The success of this first fintech wave has encouraged a new generation of start-ups, which are applying technology to deliver products and services designed specifically for certain demographics.

The creation of tech-enabled Sharia compliant banks is on the rise in both Western and Islamic jurisdictions. Particularly in regions like Central Asia where countries are undergoing economic modernization, fintech companies are playing an important role in giving consumers and investors the digital tools needed to effectively manage their finances. As more investment is directed into these Islamic fintech companies we are likely to see the sector grow.

The third and final factor concerns the growing market awareness of Islamic finance by big financial institutions.

Take Sukuk (an Islamic financial bond that effectively acts as a trust certificate) as an example. Sukuk supply has been rising in both Islamic and non-Islamic markets. Most Sukuk issuances are hybrid, with debt making up no less than 30 per cent. According to Fitch, the global amount of outstanding Sukuk reached $754.1bn in Q2 2021, which is 5 per cent higher than the same figure recorded in Q1. As the first western nation to issue a sovereign Sukuk, the UK has raised more than $50bn through 68 Sukuk issuances on the London Stock Exchange.

While there is general awareness of Islamic finance, actual knowledge of its basic principles is not typically high among financial professionals based in non-Muslim jurisdictions. This is an issue that has been raised on numerous occasions in the UK.

There have been attempts by the government to make the financial environment more religiously inclusive in the UK, yet the overall lack of available Sharia-compliant products has been a topic of recent debate. There are calls for the introduction of Sharia-compliant student loans by September 2022, enabling more students to access university education in the UK.

Moves to make the UK’s financial system inclusive and diverse will remain a top objective in 2022 and beyond. Part of this is due to the growing customer base. In the UK, there is estimated to be more than 100,000 Islamic finance retail customers. Government also puts the value of net assets of Islamic funds in the UK to £600m, with this figure set to rise in the ensuing years.

What Does The Future Hold?

Islamic fintech is an enabler of Islamic finance’s growth. The integration and use of technology that is Sharia-compliant will naturally increase the number of people able to engage with Islamic finance products and services, in turn boosting demand. However, there are still challenges on the horizon.

The first issue lies in the lack of qualified personnel who can provide Sharia-compliant products that meet evolving market expectations. For Islamic financial institutions, there is a need to educate and equip their staff with the skills to fulfil their clients’ needs.

Over the past year, demand for Islamic financial institutions has been rising with the nature of work increasing in complexity. This is a common problem being faced across the financial services sector – while demand for services is rising, the lack of skilled professionals is resulting in delays.

The second issue is changing public perceptions towards Islamic finance. As mentioned previously, there is a general lack of awareness when it comes to understanding the fundamentals of Sharia-backed products and services. In places like the UK, where Islamic finance has potential for growth, ongoing training and awareness campaigns for potential customers, financial professionals, public and private institutions will play key roles.

Regulatory environments that promote innovation and competition will also ensure Islamic fintechs are able to effectively scale-up and compete with other financial players. It will also allow for the proliferation of Sharia-compliant products. To accommodate the unique nature of the Islamic finance institutions, the legal landscape needs certain adjustments to achieve tax neutrality.

This is an evolving process, and in places like the UK important steps have already been made. For example, detailed rules and regulations governing collective investment schemes mean increased financial burden is placed on Sukuk products, making them prohibitively expensive when compared with conventional interest-bearing bonds.

However, once raised to the government, new legislation was introduced that defined Sukuk as ‘alternative finance bonds’, essentially excluding it from the financial costs attached to collective investment schemes. Despite these challenges, Islamic finance also has exciting developments on the horizon.

From a product standpoint, the Islamic fintech industry is set to grow dramatically in the ‘buy now, pay later’ (BNPL) schemes, where less documentation and Shariah requirements exist. Many renowned BNPL providers are not Sharia compliant for two reasons. The first revolves around the charging of interest and the second has to do with a lack of an Islamic contract, between the BNPL lender and the borrower.

BNPL is an evolving sector. Its rapid expansion has caught regulators off guard, which is why institutions like the Financial Conduct Authority have launched consultations to better understand the impact it could have on consumers. As BNPL establishes itself within the retail credit industry we are likely to see an emergence of Sharia-compliant providers, be it standalone brands or Islamic fintechs, expanding their service offerings.

The link between Islamic finance and impact investing linked to economic, social and governance outcomes is also a key trend. A core principle of Islamic finance is promoting activities that have a positive impact on society.

Screening of assets to ensure they are Sharia-compliant can encourage investment into ESG assets. 2019 research from Refinitiv’s Eikon database revealed that Sharia-compliant companies have ESG scores that are approximately 6 per cent higher than those that are not. With public awareness of ESG at the forefront of everyone’s minds following Cop26, Islamic finance has an evident role to play here.

Facilitating automated Shariah-compliant products is an ambitious endeavour that can bring financial stability and financial inclusion to the segments of the populace that is financially deprived. With Islamic fintech enhancing awareness and accessibility of Sharia-compliant products for consumers, investors and businesses, Islamic finance is poised for years of significant consolidation and expansion.

For now, it is advisable for financial professionals across all jurisdictions to expand their knowledge of Islamic finance.

Abdullo Kurbanov and Zuhursho Rahmatulloev are co-founders, and Khofiz Shakhidi is chairman of Alif Bank.


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DIGITAL ECONOMY & TECHNOLOGY

Aeon Bank Officially Launches Malaysia’s First Islamic Digital Bank

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Aeon Bank (M) Bhd has officially launched Malaysia’s first Islamic digital bank, marking a significant milestone in the country’s banking sector. The launch aims to provide comprehensive, Shariah-compliant digital banking solutions to all Malaysians, setting a new standard for financial services in the region.

Comprehensive Shariah-Compliant Solutions

At the public launch ceremony, Chief Executive Officer Raja Teh Maimunah Raja Abdul Aziz outlined the bank’s vision. “We aim to offer safe, simplified, and inclusive Shariah-compliant digital banking solutions such as savings accounts, retirement savings plans, various borrowing options, and payment services,” she stated. “This will allow us to offer financial services to our customers comprehensively, helping us achieve our mission.”

Innovative Banking Products

The Islamic Digital Bank’s services currently include personal banking products like Savings Account-i and customizable Savings Pots with optimization features. These products were developed and refined through extensive testing phases. Raja Teh Maimunah highlighted the success of the beta testing phase, which involved over 1,800 participants over 12 weeks. “The beta test was meant to identify any necessary improvements and fixes. We received a lot of positive feedback on the overall architecture. We did not rush the test and also conducted an alpha test before the beta, ensuring platform stability,” she explained.

Seamless User Experience

Users who activate their Aeon Bank account will immediately gain access to their virtual Aeon Bank x Visa Debit Card-i and can request a physical Debit Card-i. To celebrate the public launch, Aeon Bank is offering a sign-up bonus of 3,000 Aeon Points and triple Aeon Points for transactions using the Aeon Bank x Visa Debit Card-i, along with a profit rate of 3.88% per annum.

Additionally, Aeon Points Programme members will have their memberships automatically linked with the Aeon Bank (M) app, providing extra benefits and rewards to Aeon Group’s outlets and merchants.

Revolutionizing Digital Banking in Malaysia

Jointly owned by Aeon Financial Service Ltd and Aeon Credit Service (M) Bhd, both subsidiaries of Japan’s largest retail group Aeon Group, Aeon Bank is set to revolutionize digital banking in Malaysia. Raja Teh Maimunah expressed optimism about the bank’s potential to perform detailed financial analyses and promote financial inclusion.

Competitive Landscape

In addition to Aeon Bank, a consortium led by KAF Investment Bank Sdn Bhd has also secured an Islamic digital bank license from Bank Negara Malaysia. Other recipients of digital banking licenses include a consortium of Boost Holdings Sdn Bhd and RHB Bank Bhd, a consortium led by GXS Bank Pte Ltd and Kuok Brothers Sdn Bhd, and a consortium led by Sea Ltd and YTL Digital Capital Sdn Bhd.

Promoting Financial Inclusion

With the launch of Malaysia’s first Islamic Digital Bank, Aeon Bank is poised to make significant strides in promoting financial inclusion. The bank’s innovative products and services are designed to cater to the diverse needs of Malaysian consumers, providing them with Shariah-compliant, convenient, and efficient banking solutions. This initiative aligns with the broader goals of enhancing financial accessibility and inclusion across the country.

As Aeon Bank continues to expand its offerings and reach, it is expected to play a pivotal role in shaping the future of digital banking in Malaysia. By leveraging advanced technology and adhering to Shariah principles, Aeon Bank aims to provide a robust banking platform that meets the evolving needs of its customers. The successful launch of Malaysia’s first Islamic Digital Bank marks a new era in the country’s financial landscape, promising a future of inclusive, innovative, and customer-centric banking services.


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DIGITAL ECONOMY & TECHNOLOGY

Crypto Miners See ‘Enormous Potential’ in the Gulf

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  • Crypto miners drawn to Gulf
  • Electricity is 80% of cost
  • Tech-savvy population

With cryptocurrencies edging up again after last weekend’s “halving” – in which the rewards Bitcoin miners get for solving problems is cut in two to maintain scarcity – these are heady days for holders of Bitcoin and other virtual currencies. Bitcoin miners have been attracted to the Gulf by cheap electricity and established infrastructure.

“GCC countries have enormous potential in relation to the development of the Bitcoin mining sector,” Abdumalik Mirakhmedov, executive president of Dubai-based Bitcoin miner GDA, told AGBI. “In the past year, the region has been experiencing active growth, with several significant launches.”

Bitcoin “mining” is a process in which information in a blockchain block is validated by specialist machines. When a complex solution is reached by this equipment, a reward – in the form of Bitcoin and fees for the work done – is then issued. Initially, mining was often done in back rooms and sometimes-unofficial data centres. These days, however, it is increasingly dominated by larger businesses.

This equipment, however, also requires a lot of electricity.  In 2023, the Cambridge Bitcoin Electricity Consumption Index (CBECI) estimated global electricity usage associated with Bitcoin mining to be around 120 terawatt hours – about the same as Australia’s total electricity consumption that year.

Working day and night, Bitcoin miners also generate a lot of heat.  In colder climates, this has sometimes been repurposed to provide heating.  In the Gulf, however, the heat creates even greater electricity consumption, as powered cooling systems are used to keep the machinery within its operational temperature range.

A further problem in the Gulf recently has often been the lack of a clear regulatory framework for the industry – sometimes because of a general suspicion of cryptocurrencies.  Kuwait, for example, has banned all virtual asset transactions, investments and mining. In Saudi Arabia and Qatar, crypto has only quasi-legal status.

Yet, despite the obstacles, “the GCC region is the world’s sixth-largest adopter,” said Paige Aarhus, Paris-based director of crypto news and analysis site DL News. And figures from Chainalysis, a US-based cryptocurrency software development company, estimate that total crypto transaction levels in Saudi Arabia alone amounted to $36 billion and in the first two months of 2024 it hit $6 billion.

In the UAE and Oman, too, a more positive approach has been taken. A regulatory framework has been established, enabling facilities such as the DMCC Crypto Centre in Dubai to provide a wide range of services, including mining. In Oman, $800 million is now invested in crypto mining in the Sultanate. Abu Dhabi’s Green Data City in Salalah was Oman’s first licensed mining entity, while Exahertz International has also now joined it in the southern – and slightly cooler – Omani city.

Power plays

With electricity representing around 75-80 percent of a data farm’s average cost, cheap power is a major draw for miners when it comes to the Gulf. In Oman, although subsidies for electricity are being phased out, typical costs remain at around $0.05 per kilowatt – much less than the US average of $0.23, which is itself lower than average tariffs in Europe. “Innovations such as liquid cooling and immersion cooling are expected to significantly contribute to the expansion of operations within the region,” says Mirakhmedov.

This was recognised at the recent Global Digital Mining Summit hosted by mining server manufacturer Bitmain, held in Muscat. The “Hydro-mining Wins in the Desert” gathering highlighted progress in water cooling.

Green, renewable energy from solar is also available in abundance in Oman and other Gulf countries, providing miners with more sustainable credentials. At the same time, the Gulf offers a developed infrastructure and few restrictions on land for large data farms.

Oman, and other Gulf states, have also all invested heavily in education and training in IT, producing large, tech-savvy populations. “Key benefits of the Gulf also include the region’s access to capital and the ease of doing business,” says Mirakhmedov.  These benefits may help Gulf miners weather the storm of the recent halving.

Larger mining companies, or groups of miners, stand a better chance of absorbing that loss, while “some smaller mining companies may well go out of business as a result,” Aarhus says. With miners in the Gulf generally larger operations with lower overall costs, they may now be well placed for further expansion. More data farms could therefore be springing up around the region, in the months to come.


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DIGITAL ECONOMY & TECHNOLOGY

Zakat on Stocks and Shares: A Modern Dilemma Solved

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In today’s fast-paced world, where the buzz of the stock market is as familiar as morning coffee, a timeless tradition meets the modern age: the practice of paying Zakat on stocks and shares. This intersection of faith and finance might seem like a modern dilemma, but “Zakat on Stocks and Shares: A Modern Dilemma Solved” can be achieved with a blend of ancient wisdom and contemporary understanding. Let’s dive into the world of stocks, shares, and spiritual duty, and discover how this blend enriches both our wallets and our souls.

Understanding Zakat in the Digital Age

Zakat, one of the Five Pillars of Islam, is a form of almsgiving to the less fortunate, calculated as a percentage of one’s wealth. Traditionally, it applied to tangible assets like gold, silver, and livestock. But what happens when your wealth is tied up in the intangible world of the stock market?

Imagine you’re in a vast, bustling city where skyscrapers are filled with traders, analysts, and investors, all meticulously tracking the rise and fall of stocks. In this modern jungle, your investments grow, sometimes unpredictably, reflecting not just your financial acumen but also the global economic heartbeat. Here lies our modern dilemma: how do we apply the ancient practice of Zakat to this digital-age wealth?

Calculating Zakat on Stocks and Shares

The key to solving this puzzle lies in understanding the nature of your investment. Are your stocks purely for capital gain, or do they yield dividends from companies that deal in tangible goods and services? The answer guides how Zakat is calculated on these modern assets.

  1. For Long-Term Investment: If you hold stocks as a long-term investment, Zakat is due on their market value. Think of it as if you’re a farmer with fields (stocks) that grow crops (dividends). Just as a farmer would calculate Zakat on the harvest, you calculate Zakat on the annual value of your stocks.
  2. For Active Trading: If you’re an active trader, your stocks are akin to the goods in a merchant’s caravan, constantly moving and changing. Here, Zakat is calculated based on the total value of your trading portfolio at the end of the lunar year.

Stories from the Stock Market

Let’s take a moment to walk in the shoes of Aisha, a dedicated software engineer by day and a savvy investor by night. Aisha’s portfolio is a mix of long-term tech stocks and short-term trades in renewable energy. When the time comes to calculate her Zakat, she reflects on the nature of each investment. Her tech stocks, akin to a golden wheat field, are valued at their current market price, while her active trades are tallied up like a merchant’s inventory at year-end. This careful consideration ensures Aisha fulfills her spiritual obligations without overlooking her modern investments.

Similarly, Omar, a retired teacher with a passion for philanthropy, uses his dividends from healthcare stocks to support various charities. By calculating the Zakat on his shares, Omar turns his investments into a powerful tool for social good, illustrating how ancient practices can meet modern philanthropy.

Embracing Modern Dilemmas with Ancient Wisdom

The dilemma of paying Zakat on stocks and shares illustrates a broader lesson: that our faith and traditions are not static, but rather, they evolve with us. As we navigate the complexities of the modern financial world, we’re reminded of the adaptability and enduring relevance of Islamic teachings.

Zakat on stocks and shares: a modern dilemma solved, not just through numbers and calculations, but through the stories of individuals who bridge the gap between their faith and their finances. In doing so, they enrich not only their own lives but also the lives of those around them, weaving a tapestry of spiritual and material prosperity that spans the ages.

In conclusion, the practice of paying Zakat on stocks and shares: a modern dilemma solved, offers a fascinating glimpse into how timeless traditions adapt to contemporary realities. It’s a journey that not only addresses a modern financial challenge but also deepens our connection to our faith, our community, and the wider world. As we move forward, let’s carry this wisdom in our hearts and portfolios, ensuring that our investments reflect our values and contribute to a better world for all.


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