Islamic finance moves towards open banking
Islamic finance professionals expect the sector to move rapidly towards greater use of open banking over the next three years, according to new research.
The study, by IslamicMarkets.com, found that 90 per cent of Islamic finance professionals believe the adoption of open banking by financial institutions, governments, fintechs and other stakeholders will increase by 2025, with nearly two out of five (38 per cent) expecting a dramatic rise in adoption.
The study also found that growth of open banking in Islamic finance is expected to partly be driven by better regulations.
Almost a third (32 per cent) of Islamic finance professionals who were questioned predicted a dramatic increase in regulation, with another 59 per cent forecasting a slight increase in regulation.
Islamic finance is a way of managing money that keeps within the moral principles of Islam. It is based on the belief that people should not seek to earn interest by money lending and that money should not cause harm.
As such Shariah-compliant financial services do not invest in vice industries, such as alcohol, tobacco and gambling. It is also important that, where possible, both profit and risks should be shared, making it well suited to the peer-to-peer lending model.
Platforms such as Nester and Qardus are among the P2P lenders that offer Shariah-compliant financial services, while Robocash Group has partnered with a Shariah-compliant finance firm in Indonesia.
The study found that Islamic finance professionals working across a wide range of sectors believe open banking will mean greater use of fintech innovations in Islamic finance such as Waqf (a charitable endowment), Zakat (a form of alms giving) and Sadaqah (essentially, a donation).
More than half (62 per cent) strongly agreed that open APIs will enable the platforms to access customer accounts in Islamic finance, enabling customers to make contributions through the platforms. Another 30 per cent slightly agreed.
Islamic finance professionals believe that the key benefit of open banking in the Islamic finance industry is to meet strong customer demand and offer more choice.
Other benefits include being able to manage the escalating costs of launching new digital services at scale and developing strategies to monetise customer data to generate new revenue streams.
The growth of open banking will also enable institutions to meet regulatory requirements to provide higher transparency for reporting data.