FinTech and Islamic Finance: Opportunities and Challenges

Abstract

After the financial crisis of 2007–2008, the financial service industry realized that the world’s worst financial catastrophe had been caused by an age of easy money and lax monitoring. This realization led to pressure on regulators to overhaul the financial system during the Great Depression. Banks were required to make sure they implemented a variety of endogenous risk-minimization mechanisms and assume accountability for verifying the stability of the financial scheme. Innovative financial technology (FinTech) solutions arose in this more regulated environment to address – or, as one would argue, avoid – risks that arose during the financial crisis. The goal of this chapter is to examine the possible challenges and opportunities of incorporating FinTech into Islamic finance. Four services are provided by Islamic FinTech: finance, payments, advisory, and compliance. The traditional financial system is being recolonized by Islamic FinTech. FinTech adoption in Islamic finance could lead to greater financial inclusion, the solution to emergencies like COVID-19, and the achievement of Sustainable Development Goals (SDGs) for a sustainable national economy. However, there could be obstacles associated with this acceptance in the form of risk, investment, and regulatory issues. In order for FinTech companies to be innovative and address social issues that conventional financial institutions fail to address, authorities must provide a market whereby these companies can thrive without having to be acquired by major banks or focus their innovation solely on meeting the demands of these banks. Furthermore, they need to be explicit about the regulations' applicability to FinTech companies, especially with regard to how to strike a balance between being a technology company and a financial institution.

Citation

Hamadou, I. and Suleman, U. (2024), "FinTech and Islamic Finance: Opportunities and Challenges", Smolo, E. and Raheem, M.M. (Ed.) The Future of Islamic Finance, Emerald Publishing Limited, Leeds, pp. 175-188. https://doi.org/10.1108/978-1-83549-906-120241011