a new wave of fintech

Islamic Finance: the boom of Shariah-compliant microloan platforms

islamic microfinance platforms

Islamic banking has grown significantly both in Muslim majority and minority countries across the globe during the last decade.

Despite Islamic microfinance not expanding to the expected level, in recent years we witnessed a change.

Countries such as Malaysia and Indonesia are leading a new fintech boom. To make services shariah-compliant, a new wave of fintechs doesn’t charge interest, embrace profit sharing and avoid alcohol and tobacco transactions.

Concept and Principles of Islamic Microfinance

Today, there are fintechs and banks (both Islamic and not) that launch Sharia-Compliant Microcredit programs. Islamic microfinance refers to those financial services delivered among low income/destitute people based on Islamic Shariah, which includes prohibition of interest, risk sharing, and avoidance of gharar or ambiguity and ensuring falah (welfare) for all member of the society. Basically, according to Islamic law, financial institutions should focus on promoting the welfare of each member of the community.

According to GIFR, Islamic microfinance products based on Islamic Law can be divided into charity and profit based models. Charity based models such as zakat, sadaqa, waqaf and qard hasana serve the extreme poor and marginal poor just above the poverty line. Profit based model such ad wadia and mudaraba serves for low income poor.

Why South East Asia

Southeast Asia is already home to a thriving fintech scene, moreover countries like Indonesia and Malaysia, not only have a mature fintech landscape, but are also among the countries with the largest Muslim populations in the world. These factors are proving fertile ground for establishing and growing fintechs that focus exclusively on Islamic finance.

For example, Indonesia’s e-commerce company Tokopedia and Islamic bank BNI Syariah are collaborating to improve access to finance for small, medium and microenterprises. BNI Syariah provides financing via its micro-financing arm for the e-commerce platform’s merchants and partners. Gojek’s GoPay is also partnered with the Indonesian mosque council to allow users to make zakat, or obligatory almsgiving, online. Peer-to-peer lending without interest.

According to data, there are 375 Islamic fintech companies around the world. Most are in the P2P financing space, and Indonesia is one of the top markets in transaction volume, followed by Malaysia. Those startups have been largely supported by the local government. However, from those two countries, a new wave of fintechs is floating among Muslim countries. Let’s see a few case studies.

From UK to Bangladesh, How AI is boosting Shariah based micro loans

Recently, the UK-based fintech AGAM International has partnered with Bangladesh’s SBK Foundation to launch a Sharia-compliant digital microcredit product in the country. The offering aims to provide access to financial resources for unbanked and underserved communities, including factory workers, small business owners, and gig-economy workers. This new financing product aims to make a significant impact, especially for individuals and small businesses who need financial resources but lack collateral or credit history.

Shabnam Wazed, AGAM International’s founder and CEO, highlighted the role of AI in transforming Sharia lending to make it faster, more efficient, and fair. AGAM’s credit scoring platform will enable SBK Foundation to make accurate, speedy lending decisions, even for financially underserved individuals who lack a traditional credit history.

AGAM’s AI-based behavioral analysis-backed credit scoring provides the SBK Foundation with the confidence to identify prospective borrowers and make accurate, speedy lending decisions, enabling microentrepreneurs to create value.

Even Saudi Arabia launched its own Shariah microloans

In 2021, Taman was officially licensed by the Saudi Central Bank (SAMA) as the first company to provide microfinancing services to consumers across the Kingdom. The fintech announced the certification of its microfinance Tamam app in light of Sharia principles by the Shariyah Review Bureau, allowing the Tamam app to extend a suite of Sharia compliant microfinance loans to borrowers in the Kingdom of Saudi Arabia.

Established in 2019, the company aims to increase financial inclusion in the Kingdom in line with the Financial Sector Development Plan of Saudi Arabia’s Vision 2030. The platform provides individuals requiring financing the opportunity to immediately avail a Shariah compliant consumer microfinance. The end-to-end Shariah approved process takes less than 5 minutes from downloading the app to receiving the financing amount based on the user credit profile.

To ensure Sharia compliance, Shariyah Review Bureau (SRB) will supervise the trading and processing of commodities and Sharia audit services and processing operations of Tamam’s activities. “We see our assignment as an opportunity to serve the unbanked population in the Kingdom,” said Yasser S. Dahlawi, Founder and CEO of SRB. “We have an unwavering focus of maintaining Sharia compliance as we partner with Tamam Financing company to serve the financially underserved communities and business.”

And after Saudi Arabia, Africa

Last year, Egypt’s Financial Regulatory Authority (FRA) issued for the Egyptian company Maksab for micro-financing in compliance with Islamic law – the first of its kind in the non-banking system in Egypt. “This licence adopts the Wakala investment instrument, which is an investment contract done by an investment agency on behalf of the investor,” said FRA chairman Mohamed Farid. The North African country is moving toward diversifying its financing instruments to cover its debt, including preparing for Egypt’s sovereign sukuk.

Farid also revealed that the FRA is currently considering approving other financial products that adopt key principles of Islamic financing, including Murabaha and sharing financing tools, to be applied for the first time in Egypt, particularly in the macro-sized non-banking enterprises sector.

In Kenya, Safaricom has partnered with Gulf African Bank to introduce a Shariah-compliant mobile loan service. The repayment period is 30 days on the platform dubbed Halal Pesa and which is built out of the telco’s mobile money platform M-Pesa. All M-Pesa customers can access Halal Pesa as a mini App. Customers will initially be provided with a personalized facility limit based on their M-Pesa usage. The limit can be increased based on a customer’s usage of Halal Pesa.

Why we should keep eyes on those apps

This new fintech boom is still at its early stage. Experts believe Indonesia is uniquely positioned to be a starting ground for Islamic micro loan platforms to expand to other markets around the world. However, founders in countries with large Muslim populations say they also had to educate investors.

There is resistance versus going to a fintech launched in a Muslim-majority country, but that is changing. Today, a lot of investors already have a strong interest in Islamic financial services because it is a growing niche that is able to provide differentiation for fintech players.