Blue ocean for Islamic finance industry

An opinion piece by Miljan Stamenkovic, Regional Director, Mambu

Islamic finance is going digital. Muslims around the world are looking for alternative Shariah-compliant solutions to manage their daily finances. New fintechs offering Islamic banking products and services are on the rise and there is a blue ocean for established Islamic banks and challengers in the underbanked segments of Islamic countries. Digitisation is helping Islamic banks reach these populations and provide them with products that are more aligned with their ethical codes.

Challenges that drive the adoption of fintech in Islamic banking

The fact that millennials make up a large chunk of the customers of Islamic banking means that they will also direct its growth. A recent study conducted by Alvarez & Marsal Middle East predicted that the younger generations will contribute to about 75% of banking revenue in the region. Sharia-compliant banks are stepping up investments in digital space to cater to this demographic.

Similarly, the majority of the Muslim countries’ population is dominated by millennials. Not only are they very well educated when it comes to the use of technology, but they are also driving the qualities of a fast-paced life. Millennials are looking to partner with banks that are easily accessible from anywhere in the world; They want services that can complement a lifestyle that is driven by increased mobility. This also means financial institutions need to provide flexible banking solutions to fit into this way of living. Islamic banks should see this as an opportunity to enhance their services by tapping into and addressing the demands of this tech-savvy customer base for greater transparency, highly-personalised products and seamless experiences.

To succeed and grow, a modern technology stack must lie at the heart of financial service companies. That said, the region’s initiatives that drive digital transformation are causing banks to face technical debts, a phenomenon used to describe technology solutions that have become non-functional and outdated technology. Digitisation has disrupted the current business models of Islamic banking. They are now facing a need to upgrade their technology, adapt agile ways of working and modernise their legacy systems as unresolved technical debt can lead to excessive costs and compromised business agility.

According to Thomson Reuters, Islamic banks typically have higher fixed costs as compared to conventional banks and digital solutions can help reduce overhead and allow banks to compete more effectively. For example, technology can effectively help in automating workflows, operating on an omni-channel system and enhancing mobile services. In fact, being digitally present and easily mobile is becoming a necessity for banks to survive in today’s competitive world.

With many countries working towards implementing digital transformation strategies, banks have no choice but to walk into the footsteps of these nations. In fact, over the last couple of years, the Islamic banking industry has been booming especially in the GCC. Hence, there is huge competition and the latest technology can help Islamic banks have a competitive edge. A brick and mortar banking structure can no longer survive on its own. Whilst physical banks can still exist, offering interactive services via online and mobile banking is where the future of Islamic banking is headed.

How composable banking addresses these challenges

Digital banking technology creates opportunities for Islamic banks to achieve multiple strategic objectives such as financial inclusion, best-in-class user experience, and ability to grow and scale rapidly.  This digital boost is transforming Islamic banking by adding new models of payment and regulating boundaries. Using API-first approach and cloud-based digital platforms, banks in the Middle East can easily expand their reach to their customers around the world, while providing a tailored customer experience.

Similarly, digitisation in general helps banks streamline their internal processes, which in return reduces costs and boosts revenue. It is evident that as time goes by, competition is intensifying and the need to evolve is becoming inevitable. Fintech will empower banks to go beyond their physical presence and keep up with ever-changing customer demands. 

This means that Islamic banks and financial institutions should have an infrastructure that will enable them to migrate and operate on the cloud at any given time. One very effective way of doing so is through composable banking.  It is a unique approach that separates different banking functions so they can be combined and recombined in different ways to deliver new services and customer experiences.

One of the key benefits of composable banking is that it works on cloud platforms that are agile and innovative. This means that scalability should never be a problem for Islamic banks. Banks operating on the cloud can add scale across infinite numbers of servers and databases. Cloud provides a cluster approach that is natively designed for that sort of flexible scalability while still being more cost-effective than mainframe-type systems.

In conclusion, interest in Islamic banking is increasing significantly, especially in Muslim countries. Millennials are driving its growth as they seek financial services that are ethical. That said, there are some challenges that banks are facing as they witness increased demand for online services. This includes the need for services that can complement a lifestyle driven by increased mobility. Digitisation of financial services in the Middle East is causing banks to face technical debts and driving them to upgrade their legacy systems. A cloud driven approach such as composable banking is one of the best ways to address these demands while ensuring maximum reach to Muslim customers, agility, and flexibility while streamlining processes and reducing costs.