Islamic finance

Faith &
finance.
The changing face of Islamic banking.

INSIDE: Results of Mambu’s global Islamic banking consumer survey.

Including comments from:

‘Islamic finance is based on a belief that money
shouldn’t have any value in itself’, as described by the
Bank of England. At its most simple, Islamic finance
or Islamic banking is a system where products and
services comply with Islamic law, which is based on
a set of moral and ethical principles that promote
the public good and avoid actions and transactions
likely to be against the public good.
This includes key beliefs like:
• You shouldn’t make money from money –
essentially, a system that is ‘interest free’.
• Your money should not cause harm, meaning
Islamic financial services should not invest in
things like alcohol, tobacco and gambling.
• Islamic finance encourages partnership
(Mudarabah), in which partners share in the
profits and losses of an enterprise.

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With an estimated 1.9 billion Muslims around the world - nearly a quarter of the As a sector, total assets
global population and the largest religious group in the world - the opportunity have exceeded:

$2
and necessity of Islamic finance is evident. This relatively new banking sector
has been around for roughly 40 years, and given how young the industry is, it
demonstrates a huge potential and scope for evolution.
trillion
To get better insight into how this industry can develop, we conducted a
global survey of 2,000 members of the younger Muslim community (Gen Z and
millennials) to understand what Islamic finance means to them, as well as their It is expected to reach:

$3.8
expectations of this sector.

Where are we now?

As one of the fastest-growing financial industries, Islamic finance continues to trillion by 2023
grow in size and influence spreading far beyond the Middle East into Muslim-
majority countries in Asia and Africa, as well as parts of Europe and beyond.
As a sector, total assets have exceeded $2 trillion and is expected to reach
$3.8 trillion by 2023. Greater awareness of Islamic finance, alongside improved
legal and regulatory structures in many markets, is supporting the growth of the
sector. This is a trend that is unlikely to slow even with the greater uncertainty
brought about by the COVID-19 pandemic.

The growth of Islamic finance is being driven, in large part, by the explosion of
Islamic fintechs which is expected to reach $125 billion by 2025. Interestingly,
according to IFN Islamic Finance, the United Kingdom has the most Islamic
fintechs with 27 companies followed by Malaysia with 19 companies and
third is the United Arab Emirates (UAE) with at least 15 Islamic fintechs. This
demonstrates the global relevance and promise of this industry.

In addition, the fact that millennials make up a large percentage of Islamic

banking customers means they will also direct the growth and evolution of the
sector - particularly given how young the sector is. This is supported by a study
conducted by Alvarez & Marsal Middle East which predicted that the younger
generations will contribute to about 75% of banking revenue in the region.

As stated by Mufti Faraz Adam, CEO of Amanah Advisors: “Islamic finance is

there to add value to people’s lives. The future is all about fintech – we are
seeing entrepreneurship and huge talent from millennials coming forward,
which is enabling choice and lowering barriers of entry.”

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The future of Islamic finance is wide open and ripe for disruption, driven by a
tech-literate generation. The challenge will be both financial institutions and
fintechs keeping up with the changing demands and expectations, ensuring that
they are providing access to the right financial products and services to meet
these needs at the right time.

According to our
research, of those
respondents that do not
use Islamic banking, 53%
stated that they would 53%
like to if it was easy.

32 %
Looking further at
the reasons why they
have not adopted
Islamic banking: claimed that they do not have
access to banks that adhere to
Islamic principles.

24 %
state that they need
23 %
are distrustful that banks
more from their bank. can be fully compliant.

In order to attract and retain customers, it’s imperative that financial institutions
understand what is important to this audience, as well as increasing the level of
awareness and trust in the Islamic finance options that are available.

Shakeel Adli, partner and global head of Islamic finance at the international
law firm, CMS and one of the leading authorities on the sector in the UK, said:
“Islamic finance products need to distinguish themselves from conventional
finance in new ways, whether it be through exceptional customer service, or
being able to secure finance without seeing someone in person, for example.
All finance offerings need to be commercially viable to work – being legally or
ethically sound isn’t enough.”

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 Nazif Mohammed, Senior Director,
Global Industry Strategy Financial Services, Oracle
We see faith in finance as a major disruptor with the demands. We see growth of Islamic banking by
growth of Islamic banking and especially attractive fntechs and neobanks targeting Muslim customers
to younger generations who seek to promote globally and drawing new customers and money
sustainable development goals to end poverty, into banking with better products and excellent
protect the planet, and ensure prosperity for all as customer service, rather than taking existing
part of a new sustainable development agenda. customers and their money away from conventional
banking. Some experts believe that the Shariah-
Successful Islamic banking products and services compliant banking system can be a less risky
will be more appealing if they are not only Shariah- form of finance by forbidding speculation so that,
compliant but meet additional “ethical, sustainable, for example, the excesses that led to the global
environmentally- and socially-responsible” financial crisis of 2007–2008 can be avoided.

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The future is ethical
There are many different facets to ethical banking; however, put simply, it is a way
for consumers to manage their finances while promoting environmentally and
socially conscious practices. This practice ensures that the way a bank manages
consumers’ money does not support unsavoury industries in the process. This
ethos undoubtedly has many similarities to Islamic finance principles.

It’s important to acknowledge that there are also many differences to standard
ethical banks and Islamic banking practices; however, the rise in popularity of
ethical banking cannot be overlooked as we examine the evolution and growth
of Islamic finance - particularly in the wake of the COVID-19 pandemic.

A recent study by Accenture revealed that consumer preferences “have

dramatically evolved” since the crisis, and that 60% were reporting making
more environmentally friendly, sustainable, or ethical purchases since the start
of the pandemic. This also relates to consumers’ approach to banking, further
supported by Deloitte research which indicated that 71% of respondents would
be more likely to choose a bank or credit union with a positive environmental
and social impact.

Gulf News recently reported that, “While the global Muslim population remains
one of most significant drivers of growth for the Islamic finance industry, the global
trend of ethical consumerism is leading to higher appeal of Islamic products.
This uptick is likely to attract a new class of consumers driven by social
consciousness, trickling down to higher demand for Islamic finance services
and platforms”.

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This is further supported by our research which shows that ethical motivations
are a primary driver for the younger Muslim community in how they bank and
manage their finances.

74% of respondents
confirm it is important
that the investments their
bank makes using their
74%
money are ethical.

62 %
Delving into this
further, the majority
state it’s important
their bank doesn’t Tobacco companies

lend their money to:

69 %
Gambling companies
67 %
Alcohol companies

This implies that the younger generation of Muslims prioritise ethical practices
in their bank. This is reinforced by Areeb Siddiqui, founder and CEO of British
Muslim money app Kestrl who “found that with younger Muslims, it was less
about ticking an arbitrary no interest box, and more about their investments
doing good in the world”.

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Technology leads the way From our study:

The rise of Islamic fintechs around the world has and will continue to play a
central role in the evolution and disruption of the Islamic finance sector. Looking
at millennials and Gen-Z in particular, not only are they tech savvy, but they
are also driving the qualities of a fast-paced life. The younger generations are
70 %
of respondents claim it
looking to partner with banks that are easily accessible from anywhere in the is important that they
can make an investment
world. They want services that can complement a lifestyle that is driven by without seeing someone
increased mobility. This means financial institutions need to provide flexible in person.
banking solutions to fit into this way of living.

74 %
From our study, 70% of respondents claim it is important that they can make
an investment without seeing someone in person, with 74% citing a mobile
banking app as important. This illustrates the growing demand among younger
generations for efficient mobile banking solutions that can keep pace with their
busy lives. cite a mobile banking
app as important.
Clearly illustrating their view of digital services, 78% confirm that the availability
of online banking options is critical, with 76% stating that it is a deal-breaker
if online options are not available. Simply put, to remain competitive, banks
must embrace innovative technology solutions in order to attract younger users
who are the future of Islamic banking. As Arif Amiri, CEO of Dubai International
Financial Centre explained in a S&P Global report, “Millennial and Generation Z
customers will continue to play a significant role in the growth of Islamic finance.
They will expand the sector’s future customer base, with the younger segment
expected to contribute to as much as 75% of total bank revenue by 2030.”

This consensus is particularly interesting as the Islamic finance industry has only
seen a meaningful integration of Islamic fintechs in recent years. It is still early
days and the sector is ready for disruption, presenting a huge opportunity for
financial institutions around the world.

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What does this mean for banks?
Given the significant promise that Islamic finance presents, there is an
opportunity for conventional banks to build further upon their existing efforts of
green and sustainable banking practices, and introduce portfolios that abide by
Islamic principles. This is supported by our research which shows that:

Less than half of respondents

(47%) feel it’s important
for their entire bank to be
Shariah-compliant. This means
that adding specific Islamic 47%
finance products and offerings
as part of an existing portfolio
would be well-received.

In addition, 32% claim that they cannot easily access banks that adhere only to
Islamic principles. Again, a mixed portfolio of products is a viable option.

There is a clear opportunity for both conventional and Islamic banks to enhance
their services by tapping into and addressing the demands of their tech-savvy
customer base for greater transparency, highly personalised products and
seamless experiences. Digital banking technology will allow these financial
institutions to achieve multiple strategic objectives such as financial inclusion,
best-in-class user experience, and the ability to grow and scale rapidly.

However, digitisation and abiding by ethical principles isn’t enough.

According to our research, 78% of

respondents cite that it is important that
they receive great customer service from
their bank.
Personalisation is vital in ensuring that Islamic finance customers are being
served in a way that suits their needs - whether that is in-person, online or a
combination of both.

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Where do we go from here?
Knowing how fast the Islamic finance sector is growing and evolving, what is the
best way to proceed to meet the growing demand?

For conventional banks, it is apparent that ethical practices are being pushed
further up the agenda. In the past year alone, we have seen a number of new
ethical challenger banks and fintechs enter the market, including Starling Bank,
Spiral, Banca Ética Latinoamericana and TreeCard. Triodos has also announced
record lending in Wales over the past year, while Starling has hired more than
550 people since March 2020.

The financial institutions that don’t act are at risk of losing customers to banks
that align with consumer values and societal good. Islamic finance cannot be
ignored as conventional banks continue to develop their approach to ethical
banking as more people will choose to bank this way, regardless of their
religious beliefs.

In addition to meeting customer demands and expectations, technology will

also be critical in supporting banks to seamlessly introduce Islamic or ethical
products to their existing infrastructure, as well as enable Islamic banks to grow
their customer base.

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 Jamshir Wadia, Portfolio Manager,
Banking and Capital Markets, Capgemini

Age is often one of the factors determining the target Expectedly, it is the newer age fintechs that are
market of a business. By knowing the potential driving the innovation in this segment. Malaysia-
customer’s age, we are in a position to determine based HelloGold is developing the world’s first
the kind of marketing strategy that should be Shariah-compliant gold mobile application.
proposed. It is not surprising that millennials have IslamiChain is an innovative start-up leveraging
now dominated consumer databases. The facts have blockchain technology to enable philanthropy and
not skipped the attention of the Shariah banking compassionate giving. Hakbah is an Islamic fintech
sector either, which is now taking steps to capture start-up specialised in cooperative savings and
this segment. Islamic banks’ opportunities to attract Wethaq is a platform focused on the structuring and
millennials include familiarity with Islamic banking distribution of securities in sukuk capital markets.
products and contracts, momentum of Hijrah, This is not to say that conventional Islamic banks are
digitizing Islamic banking, and unique segmentation. looking to be left behind by the more agile fintechs.
Abu Dhabi Islamic Bank’ “ADIB Rise” is a banking
Much like their non-Muslim counterparts, Muslim
proposition catering to the needs of emerging
millennials are also interested in ensuring that their
affluent millennials in the UAE, offering customers
money is deployed towards the social good. In fact,
wealth management services and advisory with
young consumers often fail to invest in line with their
exclusive global rewards and lifestyle privileges,
personal and ethical values due to a lack of product
including premium cards.
awareness. The major force for growth therefore
exists in Islamic finance product offerings within the Islamic banks have also applied blockchain
ethical finance space. technology in their various operations, albeit still at a
very early stage and mainly in cryptocurrency which
Islamic banks and fintechs need to offer a wider
although has attracted a variety of rulings among
range of digitally focussed products and services.
Shariah scholars seems to be gaining momentum.
New age facial recognition technology such as
Some fintechs have obtained certification for the
that being implemented by leading Islamic banks
Shariah compliance of their digital currencies in
in Bahrain, allows customers to be onboarded
their respective jurisdictions. Blockchain technology
completely digitally, with no human interaction.
is also increasingly being used for the operation of
In these pandemic driven times, such inherently
smart contracts in Islamic banking.
socially distant business strategies can have a
huge impact on new customer attraction. A tactic The goals or objectives (Maqasid) of Shariah
to developing a better online banking experience share some links with ESG considerations and
connected to popular e-wallets and e-commerce the broader aim of sustainable finance. The onset
platforms, which also has religious features such as of responsible financing gaining momentum, is
a function to find mosques, a prayer time reminder, likely to increase the demand for Islamic banking
‘ziswaf’, the zakat, infaq, and waqf, can yield rich products and services.
dividends in customer attraction.

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So, what next?
Some things to think about:

The future is ethical. One step ahead.

Organisations are increasingly being held to a With instant gratification the norm, consumers
higher standard, with their business practices will expect you to know what they need before
under a microscope and regularly amplified over they even know. Use the technology available to
social media. With that, there is a call for greater understand your consumers’ habits and in turn,
transparency and better governance - particularly anticipate their needs, providing hyper-personalised
from financial institutions. This was evident recommendations and services. Further, using an
even prior to the pandemic as demonstrated API-first approach and cloud-based digital platforms,
in a Nielsen study which found that 81% of people Islamic banks and fintechs can easily expand their
strongly agreed that companies should help reach to their customers around the world, while
to improve the environment. For Gen Z, these providing a tailored customer experience.
numbers are even higher. Ethical practices are now
a business and societal imperative, with Islamic
banking a related and important industry that will There is a clear opportunity for both
continue to increase in popularity as a result. conventional and Islamic banks to
enhance their services by tapping into
and addressing the demands of their
It’s not ‘All or Nothing’.
smart-phone toting customer base for greater
While there will be people who will choose to only use transparency, highly personalised products
Islamic banks, for many customers who want to bank and seamless experiences. Digital banking
according to Islamic principles, they have a degree technology will allow these financial
of flexibility and are open to investing in compliant institutions to achieve multiple strategic
or ethical portfolios within conventional banks. objectives such as financial inclusion,
best-in-class user experience, and ability
to grow and scale rapidly.

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How can we help you?
Worldwide, an estimated 1.9 billion Muslims are financially underserved and are
looking for alternative Shariah-compliant solutions to manage their money. The
opportunity and necessity of Islamic finance is evident. As an API-driven SaaS
platform, Mambu is uniquely positioned to support your Islamic banking ambitions.
If you can dream it, we can help you build it.

About Mambu
Mambu’s Shariah-compliant product enables Islamic financial institutions
to enhance their offerings and increase brand loyalty by delivering a more
personalised level of service - all in the cloud. By developing and launching
products on Mambu, Islamic financial institutions get agility and speed while
providing their customers with products that are aligned with their ethical codes.
By using Mambu’s composable approach, Islamic financial institutions can fully
realise the benefits of cloud, assemble components and services flexibly, while
ensuring the delivery of Shariah-compliant products to its customers.

Today, Mambu’s SaaS cloud banking platform enables Islamic banks and lenders,
such as Bank Islam and Ta3meed, to deliver innovative digital Shariah-compliant
products to businesses, consumers and investors.

mambu.com
[email protected]

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