Mufti Asad Gul
The Islamic Development Bank started operations in 1975, headquartered in Jeddah, Saudi Arabia. Clause one of its charter states that it is “to foster economic development and social progress of member countries and Muslim communities individually as well as jointly in accordance with the principles of Sharia.”
The first Islamic insurance (or takaful) company – the Islamic Insurance Company of Sudan – was established in 1979. The Amana Income Fund, the world’s first Islamic mutual fund (which invests only in Sharia-compliant equities), was created in 1986 in Indiana. The transition from an analogue to a digital economy began in the 1960s. By the 1980s, a digital economy had taken shape.
The Clearing House Interbank Payments System, or CHIPS, was established in 1970 to transmit and settle payment orders in American dollars for some of the largest and most active banks in the world. The NASDAQ-National Association of Securities Dealers Automated Quotations-was created in 1971 in the United States.
The Society for Worldwide Interbank Financial Telecommunications, or SWIFT, was established in 1973 to solve the problem of communicating cross-border payments. These payment systems allow large value payments to take place today on a real-time basis, which underpins massive volumes of transactions around the world. SWIFT enables communications between domestic digital payment systems.
The first online brokerage, E-Trade, was founded in 1982, by executing the first electronic trade by an individual investor. Britain saw the first online banking experience by the Bank of Scotland for the Nottingham Building Society (NBS) customers in 1983. All these developments are jigsaw pieces in the Fintech puzzle. During this era of digitisation, companies doubled and tripled their IT spend, as well as developed innovative risk management technology to address the varying risks.
In the 1980s, stock exchanges from New York to Tokyo were going electronic, whilst the famous Bloomberg terminals were in ever-increasing use among financial services providers.
The Bloomberg Terminal now services hundreds of thousands of customers with everything from the latest information on financial matters to the ability to actually execute trades. It processes approximately more than 60 billion pieces of information from the market per day.
The late 1980s are significant in the history of both Fintech and Islamic Finance. The world experienced a major market crash in 1987 presumably by programme trading, which involved pre-set computerised buy and sell orders being triggered by price drops and causing further drops – and thereby triggering more sales.
This manifested the risks involved in digitised cross-border financial connections and transactions, showing that the entire connected market is faced with the same risks.
In 1990, an accounting organization for Islamic financial institutions (Accounting and Auditing Organization for Islamic Financial Institutions, AAOIFI), was established in Algiers by a group of Islamic financial institutions. The same year witnessed the Islamic bond market emerge when the first tradable sukuk – the Islamic alternative to conventional bonds – was issued by Shell MDS in Malaysia. The nucleus of Fintech appeared in 1995 when Wells Fargo used the World Wide Web (WWW) to provide online account checking.
The Internet merged with finance like never before. By 2001, eight banks in the United States had one million customers online, with other main jurisdictions around the world rapidly developing the same systems and related regulatory frameworks to address risk.
In 1996, Citibank began to offer Islamic banking services when it established the Citi Islamic Investment Bank in Bahrain. In 1999 the Dow Jones Islamic Market Index (DJIMI) was established, becoming the first successful benchmark for the performance of Islamic investment funds. In 2002, the Malaysia-based Islamic Financial Services Board (IFSB) was established as an international standard-setting body for Islamic financial institutions.
Islamic Finance was equally growing with the technological developments. By 2005, the first direct digital banks without any physical branches emerged (e.g. ING Direct, HSBC Direct) in the UK. With the dawn of the 21st century, advancements in Internet technology opened the doors to several Fintech companies with consumer-facing solutions.
PayPal was launched in 1998 and was among the early Fintech companies that started transforming the way people managed their money through payments. eBay was also one of the first e-commerce websites that permitted consumers to create the market and establish prices for auction items. The digital revolution had truly begun. Most Fintech entrants and start-ups were providing transfer, payments, investment management, and lending.
Envestnet and Yodlee were founded in 1999, Mint in 2006, and Credit Karma in 2007, all providing services for personal finance and investment management. Xoom was founded in 2001 and Payoneer in 2005, both providing services for money transfer and currency.
Prosper was founded in 2005, Lending Club in 2006, and OnDeck in 2007, providing lending services. Klarna was founded in 2005, Adyen in 2006, and Braintree in 2007, providing services for payments. Trading and data analysis provider Fintech companies are MarketAxess, which was founded in 2000, Market in 2003, and BATS Global in 2005. Then the Global Financial Crisis (GFC) took place.
The world changed. Finance changed. The markets changed. Another evolution of Fintech took centre stage. From the point of view of Fintech, the Crisis played a huge role.
Firstly, there was a huge pool of talent that was made redundant and lost their jobs in financial services. This would lead them to either try entrepreneurship or explore different opportunities altogether.
Secondly, the GFC resulted in sweeping regulatory changes to prevent the systemic risk that shook the entire system. The regulatory changes impacted the profitability of the financial institutions and increased the compliance costs.
Thirdly, the GFC impacted consumer confidence in the traditional financial system. The lack of trust opened up the floor for tech companies to start offering financial services. 2007 also saw something revolutionary: the iPhone.
The smartphone is the device at the heart of the Fintech revolution. The previous decade has been all about Fintech. Fintech has transformed exponentially, from being merely a digital facilitator for B2B and B2C such as services for banks, financial companies, and digital wealth management, to becoming an industry collaborator, hybrid, and integrated operators.
Fintech is now much more about sharing core banking services and banking-as-a-service (BaaS), sharing APIs, Open Banking, co-creation and innovation, leveraging technology and data to create value for its cross-border services, applying machine learning algorithms, and for providing integrated, re-bundled financial services.
Based on a report by Accenture, the amount invested in Fintech has risen from US$930 million to US$57 billion between 2008 and the first half of 2018. As for Islamic Finance, the Global Islamic Economy Report 2019 estimates that the industry is expecting strong growth and will reach USD 3.5 trillion in assets by 2024.
The top five growth sectors for Islamic Fintech in 2020 are expected to be
Crowdfunding, Challenger Banking, Blockchain and Crypto, Robo-Advisory, and PFM (Personal Financial Management).
Before 2016, the only real manifestation of Fintech in Islamic finance was through crowdfunding platforms. 2016 saw Islamic robo-advisory firms launched as well as an Islamic Account Platform (IAP). The same year witnessed the birth of the Islamic Fintech Alliance (IFT Alliance), Islamic Fintech Hub, and Islamic Peer-to-Peer (P2P) financing. It was in Malaysia that eight Islamic crowdfunding platform operators came together in April 2016 to announce their alliance and cooperation to develop Islamic Fintech.
They called this initiative the Islamic Fintech Alliance (IFT Alliance). The founding members were Blossom Finance, Easi Up, Ethis Crowd, Narwi, Funding Lab, Kapital Boost, Launchgood, and SkolaFund.
Whilst Malaysia was booming with Islamic Fintech, the UK and US began to see the rise of Islamic Fintech. In 2016, Yielders was launched. Yielders is the UK’s first Islamic Fintech real-estate crowdfunding platform which is FCA licenced. Across the pond, New York-based Wahed Invest Inc launched one of the world’s first Sharia-compliant robo-advisory platforms. In the same year, Ethis Kapital was given the licence to operate a Sharia- compliant P2P license by the Securities Commission Malaysia; Ethis Kapital concentrates on funding small businesses and real estate development projects.
Since 2016 to date, there have been over one hundred Islamic Fintech start-ups established across the spectrum of Islamic Finance.
The Global Islamic Fintech Report 2019 found that 70% of Islamic Fintechs expect to raise an equity funding round in 2020 with an average round size of USD 7M. More mature companies expect to also pursue other forms of funding, namely debt, bridge/mezzanine finance, and SAFE (simple agreement for future equity).
(Concluded)
