Skip to content

Asian digital banks cannot ignore Islamic opportunity

Nadia Benaissa Sep 23, 2021 10:16:00 AM

BPC - in collaboration with Fincog - recently published a report on the state of digital banking in Asia. In the latest in a series of blogs we look at the potential of Islamic banking as a niche opportunity in the Asia Pacific digital banking market.

Islamic banking continues to grow in importance. In May, S&P Global Ratings reported that the $2.2 trillion global Islamic finance industry was expected to expand by between 10% and 12% over the next 12 months.

Ratings agency Moody’s has observed that Islamic banking is poised to grow particularly strongly across South and Southeast Asia post-pandemic with growth outstripping that of conventional banking and government efforts to develop the sector supporting long term growth.

Key to the growth of Islamic banking are efforts by governments of major Islamic banking markets in South and Southeast Asia to develop the sector, given its role in increasing financial inclusion and its inherent alignment with ESG principles. Additionally, Islamic banking is part of a halal ecosystem governments want to create to spur economic development.

Fitch Ratings notes that in developed markets such as Malaysia, Islamic banking has achieved systemic importance and mainstream relevance. However, it warns that awareness gaps still remain even in developed markets - in 2019, Bank Negara Malaysia reported that almost 60% of SMEs in Malaysia were not aware of the availability of Islamic financing facilities, for example.

Young people are particularly enthusiastic about getting access to Islamic banking services according to an August 2021 report. According to Faith and finance: The changing face of Islamic banking, more than half (53%) of young Muslims would choose Islamic banking if barriers to entry were removed.

Three quarters of the young Muslims surveyed said the availability of online banking options was a dealbreaker and that they wanted to be able to access their bank’s services via a mobile app. Yet one third said they were currently unable to access banks that adhere to Islamic principles.

The 2020 Islamic Finance Development Report notes that Islamic financial institutions responded to the coronavirus crisis by stepping up their digital services. The report authors also observe that digital-based financial institutions have become much more popular during the pandemic with Islamic challenger or digital-only banks emerging in non-core markets such as Malaysia and Australia.

Similar observations were made in the Islamic Finance Outlook 2021 edition, which suggested that greater digitisation and fintech collaboration could help strengthen the resilience of the industry in a more volatile environment and open new avenues for growth.

In an interview with Oxford Business Group in 2020, Ayman Sejiny, CEO of the Islamic Corporation for the Development of the Private Sector (ICD) stated that the acceleration of the digital transformation that was already under way prior to the pandemic would expand access to - and increase the socially transformative role of - the Islamic banking sector.

Fintech has the capacity to increase standardisation, streamline processes, reduce costs and boost transparency, making Islamic financial instruments more competitive relative to conventional forms of banking.

As economic development continues to flourish and regulations across the region become more established, it is clear that the APAC fintech industry is ripe with opportunity. Southeast Asia is a particularly interesting market given that it is currently less established in the digital banking space.

Unlike the blanket approach neobanks in Europe have adopted to enter multiple markets simultaneously, consumer needs and expectations vary greatly within and between countries in APAC. Therefore, it is important that new players develop targeted, localised products and propositions, embrace partnership opportunities within an open tech ecosystem, and utilise customer insights with a data-driven approach to successfully attract consumers.

Creating a targeted proposition which addresses gaps in banking service availability in countries such as Indonesia (which is home to the largest Islamic population in the world) is a potentially valuable approach.

As religious beliefs and their respective approaches to finances differ across the region it is evident that a blanket approach to digital banking would not be successful, but rather that tailored solutions are more likely to bring success.

Furthermore, a plethora of opportunities still exist to focus on the vast unbanked and underserved population in the region, who seek low cost digital services accessible in rural societies. There is an increased need for non-financial services to drive added value to underserved customers through embedded finance, which can be defined as the use of banking-as-a-service and API-driven banking and payments services to integrate financial services within other environments and ecosystems.

Players who want to develop a less targeted proposition may still find success. However, as joint ventures and consortia continue to be the dominant receiver of digital banking licenses, it is highly advisable that new entrants follow a similar business model.

Specifically, in less established markets, partnerships with established tech groups will likely prove vital in quickly scaling to take market dominance over other new competitors.