Islamic finance has emerged globally as a dynamic sector, garnering increased investor attention and becoming a new frontier of digitalisation efforts. Given Qatar’s significant experience in the sector, authorities and financial institutions are increasingly paying attention to ways in which financial technology (fintech) could become a lever for the sector’s expansion.
On the Rise
“State of the Global Islamic Economy Report 2023/24” – published by DinarStandard, a US-based research and advisory firm – indicates that the total value of Islamic finance-related transactions rose from $2.2bn in the 2021-22 period to $14.4bn in 2022-23. In this context, the sector is moving towards sustainability and financial inclusion. For example, the issuance of green, social and sustainability-linked sukuk (Islamic bonds) is growing in several countries, including Bahrain, Indonesia, Malaysia, Saudi Arabia and the UAE. As a result of this trend, Islamic finance assets increased by 17% to nearly $4trn in 2022-23, compared to $3.4trn in the 2021-22 period. Moreover, assets are projected to reach more than $5.9trn by 2025-26, reflecting a compound annual growth rate (CAGR) of 9%.
Against this backdrop, there is increased interest in Islamic fintech start-ups, particularly from investors exploring new avenues for ethical investment. Islamic social finance tools, namely those supported by social fintech platforms that engage in microfinancing, crowdfunding and social commerce, are playing a role in reducing poverty and supporting the development of small and medium-sized enterprises.
DinarStandard’s “Global Islamic Fintech Report 2023/24” estimates the Islamic fintech global market transaction volume at $138bn in 2022-23, and is predicted to hit $306bn by 2027, with a CAGR of 17.3%. Meanwhile, the overall global fintech segment is expected to have a CAGR of 12.3% in the same period.
Geographically, the highest transaction volumes in Islamic fintech were recorded in Indonesia, Iran, Kuwait, Malaysia, Saudi Arabia and the UAE. These six countries make up 85% of the global Islamic fintech market size. In Qatar, the Islamic fintech market recorded $2.1bn in transaction volume during the 2022-23 period, and is estimated to reach $4bn by 2027. Home to 24 of the 417 Islamic fintech firms recognised worldwide, the country has climbed one spot in the 2023-24 Global Islamic Fintech Index, solidifying its position as the eighth-most supportive ecosystem within this subsector.
Challenges
Moving forwards, the success of Qatarbased Islamic fintech firms will largely depend on their ability to reach foreign markets, given the relatively small size of potential domestic demand. In this sense, there is a clear rationale underpinning Qatar’s goal to become a global node in financial services, as stated in its Third National Development Strategy (NDS-3) 2024-30. Attaining the consideration of a centre would imprint an outwards-oriented direction to the country’s Islamic fintech subsector and, more broadly, to its Islamic finance sector, as a whole.
However, the development of such a status faces external challenges. While awareness of, and confidence in, Islamic products in Qatar and the broader GCC region is relatively high, the same does not apply in some other jurisdictions. This potentially constrains the demand for Islamic fintech. In addition, regulatory fragmentation and licensing costs, even in developed regions such as the GCC, could potentially limit the cross-border scalability of fintech companies. There is inherent complexity in regulating the fintech sphere given the high level of heterogeneity of its services, regulatory oversight of technology, anti-money laundering measures, cybercrime prevention and financial stability differing across markets, all of which have implications for external expansion. Nevertheless, policymakers are aware of all of these challenges, and under the broad strategic framework articulated by the NDS-3, outlined the key goals of setting a clear direction for the national Islamic finance sector and supporting the development of innovative, digitally enabled products.
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