Interview: Christoph Koster
To what extent is ethical consumerism underpinning the demand surge for Islamic banking?
CHRISTOPH KOSTER: Ethical consumerism has emerged as a powerful force driving demand for Islamic banking. Younger consumers, in particular, increasingly align their financial decisions with values such as fairness, transparency, social responsibility, openness and honesty. These values resonate with the principles of Islamic finance, making it a natural fit for this demographic. Risk sharing, a fundamental tenet of Islamic banking, is also closely aligned with the ethos of ethical consumerism, offering an approach rooted in fairness and mutual benefit. Looking ahead, we expect a growing preference for economic value rooted in real assets, rather than speculative ventures. While older generations may prioritise different financial goals, the younger generation seeks growth paired with ethical considerations. Islamic banking’s inherent emphasis on ethics positions it to lead in meeting this evolving demand.
What challenges do Islamic banks face in integrating emerging technologies into their operations?
KOSTER: Integrating advanced technologies presents both opportunities and challenges for Islamic banks. The foremost challenge is ensuring these technologies align with sharia principles. For artificial intelligence, this means emphasising transparency, as opaque decision-making processes could conflict with Islamic banking’s ethical requirements. Blockchain, on the other hand, offers significant potential by enhancing transparency and enabling sharia compliance across the entire transaction chain. A hybrid approach that combines human expertise with advanced technologies could be the most strategic path forward. By leveraging these technologies while maintaining human oversight, Islamic banks can enhance sharia compliance for regulators, partners and clients. The goal is not just technological integration, but the creation of systems that strengthen the ethical foundations of Islamic finance.
How does recent regulatory development affect the competitive landscape for Islamic digital banking?
KOSTER: Regulatory development aims to build consumer trust and safeguard customers. These measures are crucial in a landscape that is increasingly threatened by cybersecurity fraud, which often targets individuals and businesses rather than financial institutions themselves. Initiatives such as the UAE Pass digital identity platform are key steps forwards, but cybersecurity remains a dynamic challenge. For Islamic digital banking, these regulations create a dual imperative: ensuring compliance with enhanced cybersecurity standards while maintaining sharia principles. The ability to protect customer data and ensure secure transactions is vital to remaining competitive in an increasingly digitalised banking environment.
What investment opportunities do you foresee emerging within the Islamic digital banking sector?
KOSTER: Sharia-compliant digital banking offers opportunities in areas such as financing for small and medium-sized enterprises (SMEs) and green finance initiatives. Historically, SMEs have struggled to access financing due to unpredictable cash flows and limited credit histories. Islamic banks can address this gap through innovative financing models like profit-and-loss sharing and alternative credit assessments, unlocking market potential. Green finance, particularly green sukuk (Islamic bonds), represents another promising avenue. As a tool for sustainable financing, green sukuk aligns with the values of Islamic finance while supporting environmental initiatives. Islamic wealth management is an area ripe for growth. Advances in technology enable the screening of investment securities for sharia compliance, making it feasible to construct sophisticated financial products tailored to Islamic principles. While the Islamic finance industry has not yet reached the scale of conventional finance in this regard, the potential for innovation and expansion is significant.
