Will Islamic retail banking survive the fintech onslaught?
Bank Negara Malaysia


Financial technology (fintech) is the buzz word in today’s financial industry landscape. In recent times, fintech start-ups have emerged as a disrupting force within the banking industry and has impacted every aspect of financial services, particularly the retail banking operation. Islamic retail banks especially the players from the Gulf Cooperation Council (GCC), and Middle East and North Africa have been relatively slow in adopting transformative digitisation compared to its conventional global peers.

Fintech has become synonymous with the financial services as their global adoption has risen on average from 16% in 2015 to 33% in 2017. It is estimated that the volume of collective funding generated through fintech could reach US$90 billion (RM358.2 billion) by 2020, with the software and data market projected to hit US$92 billion by 2026.

This exponential rise in fintech provides both opportunity and disruption for the incumbent Islamic banks in the coming years.

While conventional banks are increasing their digitisation effort to overcome the onslaught of fintech start-ups, Islamic banks are still struggling with lower penetration in mobile banking and lack of readiness for emerging technology adoption. Due to the rise in fintech start-ups, every service category of Islamic retail banking namely payments, money transfer, wealth management and personal finance are under continuous threat.

Taking Blows

So, which Islamic retail banking segment is taking the blow from fintech? Mobile banking is one area where Islamic retail banks will suffer the most. With the emergence of payment gateways such as Apple Pay and Samsung Pay, there is a rapid shift in the behaviour and expectations of banking customers which will see fever visit to branches. Islamic banks are in a greater need to integrate the banking channels to have a wider dissemination of financial services among the users. Due to ever increasing competitive landscape in the GCC banking sector, a hotbed for global Islamic finance, Islamic banks need to prepare itself for increasingly digital users.

Another area of growing concern is the wealth management domain. Traditionally, retail banks were the first point of contact for savers and investors for managing their savings and provide investment advices. In the era of roboadvisors and algorithmic investment solution, investors across the globe are looking for fast, efficient and high-return hybrid

products, thus making retail banks losing their share of wealth management practices. Islamic investment products based on profit and loss-sharing principles like Mudarabah are yet to find a niche in the space of digital wealth management solution.

Barring technological aspect of the disruption, lack of Shariah-compliant robo-advisor is another concern for the Islamic retail banks. So far in Islamic finance landscape, we have only Algebra, the first Shariah-compliant robo-advisor, and Wahed, the first automated Shariah-complaint investment platform in the world. Interestingly, none of these innovations are invented or hosted by any Islamic banks.

Islamic retail banks are in a dire need to digitise their wealth management services, or ready to be out of the business soon. It is not surprising that a wealth management user base consists of a demographic, which can pay a premium for expert advice and achieve their investment goals via automated and efficient service through robo-advisor. Resistance to digital adoption among the wealth managers of legacy Islamic retail banks combined with an innovative wealth management solutions from fintech start-ups is causing a major interruption to the retail banking services. The emergence of tech savvy millennials is further adding to the woes as they believe that their financial advisor or wealth manager has a strong digital offering.

Growing Trend

Everything is neither gloomy when it comes to adoption and usage of fintech in the Islamic retail banking space, nor we are expecting the extinction of retail banks. Islamic fintech landscape is a growing trend which provides an opportunity for Islamic banks to collaborate and embark on the digital transformation.

According to IFN Fintech, there are over 100 fintech companies in Islamic banking countries which offer services in payment, remittance, crowd-funding, personal finance and peer-to-peer, among others. The rapidly developing Islamic fintech community in Malaysia, United Arab Emirates and Indonesia is a testimony to the appetite for efficient Shariah-compliant fintech offerings, as well as readiness of retail banking users to adopt digital financial services.

In many instances, Islamic fintech providers are complimenting the role of Islamic banks. For example, Alami Sharia, an Indonesian-based fintech start-up, facilitates small businesses to obtain financing from Islamic banks.

Regulatory Support

There is also a growing support from regulators to harness the potential of fintech, which will further supplement and enhance the offerings of Islamic banks.

Bank Negara Malaysia (BNM), the Malaysian central bank and financial regulator, came out with a regulatory sandbox framework to boost the fintech sector in the country and to complement banking services. “Regulatory sandbox” is a concept where businesses can test innovative products, services, business models and delivery mechanisms in a live environment without immediately incurring all the normal regulatory consequences of engaging in the related activities.

It is high time that both Islamic banks and fintech start-ups should move away from being a competitor to a collaborator. It will be naïve to ignore the fintech tractions in the financial services and Islamic banks should leverage on fintech innovations in the domain of personal finance and wealth management, and buckle the way consumers access financial services.

Collaboration is the way forward for both fintech players who have scalability and trust issues to target larger audiences as established Islamic banks might struggle to digitise their operation completely without the help of fintech solution providers. The biggest gainer of this collaboration will be the users of financial services.

  • Dr Nafis Alam is currently an associate professor of finance at Henley Business School, University of Reading Malaysia. His research is focused on fintech, banking regulation, financial market, corporate finance, and Islamic banking and finance.