Islamic Business and Finance Series
ISLAMIC FINTECH
Edited by
Sara Sánchez Fernández
Islamic Fintech
The implementation of new technologies is expected to boost the development of
Islamic Finance by increasing accessibility to banking and other financial services
in Islamic communities and democratizing access to investment opportunities.
At the same time, new technologies will increase financing opportunities and
facilitate asset management for Sharia-compliant businesses. This collection of
essays from selected experts in the field comprise some of the most topical issues
on Islamic Fintech, combining a business focus with legal insights.
The book takes as a point of departure the role that Islamic Fintech can play
in promoting sustainability. The social vision of welfare improvement and justice
is already embedded in Sharia’s economic rules, which makes Islamic Finance
particularly well suited to bridge the gap between sustainability and funding.
Although it is not without challenges for the industry, technology will help
unleash its potential. With a holistic approach to Islamic Fintech, the contributing
authors address the application of new technologies to Islamic Finance, including
robo-advisory, crowdfunding and digital ledger technology (both in the issuance
of bitcoin and the registration of securities in tokenized form) and in certain
sectors such as takaful (takaful-tech) and health (e-health). Finally, they explore
the challenges posed by anti-money laundering (‘AML’) in the specific realm of
Islamic Fintech.
The book combines theoretical analysis with a practical focus, both through
case studies and directly through the experiences of leading entrepreneurs. In
addition, it provides insights on legal and regulatory aspects, which are key in a
field that is still in its infancy and needs support from lawmakers and regulators. It
is, thus, a reference for academics, legal practitioners, policymakers, entrepreneurs
and the Islamic Finance community.
Sara Sánchez Fernández is Assistant Professor at IE Law School, IE University
(Spain). She specializes in capital markets law from a cross-border perspective,
as well as in Islamic Finance. Sara holds a PhD in Private International Law from
Universidad Autónoma de Madrid (Spain).
Islamic Business and Finance Series
Series Editor: Ishaq Bhatti
There is an increasing need for western politicians, financiers, bankers and indeed
the western business community in general to have access to high quality and
authoritative texts on Islamic financial and business practices. Drawing on expertise from across the Islamic world, this new series will provide carefully chosen
and focused monographs and collections, each authored/edited by an expert in
their respective field all over the world.
The series will be pitched at a level to appeal to middle and senior management
in both the western and the Islamic business communities. For the manager with
a western background the series will provide detailed and up-to-date briefings
on important topics; for the academics, post-graduates, business communities,
manager with western and an Islamic background the series will provide a guide
to best practice in business in Islamic communities around the world, including
Muslim minorities in the west and majorities in the rest of the world.
Growth of Islamic Banking in Indonesia
Theory and Practice
Sigit Pramono and Yasushi Suzuki
Islamic Monetary Economics
Finance and Banking in Contemporary Muslim Economies
Edited by Taha Eğri and Zeyneb Hafsa Orhan
COVID-19 and Islamic Social Finance
Edited by M. Kabir Hassan, Aishath Muneeza and Adel M. Sarea
Islamic Fintech
Edited by Sara Sánchez Fernández
For more information about this series, please visit: www.routledge.com/Islamic
-Business-and-Finance-Series/book-series/ISLAMICFINANCE
Islamic Fintech
Edited by
Sara Sánchez Fernández
First published 2021
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Names: Sánchez Fernández, Sara, editor.
Title: Islamic fintech / edited by Sara Sánchez Fernández.
Description: Abingdon, Oxon ; New York, NY ; Routledge, 2021. |
Series: Islamic business and finance | Includes bibliographical references
and index.
Identifiers: LCCN 2020046160 (print) | LCCN 2020046161 (ebook)
Subjects: LCSH: Finance--Technological innovations--Islamic countries. |
Financial services industry--Technological innovations--Islamic countries. |
Financial engineering--Islamic countries.
Classification: LCC HG187.4 .I836545 2020 (print) | LCC HG187.4
(ebook) | DDC 332.10917/67--dc23
LC record available at https://lccn.loc.gov/2020046160
LC ebook record available at https://lccn.loc.gov/2020046161
ISBN: 978-0-367-44369-6 (hbk)
ISBN: 978-1-003-01461-4 (ebk)
Typeset in Times New Roman
by Deanta Global Publishing Services, Chennai, India
Contents
Contributors
Foreword
Abbreviations
1
Role of Fintech to achieve the SDGs from an Islamic perspective
vii
xi
xiii
1
HOUSSEM EDDINE BEDOUI AND WAIL AAMINOU
2
Islamic Fintech and ESG goals: Key considerations for
fulfilling Maqasid principles
16
BLAKE GOUD, TANVIR A. UDDIN AND BAYU A. FIANTO
3
Takaful and Fintech: Can Fintech save takaful? A case study
36
GERMÁN RODRÍGUEZ-MORENO
4
Robo-advisory: An opportunity for innovation in
Sharia-compliant markets
44
PABLO SOLER BACH
5
Telemedicine and e-health in the Middle East
52
SARMAD R. AHMAD
6
Is a cryptocurrency a currency or a product/commodity?
The case of bitcoin
65
KALEEM ALAM
7
DLT and capital-raising in Islamic Finance
79
SARA SÁNCHEZ FERNÁNDEZ
8
The role of Islamic crowdfunding in the new economy
UMAR MUNSHI
91
vi
Contents
9 Crowdfunding in Spain under Sharia rules
102
ANTONIO GABRIEL AGUILERA
10 Anti-money laundering from the Islamic perspective in the
digital era
114
GONZALO RODRÍGUEZ MARÍN
Index
127
Contributors
Wail Aaminou is an international consultant in impact finance. Dr Wail Aaminou
particularly focuses on Fintech and on integrating sustainable development
into the business model of financial institutions. In this capacity, he has been
advising banks, mutual funds and international organizations. On the academic
side, Dr Wail Aaminou lectured in many universities including the University
of Istanbul Sabahattin Zaim, the University of Sunderland, Paris Dauphine
University and Toulouse Business School. He also contributed to several articles in international journals. His research specializes in consumer behaviour
and sustainability financing. Dr Wail Aaminou holds a PhD. in financial engineering from Ecole Mohammadia d’ingénieurs (Morocco). He also holds an
MBA in Finance with an academic excellence award from Duke University
(US) and graduated in IT engineering from ENSIAS (Morocco).
Antonio Gabriel Aguilera is a lawyer with more than 15 years of experience.
Antonio Aguilera has an MBA from San Telmo International Institute, is certified as an External Expert in Anti-money Laundering (‘SEPBLAC’) Bank of
Spain and holds a Diploma in Islamic Finance granted by the King AbdelAziz
of Jeddah University, Saudi Arabia.
Sarmad R.Ahmad is a health-tech entrepreneur based in Bahrain. His company
Saaya Health provides Emotional & Mental Wellbeing access to Corporates
and Diaspora communities across the globe – enabling access to culturally
relevant mental health.
He is currently also serving as the Director of Digitisation and Innovation for
Hajj & Umrah with the Saudi Government while also teaching Entrepreneurship
at IE Business School as an Adjunct Professor. Due to his work in Mental
Health, he sits on the board of Alkaram Institute, USA’s first Islamic psychology research institute (www.alkaraminstitute.org) and the Self-Empowerment
Centre (www.secpak.org).
Sarmad’s hobbies include helping entrepreneurs make connections across
the globe to investors and he is an early stage angel investor in companies
such as London Fintech Goldex (www.goldexapp.com) and travel aggregator
FindMyAdventure (www.findmyadventure.pk).
viii Contributors
Kaleem ALAM is a researcher at Islamic Economics Institute (‘IEI’), King
AbdulAziz University, KSA. He is also an advisor and international collaboration at IEI. He is responsible for coordinating the activities of SaudiSpanish Center for Islamic Economics and Finance (‘SCIEF’) in Madrid,
Spain. He holds a PhD in Commerce from TMBU, India, MBA Finance
from Coventry University, UK and BBA from IIUM, Malaysia. His interest includes Islamic Banking and Finance, Strategic studies (development/
management/planning), Feasibilities and Conceptual Visualization (business/
finance).
Houssem eddine Bedoui is an Expert at the Islamic Development Bank. As
part of his work at the Islamic Development Bank, he actively contributes
to the structuring, launch and implementation of innovative products and
processes for the market. Besides, Dr Bedoui is a CIBAFI and ATD certified trainer (‘MTP’: Master Trainer Program). He has several entrepreneurial
experiences putting Islamic Finance principles and products into practice.
He has a Master’s from Telecom SudParis Engineering School (‘INT’),
France; an MBA from IE Business School (Spain); a PhD. from ENS (École
Normale Supérieure, France); he is also an Alumni from Harvard Kennedy
School (‘CID’, Center for International Development). His research interests comprise Islamic capital markets, Fintech, social entrepreneurship and
finance, competitiveness and Islamic banking; he has published in several
academic journals and presented his research works at various international
conferences.
Bayu A. Fianto is an Assistant Professor at the Department of Shari’a Economics,
Faculty of Economics and Business, Universitas Airlangga. He earned his
PhD in Finance from Lincoln University, New Zealand, his MBA in Islamic
Banking and Finance from International Islamic University Malaysia, and
Bachelor’s degree in Management from Brawijaya University, Indonesia. He
has published several articles in peer-reviewed journals including PacificBasin Finance Journal, Journal of Islamic Marketing and Agricultural Finance
Review. He is also a reviewer for several refereed journals such as Journal
of Economic Analysis and Policy, International Journal of Islamic Middle
Eastern Finance and Management and SAGE Open. His current research interests include Islamic microfinance, Islamic banking and finance and Islamic
capital market. He can be reached at: bayu.fianto@feb.unair.ac.id.
Blake Goud is the CEO of the RFI Foundation, a non-profit focused on promoting convergence between responsible finance and Islamic Finance. His primary
area of interest global Islamic banking, capital markets and opportunities to
increase financial inclusion through Islamic Finance. He was the Community
Leader for the Thomson Reuters Islamic Finance Gateway from 2012 to 2015.
His published research includes papers on Islamic microfinance, renewable
energy microfinance and public finance. He received his BA in Economics
from Reed College in 2003.
Contributors
ix
Umar Munshi is a social entrepreneur from Singapore. He is the president of
the Islamic Fintech Alliance and the co-founder of Ethis.co, a group of pioneer crowdfunding and investment platforms with regulatory approvals in
Indonesia, Malaysia and Dubai. Its flagship platform Ethis Indonesia is an
award-winning property crowdfunding platform that has transacted impact
investments from 50+ countries to build 9,000+ homes for needy families,
giving investors healthy double-digit returns. His second platform, Global
Sadaqah, is an Islamic Social Finance marketplace that works with Islamic
banks to match charity organizations and social enterprises to corporations
high net worth and public donors, with a strong focus on zakat.
Ethis launched Malaysia’s first Islamic equity crowdfunding platform in
mid-2020 and is currently preparing to launch Dubai’s first property crowdfunding platform.
Munshi is passionate about spreading the opportunity for sustainable development through socially responsible applications of Fintech and crowdfunding. He regularly gives masterclasses, presentations and panel sessions at
events and webinars.
Gonzalo Rodríguez Marín is the General Coordinator of the Saudi-Spanish
Centre for Islamic Economics and Finance (‘SCIEF’) at IE Business School.
Previously he was a lawyer at Triodos Bank, the leading ethical bank in
Europe, and the legal advisor at Garrigues Abogados (the Iberian Peninsula’s
leading tax and legal services firm in terms of professional headcount and billing). He received his MAJ (LLM) from IE Business School, a Degree in Law
from Universidad Autónoma de Madrid, an International Executive Program
in Islamic Finance at IE Business School and he also holds studies in political
science from Universidad Complutense de Madrid and Islamic studies Course
at the Diplomatic School of Spain.
Germán Rodríguez-Moreno is an Adjunct Professor in Islamic Finance at the IE
Business School. He has developed an expertise in takaful (Islamic insurance)
and waqf (Islamic charitable trusts). His latest publications include ‘Waqf-based
Takaful Model: A Challenge for Social Entrepreneurship’ (2018) and ‘Islamic
Finance in Spain’ (2019). He has delivered masterclasses on takaful in Ryad
and Paris as a guest of the Ryad Chamber of Commerce and the Université
Paris Nanterre as well as at international conferences in Istanbul and Seville.
He is a founding member of the Observatorio de Finanzas Islámicas (Islamic
Finance Observatory) in Spain. City of London trained, Germán is an English
solicitor with 20 years’ experience as a corporate lawyer in the financial services sector. Prior to qualifying as a lawyer, Germán obtained a First Class BA
(Honours) and an MSc in Politics at Stirling University, Scotland.
Sara Sánchez Fernández is an Assistant Professor at IE Law School-IE
University (Spain), where she teaches both undergraduate and master’s
courses. Currently, her main research interests lie in capital markets law from
a cross-border perspective and its interface with new technologies. She is also
x
Contributors
interested in Islamic Finance and holds a diploma from the King AbdulAziz
University of Jeddah (Saudi Arabia). Prior to joining IE, Dr Sara Sánchez was
in practice as a lawyer at the capital markets department of one of the major
Spanish law firms, specialized in IPOs and corporate governance matters for
listed companies. She also worked as a researcher at Universidad Autónoma
de Madrid (‘UAM’) and Universidad Rey Juan Carlos (‘URJC’). Sara holds a
PhD in private international law from UAM (Spain).
Pablo Soler Bach lectures at the Finance Department of IE Business School and
is a guest lecturer at the Microfinance and Financial Inclusion Master programme of the Universidad Autónoma de Madrid.
He is also active as a consultant and advisor to corporations, Corporate
Venture arms and start-ups and he contributes his experience mentoring in two
international accelerators: Startup Bootcamp and Finnovista.
His interest in social impact investment has led him to take roles as an
advisor to Open Value Foundation and Fundie Ventures, and as a jury of the
Acumen Fellows programme.
Pablo started his career in General Electric Alstom (France) and the Boston
Consulting Group (Spain). After that period, which included an MBA at
Instead, he became an entrepreneur and investor, co-funding and managing
several innovative projects in different sectors.
Tanvir A. Uddin is a Commercial Manager at Brighte Capital, a leading energy
and home improvements financing Fintech based in Sydney. He is also a PhD
candidate researching Islamic microfinance in Bangladesh and Indonesia at
the University of Sydney Law School. Previously, Tanvir worked as a management consultant at McKinsey & Co and was an Islamic Finance Talent
Development Program Associate at the Islamic Development Bank in Jeddah.
There he supported utility-scale renewable energy Islamic project finance
investments in emerging countries while completing a Masters of Islamic
Finance at IE Business School. Tanvir’s research interests span social entrepreneurship, social Fintech and law and development.
Foreword
In the wake of the 21st century, the world has been enjoying the advancement of
cyberspace in almost every sector of daily life, be it on a private, social, political, economic or a global sphere. The corporate and financial sectors are still
dominated by traditional culture, in a race to cope up with gradual technological
evolution.
Recently, the financial and non-financial corporate sectors are adopting multiple borderless mechanisms using sophisticated technologies suited for the contemporary financial movement of their products and services. This transformation
helps to maximize comfortability, rational cost effectiveness and customer satisfaction, with the ultimate goal of advancing the industry to the new dynamism of
Fintech.
Despite such opportunities in the sophisticated cyberspace (Fintech), which are
to be optimized by the financial industry, there are still challenges that hinder the
smooth way forward. Among those challenges are black hat hackers, misuse and
fraud cultures, natural system crashes, rapid and repeated growth of devices, poor
professionalism and skills, unskilled corporate governance, lack of confidence,
non-etiquette and an insufficient support and cooperation from decision makers.
Most of these challenges arise through innovation in this new dimension,
whose effects perhaps are only temporary. In this promising journey of the emerging era of Fintech, these challenges may not last long, shifted away by Fintech’s
skilled dynamism.
Islamic financial industries are not the exception in coping with the global
emergence of Fintech in their products and services, but they do so within the
rules of Maqasid al-Sharia.
Global capital market, share market, money market, easy-pay, social finance,
digital currency, payment through apps or mobile banking are among those facilities systemized by Fintech with affordable mechanisms and less risk.
Financial authorities, regulators, decision makers, operators and customers are
moving with greater prospects towards converting and adapting the traditional
financial system into Fintech with promising benefits and better services. Such
renaissance is not happening only among the developing states but as a rising
global phenomenon.
xii
Foreword
Islamic financial markets are growing faster than its conventional counterparts,
with an annual growth rate ranging from 15% to 20% per annum, with sustainable
existence appreciated across today’s world.
Islamic financial industries capitalize every digital opportunity available
in system, products and services within the boundaries allowed by the rules of
Maqasid al-Sharia, aiming at serving the customers with satisfaction compatible
with possibly the best offerings of global practices. The Islamic Finance industry
in the contemporary era foresees the emergence of Fintech as the pushing factor
of products and services that bring innovation to a global platform with a furtherance legacy to position itself as an able alternative to the conventional counterparts with significant results and added benefits for all with a universal value.
Countries that are leading the advancement of Fintech for the Islamic Finance
industry are Saudi Arabia, United Arab Emirates, Malaysia, Indonesia, Bahrain,
Pakistan, Kuwait, Turkey, Qatar, Oman, Bangladesh, Brunei, Sudan, Iran, Egypt,
Jordan, Gambia, Uganda, Ghana, Kenya, Nigeria, Bosnia, South Africa, UK,
Singapore and the Philippines.
The political and financial authorities, corporate and professional entities,
researchers and decision makers are among those who are earnestly pushing, supporting and innovating the technical know-how of Fintech in Islamic Finance.
Cryptocurrencies, smart-payments, crowdfunding, capital markets, SRI sukuks,
waqf cooperation, zakat management, online financial services and mobile banking are among those opportunities which are already in action through Fintech.
The publication of this book is a milestone of the contemporary Fintech within
Sharia ethical values, by contributing several notable chapters on specialized
issues of Fintech, both from an academic and practical perspective, namely:
the role of Fintech in relation to SDGs and ESG goals, crowdfunding, Shariacompliant robo-advisory in the wealth advisory industry, takafultech, anti-money
laundering, cryptocurrencies – whether they are a product or a commodity –
Spanish crowdfunding, DLT capital-raising and e-health.
It is thus a pleasure for me to acknowledge that this book is indeed a result of
the effort of Dr Sara Sánchez Fernández (Assistant Professor, IE Law School-IE
University) and intellectual researchers from different parts of the world as contributors, which is timely to meet the global market demand of researchers, academia, professionals, industrialists, financial authorities and students.
Thus, the book may be a useful reference in understanding the technical knowhow of financial technology within the spirit of Maqasid al-Sharia and duly apply
the model in the contemporary Islamic financial environment.
Abdullah Qurban Turkistani, PhD
Dean
Islamic Economics Institute
King Abdulaziz University
Kingdom of Saudi Arabia
Abbreviations
AAOIFI
AI
AML
API
AR
AUM
BIS
B2B
B2C
CAGR
CBM
CFTC
CNMV
CONSOB
CSD
CTF
DLT
EBA
ECB
EIF
ENISA
ESG
ESMA
ETF
FATF
FCA
FINMA
FSMA
GCC
GDPR
GIIN
HKEX
Accounting and Auditing Organisation for Islamic Financial
Institutions
Artificial Intelligence
anti-money laundering
application programming interface
augmented reality
assets under management
Bank for International Settlements
business-to-business
business-to-consumer
Compound Annual Growth Rate
Central Bank of Malaysia
Commodity Futures Trading Commission
Comisión Nacional del Mercado de Valores
Commissione Nazionale per le Societa e la Borsa
central securities depositary
counter-terrorism financing
Distributed Ledger Technology
European Banking Authority
European Central Bank
European Investment Funds
European Union Agency for Network and Information Security
environmental, social and governance
European Securities and Markets Authority
exchange traded fund
Financial Action Task Force
Financial Conduct Authority
Swiss Financial Market Supervisory Authority
Financial Services and Markets Authority
Gulf Cooperation Council
General Data Protection Regulation
Global Impact Investment Network
Hong Kong Exchanges and Clearing Company
xiv Abbreviations
ICO
IFSB
IMF
IOMT
IOSCO
IOT
IRR
IT
KYC
MEA
MENA
MENAP
OIC
PLS
PRI
P2P
R&D
SDG
SEC
SME
SPV
SRI
UAE
UNPRI
VBI
VR
WWF
initial coin offering
Islamic Financial Services Board
International Monetary Fund
internet of medical things
International Organization of Securities Commissions
internet of things
Internal Rate of Return
information technology
Know Your Customer
Middle East and Africa
Middle East and North Africa
Middle East, North Africa, Afghanistan and Pakistan
Organization of Islamic Cooperation
profit-loss-sharing
Principles for Responsible Investment
peer-to-peer
research and development
Sustainable Development Goals
Securities and Exchange Commission
small and medium-sized enterprises
special purpose vehicle
socially responsible investment
United Arab Emirates
United Nations Principles for Responsible Investment
value-based intermediation
virtual reality
World Wildlife Fund
1
Role of Fintech to achieve
the SDGs from an
Islamic perspective
Houssem eddine Bedoui and Wail Aaminou
Introduction
There is an annual need to mobilize between USD 3.3–4.5 trillion in order to
attain the Sustainable Development Agenda 2030 (UN SDG 2018). In particular,
the developing countries are facing an average annual financing gap of USD 2.5
trillion of both government and private investment in SDG-related industries (IMF
2019). The Islamic Finance industry is offering opportunities to bridge the sustainability–financing gap. The chapter starts presenting the background of the current
study. Then it clarifies the genuine value proposition of the Islamic Finance and
Fintech industries. It shows the relationship between religion and sustainability
and Islam in particular. The Maqasid Sharia framework is studied as the motive
that captures sustainability in the Islamic Finance contribution. Then, the chapter
reviews sustainability specifically on six sustainability challenges in Organization
of Islamic Cooperation (‘OIC’) countries (gender equality, water, labour market,
healthcare, environment and education), and the role that Islamic Fintech should
play to capture and solve these issues. The chapter, later, displays Islamic Fintech
experiences in sustainability and proposes recommendations to unleash the potential of Fintech in the context of Islamic Finance. For instance, the chapter suggests having (i) a suitable ecosystem and innovation ecology, (ii) an adaptive and
evolving regulatory framework and (iii) organizational realignment to capture and
retain the required resources with a very complex skillset.
Background
The challenges facing humanity today are, by all measures, exceptional. To illustrate, economic and social inequalities have never been stronger; at least one billion people today live below the poverty line with problems of access to care,
inadequate nutrition and substandard housing conditions (Sachs 2015). What is
more, the effect of extreme natural disasters causes an annual loss of $520 billion
and creates 26 million new poor every year (IFC 2017).
In response to this serious situation, the international community adopted
in 2015 the Sustainable Development Goals (‘SDGs’) to end poverty, protect
the planet and ensure prosperity for all by 2030 (Bertelsmann Stifung 2017).
2
Houssem eddine Bedoui and Wail Aaminou
However, in the light of current trends, countries will widely miss the goals if
public and private financial resources needed to finance investments are not mobilized (Schmidt-Traub 2015). The Sustainable Development Solutions Network
estimates that 1.5–2.5% of the world’s GDP may be needed to finance the
achievement of the SDGs globally. More specifically, incremental spending needs
in low- and lower-middle-income countries may amount to at least $1.4 trillion
per year to reach SDGs (Schmidt-Traub 2015). On the climate ground, the World
Wildlife Fund (‘WWF’) believes that to limit the increase in global temperature
to 2°C (or even 1.5°C), an estimated annual investment of about $2 trillion over
the next 15 years is needed to transform our energy system, preserve ecosystems
and ensure sustainable water use (WWF 2016).
Addressing the above sustainability financing challenges has to take place in a
world governed by the influential trends of the fourth industrial revolution, which
has been enabled by modern technology advances at the crossroads of the physical, digital and biological worlds (World Economic Forum 2019). Fintech companies exemplify such a mutation in financial markets.
According to the Hong Kong Exchanges and Clearing Company (‘HKEX’)
(Cheung 2018), Financial technology, or Fintech, refers to ‘financial innovations
driven by technological advancement in the forms of new business models, new
financial services, and new software and applications that have a great impact on
the provision of financial services and the development of the financial industry’.
EY (2016) proposes a slightly different definition by presenting Fintech entities
as ‘high-growth organizations combining innovative business models and technology to enable, enhance and disrupt financial services’. This definition is not
restricted to start-ups or new entrants; it includes scale-ups, maturing companies
and even non-pure finance companies such as telecommunication providers and
e-retailers.
The rise of Fintech is underpinned not only by recent technological developments in blockchain (distributed ledger), mobile technologies or artificial
intelligence but also by the emergence of the ‘service now’ mentality and the
crowdsourcing of information and solutions (Hong Kong Steering Group on
Financial and Technologies 2016). While acknowledging that there is no commonly accepted taxonomy for Fintech innovations, the Reserve Bank of India categorizes Fintech innovations into five main groups (Reserve Bank of India 2017).
The financial industry’s landscape is evolving so rapidly due to the technological developments that it is ultimately shifting the world economy (Hayen
2016). Hence, the technology applied to Islamic Finance offers this opportunity
to observe sustainability and business ethics in financial transactions (transparency, fairness and justice). Islamic Finance then offers excellent potential to leverage technology as a catalyst to improve operational efficiency. Fintech offers
the ability to deliver value-added and customer-focused services by delivering
customized solutions using biometric techniques, big data and predictive analysis.
Moreover, the potential of blockchain technology empowers transactions to be a
cost effective and time-saving implementation (Miskam & Siti Hawa 2018).
Role of Fintech to achieve the SDGs 3
The Assistant Governor of Bank Negara Malaysia in his Opening Remarks at
Islamic Fintech Dialogue 2017 (Omar 2017a) confirmed that Fintech provides the
potential for the following three areas critical to the Islamic Finance: (i) industry
players can generate more value and customer-focused services by leveraging
technology. By making banking operations more accessible, faster and more convenient, the technology could bring significant advantages to customers (Omar
2017b). (ii) Adopting technology can assist Islamic Finance to reach market
segments that otherwise would not be cost effective. This implies an excellent
opportunity for untapped markets to be served. (iii) Fintech can help enhance
the effectiveness of back-end devices, activities and procedures, including using
predictive analytics to conduct real-time risk management.
Henceforth, Fintech products and services need their regulations to supervise
their operations in order to preserve the trust of different stakeholders in Islamic
Finance, and importantly meet society’s requirements and ultimately achieve sustainable development goals and accomplish Maqasid Sharia.
Relationship between sustainability and Islamic Finance
The role of religion in development has generally been viewed with suspicion
and even indifference, especially in the face of institutional concerns about development planning and policies. Though, three decades ago, a growing interest in
religion started as a category of developmental studies assessment (Narayanan
2013). Narayanan identified three ways in which religion would play a significant
role in empowering sustainability and sustainable development through its: (i)
values, (ii) potential for social and ecological activism and (iii) capacity to enable
self-development.
Deneulin and Bano confirmed the failure of the secular thesis of religion’s
meaninglessness as societies modernize (Deneulin & Bano 2009). In their
attempts to attain their shared objectives of humanitarian welfare and ecological
conservation, religion and sustainability are of significant significance to each
other (Narayanan 2013). Deneulin and Bano highlighted as well the role of religion in humanitarian activities and confirmed the requirement of development’s
commitment to religion as well. In fact, it is true that religion has its potential to
clarify and develop the determinations of sustainability and sustainable development in order to play a beneficial role in both domestic and international development policy (Deneulin & Bano 2009). On the other hand, the development can
as well provide an opportunity for religion to revisit some of its claims and procedures introspectively, and accordingly, religion has habitually been adaptive to
changes in the socio-political environment (Deneulin & Bano 2009). Narayanan
(2013) concluded that sustainable development as a practice and religion as a
belief system are entwined and must be discussed together.
In the 5th International Conference on Sustainable Development (‘ICSD’) of
the International Environment Forum (‘IEF’) in the Czech Republic, on October
2001, Arthur Lyon Dahl pointed out the following:
4
Houssem eddine Bedoui and Wail Aaminou
Values, or the application of spiritual principles, have been the missing ingredient in most past approaches to sustainable development. Grand declarations
and detailed action plans, even when approved by all the governments, do
not go far if people are not motivated to implement them in their own lives,
and if institutions are not made responsible to carry them out. The exciting
thing about addressing sustainability at the level of values is the potential to
create self-generating human systems building a more sustainable and thus
ever-advancing civilization. The World Summit on Sustainable Development
should include this dimension in its agenda.
This confirms the intricate connexion between religion and social values for sustainability. Although there are steady tendencies in the values promoted by the
major religions and some of the values embodied in the theory of universal human
values, religion includes much more than the promotion of these specific values
(Ives & Kidwell 2019).
To advance study on this intersection of religion and human values, Ives and
Kidwell suggested that religion be understood as a multifaceted incarnational institution of substantial social and political significance. This wide-ranging understanding of religion allows, therefore, researchers to study the social values of
sustainable development in connection with the theories of social transformation.
The Islamic religion, for instance, does have its economic vision that highlights these social values. In fact, Sharia offers a reflection’s structure favourable
to integrate sustainability issues into economics and business. This vision is an
integrated characteristic of Maqasid Sharia aimed at encouraging welfare (jalb
al-masalih) and avoiding evil (dar’a al-mafasid) (Ibn Ashur 1945). Ibn Ashur
offers further specific facets covering the promotion of welfare, the fight against
corruption, the cautious use of natural resources and the improvement of the
Islamic lifestyle.
Maqasid Sharia translated literally as the fundamental objectives of Islamic
law is a supra-normative framework to anchor any jurisprudential process (Bedoui
2015; 2012; Bedoui & Mansour 2015). Al Ghazali (12th-century famous Muslim
scholar and philosopher introduced the concept) believes that Maqasid Sharia’s
definitive drive is to attain the benefits of man on earth (Al-Ghazali 1937). Shatibi,
a 14th-century scholar, confirmed that the legislator’s overall objective, in the
law’s prescriptions, is to offer human interests (Ar-Raysoûnî 2016). Al-Ghazali
recognized five necessities (or essentials) that are basic from the perspective
of Sharia on account of their vital role in human life. These essentials are (i)
human self; (ii) faith; (iii) intellect; (iv) posterity (or procreation); and (v) wealth
(or property). Al-Najjar in his book The Purposes of the Islamic Way with New
Perspectives (2008) adds three additional objectives of Sharia. His point of view
of Maqasid Sharia consists of having four groups of objectives split each one into
two subgroups. Al-Najjar studies the subsequent Maqasid: safeguard the value
of human life (faith and human rights); safeguard the human self; safeguard the
value of society (prosperity and social entity) and safeguard the physical environment (wealth and environment). Accordingly, social and environmental issues are
Role of Fintech to achieve the SDGs 5
imbedded into the vision of Sharia. The practitioners of Islamic Finance, therefore,
have an exclusive responsibility in the real-world transformation of this religious
theory by taking into account the sustainability interests in the business process.
Sustainability challenges in OIC countries
The Organization of Islamic Cooperation (‘OIC’) is an inter-governmental organization with a membership of 57 countries across four continents. The organization was established on 25 September 1969 to represent the collective voice of the
Muslim world (OIC 2019). OIC countries are highly diverse in terms of geography, demography and economic development.
All countries are concerned with the 15-year SDG agenda to end poverty, protect the planet and ensure prosperity for all, and OIC countries are no exception.
However, such countries face specific sustainability challenges related, among
other things, to armed conflicts and forcibly displaced persons (40.8 million out of
68.5 million globally) (UNHCR 2019), demographic growth (expected increase
of 35% in the next 13 years) and acute vulnerability to climate change especially
in fragile and conflict-affected settings (IsDB 2019).
This chapter focuses specifically on six sustainability perspectives in OIC countries: gender equality, water, labour market healthcare, environmentand education.
Gender equality
As in other parts of the world, OIC countries generally struggle with existing social and economic inequalities at varying levels, which negatively affect
women’s well-being and their contribution to the development of their countries.
Indeed, the Gender Gap Index of the World Economic Forum, which gauges gender inequality in four key areas (health, education, economy and politics), reveals
that the gender inequality in OIC countries slightly decreased between 2006 and
2017 but remained below the world average (SESRIC 2018a). Specific gender
inequality metrics are presented hereafter.
Education
Despite making forward strides in the overall education level in OIC countries
during the past two decades, there is still a significant disparity between men and
women. In fact, between 2008 and 2016, the adult women literacy rate was only
69.4 compared to 80.7 for adult men. Between 2006 and 2016, 18.9% of all girls
of primary school age in OIC countries were out of school compared to 17.2% of
all boys. Finally, during the same period, 23.3% of all girls of secondary school
age were not attending school compared to 18.8% of boys (SESRIC 2018a).
Labour market
During the 2008–2017 period, female participation rates in OIC labour markets
grew from 36.3% to 38.1%, and the participation gap rates between women and
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Houssem eddine Bedoui and Wail Aaminou
men was 37.7% in 2017. There is a significant disparity of labour participation rates across OIC countries. For instance, in 2017, this rate was 82.5% in
Mozambique and only 14% in Jordan (SESRIC 2018a).
Health
On average, women in OIC countries had the lowest life expectancy at birth in
2006 and 2016. Furthermore, the average female adult mortality rate was 158 per
1,000 adults in 2016, which is almost four times higher than the average of developed countries (SESRIC 2018a).
Water
Many OIC countries face common challenges related to limited water supply and
growing demand. This supply and demand mismatch is placing unprecedented
pressure on existing limited water resources in OIC countries (SESRIC 2018b).
Water supply
Even though water supply across different OIC regions exhibits high variability,
on average, limited water availability is an acute challenge. To illustrate, the OIC
share of the world’s total renewable water resources is 13.3%, less than their
share in the world’s total population of 23.6%. Furthermore, OIC countries in
the Middle East and North Africa exhibit the highest global utilization rates of
non-renewable water resources. The limited water supply issue is compounded
by inadequate water infrastructures in several OIC countries. For instance, dam
capacity in OIC countries is only 661 m3/inhabitant compared to 790 m3/inhabitant in non-OIC developing countries and to 1,874 m3/inhabitant observed in
developed countries (SESRIC 2018b).
Water demand
The annual total water withdrawal per capita in OIC countries is 622m3/inhabitant/year compared to 391m3/inhabitant/year for non-OIC developing countries.
What is more, the pressure on water resources in OIC countries is 12.2% above
5.3% and 9.1% observed respectively in non-OIC developing and developed
countries. The increasing demand for water in OIC countries stems from population growth, increasing incomes, growing economies and consumer behaviour
(SESRIC 2018b).
Labour market
On average, OIC countries have been struggling with low labour participation
for a long time compared to other country groups. Inactivity creates not only
significant economic but also social and environmental challenges. Although the
Role of Fintech to achieve the SDGs 7
unemployment rate is a leading macroeconomic variable, it does not holistically
capture the healthiness of a labour market. In fact, this indicator focuses on people seeking employment for pay but not on people actively engaged in the labour
market, by either working or looking for work (SESRIC 2017a).
Relative to the working-age population, around 54% of people were employed
in 2016. The share of unemployed people represents only 4.3% of the total
working-age population while 41.3% of people at the working age are inactive
(SESRIC 2017a).
Healthcare
While healthcare performance indicators in OIC countries have been improving
for the last 50 years, many low-income and least developed OIC member countries are still severely lagging behind in providing healthcare services, primarily in
the developing regions of South Asia and Sub-Saharan Africa (SESRIC 2017b).
In 2014, the average per capita total health expenditure in OIC was only
US$202 compared to US$339 in non-OIC developing countries. In addition, OIC
countries were underperforming in terms of hospital numbers per 100,000 people
with a ratio of 0.9 (World: 1.3) and health posts per 100,000 people with a ratio of
6.7 (World: 14.8) (SESRIC 2017b).
Environment
The impact of environmental degradation is not uniform globally. In fact, OIC
countries specifically are more vulnerable to various environmental systemic
challenges ranging from agricultural productivity and healthcare to water quality
and social unrest (SESRIC 2017c).
The analysis of the Environmental Performance Index, which ranks countries
on 24 performance indicators across categories covering environmental health
and ecosystem vitality (EPI 2019), discloses that OIC member countries perform
poorly with a score of 59.4 compared to 65.4 for non-OIC developing countries
and 85.4 for developed countries. The environmental performance of OIC countries shows significant regional variations. OIC countries located in Europe and
Central Asia, Latin America and East Asia and the Pacific outperform the world
average with scores of 72.4, 69.9 and 69.3, respectively. The worst performing
OIC region is South Asia with a score of 46.9 followed by Sub-Saharan Africa
with a score of 48.7 and the Middle East and North Africa (‘MENA’) with a score
of 66.0 (SESRIC 2017c).
Education
Most OIC countries struggle with both rising inequality of educational opportunity and declining educational standards despite these countries’ achievements
in reducing inequality in educational participation and completion. Although
the out-of-school population and illiteracy have declined, OIC countries are still
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Houssem eddine Bedoui and Wail Aaminou
unevenly affected by out-of-school children issues in comparison with non-OIC
countries. Moreover, democratizing access to quality early childhood education
is still beyond reach. Finally, there is a lack of progress in improving education
quality in OIC countries in the last two decades as evidenced by these countries’
performance in international assessments with the exception of a few countries
(COMCEC 2018).
Islamic Fintech and sustainable development
During the last 50 years, the Islamic Finance industry has witnessed remarkable
growth with around $2.3 trillion assets across banking, insurance and capital markets in more than a hundred countries and Islamic banking is categorized as systemically important in 12 jurisdictions where the market shares have reached 15%
(IFSB 2016). Today, not only specialized players but also international financial groups provide Islamic Finance services to Muslims and non-Muslims alike
(Thomson Reuters 2014).
From a competitive advantage standpoint, Islamic financial institutions rely
heavily on debt-based instruments, perceived as similar to conventional financial
products (Ayub 2007), and usually lack economies of scale to enable pricing differentiation. As a result, Islamic financial institutions value proposition remains
centred around Sharia compliance, which is insufficient to attract on a non-religious customer (Haniffa & Hudaib 2007).
On the sustainability side, many Islamic Financial Institutions (‘IFIs’) undertake several social initiatives ranging from qard hassan and energy conservation
to zakat payment and charities support. Yet, on average, these institutions’ social
and environmental initiatives have been below customers’ expectations (Asutay
2007). Furthermore, IFIs underperform their conventional counterparts (Mohd
Nor 2012) with low levels of disclosures on ethics and sustainability (Nobanee &
Ellili 2016).
Islamic Finance has the legitimacy to lead the impact finance industry globally and to bring new perspectives into responsible finance. First, Islamic Finance
is already well established in many OIC countries and as such can address the
immense economic, social and environmental challenges faced by these countries
as presented in earlier paragraphs. Second, the ethical perspective is natively built
into the DNA of Islamic Finance (Ayub 2007). Third, the Islamic Finance business model is inherently embedded into the real economy and can be easily integrated into different sectorial ecosystems (Ayub 2007). Fourth, awqaf (Islamic
endowment funds) and zakat institutions (compulsory charity funds) have the
necessary levers to channel capital to ‘below-market return’ projects through subsidizing or guaranteeing schemes (Chaker & Aaminou 2018). Fifth, customers
are expecting IFIs to be very active on the sustainability front (Maali et al. 2006)
and finally, impact finance can provide IFIs with a competitive advantage beyond
‘Sharia compliance’ value proposition.
Despite the abundant literature on the fit between sustainable development and
Islamic Finance as well as some successful impact finance initiatives, especially
Role of Fintech to achieve the SDGs 9
in Southeast Asia, the market has not yet seen the potential of the Islamic Finance
industry in driving sustainable development with positive environmental, social
and governance outcomes (Aaminou 2019).
Taking the Islamic impact industry to the next level requires combined and
coordinated efforts from asset owners (IFIs, awqaf and zakat funds, institutional
investors, etc.), asset managers (investment advisors, IFIs, government investment programmes), demand-side actors (social enterprises, micro-entrepreneurs,
Islamic microfinance institutions) and service providers (technology companies,
research institutions, standards-setting bodies, consultants, etc.). Most importantly, these efforts have to converge towards a clear impact investing vision that
the industry still needs to clarify (Aaminou 2018). In this context, it is hard to
imagine the emergence of Islamic impact finance without leveraging technology.
Today, technology (smartphones, peer-to-peer platforms, blockchain, artificial
intelligence, etc.) provides tremendous possibilities to make financial services
affordable, scalable, customizable and effective.
Although Fintech start-ups operating in the Islamic Finance sphere are relatively small in scale, they are growing and developing rapidly (IFSB 2019). In
2018, there were 93 Islamic Fintech start-ups globally, of which 65 focused
on peer-to-peer finance and 15 focused on wealth management (DinarStandard
2018). In 2017, ‘Innovate Finance’ identified 103 Islamic Fintech companies
across 24 countries (Islamic Finance News 2017). Therefore, Islamic Fintech represents a tiny proportion of the massive amounts raised globally in the Fintech
industry. Total Fintech start-ups valuation in the Middle East and North Africa,
for instance, was only US$66.6 million as of December 2017. However, the
Fintech market in the MENA region can grow to US$2.5 billion by 2022 (Clifford
Chance 2019).
As far as sustainability is concerned, several Islamic Fintech business models
address social and environmental issues. For instance, in donation-based crowdfunding, the Global Saqaqh platform matches sadaqah, zakat and waqf donors
with credible charity partners internationally (Global Sadaqah 2019). In investment-based crowdfunding, EthisCrowd’s platform allows investment directly in
real estate development and construction projects, with a special focus on social
housing in Indonesia (Ethis 2019). In blockchain, Finterra provides a blockchain ecosystem to improve the performance and efficacy of waqf management
(Finterra 2019). Despite these achievements, Islamic Fintech have only scratched
the surface of tackling sustainability issues so far. There remains substantial room
for progress by scaling and diversifying existing initiatives centred on peer-topeer finance and leveraging other Fintech verticals such as cryptocurrencies and
artificial intelligence in sustainable development.
Recommendations to unleash the potential of Islamic Fintech
First, to unleash the potential of the Fintech and the Islamic Fintech in particular, it is recommended to have a suitable ecosystem and an innovation ecology.
According to Stefik and Stefik (2004, p. 7), ‘an innovation ecology includes
10
Houssem eddine Bedoui and Wail Aaminou
education, research organizations, government funding agencies, technology
companies, investors, and consumers’. Regulators, start-ups, Islamic Fintech
firms, IFIs, venture capitalists (‘VCs’), public organizations, consultancy firms,
media and academia are the primary stakeholders of this required innovation ecosystem. They make up the digital ecosystem’s demand and supply sides.
Developing alliances in the digital Islamic ecosystem with a range of stakeholders including governments, public and private sectors would empower societies
and would be a strategic way for organizations to add value to current initiatives
or support their regions.
Regulators are recommended to afford innovation-friendly policies and an ecosystem offering incentives to Islamic Fintech to test and refine their innovative
ideas, and where established IFIs can deliver financial services or access to their
internal sources and their financial expertise.
Second, finance is one of the most regulated industries. Supporting laws and
policies are of paramount significance to promote innovation and entrepreneurship. Moreover, as digital partners and suppliers are changing, and clients are
evolving, the capacity to adapt to new circumstances will be a driving factor in
preserving the digital ecosystem. In fact, the regulatory environment is continuously evolving and regulatory constraints and issues could hamper IFIs’ capacity
to innovate and develop impactful products and services.
Regulatory frameworks offer an ecology to support entrepreneurs and other
IFIs in testing their creative business models. There is then a pressing need to
develop an adaptive set of regulations to foster and regulate the growth of the
Islamic Fintech industry, which helps to develop a consensus on a set of prudential regulations that can be applied globally. This work will not be achievable without the cooperation of firms and the regulators. For instance, regulating
a public and decentralized blockchain would be considered eccentric and risky
without finding a roadmap with market players until regulators are satisfied with
the concept of a decentralized digital economic system.
Finally, it is highly recommended to realign organizations and their required
resources to support the development of Fintech impactful and sustainable products. Human resources required in the industry include finance experts, Sharia
scholars and information technology (‘IT’) professionals (data scientists, cryptographers, programmers, etc.). There is then a panoply of skills that would be
aligned towards SDG-oriented products. IFIs will need to be attractive to top
innovative talent but should not lose focus on the objective (Maqasid), which is
the impact. ‘Innovation is the path, impact is the destination’ (Chang 2019).
Future research directions
At the end of the chapter, different research directions can be suggested as a
continuity of the current work. First, the Islamic Fintech and more precisely the
sustainable and social digital finance would need to form blockchain consortia
respecting the specificities of Islamic Finance and social finance (waqf, zakat and
Islamic microfinance, etc.). Research work on the technicalities of these consortia
Role of Fintech to achieve the SDGs 11
would help the industry to move on technically and helps start-ups and the established firms to benefit from this work.
A second research direction would be to tackle the financial challenges that
Islamic Fintech are facing. In fact, unlike conventional Fintech, Islamic Fintech
firms are facing financial challenges whereby funding possibilities are not abundant (Mohamed & Ali 2018).
Third, we suggest studying and evaluating the role of the regulators in the development of Islamic Fintech in particular. A non-regulated environment would be
propitious for the expansion and the development of new sustainable Islamic digital finance products. In that case, what would be the proxies that can be utilized to
evaluate and benchmark both environments (regulated and non-regulated).
Finally, with the development of libra, the recent permissioned blockchain digital currency proposed by Facebook, a future research direction to have an Islamic
social version of libra that can be utilized for SDG-oriented projects would be of
great importance. A similar idea was suggested previously (Bedoui & Robbana
2019) but now with the development of libra, the issuance of a cryptocurrency (i.e.
an Islamic version of libra) can be materialized to mobilize resources to SDGs.
Conclusion
There is clearly a case to be made on the necessity of integrating sustainability
into the business model of Islamic financial institutions, especially with regard to
the magnitude of the economic, social and environmental challenges that not only
threaten the growth but also the stability of many OIC countries.
In the recent decade, the international Fintech industry has blended innovative business models and technologies to enable and enhance the provision of
financial services globally, ranging from data analytics and cryptocurrencies to
crowdfunding and robo-advisors. Therefore, leveraging Fintech know-how offers
tremendous possibilities to channel Islamic Finance efforts and resources to
address sustainable development especially with a digitally native young Muslim
population. Even though the number of Islamic Fintech start-ups across the world
is in constant growth, it is still below the market expectations. On one hand, these
start-ups are mainly focusing on group lending or equity crowdfunding schemes.
On the other hand, because of their limited scale, their activities’ impact remains
very marginal compared to the needs in OIC countries.
Building on the existing momentum and unleashing Islamic Fintech potential
requires the undertaking of the following strategic initiatives. First, developing a
suitable ecosystem and an innovation ecology. Second, building supporting laws,
regulations and policies that adapt to Fintech rapid evolutions. Finally, realigning
organizations and their required resources to support the development of Fintech
impactful and sustainable activities.
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Role of Fintech to achieve the SDGs 15
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2
Islamic Fintech and ESG goals
Key considerations for fulfilling Maqasid
principles
Blake Goud, Tanvir A. Uddin and Bayu A. Fianto
Introduction
The global financial crisis catalyzed a major re-evaluation of the relationship between society and the financial sector. Besides the immediate economic
impacts from the crisis, it led to a breakdown of trust in institutions, including
financial institutions that have been slow to rebuild. Many within the financial
sector, including those who have joined the Principles for Responsible Investment
(‘PRI’) (United Nations Global Compact 2015), recognize the challenges that
confront shared humanity especially around climate change and inequality and
are trying to find a solution by focusing on environmental, social and governance
(‘ESG’) data. The rising share of asset managers and asset owners using ESG
in their investment decision-making has contributed to a growth in responsible
investment. Beyond the societal demand for alternatives, prolonged quantitative
easing, low or negative interest rates and the thirst for higher yields have flooded
investments into technology start-ups including Fintech companies to drive a new
paradigm in financial services globally. With a greater faith in technology to disrupt old ways of working, Fintech is seen as more capable of delivering customercentric solutions that democratize the incumbents’ domination of how wealth is
generated and ultimately invested.
Emerging trends in Fintech-enabled alternative finance, which includes channels and instruments emerging outside the traditional financial system, delivers
an unprecedented opportunity to improve financial intermediation and increase
access to finance. With widespread criticism of the mainstream Islamic banking
and finance sector as either mimicking the conventional system, failing to achieve
inclusive growth or both, industry stakeholders are turning to technology to show
that finance can be done differently.
After justifying the overlap between responsible finance and Maqasid al-Sharia, we argue that the mainstream practice of Islamic banking and finance has
been too one-eyed on formal compliance at the expense of substantive ethical outcomes. However, Islamic Fintech, despite considerable hype, cannot guarantee
the realization of higher Sharia ethics without a clearly defined positive intention
via an objective theory of change, strong long-term commitment from industry
and regulatory leadership and ensuring objective measurement of its activities
Islamic Fintech and ESG goals 17
to validate realization of said intention. Taking lessons from Islamic Fintech
case studies, we provide a theoretical framework for considerations that are a
priori essential for Islamic Fintech, as purveyors of alternative Islamic Finance,
to achieve Maqasid outcomes. We further propose recommendations for Islamic
financial institutions, Fintech companies, regulators and other stakeholders who
are integrating or who are considering introducing Islamic Fintech-enabled alternative finance solutions. The methodology deployed to form our argument and
conclusions is an evaluation of theoretical and empirical literature and case study
analysis.
Conceptual and contextual background
Responsible finance and investment
While arguably responsible forms of finance and investment have existed since
the advent of economic activity, it is only in the 2000s that it has received focused
attention and widespread support. While impact investing, or the targeted use of
investment resources for sustainable outcomes, is a core aspect of responsible
finance, consumer protection, financial systems regulation and financial education
have also been recognized as essential, taking on lessons from the excesses that
led to the global financial crisis. According to the United Nations Principles for
Responsible Investment (‘UNPRI’) (2016), responsible investment is an approach
to investment that explicitly acknowledges ESG factors and the long-term health
and stability of the market as a whole. The central premise is that investment
activities steered by the financial sector can help reduce harm from the excesses of
our current post-industrialized (e.g. divestment from fossil fuels) and direct positive economic activity (e.g. investing into renewable technologies). The Global
Impact Investment Network (‘GIIN’) estimates that the market for impact investment is currently $502 billion (Global Impact Investing Network 2019b). The
development of impact investment emerged from a recognition that not all investors are focused on achieving market-based returns. Some investors are exploring
what leverage they have to sacrifice in financial returns in exchange for tangible
social and environmental impacts.
Some fund managers are focusing in part or exclusively on impact investments,
which differs from responsible investment by focusing on creating both a social
or environmental impact alongside financial returns. Responsible investment is an
approach that is most at home in the institutional markets. Institutional investors
have a greater advantage to scale because they can more efficiently integrate ESG
data into investment decision-making. Therefore, although it emerged from those
concerned by the ‘niche’ appeal of socially responsible investment, responsible
investment gained its foothold in the investment market on the strength of its
positive financial impact (Clark, Feiner & Viehs 2015; Friede, Busch & Bassen
2015). The PRI, which were launched in April 2006, became a de facto metric
for the size of the responsible investment industry. From 63 signatories managing
$6.5 trillion in 2006, the PRI had reached 523 signatories managing $18 trillion
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Blake Goud, Tanvir Uddin and Bayu Fianto
by April 2009 and currently has 2,372 signatories managing a collective $86.3
trillion in assets (UNPRI 2019).
Alternative finance and the role of Fintechs
In parallel with the ESG movement, new companies called Fintech that combine the delivery of financial services with technological solutions are addressing
many challenges that relate to environmental, social and governance factors. In
addition to their distinction as tech-centric, Fintechs are part of what has been
termed the alternative finance movement. World Bank Group (2019) defines alternative finance as financial channels and instruments that have emerged and principally function outside the traditional financial system such as regulated banks
and capital markets. There are Fintechs improving the access to finance through
peer-to-peer financing to leverage the blockchain to improve accountability of
supply chains.
What differentiates the Fintech movement concerning institutional capital
markets-driven ESG is that the former aims to go beyond financial decisionmaking based on metrics, which are ultimately optimized with profit-driven
motives. Rather, many Fintechs aim to fundamentally disrupt the global financial
order where incumbents have abused their market power to collude with companies whose products undermine ESG outcomes. Seeing the potentially negative
implications of Fintech’s disruptive threat, financial institutions are increasingly
engaging with Fintech start-ups either as investors or as strategic partners. Galvin
et al. (2018) reported that Fintech firmly associated with almost 80% of financial
institutions. Globally, Fintechs are rising to become major financial players and
the capability to drive meaningful ESG outcomes.
Significance and challenges of Maqasid in Islamic banking and finance
Islamic banking and finance emerged as a rapidly growing business differing not
only in the way they do business but also in the way they integrate the Shariabased values with banking operations and prospects. These Sharia values are
expressed not only in their transactions but also in a broad range of roles in realizing Maqasid al-Sharia (Sharia objectives). Maqasid al-Sharia changes the
holistic view of Islam because Muslims follow Islam as a complete and integrated code of life that complements individuals and society, in this world and
the hereafter.
A deep understanding of Maqasid al-Sharia requires a strong commitment
from every individual and organization to realize prosperity, brotherhood and
social welfare. This will lead to a society where every member cooperates and
even competes constructively because success in life is getting falah (highest happiness). Thus, maximizing profits alone cannot be an adequate goal for Muslim
communities. Profit maximization must be directly congruent with ensuring health
and spiritual awareness, fairness and fair play at all levels of human interaction.
Only this kind of development is following Maqasid al-Sharia (Chapra 2008).
Islamic Fintech and ESG goals 19
Hence, the restricted view of understanding the Sharia by only focusing on
the legal forms of a contract needs to be changed. The ‘substance’ of the Sharia
should be the focus when structuring a financial product because otherwise, critics
will come from a stronger position in arguing Islamic banks are just an exercise in
semantics. Their functions and operations will be perceived as no different from
conventional banks, except in their use of legal strategies to disguise interest and
circumvent Sharia prohibitions by following the letter but not the spirit of Sharia
principles.
As mentioned above concerning the integration of ESG and Sharia, the measurement of performance of all financial institutions, including Islamic banks, is
no longer dominated by the financial ratios alone. The concept of the triple bottom line bringing together economic, social and environmental considerations is
applicable. For Islamic banks to successfully have Maqasid-aligned sustainable
growth, their main activities must be focused on benefiting their shareholders as
well as the wider stakeholders, including in their community and the environment
(Antonio, Sanrego & Taufiq 2012).
Soualhi (2015) highlighted that triple bottom line concepts are in line with the
concept of Maqasid al-Sharia, as noted by Ibn Qayyim Al-Jawziyah that the overall Sharia objective is to realize the comprehensive and holistic benefit to society.
Efforts to develop an evaluation on Islamic banking performance measurements
which are in line with the concept of Maqasid al-Sharia has been discussed by
many others (Mohammed, Razak & Taib 2008). Results showed that the Maqasid
index approach could be useful to describe the quality of performance of Islamic
banking institutions in a way that would be more universal and able to appeal to a
wider constituency (Antonio, Sanrego & Taufiq 2012).
Islamic banks made their first appearance in the 1970s. Since their first inception, the public and commentators have expected them to become analogous to
an ancient financial organization based on profit-loss-sharing (‘PLS’) mechanisms, particularly musharakah and mudarabah. Prominent Muslim economists
including Umer Chapra and others favour equity-based instruments and place
greater social welfare responsibilities and religious commitments upon Islamic
banks to realize the Maqasid al-Sharia (Chapra 2008). This includes expectations that through economic and financial transactions, Islamic banks will be able
to deliver social justice while at the same time promoting economic growth and
development.
Limitations and challenges of Islamic banking and finance
Despite its potential to deliver a better outcome for society, there should be a recognition that Islamic Finance will be unable to make the change entirely on their
own. Islamic Finance has been challenged to close the gap between its Maqasidrelated objectives and the practical realities of the financial industry. The tension
has been particularly acute concerning banking regulations, which exasperate
tensions between the risk-sharing approach of Islamic Finance and debt-based
finance system and prudential mandates that regulators hold.
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Not everything can be ascribed to regulations, however; Islamic banks’ business models borrow heavily from interest-based banking. Along with the business models, many Islamic banks have taken a conservative and conventional
approach to adopt a strategic intent and very few have placed environmental sustainability or social justice at the centre of their decision-making guidance. This
same conventional mindset is built into the Sharia governance process, which
is focused on form-based compliance rather than substantive alignment to the
Maqasid (Laldin & Furqani 2016). Warde (2010) stated that Islamic Finance is
largely embedding the harmful excesses of wanton materialism rather than being
truly transformational.
Islamic banks have struggled to offer cost-effective products in competition
with their conventional counterparts in regulatory systems that contain contradictions for Islamic banks. The contradiction comes because Islamic banks use
Sharia-compliant contracts to deliver the same services to depositors and borrowers as conventional banks. This forces them to prioritize staff capacity development on expertise in the conventional system within the constraints of Sharia
compliance. Less capacity has been built among staff in striving towards Maqasidrelated considerations, including environmental stewardship and the social societal objectives most relevant to Islamic values.
Meanwhile, Islamic Finance’s growth has slowed considerably in the past
five years. Muslims who had otherwise avoided interest-based financial services
and those who were less price sensitive drove significant growth. This retail
enthusiasm for Islamic Finance was also supported by expanding liquidity in
oil-exporting Organization of Islamic Cooperation (‘OIC’) countries through
2013 buoyed by high oil prices. After 2013, when commodity prices including
oil crashed, the growth rate slowed across core markets. Data from the Islamic
Financial Services Board starting in 2014 shows that the growth rates remained
in mid-to-high single digits through the end of 2017. However, several factors
converged together to drive growth rates down to 1% for the year ending June
2018 (Islamic Financial Services Board 2018). Slowing growth has prompted
many within the industry to seek out avenues for expanding the market for
Islamic Finance.
Islamic banking and finance and its ESG potential
Meanwhile, despite philosophical overlaps, the Islamic Finance market has been
slow to adapt well-known ESG frameworks and enhance impact investments.
This is primarily because of a lack of awareness about the financial benefits and
ethical alignment between Islamic Finance and ESG (RFI Foundation 2019).
Further, the Islamic Development Bank, the most influential promoter of Islamic
Finance in the Muslim world, is directly linking its financing activities with the
United Nation’s Sustainable Development Goals as a clear validation of the
overlap between Islamic Finance and ESG. Thomson Reuters (2015) estimated
that the market size among Sharia-compliant ESG investment funds was $9.9
billion and would rise to $28.3 billion by 2019. Moreover, the RFI Foundation
Islamic Fintech and ESG goals 21
(2019) reported that the proportion of Sharia-compliant ESG funds (1.6% of
$1.7 trillion market) is well below the conventional ESG market (27% of $317
trillion).
However, the recent growth in the Sharia-compliant ESG market has been
expanded dramatically with regulatory support from Malaysia’s central bank,
Bank Negara. In 2017, Bank Negara released a Strategy Paper on value-based
intermediation (‘VBI’) (Central Bank of Malaysia 2018). Guided by a community of practitioners made up of nine Islamic banks in Malaysia, Bank Negara
issued Implementation Guidelines in October 2018 to help Islamic banks define
their corporate value-intent, develop an internal VBI Investment and financing
assessment framework and conduct a self-assessment to measure their effectiveness (Central Bank of Malaysia 2018). Regardless of the speed of uptake by
Islamic Finance institutions and regulators of Muslim-majority countries, Islamic
banks and Islamic business units are now influenced by engagement from global
asset owners relating to their ESG practices. Ironically, the conventional sector
is raising the prominence of responsible finance as a key strategic concern and
Islamic financial institutions are now forced to play catch up with conventional
institutions on their demonstration of the environmental and social impact of their
activities (RFI Foundation 2019).
Looking forward, although they lag behind many of their conventional peers
on responsible finance, Islamic financial institutions retain the advantage of being
ethically oriented at their core. They can look to use their adoption of ESG as
something that is not just done to stay on par with conventional competitors, but
something aligned with Islamic values that contributes to their overall value proposition to customers. The advantage that Islamic Finance holds in comparison
to the conventional sector is that the ethical principles cannot be compromised
even for-profit motivations. Moreover, principles such as universal solidarity with
fellow human beings and the environment actively mandate behavioural change
which can help encourage uptake and acceptance by finance institution’s customers, employees and shareholders.
Alternative Islamic Finance via Islamic Fintech
Whereas traditional banks and the capital markets have been slow to evolve
and adapt to 21st-century challenges and opportunities, there is increased attention towards alternative finance. Invariably, Fintechs are driving the delivery
of alternative finance both as disruptive, tech-enabled financing channels and
as a reaction to the excesses of mainstream finance. Meanwhile, the inability
to compete with their conventional counterparts coupled with a one-eyed focus
on formal compliance through product development has limited the adoption of
ESG financing frameworks within Islamic Banking Finance (‘IBF’). Nowadays,
numerous scholars and practitioners’ efforts have been narrowly focused on reimagining classical Islamic social instruments such as waqf, zakah and Islamic
microfinance rather than a wholesale and scalable shift in the general approach
to IBF.
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Blake Goud, Tanvir Uddin and Bayu Fianto
The potential for Islamic Fintech
Within this lacuna a new generation of IBF players is emerging, principally Islamic
Fintechs, which are attempting to directly align their activities with ESG outcomes and the Maqasid. In contrast to mainstream IBF, the alternative approach
to Islamic Finance arises from two trends: rapid digitalization and the slowing
growth of traditional forms of Islamic Finance. It aspires to add more than just the
efficiency that digital technology can deliver by incorporating Maqasid-consistent
practices from the broader ‘responsible finance’ industry, which includes socially
responsible investing, ethical banking and ESG. In this paper, we focus our evaluation on Islamic Fintech in its capacity to achieve ESG outcomes.
This is not to say that responsible Islamic Finance does not and cannot exist.
We are concerned with alternative Islamic Finance because it has the potential to
respond to ESG challenges in a more agile manner. However, due to their small
size, each will need to focus on a single issue. This will allow them the focus
required to use efficiency gains from technology, and their lack of internal bureaucracy compared with highly regulated banks will help them to stand out and add
value. Their fresh start as new companies can allow Islamic Fintechs to operate at
the convergence of ESG outcomes from the outset.
As technological capabilities in the financial sector improve, especially relating
to measuring and managing ESG risk, and Fintech companies develop propositions that allow them to partner with established brick-and-mortar banks, Islamic
banks should be actively looking for ways they can benefit from technology. With
the fast pace of development in Fintech and the more limited focus on sustainable
finance and Fintech, Islamic banks may still find opportunities where they can
‘leap-frog’ over their conventional competitors with a smart combination of technology, ESG and a strong ethical proposition. As a result, the promise that Fintech
companies can credibly offer of ‘disrupting’ the banks is especially appealing in
the Islamic Finance context because it offers hope to escape the regulatory constraints and those constraints emanating from the choice to scale Islamic Finance
through the banking business model.
Evaluation of alternative Islamic Fintech
Islamic Fintech’s limitations with ESG outcomes
Although some Islamic Fintechs have been successful in bringing a social impact,
they remain focused on realizing efficiency gains within the system as it exists
today. The most comprehensive assessment of the Islamic Fintech industry
reported that Malaysia, Indonesia and the United Arab Emirates (‘UAE’) became
the most burgeoning Islamic Fintech community due to the effectiveness and the
readiness of Sharia financial institutions to adopt digital-based services (Islamic
Finance News 2017). However, after initial strong enthusiasm, we see that many
Islamic Fintechs are struggling to deliver a significantly different proposition
from what Islamic financial institutions offer with enough breadth and depth to
generate a significant change in the industry as a whole.
Islamic Fintech and ESG goals 23
The biggest challenge is that Islamic Fintechs frequently must choose to be
more disruptive – and potentially risk losing industry support and adoption – or
become more integrated into the industry while undermining the chance to fundamentally change how it works. The most ESG-oriented Islamic Fintechs can find
themselves in a place of being ahead of the market while needing it to catch up
to be able to achieve scale. If an Islamic Fintech has developed something that is
useful for industry and can scale it efficiently, there should (in theory) be competition among the industry to be earlier adopters, but this is often lacking. From
the perspective of a Fintech seeking to reach its next funding round, there will be
an intense pressure towards conformity with the traditional approach to Islamic
Finance that is less disruptive to its business model or its eventual impact.
Case study learnings from leading Islamic Fintechs
As an illustration, most of the Islamic Fintechs that have gained recognition for
their alternative Islamic Finance have done so from a position independent of the
mainstream marketplace. This has been necessary because of a lack of strategic
vision paired with the right level of resourcing, coming from the top of large institutions to enable more disruptive technologies. In the section below, we explore
how several emerging Islamic Fintechs who are charting a new course – developing tech-enabled solutions that are directed towards a clear Maqasid goal – derive
insights for the collective industry. The Fintechs have been chosen based on their
overt Maqasid focus and for utilizing alternative finance.
EthisCrowd
EthisCrowd is the world’s first real estate Islamic crowdfunding platform, investing in entrepreneurial, business, trade and real estate activities in ‘Emerging Asia’
(Ethis 2019a). Based in Singapore, the company crowdfunds the construction
of affordable and commercial housing, mostly in Indonesia, through private and
institutional investors, as well as Islamic banks. EthisCrowd intentionally seeks
to address the affordable housing gap, capitalizing on a booming Indonesian real
estate market and an increasingly accessible pool of social and ethical small and
medium-sized investors through real estate crowdfunding, which was estimated
by Massolution to be a $3.5 billion industry in 2016, linking such investors directly
with contractors and real estate developers (Ethis 2019b). Despite the significant
impact that they are having, operational challenges make it exceedingly difficult
to scale up. According to Ethis’ founder, Umar Munshi, in addition to usual dealflow challenges, Ethis has to overcome a lack of education and awareness about
participatory financing schemes (Munshi 2019). This awareness challenge arises
because both investors and beneficiaries are more familiar with fixed and guaranteed income/interest-bearing products.
Moreover, Munshi commented that Ethis is not trying to transform the entire
economy; they are focusing on a niche segment in affordable housing and trying to grow alternative financing mechanisms via crowdfunding. Additionally,
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Ethis has been actively working with regulators in Southeast Asia and the Middle
East to expand the alternative Islamic Finance sector. In November 2019, Ethis
received regulatory approval to operate in Indonesia, making it the third market
where the platform can facilitate online capital formation. Earlier in 2019, Ethis
also received the first Islamic equity crowdfunding licence in Malaysia and later
followed that up by receiving the first property crowdfunding licence in Dubai.
Ethis intends on pursuing regulatory approval in other jurisdictions on a rolling
basis at it pursues the goal of becoming a global platform.
Blossom Finance
Blossom Finance is an investment platform raising funding for social impact projects using a SmartSukuk, which implements blockchain to expand the cost effectiveness of issuance for projects raising between $50,000 and $50 million, which
is not feasible today (Blossom 2019). The first SmartSukuk was issued to provide
financing to an Islamic microfinance cooperative, a unique type of Islamic microfinance provider in Indonesia. Through greater accountability and transparency
based on blockchain technology, the sukuk tries to overcome highly predatory
lending (‘loan sharking’) (even where couched as Fintech-enabled), which is contrary to the objectives of responsible Fintech.
As Blossom expands its reach, it is focused on understanding local context to
scaling impact along with its growth. Blossom does so through a partner with passionate locals who understand their local context and can help adapt the application of capital into the local context to maximize its impact. Blossom begins with
negative screening per Islamic principles to ensure money is directed towards productive business purposes rather than consumptive spending. The contract must
be clear and understood by the beneficiary and the underlying businesses being
financed must not have any harmful effect on society. In addition to the negative
screening, Blossom adds a positive screening to prioritize projects addressing one
or more of the UN Sustainable Development Goals. One metric they are encouraging their partner network to adopt is a ‘gold’ or ‘silver’ star metric concerning impact measurement. A gold star would indicate where financing has helped
someone at the poverty level earn an income exceeding the minimum wage, while
a silver star would indicate an increase in income post-financing.
One of the challenges that Blossom has seen in their approach to Islamic
Finance and Fintech is to focus on longer-term outcomes, where there is not a
trade-off between achieving a higher ethical purpose and business success. One
issue on which Blossom sees relevance is the preference within the Islamic
Finance industry towards synthesized debt structures. The construction of these
synthetic structures adds significant complexity in comparison with simpler
forms of Islamic Finance, including the profit-sharing arrangements which the
SmartSukuk embeds. Blossom says that their investors have been more receptive
to profit-sharing instruments than the Islamic Finance industry altogether. Their
promotion of profit-sharing instruments provides another benefit to stimulate the
Islamic Finance industry to create more investable assets that are equity-like. It
Islamic Fintech and ESG goals 25
also provides benefit on the social impact side since it finances with a simpler
structure, and thus it avoids creating new debt.
Teek Taka
Teek Taka is a Fintech working to build an ethical trade finance platform to
improve work conditions in Bangladeshi garment factories by incentivizing the
owners to improve conditions in exchange for access to cheaper and faster financing (Teek Taka 2019). Bangladesh’s garment industry is the world’s second largest and provides vital job opportunities to millions of low-income workers, most
of whom are women. Although progress has been made on work conditions since
the 2013 Rana Plaza collapse, which killed 1,134 people, work conditions remain
grim. Garment workers face exploitative conditions, characterized by poverty
wages, poor health and safety and excessive work hours while factories lack the
capital to make improvements. The social impact objective of Teek Taka is to
improve labour conditions for low-income women in Bangladesh to ensure that
the benefits of international trade are shared with some of the most disadvantaged
people in the world. It is doing so within the principles of a just, responsible and
free-market economy where Teek Taka seeks to create a fairer society by diminishing wealth inequality.
The key challenges that Teek Taka faces for scaling impact are regulatory
constraints within Bangladesh and a lack of stakeholder buy-in. The lack of
stakeholder buy-in is driven by the existing competitive nature between brands,
suppliers and finance providers to forge new approaches and incentives to drive
a change. As an early stage start-up, Teek Taka does not see any problem so far
and is still formalizing an ethical decision-making framework to make operational decisions. The framework used for decision-making is a consequentialist
framework focusing on the future effects of the possible courses of action and
considering who will be directly or indirectly affected to reach the best outcomes. These decisions are made about duties and ethical obligations based
on Sharia guidance which affects key decision-making in company strategy,
employee management and product offering to the communities in which they
operate.
Synthesis of case study learnings
What distinguishes the Islamic Fintechs that are ESG-focused, such as our case
studies, is that technology is an enabler towards an alternative finance paradigm
rather than narrowly focusing on operational and market disruptions. Their humble efforts in charting a new course for the Islamic Finance industry overall yields
important lessons for other alternative Islamic Finance players.
Ethis shows how to build adoption and awareness by focusing on small project
size, which allows for the demonstration of success in practice. They do this by
finding booming markets where the projects can support the democratization of
financing and a track record that shows credibility for regulatory engagement.
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Blake Goud, Tanvir Uddin and Bayu Fianto
They still face a lack of education and awareness among those in the market about
how participatory, risk-sharing, financing products deliver value in practice.
Blossom shows how some of the efficiency-gain focused approaches can be
welded together with examples that also show the feasibility of financing for
social impact. They pair traditional Sharia screens (sector negative screens) with a
positive screen linked to the SDGs. Like Ethis, they find markets with strong prospects and use local knowledge to adapt their approach to financing to local needs.
Also, like Ethis they face a challenge in market preferences towards synthetic
debt rather than equity-based and risk-sharing structures. They are overcoming
this challenge by simply demonstrating that equity and risk-sharing structures are
a better fit for issuers and investors alike.
Unlike Ethis and Blossom, Teek Taka focuses less on direct change within the
Islamic Finance sector and instead aims to drive change within a real economy
sector (i.e. garment manufacturing). In doing so, they have aligned on an issue
that brings together the compatibility of Islamic principles with an issue that
attracts many other types of ethically oriented activists. By focusing on an issue
that has a broad advocacy base, Teek Taka can multiply its impact. They offer a
solution that can bring value to local companies in Bangladesh by fulfilling objectives shared with these companies’ customers who are trying to improve practices
across their supply chains.
Each of these three Islamic Fintechs shows a unique approach that shows how
technology can enable better outcomes by linking their entire purpose (technology and financing structure) to social impact that fulfils Sharia compliance as
well as Maqasid alignment. They have all faced a challenge of a market where
awareness and education are still focused on a business-as-usual approach that
prioritizes compliance over Maqasid alignment. Yet each has found ways to show
incremental progress and successes that meet current market expectations and
show their ability to meet market expectations while still moving towards their
bigger objectives.
Three ideas for the way forward for Islamic Fintech
Based on successful conventional alternative finance players and a review of
shortcomings, several framework recommendations could be made to pave the
way for a more impactful Islamic alternative finance sector.
Recommendation one: positive intention via
an objective theory of change
Firstly, the market dynamics within Islamic Finance have not enabled technology to be widely and competitively adapted to integrate Maqasid into the core
raison d’etre of the industry. One primary barrier has been sufficient recognition of the change that needs to come for the world to achieve sustainable development as articulated by the UN’s Sustainable Development Goals. In contrast,
these goals have been embedded across government policy and regulation in the
Islamic Fintech and ESG goals 27
consciousness of many consumers and will be reinforced regularly through at
least the next decade. The inevitability of future disruption from growing social,
environmental and economic challenges needs to guide business strategy. Islamic
financial institutions can be late adopters and become further marginalized or they
can recognize what the current trajectory means for their future and find ways to
seize the opportunity.
For Islamic Fintechs that choose to seize the opportunity, their first challenge
will be understanding which of their decisions can affect their future and which
ones are out of their control. This knowledge will allow a strategic redirection of
their efforts under a coherent vision that outlines their strategic intent, as well as a
‘theory of change’ that explains how their decisions today support their ultimate
intent. Having this fundamental story, which must be revised regularly as the
world proves or refutes their theory of change, Islamic Fintechs can use it to gain
buy-in for the initiatives that can help them transition to a more Maqasid-oriented
future and operating framework.
This tension (a ‘tragedy of the time horizon’, to repurpose a phrase from Bank
of England Governor Mark Carney) will also need to be managed (Climate Action
in Financial Institution 2015). Thus, it is crucial that Islamic Fintechs develop a
strategic intent and theory of change as we outlined for traditional Islamic financial institutions. This will provide Islamic Fintechs with the ability to manage
short-term needs to maintain economic sustainability without losing their credibility. Islamic FinTechs can expect to gain credibility in differentiating themselves in the longer term when they can become a ‘plug and play’ option for
Islamic banks by adopting ‘alternative Islamic Finance’.
As an example of approaching operations with greater strategic intent, some
Fintechs have worked to address the fundamental shortcomings of debt-based
products by developing non-bank approaches that enable profit-and-loss sharing,
which most critics of the status quo prefer. For example, Niyah Bank says it plans
to offer small and medium-sized enterprise (‘SME’) financing where ‘repayments
are based on revenue sharing and profit-sharing – not interest’ (Niyah 2019). If
these Fintech companies were organized as traditional banks, they may face similar regulatory challenges that make their business model incompatible with PLS.
However, they lack the similar institutional baggage that constrains the possible business models they could adopt, which would only attach to them if they
become a ‘bank’ as they work to achieve scale. In the past, this strategy was the
only economically attractive route to scale up in countries with high demand for
Islamic Finance. However, today technology and the enabling environment set up
through Fintech sandboxes provide more opportunity for experimentation.
Outside of these regulatory sandboxes, there have been a few other pathways
charted by Fintech companies including the establishment of wholly digital banks
under regulatory systems that allow them (such as the UK’s Niyah Bank) to use
capital markets and technology to raise financing more cost-efficiently for social
impact projects (such as Blossom Finance). The long-term merits of each are difficult to assess as few Islamic Fintechs are scaling their operations and even fewer
with a long track record. Nonetheless, their bold moves will blaze the trail for
28
Blake Goud, Tanvir Uddin and Bayu Fianto
others to follow. The imperative of Islamic Fintechs outlining their long-term
strategic intent with the SDGs and the Maqasid al-Sharia provides a better way to
align incentives for long-term industry development. It is designed to be a source
of pre-commitment concerning their long-term objectives to mitigate conflicts
they face between the short-term pressures of inertia (business-as-usual) and the
long-term objectives.
Recommendation two: long-term, committed strategic
vision from industry and government leaders
Although Islamic Fintechs have not yet delivered SDG and Maqasid-aligned outcomes, they are still the best source of hope to deliver change to the Islamic Finance
industry and beyond. The types of Islamic Fintechs that we have highlighted here
combine Islamic Finance, responsible finance and technology. This alternative
Islamic Finance requires development from many sides. It is most likely to emerge
where there is a strong ‘tone from the top’ in both the financial industry and regulatory communities, as well as within the emergent Fintech sector.
The tone from the top is essential to create change by setting out a strategy
that can be injected into every element of a Fintech’s business. The leadership
support and drive towards the SDG and Maqasid-aligned objectives encourage
not only the adoption of technology but a change in how a Fintech engages with
other stakeholders, including financial institutions, around its economic, social
and environmental impact. This will be reflected in developing a coherent value
proposition to its shareholders, customers, partners and competitors.
The type of leadership required in Islamic Fintech companies does not only
benefit them internally because regulators have encouraged a similar tone-fromthe-top attitude towards economic, social and environmental objectives in their
regulation of other institutions. As an example, Bank Negara Malaysia Deputy
Governor Abdul Rasheed Ghaffour, when addressing a roundtable of bank and
takaful executives, explained that Sharia embeds inherent features that make it
natural for Islamic financial institutions to play a catalytic role in advancing a
sustainability agenda. While considering profit, financial institutions should not
avoid the element of being socially and environmentally responsible (Central
Bank of Malaysia 2019).
The speaker brings the perspective of a regulator to underpin the seriousness
of the message. His message communicates the value of considering environmental and social sustainability within the context of institutions that are ultimately
required to maintain their economic sustainability to meet regulators’ expectations for financial stability.
The leadership qualities required to adopt an SDG and Maqasid-aligned business model are essential for a Fintech’s success, but adopting or instituting a leadership mindset on its own from the top is not sufficient to change the institution.
The preceding recommendation for outlining a strategic intent is interlinked and
pairing that intent together with having good leadership creates a positive reinforcing cycle.
Islamic Fintech and ESG goals 29
If a strategic intent is embedded to follow market expectations or to emulate
the messaging of another successful Islamic Fintech, it is unlikely to be successful. The intent will be implemented only as far as it does not conflict with another
business objective and will remain a useful marketing tool, not an asset and objective to drive systemic change. Similarly, a good leader with a positive vision who
develops the strategic intent alone and expects others to follow will make others
too reliant on his leadership.
The process will not create a strategic intent for the Islamic Fintech that reshapes
business-as-usual unless the leader recognizes the need for full buy-in, not only
acceptance. This requires the leader to challenge her team as they explore what
they value and what is possible for a single Fintech to do. The process requires a
leadership strong enough to seek broad input that gives everyone ownership and
accountability for the objective expressed in the strategic intent.
For institutions to become examples for others and sources of systemic change,
they must be resilient so that they could succeed even if they lost the leader’s
vision. This provides the essential link between strategic intent – grasped and
supported by every part of an Islamic Fintech’s operations – and leadership,
expressed through enabling team-wide buy-in to encourage the responsibility for
taking action back to each member of her team.
Recommendation three: objective measurement to
validate and ensure ‘on track’ direction
The split incentives that are represented between short and long-term outcomes
leave significant ground for a form of ‘greenwashing’ of SDG and Maqasid alignment. Because of imperfect information, it is difficult to assess the authenticity
and real-world effectiveness of an institution’s long-term intent. An objectively
verifiable Islamic Fintech’s achievement of ESG outcomes will make it easier
to gain attention and possibly funding. It can also help rebut scepticism about
even the most well-intentioned Fintech. The wide varieties of activities that could
qualify as SDG or Maqasid-aligned mean that the metrics will most likely not be
standardized and the focus will have to be more on reporting methods and traceability. In some ways, the consistency of the follow-through is more important
than the specific ways in which it is measured. Consistency will build credibility,
which can help like-minded Islamic financial institutions and Islamic Fintechs
match and make the needed collaborations towards a shared objective.
The Financial Services Authority of Indonesia has launched a registration system for Fintech start-ups, marking a formal recognition of the sector. A similar
global registry under the auspices of a neutral organization such as the Islamic
Development Bank, arguably, the most prominent champion of the SDGs in the
Muslim world, could similarly be set up. Without a certified registry, widespread
Fintech acceptance by regulators will be limited. Although technology provides
an opportunity to move markets, we must question the potential of Fintech to
change the fundamentals of the economy and society. Thus, objective standards
provide a benchmark to make this crucial assessment, especially as we have been
30
Blake Goud, Tanvir Uddin and Bayu Fianto
concerned about the limited transparency and ineptitude of mainstream Islamic
Finance.
There have been other such efforts established within the impact investment
sector which can guide standards-setting. One of the most notable has been the
GIIN Impact Reporting and Investment Standards (‘IRIS’). According to the
GIIN (2019a), the IRIS Catalogue of Metrics was developed in 2008 to allow
impact investors to define, track and report social and environmental performance. Moreover, it has been supplemented with other sector and industry-specific metrics in a new IRIS+ which embeds the original Catalogue of Metrics as
one component. Furthermore, an overlapping initiative is the Impact Management
Project (‘IMP’). The IMP brings a broader objective more aligned with the ‘strategic intent’ we have outlined by encouraging the creation of a global consensus
on how to measure and manage impact (Global Impact Investing Network 2019a).
Because IRIS+ and IMP approach from a universal perspective, they may provide a reference point that is useful for those seeking to link SDG and Maqasid
objectives.
These two efforts allow for shortening the process of identifying what is possible and offer a shortcut that allows those in Islamic Fintechs to take what others are
already doing around the world. Empowered with this information, each Islamic
Fintech can evaluate which of the possible desired impacts are most closely
aligned with the Maqasid. Therefore, for Islamic Fintechs to realize Maqasid and
ESG outcomes, it is crucial to not only translate long-term intent into short-term
metrics but also ensure that reporting remains consistent across time.
Indonesia – the jurisdiction to follow closely
Across the global landscape, Indonesia has held the most potential to achieve ESG
outcomes through a deep Islamic Fintech ecosystem. The potential for alternative
Islamic Finance via Islamic Fintech is considerable because Indonesia is the largest
Muslim country. Indonesia’s total population in 2020 reached 273.642.820, with
87% Muslim citizens (World Population Review 2020). Moreover, Coordinating
Ministry for Economic Affairs of the Republic of Indonesia (2018) reported that
Indonesia’s financial inclusion rate remains low where only 55.7% of adults
own an account and 70.3% have used a product or service offered by a formal
financial institution. Moreover, Islamic Finance remains nascent in Indonesia
compared to other jurisdictions. Indonesia’s first Islamic bank was only established in 1992 and the sector comprises only 5.95% of total banking sector assets
(Financial Services Authority 2019). Furthermore, the Islamic Financial Services
Board (2018) reported that Indonesia Islamic banking assets are only 1.8% of
global Islamic banking assets. Thus, there is greater opportunity for alternative
Islamic Finance to establish a firm footing. Finally, the government has a deeper
strategic faith compared to other large Muslim nations such as Bangladesh, as
per Bank Indonesia’s 2002 Blueprint which noted the financial stability benefits
of growing Islamic Finance. Islamic Finance demonstrated its resiliency to economic crises when Bank Muamalat Indonesia was able to withstand the Asian
Islamic Fintech and ESG goals 31
Financial Crisis of 1997–98 while conventional banks suffered deep losses. More
recently, Indonesia established a National Committee for the Islamic Economy
(Komite Nasional Keuangan Syariah/KNKS) in 2017, which is directly chaired
by the Indonesian president. The KNKS is mandated to help encourage the development of Islamic economics, including Islamic banking.
Overall, Fintech in Indonesia has great potential because it can provide solutions for urgent needs that cannot be provided by traditional financial institutions.
Also, the explosion in cellular penetration (70% of the population use mobile
phones to access the web) in this country has created a fertile land for the rapid
improvement of Fintech industry. It is therefore unsurprising when the Dubai
Islamic Economy Development Centre reported that Indonesia is the home for
31 of 93 start-ups that have been registered with the country’s Islamic Fintech
association (Dubai Islamic Economy Development Centre 2018). KPMG found
that the total investment in Indonesia from 167 Fintech companies is US$182.3
million (KPMG 2019). In 2018, the transaction value in the Fintech market was
US$22.4 million and the transaction value is expected to grow 16.3% annually (Fintechnews 2018). Crowdfund Insider Ronald Yusuf, the co-founder of
Ethis and CEO of Ethis Indonesia, says that Fintech is booming in Indonesia. He
explained that Ethis would be able to promote the business cycle in Indonesia
through Fintech adoption.
The government has also issued facilitative policies related to Fintech to support
its growth. For example, Bank Indonesia has issued Bank Indonesia Regulation
No. 16/8/PBI/2014 on the amendment to Bank Indonesia Regulation No. 11/12/
PBI/2009 on electronic money, and the Financial Services Authority (‘OJK’) also
issued regulation of the Financial Services Authority No. 77/POJK. 01/2016 on
information technology-based lending and lending services. Although regulators
have imposed licensing requirements, there are still many illegal Fintechs operating in the market. OJK has the same requirements for conventional and Islamic
Fintech companies. Islamic Fintech is subject to an additional requirement of a
fatwa issued by the National Sharia Council (‘DSN’) under the Indonesian Ulema
Council (‘MUI’) to ensure companies operate under agreed-upon Islamic principles. One of the requirements to ensure consistent and prescribed practice on
Sharia issues is for Islamic Fintechs to have their own Sharia approval boards.
Therefore, not only is Indonesia a large market with considerable unmet
demand, through considerable Fintech innovation and government support, it has
great potential to achieve ESG and Maqasid outcomes. In doing so, it will soon set
the benchmark for alternative Islamic Finance across the world.
Conclusion
The pace and scope of change in modern financial systems are unprecedented
due to the introduction of technology and competition from technology-native
Fintechs that are not bound by the legacy systems and culture of major financial institutions. However, among many Fintechs, the adoption of technology is
further embedding many of the same fundamental issues in Fintechs that led to
32
Blake Goud, Tanvir Uddin and Bayu Fianto
the evaporation of trust in financial institutions after the financial crisis. Many
Fintechs, especially those with a growth-at-all-costs mindset, are risking the same
scandals driven by greed and lack of respect for their customers that has plagued
the mainstream financial system.
Within Islamic Finance, there is an overarching ethical system embedded in
the operation of the industry that has constrained some of the excesses of the
financial industry altogether. Leverage restrictions curtailed some of the issues
associated with over-borrowing that has individual, company and systemic
impacts. Nonetheless, the Islamic Finance industry also faces a problem of focusing on a limited review to allow anything that is not prohibited by Sharia, even
many practices that lead to impacts that contradict the broader objectives as per
the Maqasid al-Sharia. The risk from only completing a negative sector-based
screening relating to Islamic prohibitions and following formalistic, hybrid variations of classical Islamic contracts is that it enables the same negative outcomes
that these prohibitions were designed to avoid.
As the field of Islamic Fintech develops, it has in some cases followed the same
growth-at-all-costs mindset of conventional Fintech with purportedly similar
outcomes. The use of technology, rather than disrupting the traditional business
models of financial institutions (conventional or Islamic), continues to embed a
strategy that does not progress the world towards the achievement of the United
Nations Sustainable Development Goals. Within Islamic Fintech, this approach
that creates a digital version of the Islamic financial industry is at risk of falling short on both the sustainable development goals and the Maqasid. While not
every Fintech is falling into the same trap of only focusing on the efficiency of
the financial system at the expense of the inequities of the financial system, we
must recognize that technology is not a neutral force when applied in many fields,
from social engagement to politics to finance. Without a proper application, its
ability to reinforce existing inequities is greater than its ability to disrupt those
same inequities.
We argue that a priori, alternative Islamic Finance holds great potential to
address the shortcomings of the mainstream Islamic Finance industry but this
will not be automatic nor guaranteed. For this reason, in this chapter we have
outlined a way forward to improve the ability of Islamic Fintech that relies upon
transparency about their intention and its alignment with the SDGs and Maqasid
al-Sharia. This positive intention is necessary because of the fundamental power
of technology to reinforce rather than disrupt existing inequities. However, the
positive intention is not enough on its own to make Islamic Fintech more successful in achieving social impact.
The intention translates into action through the actions and influence of those
who orient their leadership around it. On its own, even the best conceived strategic intent aligned with the SDGs and Maqasid al-Sharia will be reduced to a
marketing tool if it is not embedded within the everyday operations of a Fintech
that adopts it. Leadership applied in this context is not only about dictating a strategy or defining the intent on its own. A good leader motivates her team to develop
a strategic intent that everyone involved with a Fintech will get behind and will
Islamic Fintech and ESG goals 33
carry forward with self and organization-wide accountability that makes realized
outcomes less dependent on the leader alone.
Finally, to address the risk of greenwashing (or ‘impact-washing’), which undermines the integrity of any positive intention, Islamic Fintechs must position their
appeal in terms of objectively measurable social impact. There has been uneven
progress in making this measurement both objective and comparable, but it is moving in the right direction and pairing intent, strategic leadership and objective measurement remain the most important ways to reinforce sincere efforts by Islamic
Fintechs towards the achievement of the SDGs and alignment with the Maqasid.
As we have seen in our case study review of three Islamic Fintechs that do
have a positive intention and a commitment to social impact, there is a consistent response that the commitment to social impact is not averse to business success. As the Millennial generation moves into their prime working age, the social
impact focus may have moved far away from being perceived as a drag on business performance to being instrumental to the appeal of customers. As climate
change, global inequality and freedoms press more firmly on the social and political conscience, alternative Islamic Finance must move closer to Maqasid outcomes through ESG frameworks to maintain its relevance for a more connected
and increasingly vocal consumer base.
The adoption of Fintech within the Islamic Finance context is still at a nascent
stage and the recommendations we provide based on the limited experience to
date will help address some of the major cross-cutting issues related to Fintech.
Further research will be needed to elucidate in more detail issues relating to individual sectors and countries within the broader global Islamic Finance industry.
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3
Takaful and Fintech
Can Fintech save takaful? A case study1
Germán Rodríguez-Moreno
Introduction
This chapter is based on the double premise that (i) takaful is in crisis; and (ii) any
helping hand is welcome. It does not pretend to answer the obvious question: why
is takaful not working? It simply looks at a case study where a takaful operator has
found success as a result of establishing a clear strategy for growth using Fintech
as a means to achieve it. Nevertheless, the fact that one can point out a successful
story begs another question: why is it not replicated?
One of the things which is missing in the Islamic Finance literature is rigorous
quantitative data and case studies. The balance so far is heavily in favour of qualitative commentary and discourse, seldom making reference to well researched,
methodologically sound studies based on primary sources. Of the latter there are
few and far between. Somehow simple data gathering does not appear to be an
easy task to undertake.2 If one then adds that the overwhelming majority of the
literature on Fintech has been published in the last five years (Oseni & Nazim
Ali 2019), it is easy to understand that quantitative research on the relationship
between Fintech and takaful is absent. Therefore, the aim of any quantitative study
has to be modest. In this case, I will make a simple exercise of testing assertions
which assure us that Fintech is ‘redefining the financial service customer journey’
(Alam, Gupta & Zameni 2019, p. 11) in such a way that if financial service providers adapt ‘the technological advancement and digitally transform themselves
in the wake of digital disruption, they have the potential to serve the customer better’ (Alam, Gupta & Zameni 2019, p. 6), against the experience of FwU Takaful
GmbH, a takaful operator. I will do so by looking at (i) FwU’s experience prior to
the introduction of Fintech; (ii) how the introduction of FinTech impacted upon
its business; and (iii) the results in terms of market production in a specific geography: The United Arab Emirates (‘UAE’). I will finally highlight aspects (and
there are many) upon which future research work may focus.
Background
The state of play of the takaful sector is as follows: the Islamic Finance industry
is worth US$2.05 trillion (expected to have reached US$2.5 trillion by the end of
Takaful and Fintech 37
2019) (Zubair Mughal 2019). While the Islamic banking sector represents 71% (or
US$1.72 trillion) of the global Islamic Finance industry, takaful represents a mere
1.3% of it (IFSB 2019) and its contribution is, if anything, expected to diminish.
The insurance industry worldwide is worth US$5.2 trillion (OECD 2020) and
takaful represents US$38 billion (ICD-Thomson Reuters 2017) of that, i.e. less
than 1% of the total insurance industry worldwide. Takaful is a young industry,
less than 40 years old, with a relatively robust regulatory3 and legal regime.4 The
legal and regulatory infrastructure, however, has not been accompanied by quantitative growth and the growth that has happened is highly concentrated in very
few countries: Saudi Arabia, Iran and Malaysia account for 85% of global assets.
Takaful is yet to become a reality for the vast majority of Muslims worldwide.
This is clearly the picture of an industry in crisis.5
Islamic Fintech or simply Fintech?
Is there something intrinsically Islamic in a Fintech tool or is a Fintech tool a neutral catalyst which allows for a more efficient production/distribution of a Shariacompliant product? What do we mean when we refer to Islamic Fintech?
If we understand Fintech to mean, following Umar Oseni: ‘the application of
technological advancement in delivering, facilitating, or enabling financial services’ (2019, p. 4), we can then say that Islamic Fintech is the application of technological advancement to Islamic financial services, i.e. financial services which
are Sharia-compliant. In other words, to use the much-quoted phrase of Martin
Luther, ‘The Christian shoemaker does his duty … by making good shoes’. The
shoes, per se, have no Christian quality; neither has Fintech Islamic quality.
Therefore, to the extent that we mean anything when we use the phrase Islamic
Fintech, we may adopt the definition provided by Abdul Haseeb Basit:
Islamic FinTech can be defined as: (i) the digital delivery of an Islamic
Finance product; [or] (ii) The application in Islamic finance of an emerging technology such as AI and Blockchain; [or] (iii) A FinTech addressing a
Muslim market demography especially when serving an unmet need.
(ELIPSES 2019, p. 2)
This definition has the merit of not ascribing an intrinsic religious quality to a
piece of (financial) technology. In addition, the characteristics are disjunctive.
Provided at least one of these characteristics is met, we are entitled to talk about
Islamic Fintech. Nevertheless, I will simply make a reference to Fintech throughout this chapter.
FwU Takaful GmbH (FwU Takaful)
FwU Takaful is a member company of a German group (FwU AG) which has
its origins in 1983. In its early years, FwU operated as a think-tank and a consultancy applying technology and client-centric solutions for its clients. It is in
38
Germán Rodríguez-Moreno
the wake of undertaking an analysis of the German insurance market in 1989
that FwU entered the insurance industry as an adviser to large insurance and
re-insurance companies worldwide, particularly in the IT field. After years of
advising others, FwU founded its own life insurance company in 1991 playing
to its strengths: innovation and technology. In 1999, FwU established the first
internet-based application system, a precursor to what later became FILOS. FwU
launched its first takaful product in 2003,6 entering the UAE, Saudi Arabia and
Kuwait in 2005. This was also the year that FwU launched FILOS, a Fintech
tool which greatly improved the sales and operational process, providing an
all-in-one-birth-to-grave insurance cycle solution. In 2007, FwU expanded into
Malaysia, followed by Pakistan in 2009.
The bancatakaful model
There is, however, an element in between FwU and FILOS that is key in explaining the success that FwU Takaful has had in distributing its products in the UAE
and beyond: the bancatakaful model.
Bancatakaful, a strategy for improving distribution, is a volume solution for
standard products. In a nutshell, in a bancatakaful relationship, the bank opens its
network (usually on an exclusive basis) for the takaful operator to sell its takaful
products. The bank may act as an intermediary, for which it receives a commission
fee per product sold, usually against an agreed business plan (wakala contract); or
as a partner where the takaful operator and the bank establish a joint-venture (distribution/service provider) company (mudaraba/musharaka contract); or indeed,
both (wakala/mudaraba contract).7
FwU Takaful made a strategic decision to distribute its products by way of
using the branch networks of, eventually, several banks. FwU Takaful did so by
‘battling the biggest first’, i.e. Abu Dhabi Commercial Bank (‘ADCB’) in 2005.
ADCB was the largest bank in the UAE in terms of size, assets and customer base.
FwU Takaful made two additional decisions: (i) it would establish this relationship on a white-label basis, i.e. the customer would not know who was behind the
products; and (ii) the products (Unit Linked) would be those that FwU used in
Europe but ‘takafulized’, i.e. they would be Sharia-compliant.
The FwU has since then extended its bancatakaful model geographically to bank
networks located in four of the six countries that make up the Gulf Cooperation
Council (‘GCC’) as well as in Pakistan and Malaysia. It has also diversified its
product portfolio. There are now four core products: Savings, Whole Life, Lump
Sum and Term Life plus six riders which include Critical Illness, Accidental
Death, Family Income and Permanent Disability. Today, FwU Takaful sells 99%
of its products through a series of bancatakaful relationships and only 1% through
brokers.
The legacy market
Prior to the introduction of FILOS in FwU Takaful’s selling/distribution process,
the contract issuance experience was as follows:
Takaful and Fintech 39
··
··
··
··
··
··
··
··
··
Applications had to be pre-printed by the bank.
The filled applications would be sent to FwU Takaful, taking two to three
days to reach their destination.
FwU Takaful itself would take two to three days to assess the application and
complete the underwriting process.
In a straightforward case, seven to ten days would elapse before the customer
received the policy documents and certificate.
The process would take longer if medical underwriting was required.
Amendments/alterations to the original contract would take as long as the
process described above.
In addition, amended documents might be lost in transit.
Manual setting up of standing instructions to debit customers could lead to
human error and non-collection of contributions.
Sharing of earnings among partners (FwU Takaful and bank) would take a
considerable time as the processing and distribution would be done manually.
FILOS
To overcome the above scenario, FwU introduced FILOS into the takaful market. This tool, already successfully used by FwU in conventional insurance in
Germany, gave FwU Takaful a competitive advantage by introducing a solution
for a complete insurance life cycle in the takaful market. The new system allowed:
··
··
··
··
··
··
··
··
A straight through internet-based solution for operational efficiency.
The introduction of two options: the pre-printed application (offline model)
and the system-driven application (online model).
Online underwriting.
On-the-spot issuance of policy documents and certificate.
Reduction of human error by introduction of direct debit of customer account.
On-the-spot online contract amendments and endorsements.
Quality sales report for more effective sales management and tracking.
A secured communication channel for data integrity and privacy.
The merits and cost effectiveness of using FILOS can be better appreciated in
Table 3.1.
The introduction of FILOS had an immediate impact. Productivity, for example, was improved by 100%, reducing the issuance time from days down to
minutes, while there was a cost savings of 80%. Underwriting is key in takaful
(probably the most important aspect in the industry). Given that underwriting may
take days, the introduction of online (and thus on-the-spot) underwriting provided
a huge competitive advantage to FwU Takaful and its banking partner (in this
case); and gave the customer peace of mind, knowing that s/he enjoyed immediate
coverage. Human error (so common in paper applications) was eradicated almost
completely.8
Given that entry into Middle East markets and the launch of FILOS occurred
almost in parallel, it is difficult to obtain a before-and-after picture. It is worth
40
Germán Rodríguez-Moreno
Table 3.1 Merits and cost effectiveness of using FILOS
Legacy process
Time
Cost
Convenience
Certainty and
confidence
Security
FILOS
2–10 Days required to issue
After accessing 6 screens for
contract certificate from
application, issuance takes 7,5
application date
minutes
Courier charges for 1 application Total incurred cost for one
(send and return) = 60 AED
application – 15 pages per
incurred by the bank
customer to be printed on the
spot: 0,65 × 15 = 9,95 AED
- Customer waiting time =
- Customer waiting time =
10 Days
10 minutes
- Sales staff may visit customer - Customer needs only single
3 or 4 times which includes
visit to the branch for online
Application
processing
- Contract handover and manual - Sales staff can reach customer
underwriting (and may not get
anywhere with offline
the contract closed)
application process
Customer is not aware whether s/ - Customer is covered on the spot
he will be covered
- No cases are rejected (minimum
0,1% takaful covered by the
system)
Initial information is stored on
Information is stored on secured
paper
channels
Source: FwU.
Author’s own elaboration from data provided by FWU
noting that Fintech is generally absent from the specialist literature in the first
decade of this century as a key element in the development of takaful in the UAE
market (and, indeed, beyond).9 Nevertheless, Table 3.2 shows the steep growth
that FwU Takaful has experienced in the UAE market since 2006 in terms of new
business: number of contracts, annualized contributions and total contributions.
Undoubtedly, the FwU success story in the takaful market has been due to
mixing the bancatakaful model with FILOS, which in the event has proved to be
a very flexible Fintech tool. FILOS has now travelled full circle: from Germany
to the UAE and Asia and back to Europe. FwU uses it now extensively in several
European countries, where product distribution occurs through a broker instead
of bancassurance networks. FILOS has proved to be the common denominator in
the FwU distribution (and hence growth) model.
The UAE market
To put the success of FwU Takaful into context, we need to look at the state of
the UAE insurance/takaful market. According to AM Best (2019), in 2018 takaful
accounted for 17% of the UAE insurance market, under-delivering on their ability to gain market share, unlike Islamic banks. Listed insurers recorded gross
Takaful and Fintech 41
Table 3.2 Takaful: UAE market production
New business
Year
No. of
contracts
Annualized
contributions – AED
Total contributions – AED
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Grand Total
4,488
2,373
2,096
5,940
5,436
1,380
1,792
2,717
4,276
3,482
3,186
1,570
1,270
1,689
41,695
32,069,691
19,555,806
25,612,603
70,507,945
74,282,912
23,593,808
38,361,552
66,003,528
118,842,417
102,183,720
99,737,528
49,675,328
39,598,025
68,000,000
828,024,863
241,209,641
158,717,242
290,560,260
716,528,490
838,874,897
298,688,060
454,909,584
866,843,636
1,438,763,231
1,277,291,095
1,176,547,451
421,738,709
321,821,480
605,000,000
9,107,493,775
Author’s own elaboration based on data provided by FWU
written premiums (‘GWP’) of AED21.90 billion (US$5.96 billion), with takaful
contributing AED3.7 billion (US$1.01 billion). The report does not differentiate
between general takaful and family takaful operators (the latter being the exclusive area of expertise of FwU Takaful), making it difficult to gain a clear picture
of FwU Takaful’s position. Mirroring the heavy concentration in three countries
of takaful worldwide (as discussed above), the UAE market is dominated by two
large players: Islamic Arab Insurance Company (Salama) and Takaful Emarat,
which together accumulated 45% of GWP. Takaful Emarat was expected to grow
even more in 2019 following its acquisition of Al Hilal Takaful.
Among the several points that the AM Best Report makes, there is one to highlight: ‘Takaful companies continue to struggle to differentiate themselves from …
conventional insurers’ (2019, p. 4). The report adds that this makes takaful companies ‘subject to the same pricing pressures’ (2019, p. 4). More than the pricing,
what is important to reflect upon is whether the lack of differentiation accounts
for the low levels of penetration (17%) that takaful has in a relatively well insured
Muslim-majority territory. Regardless of any help that Fintech may provide, the
customer may be unable to see any or much difference between a conventional
insurance policy and its takaful equivalent.
Future research
Despite the fact that we are told once and again that Fintech improves the customer
experience, there is no research done (and hence there are no data available) on
42
Germán Rodríguez-Moreno
customer satisfaction with (i) the process; (ii) the Fintech tool; and (iii) the product
purchased. My own modest piece of research lacks comparative data, both geographical (different markets) and chronological (before and after), i.e. how has FwU
Takaful done in other markets? Can the results be replicated in other takaful markets? Are there before-and-after data that would allow us a comparative analysis in
the same market of the actual impact FILOS (or any other Fintech tool) has had?
The problem of differentiation referred to in connection with the UAE market
and the level of takaful penetration merits further empirical research. There is
no point in filling pages of Fintech books with explanations of the advantages
that smart contracts bring to the customer if there is no validation of that on the
ground, other than anecdotal data.
Conclusion
Fintech innovation may bring many benefits to the customer (transparency, speed,
lower costs, convenience, peace of mind, privacy). However, this is regardless of
whether that customer is purchasing a conventional insurance policy or a takaful
one. If nothing else, the case of FwU makes it clear that FILOS is a piece of
Fintech that FwU has used to sell conventional insurance policies in Europe and
takaful policies in Asia. FILOS has been instrumental in FwU, increasing its sales
by improving the customer experience both in Europe and Asia. Fintech will help
a customer purchase a policy and improve his experience, but it will not be a
determinant factor, in the first instance, in making it choose a takaful policy over
a conventional insurance one, or, indeed, in purchasing a policy at all. In other
words, Fintech may be helpful to takaful, but the dire state of the takaful sector
will not be resolved by Fintech. The problems seem to go far deeper.
In the light of the above, Abdul Haseeb Basit’s definition of Islamic Fintech
(see above) needs to be nuanced. Whilst the first two elements are uncontroversial, the third one: ‘A FinTech addressing a Muslim market demography
especially when serving an unmet need’ causes more problems than it clarifies
(ELIPSES 2019). The UAE is a Muslim market demography where Fintech may
be addressing unmet needs (i.e. insurance/takaful), but given that Fintech does
not discriminate between consumers of conventional insurance and takaful, this
element of the definition, as stated, serves no purpose. The other two elements of
the definition remain valid.
Notes
1 I am grateful to Alexander Dirrheimer, Global Head of Business Development at FwU
AG for opening doors; and to Muzzammil Aijaz, (now former) Deputy COO in Dubai
of FwU Takaful GmbH, who so generously shared time and company information with
me. The accurate and fair use of that information is my responsibility.
2 The reason for this may be a research project in itself.
3 Entities such as the Islamic Financial Services Board (‘IFSB’) and the Accounting and
Auditing Organization for Islamic Financial Institutions (‘AAOIFI’) have played and
continue to play an important standard-setting role.
Takaful and Fintech 43
4 The Takaful Act 1984 in Malaysia being the first and a leading legislative example.
5 I found it interesting that when I explained this state of affairs to Muzzammil Aijaz he
was very surprised. His impression, as someone who has spent years in the industry
and was deeply involved in the successful story described in this chapter, was that the
situation was not as bad as the numbers point out.
6 This product was launched to serve the Turkish Muslim community in Germany. It was
later withdrawn for lack of demand.
7 I am unaware of the type of contractual distribution arrangement that FwU has reached
with any of its banking partners. Therefore, nothing should be inferred in this regard
from my brief explanation of the nature of a bancatakaful arrangement.
8 FILOS does not allow you to submit an application if it is not properly filled.
9 The Alpen Capital report in 2009 does not even make a reference to Fintech in its
review of the state of play of the insurance market in the UAE.
References
Alam, N., Gupta, L. Zameni, A. (2019) Fintech and Islamic Finance: Digitalization,
Development and Disruption. London: Palgrave Macmillan. Available from: http://doi
.org/10.1007/978-3-030-24666-2.
Alpen Capital (2009) The UAE insurance industry report. Available from: http://www
.alpencapital.com/downloads/UAE_Insurance_Industry_Report_August_2009.pdf
[Accessed: 16th September 2020].
AM Best (2019) Best’s special report on takaful insurance. Financial Review, 1–5.
ELIPSES (2019) The global Islamic fintech report. Available from: https://ceif.iba.edu.pk
/pdf/IslamicFinTechReport19.pdf [Accessed: 16th September 2020].
ICD–Thomson Reuters (2017) Islamic finance development report 2016. Available from:
https://www.zawya.com/mena/en/ifg-publications/201116120632M/ [Accessed: 16th
September 2020].
IFSB (Islamic Finance Services Industry) (2019) Islamic finance services industry (IFSI)
stability report 2019. Available from: https://www.ifsb.org/download.php?id=5231
&lang=English&pg=/index.php [Accessed: 16th September 2020].
OECD (2020) Global Insurance Market Trends 2019. Available from: http://www.oecd
.org/finance/insurance [Accessed: 16th September 2020].
Oseni, U.A. and Nazim Ali, S. (2019) Fintech in Islamic finance. In Oseni, U.A. and Nazim
Ali, S. (eds.) FinTech in Islamic Finance: Theory andPractice. London: Routledge, pp.
3–14. Available from: http://doi.org/10.4324/9781351025584-1.
Zubair Mughal, M. (2019) Islamic finance volume expected to hit $2.5 trillion in 2019.
Available from: https://www.salaamgateway.com/story/islamic-finance-volume-e
xpected-to-hit-25-trillion-in-2019-zubair-mughal [Accessed: 16th September 2020].
4
Robo-advisory
An opportunity for innovation in
Sharia-compliant markets
Pablo Soler Bach
Introduction
In 2008, Warren Buffett bet a million dollars that an index fund would outperform
a collection of hedge funds over the course of ten years. Ten years later, he won
that bet.
(Floyd 2019)
Warren Buffet’s bet was supported by two basic financial premises:
··
··
In any given market, a fully diversified portfolio will be an optimal portfolio,
offering an optimal combination of risk/return.
Nobody (individual or software program) can beat the markets systematically
and in the long term, as market behaviour is impossible to predict constantly
and accurately.
For those same reasons, indexed or passive investment is becoming mainstream
and might offer a unique opportunity to improve investment and wealth management in all financial markets, including Sharia-compliant ones.
Traditional wealth management
Traditionally, wealth advisory services and optimal investment strategies were
available to wealthy individuals and families or financially sophisticated investors
who had access to:
··
··
··
A wider and better selection of fund managers and hedge funds.
The possibility to diversify their portfolios with a wider range of asset classes,
such as private equity, venture capital, real estate or other categories that have
higher minimum investment requirements, require the status of ‘informed or
sophisticated investor’ or longer lock investment periods.
Lower commission and costs on their financial products, thanks to larger volumes invested or privileged relationships with banks and service providers.
Robo-advisory
45
Retail investors were left with limited investment options, typically through
expensive hedge or managed funds that were and still are often distributed and
managed by the same bank.
In markets dominated by a few banks, or where the financial system is overprotected or has close ties to the political system, or where open banking platforms do
not exist or have limited reach, retail or unsophisticated investors have access to a
limited number of expensive funds. Also, they often pay much higher administration and management fees than high net worth (‘HNW’) corporate or institutional
investors to invest in the same fund manager and the same strategy.
As subscription, redemption and all other processes linked to investment in
funds now happen digitally, they have become effectively free of marginal transaction costs for the management companies.
The financial regulators in general could consider preventing the distribution
of the same fund at a different cost for retail or institutional investors in order to
protect the interests of small investors, reflecting the fact that digital operations
imply zero marginal costs for transactions.
Such regulation could also anticipate and prevent a very or even too aggressive
disruption in the sector from occurring, similar to the one triggered by the US
Robinhood platform offering free share trading to retail investors, following the
same digitalization and zero real marginal cost principles.
Regardless of the quality of the managers, the impact of those management
fees and other associated costs in the actively managed funds is very significant
and explains, in good measure, the poorer performance for the investor.
A couple of examples of the impact in cost and accumulated assets under management (‘AUM’) for hedge funds and pension funds follow. The numbers of
Indexa (2020) show the significant underperformance for the observed period of
the actively managed pension funds compared to the indexed funds in the period
2017 to the first semester of 2020 and of actively managed investment funds in the
period 2016 to the first semester of 2020.
Indexa is one of the leading robo-advisors or digital wealth advisors in Spain,
and has grown its AUM from zero to 485 million Eur in only four and a half years
offering only a limited number of different portfolio strategies in passive investments (indexed investments) in funds and pension funds.
The underperformance in returns (accumulated ‘IRR’, internal rate of return)
of the benchmark (managed or hedged funds) compared to indexed or passive
managed Indexa’s pension funds is very significant, and range from 1.5% for the
portfolio type 4 up to a staggering 13% for portfolio type 7 for pension funds, for
the 2016-2019 period, and from 13% to a shocking 28% for hedge funds for the
2017 to 2020 period.
If we consider the effects of the compound returns over the years, it does not
come as a surprise that index or passive investment strategies, even in the case of
Indexa, with very limited marketing and advertising budgets, are having such a
successful growth in AUM in long-term strategies and pension funds.
46
Pablo Soler Bach
Technology disruption
The combination of Fintech and index investing has resulted in a perfect storm for
the wealth advisory industry worldwide, making low-cost and optimal investment
portfolios available to any investor, regardless of the value of their financial assets
and level of sophistication.
The Fintech element, as discussed initially above, implies that wealth advisory
services can now happen fully digitally, thanks to technology and cybersecurity in
a well-regulated environment. This means that all parts of the investment advisory
and management processes can happen digitally: client profiling, client onboarding, account opening, digital signature of contracts, transfer of money, portfolio
reporting or portfolio rebalancing. Robo-advisors need no or limited human client
support to operate and can therefore do it at a fraction of the cost of the traditional
models, such as private banking, that required costly human resources and partly
manual systems.
Additionally, and compared to traditional banks, the robo-advisors are ‘digitally born’. This means that they can have significant advantages compared to
traditional ‘private bank’ players.
··
··
··
They do not have complex and heavy to manage legacy systems, making
it easier for the new entrants to integrate with other players or suppliers of
technology. As an example, almost all the digital banks, such as Revolut,
Sterling or Monzo, have integrated in their platforms one or more robo-advisors, which are growing to millions of customers at a pace not seen before.
They have lighter organizations, processes and structures, which facilitate
faster decision-making and more flexibility and lower costs.
They have created systems focused on user experience (‘UX’) more than in
old processes or systems, which result in a much enhanced customer experience, which improves customer retention and loyalty.
They also have some disadvantages that are particularly relevant in the initial
phases of any independent robo-advisory, and mostly linked to brand recognition
and trust, as those take time to build and are very relevant in the financial investment space.
On the investment side, the principles mentioned in the introduction have
shown that the best way to provide optimal investment strategies at a very low
cost is through passive or indexed investment. Passive investment and Fintech
allow robo-advisory companies to:
··
··
Manage their clients’ portfolios simply and at a very low cost, through a
limited selection of exchange traded funds (‘ETFs’) that replicate and follow
indexes.
Adjust their portfolios according to changes in the circumstances of their
clients through automatic yearly questionnaires (e.g. age, marriage, children,
retirement).
Robo-advisory
··
47
Rebalance automatically the portfolios depending on performance and market conditions (more volatility, new uncertainties such as the pandemic).
These are all done in a very simple and cost-efficient manner, mostly through
low-cost ETF investment.
ETFs are passive investments that replicate an index or a market, having the
same composition than the benchmark in terms of assets in any given time (shares,
bonds or commodities, etc.). They therefore do not require any form of human
decision or management, as they are rebalanced automatically, and carry extremely
low management fees and no success fees or other carried interest for management.
One of the only problems ETFs have, considering the current trends in investing, is that they are, by nature, not selective but comprehensive as they have to
follow an index. As an example, if I invest in an ETF that follows the S&P 500, I
will be automatically investing in companies that produce and sell tobacco or are
related to weapons manufacturing or are non-Sharia-compliant.
As an example, Indexa has defined ten profiles in terms of risk and return that
include all their clients’ profiles, and has therefore only ten different portfolios,
both for hedge funds and pension funds, making it very simple to manage but
offering no other customization than risk-return.
Indexa and most robo-advisors also rely on simple strategies for automatic
portfolio rebalancing, shown in the studies of Vanguard by Jaconetty, Kinniry
and Zilbering (2010). They apply an automatic rebalancing (sell or buy) for assets
in the portfolio whose weight in the portfolio value surpasses 2.5% of their target
weight in portfolios of up to 100,000 Eur and 1.5% above that threshold.
According to David F. Swensen (2005), the automatic rebalancing does not in
itself improve the portfolio performance, but allows for a reduction in the risk and
maximum expected losses, which in turn result in an average improvement on the
portfolio returns of up to 0.4% annually.
The latest generation of robo-advisors are also competing with a wider offering
to their clients, and not only based on low-cost ETF investments. Some of those
are trying to differentiate themselves through:
··
··
Offering more adapted and personalized investment profiles to their clients. That is, for instance, considering individual needs or wants in terms
of socially responsible investment, ecological or green investment, Shariacompliant, etc., which, for example, Indexa’s very simple strategy with ten
portfolios linked to ten risk-return profiles of their clients does not offer.
Offering hedge or managed funds as well as ETFs, in which case they have
to have the skills, knowledge and resources to carefully select and update top
funds and managers.
A new market growing exponentially
As a result of the convergence of technology and indexed investment strategies,
robo-advisory, or automated wealth advisory and investment, has been growing
48
Pablo Soler Bach
exponentially year over year in the last decade, with increasing market share
for new entrants, and significant reduction in revenues and manpower for traditional players in the wealth advisory area. UBS has only recently announced that
500 employees of their private banking services were made redundant, while new
players, such as companies like Betterment, Wealthfront or Acorns in the US, and
many others around the world, receive dozens or hundreds of millions in investment from venture capitalists, corporates and private equity funds, and go from
just a handful to hundreds of employees in a matter of a few years, if not months.
Interestingly, together with the new entrants, the traditional providers of ETFs,
who were B2B (business-to-business) companies, mostly serving institutional or
corporate clients, and not directly the retail investor, are also expanding into the
B2C (business-to-consumer) space, and offerings robo-advisory services using
their own ETFs as investment products to retail investors, capturing massive market shares thanks to their reach, brand and scale (Statista 2020).
In the case of new entrants, this new model combines a low cost of operations
(thanks to smaller organizational structures, low overheads and automatization of
processes) and a low cost of investment. The latter is achieved through:
··
··
Automatization of the client’s risk profile assessment processes and the rebalancing of portfolios.
Investing in ETFs that provide the lowest cost for an optimally diversified
portfolio.
The volume of ETFs reached four Trillion USD in 2019, with double-digit annual
growth rates. The volume of AUM of index investment funds is soon to surpass
that of hedge or managed funds globally. Additionally, the number and variety of
ETFs available to investors worldwide, which has grown significantly, has also
made possible a certain level of customization of investment strategies for even
the smallest investor. The ETFs now offer a quite large variety of efficient strategies, including social impact investment, socially responsible investment (‘SRI’),
carbon footprint, ecology and biotechnology, among others.
ETFs are, because of their own simple and mechanic nature, a volume business, where economies of scale, network and distribution effects are significant.
The low cost of the transactions and the administration and management of the
associated financial investment products make it desirable and almost a necessity for companies managing and selling ETFs to manage very high volumes of
transactions.
As a matter of fact, the ETFs market is dominated by just three players, iShares,
Vanguard and State Street, which are all US-based companies (Floyd 2019; Di
Benedetta & Lauricella 2019).
The number of fully Sharia-compliant ETFs is still very reduced or non-existent. Currently, ETFs are evaluated across one metric:
Islamic non-compliant, which is calculated as the percentage of a portfolio’s market value exposed to companies that are non-compliant according
Robo-advisory
49
to Sharia investment principles. Non-compliant companies are those with
ownership of a prohibited business activity or total revenues greater than or
equal to 5% from prohibited business activities or with financial ratios greater
than or equal to 33.33%. Prohibited business activities include adult entertainment, alcohol, cinemas, conventional financial services, gambling, music,
pork, tobacco and weapons.
A significant and increasing amount of those indexed investments are coming
from retail investors, replacing high cost managed/hedge funds sold to them by
banks for better options provided through ETFs by Fintech companies (new companies and robo-advisors) as well as the incumbents making their products accessible to the mass market, directly or indirectly.
The process of low-cost and better and more efficient services has already
happened in financial services such as stock trading (e.g. Robin Hood, offering
low-cost trading in stocks to retail investors and the subsequent drastic reduction in trading fees for retail investor in many markets), FX markets (e.g. Kantox
and its transparent and low-cost services for FX exchange and risk management)
or international remittances (e.g. TransferWise or WorldRemit offering low-cost
international remittance services and the significant reduction of transfer fees) and
resulted in very significant advantages for the final consumer.
In general, the convergence of Fintech with new business models and more
transparency in fees results into significant advantages for the consumer and for
better and more efficient markets.
The speed of adoption of robo-advisory has been very different in different
markets, as it benefits from:
··
··
··
··
Favourable regulation both encouraging competition and innovation.
A well-developed open banking system.
Availability of ETFs that are relevant for Sharia-compliant financial markets.
The rate of adoption of Fintech, determined by the use of technologies such
as mobile banking, cybersecurity or digital signature.
As an example, even to this day, a majority of the top Spanish banks still do not
offer to their retail clients the possibility to invest in ETFs or other low-cost or
passive investment assets. In spite of that, robo-advisory has been able to develop
and grow exponentially thanks to the existence of a few relatively small open
banking platforms (such as Inversis Banco, Tressis, Renta 4 or CecaBank), which
provide the independent custodian and banking services required for the roboadvisors to operate. Not only do they offer the possibility to new companies to
open accounts for their clients and operate them, but they also offer access to a
wide range of investment products, including low-cost ETFs.
A great opportunity for Sharia-compliant markets
There are several very interesting opportunities for Islamic Finance to participate
and take advantage of these new models and technologies for financial investment, and it could happen in a diverse number of ways.
50
Pablo Soler Bach
Creating a local provider of diverse Sharia-compliant ETFs
This could be a multinational effort through collaboration between several Shariacompliant financial markets, considering that there is a need for very large transaction volumes. Depending on three large US providers for Sharia-compliant
ETFs might not be desirable not only because of the dependency on a few foreign
suppliers, but also for political, strategic and financial reasons.
An example of a parallel situation in terms of dependency from foreign suppliers in a financially strategic sector is Europe depending on three rating agencies
(Moodis, S&P and Fitch), none of which are European, and the mounting voices
that claim that a European provider should be encouraged to develop.
This association of Sharia-compliant economies could take over the current
role the three US ETF providers have in assessing the percentage of Shariacompliant investments in a given fund, as well as develop its own ETF, based
both on geography and other desirable criteria.
Encouraging financial education
This can be done in a number of ways and through national education systems or
private activities. Financial education is crucial in making investors understand
the benefits of an open banking system and of new technologies, such as roboadvisory, that benefit them both in terms of cost and performance. The concepts
of diversification, risk and return correlation or compound interest, are not difficult to understand but are often unknown by a large majority of the population in
many countries. In Islamic economies, this education would also have to include
the understanding of additional Sharia-compliant elements (Er & Mutlu 2017).
Developing open banking systems (nationally)
An open banking system is crucial for Fintech based robo-advisory competitors
to operate and grow. As we have seen with the Indexa example, independent new
robo-advisors need access to third-party platforms and products and a connection
to facilitate clients switching from their existing providers.
Fostering initiatives such as Fintech sandboxes (where new technologies and
players can be safely tested before going to market), forcing or encouraging banks
through regulation to open their platforms and make available to their clients and
other qualified providers certain components of the financial information in their
systems (e.g. account movements, balances in investments, cash balances, outstanding loans) or encouraging multiprovider platforms would facilitate this transition to an open banking system.
Facilitating innovation, competition and entrepreneurship
There are a number of ways for financial regulators to facilitate innovation,
including access to investment to venture capital funds or entrepreneurs. Europe
with the European Investment Fund (‘EIF’) is a good example of such practices,
Robo-advisory
51
as it channels hundreds of millions of euros every year to venture capital funds
in the region.
Collaboration with educational institutions and their innovation labs and
accelerators or, in general, other measures such as tax advantages, empowering
ecosystems or developing regional technological hubs to attract talent also foster
innovation.
Conclusion
A revolution in investment and wealth management is on its way as new financial technologies converge with low-cost indexed investments and open banking
systems, and it can give universal access to optimal investment strategies to both
retail and sophisticated investors.
This wave of innovation provides a very good opportunity for Sharia-compliant
financial markets to improve through technology and strategic investments and
efforts, resulting in lower costs and a better financial performance of their citizens’ investment portfolios, which means, at the end of the day, their financial
well-being, present and future.
References
Di Benedetta, G. & Lauricella, T. (2019) ETF market share: The competitive landscape of
the top three firms. Available from: https://www.morningstar.com/insights/2019/08/01
/etf-market-share [Accessed: 15th September 2020].
EFTdb (2020) Sharia compliant ETF list. Available from: https://etfdb.com/esg-investing/
social-issues/sharia-compliant-investing/ [Accessed: 15th September 2020].
Er, B. & Mutlu, M. (2017) Financial inclusion and Islamic finance: A survey of Islamic
financial literacy index. International Journal of Islamic Economics and Finance
Studies, 3(2), pp. 33–54. Available from: doi: 10.25272/j.2149-8407.2017.3.2.0.
Floyd, D. (2019) Buffett's bet with the hedge funds: And the winner is …. Available from:
https://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-fundsyear-eight-brka-brkb.asp [Accessed: 15th September 2020].
Indexa Capital (2020) Informe de rentabilidad del primer semestre 2020. Available from:
https://blog.indexacapital.com/tag/benchmark/ [Accessed: 15th September 2020].
Jaconetty, M. Kinniry, M. & Zilbering, Y. (2010) Best practices for portfolio rebalancing.
Vanguard research. Available from: https://indexacapital.com/bundles/unaiadvisor
/docs/papers/2010-Vanguard-Best-practices-for-portfolio-rebalancing.pdf?v=43
[Accessed: 15th September 2020].
Statista (2020) Value of assets under management of selected robo-advisors worldwide
as of March 2020. Available from: https://www.statista.com/statistics/573291/aum-ofselected-robo-advisors-globally/ [Accessed: 15th September 2020].
Swensen, D.F. (2005) Unconventional Success: A Fundamental Approach to Personal
Investment. Washington, DC: Free Press.
5
Telemedicine and e-health
in the Middle East
Sarmad R. Ahmad
Introduction
When the words telemedicine or e-health are heard in living rooms across the
world, we often think of a video call with a doctor. And that is it. Let us define telemedicine so that we can dive deeper into its effects and trends across the Middle
East. We will sometimes expand our conversation to North Africa and Pakistan
as well, covering the very populous region of the Middle East, North Africa,
Afghanistan and Pakistan (‘MENAP’).
As per the American Telemedicine Association (‘ATA’), ‘Telemedicine is the
exchange of medical information from one location to another using electronic
communication, which improves patient health status’ (ATA 2020).
Therefore, telemedicine could involve heart-rate monitoring, sleep-cycle monitoring, exchange of data and diagnostics across hospitals or research centres –
and of course – speaking to a doctor over a phone. Telemedicine is a subset of the
wider sector of e-health; e-health being inclusive of health informatics, knowledge management and electronic health records.
E-health, telemedicine and MedTech lends itself perfectly to the basic tenets
of Islamic Finance. Not only is health a cornerstone for societal harmony, but
a necessity for progress. Societal harmony and social progress are both firmly
rooted in the Maqasid al-Sharia (The Higher Objectives of Sharia). By making
healthcare more equitable and widely available, e-health lends itself to a strong
and natural case for Islamic Finance and investments.
In addition, the link between the Islamic waqf and healthcare goes to the heart
of the earliest hospitals in Muslim lands. Traditionally, a large part of healthcare funding came from awqaf – however, the practice has been in decline, until
recently with few governments like the United Arab Emirates (‘UAE’) and some
Malaysian corporations raising the banner (World Islamic Economic Forum –
WIEF 2017).
This chapter aims to give a brief overview of the healthcare industry in the
Middle East and Africa (‘MEA’) and the various, unique niches within this industry that can be exploited in the Middle East, including those of Islamic e-health
and the trends of technology investments in the sector. The chapter aims to bring
into quick focus the wonderful opportunities that present themselves during this
Telemedicine and e-health 53
digital age and how, with the right focus of investors and entrepreneurs, Islamic
e-health is set to boom and potentially improve the world.
The Middle Eastern healthcare industry
It is expected that the Middle East’s healthcare industry will attract $200 billion investments in the five years between 2019 to 2024 (Zawya 2019). This was
before the coronavirus pandemic hit and gave healthcare a whole new focus.
Within the Middle East, it is the oil-rich Gulf Cooperation Council (‘GCC’)
countries that are expected to be responsible for most of this growth and drive in
the healthcare industry. The GCC market itself is estimated to soon be worth $70
billion and a compound annual growth rate (‘CAGR’) of 5% is expected for the
coming years (Trade Arabia 2020).
The Middle East and North Africa (‘MENA’) healthcare industry is a large
one that is ripe for both construction and disruption. With a large population and
increasingly educated humans, capital investments into healthtech aimed at creating efficiencies for providers, insurers and patients have a high probability of
earning great returns.
If the MENA region is expanded, as it often is into MENAP – including
Pakistan – the market increases by a further 240 million people and the avenues
for insuretech, healthtech multiply manifold as Pakistan’s tech adoption with
health and insurance in 2020 is where Indonesia was in 2012 (McKinsey 2014).
Across MENAP, private and public health providers vary vastly in quality of
services. In addition, smaller clinics often lag behind in technological adoption –
often lacking even a basic electronic health record system.
The problems
Insufficient access
As per studies done by InvestCorp (De Boysson & Khouri 2018) (Figure 5.1):
Healthcare supply in the Gulf still lags behind international benchmarks, as
illustrated by the number of beds or number of nurses per inhabitant.
(p.1)
Quality
Across MENAP and even within the GCC – the quality of care varies greatly
between various private hospitals, public hospitals and smaller clinics. Often the
issues are ‘simple’ and can be solved with even a slight automation – such as
wait-times and queuing inefficiencies at hospitals. Bringing quality of care to a
minimal standard using simple-tech can go a long way.
The need for telemedicine: a perfect storm
Three aspects combine to create a ‘perfect storm’ for telemedicine to thrive in the
Middle East:
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Sarmad R. Ahmad
Figure 5.1 Comparison of healthcare resource availability. Source: Prepared by the author
based on the data available at De Boysson, T. & Khouri, R. (2018)
··
··
··
Undersupply: The above statistics on insufficient access along with an undersupply of tertiary care across UAE and the Kingdom of Saudi Arabia (De
Boysson & Khouri 2018).
Young population: In addition, the MEA region’s average age is quite young
at 28.2 years old (Worldometer 2020).
Mobile and internet penetration: The Middle East has one of the world’s
highest internet penetration rates and largest expected mobile users. This can
be gleaned from Global System for Mobile Communications (‘GSMA’) figures available over the internet (GSMA 2019a).
In addition, 344 million mobile phone internet users are expected by 2025 (a
penetration rate of 52%) across the market at a CAGR of 5.4% (GSMA 2019a).
The above statistics create a perfect storm for telemedicine, where an extremely
connected population with a high comfort with mobile phone internet and good
infrastructure are faced with a shortage of doctors, nurses and tertiary care.
While government across the GCC and wider Middle East are alert to this, the
most efficient and quick-to-market solutions involve telemedicine.
Telemedicine in the context of this chapter includes:
··
··
··
Preventative: for example, fitness trackers and apps; diabetes prevention
tools, etc.
Specialist tech: for example, blockchain electronic medical record (‘EMR’)
solutions for hospitals.
Accessibility solutions: for example, the ease of booking a doctor and ease of
reaching them via video link.
Telemedicine and e-health 55
The MEA telemedicine market size is estimated to grow from $3.48 billion in
2019 to $5.22 billion in 2024, with a CAGR of 10.8% over the next five years
(Market Data Forecast 2020).
Healthtech start-ups
There has been an increase in focus in healthcare start-ups across the region
(Magnitt 2019). The majority of start-ups around 2017–18 focused on booking
platform aggregators with a rising consensus that the population was not ready or
interested in ‘video consultations’.
The ‘boom’ of booking and aggregator start-ups is also explained by the high
barriers to entry for start-ups into the world of EMRs, electronic health records
(‘EHRs’) and other solutions that hospitals need.
While the number of deals within healthtech has risen every year in the start-up
ecosystem, the total size of deals was highest in 2017.
With the COVID-19 crisis and the strain on hospitals and supply chains, this
is expected to drastically change in the coming years. In addition, new deals and
incursions into AI with US-based firms moving into the internet of medical things
(‘IOMT’) space will see the start-up scene in healthtech boom drastically.
Most healthtech deals, however, due to lack of research and development
(‘R&D’) as outlined below, will be of ‘scale-ups’ or larger companies from
abroad moving into MEA and establishing offices. An example is the telemedicine platform Vsee, which reported expansion attempts, and the emergence of
MMG–AI – a Spanish-based AI company with an increasing presence in Saudi
Arabia and UAE. As start-ups founded in the West find an unfulfilled market
need, coupled with great infrastructure and a ‘blue ocean’, it is highly likely that
they will use their superior European or US-based R&D teams to capture volume
in the region. While this is a welcoming development for healthtech, it may not be
the best outcome for a nascent start-up ecosystem.
The COVID-19 acceleration
COVID-19 has brought a sharp focus on healthcare in general. This also meant
that telemedicine and its adoption has accelerated. Of the five largest booking
platforms in the region, all of them are now offering video consults with their
doctors – this includes Okadoc, DrFive.com, Oladoc and Meddy.com – a plan that
was at least six months if not more down the line has now been brought forward
due to COVID-19. The acceleration will continue and is expected to take us into
a new world where the trip to the doctor is taken only for the most necessary of
problems.
Currently, video consultations have increased drastically across the region –
soon, this will spill into vital signs and other aspects of a person’s health also
being reported from home – the days of going to a doctor for ‘niggles’ and slight
headaches are already far behind us. This will be a great cost and capacity savings
for hospitals – but also means doctors need to be trained and tooled for this new
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Sarmad R. Ahmad
change. In addition, internet of things (‘IoT’) devices monitoring at-home care
present a new frontier of investments.
Inventions and innovations in healthcare: a scarcity
For a region full of potential and an increasingly high-quality workforce, the
Middle East lacks funding in R&D. This lack in R&D has meant that the start-up
ecosystem is currently in ‘replication’ mode – most ideas or start-ups replicate
ideas that are working elsewhere and do not have the funding or skills required to
truly invent new solutions.
A lack of scientific R&D within the region has meant breakthrough technologies in e-health such as those being created by www.Healthplus.ai – a Dutch startup that uses AI to detect the risk of sepsis post-surgery is confined to the EU, US,
Israel and Canada. Within MEA, start-ups focus on innovative business models or
replicating successful ones and this has meant that barriers to entry for ‘replicate’
or ‘copycat’ telemedicine start-ups have remained high.
Telemedicine behemoths such as Vsee are also making inroads into MEA with
their superior video security and touch-free features that help with the monitoring of sleep and vitals. The UK-based company WAFFL – an automated healthcoach that prevents against diabetes – has also made inroads into the Middle East
with partnerships with an insurance giant. Therefore, the telemedicine market is
dominated by incumbents such as AMD Global Telemedicine, CISCO Systems,
Medtronic, Cerner Corp, Aerotel Medical Systems, GE Healthcare, Honeywell
LifeSciences and Phillips Healthcare (Market Data Forecast 2020). For a start-up
to break into the healthcare ecosystem and compete against GE Healthcare, truly
inventive value has to be created. This is, unfortunately, rare in the region.
The trend is to aim more towards B2C start-ups providing ease-of-access to the
population via connectivity or bookings. Healthtech is primarily a B2B play with
technology helping providers and facilitators (hospitals, clinics, insurers, etc.)
reduce costs and improving efficiencies. As an example, a truly high-tech solution
such as an MRI scanner is obviously sold to providers and not directly to patients.
Healthtech venture strategies need to understand and pivot towards this mindset.
The current focus in the region currently is that B2C will fast get saturated. In
addition, since doctors’ licensing is controlled by governments and spaces for
testing/diagnosis is dependent on hospitals, the growth in the typical B2C model
of ‘link doctors with people’ has greater limits than technology that might help
hospitals improve, for example, diagnostics.
Issues within the ecosystem
The following sections summarize some of the issues that exist within MENAP in
general as they pertain to the growth of potential healthtech companies. These are
from the author’s personal experience as the founder of a telemedicine company
and angel investor in the region and from understanding various issues around the
ground realities within the vast region of MENAP and specifically GCC.
Telemedicine and e-health 57
Research and development
The model of Silicon Valley venture capitalism (‘VC’) has entered the Middle
East. With its focus on execution and growth, it has created wonderful companies across the region, but the aggressive growth with this model often looks to
grow with negative unit-economics (as is the case for Uber or Twitter, not turning a profit till 2019). However, e-health needs more than just ‘month on month’
growth numbers and more than simply ‘burn to grow’ strategies. Healthtech
requires research.
The Silicon Valley VC model cannot work without a Stanford level of R&D.
Without an Oxford or an Imperial College helping create algorithms for AI, the
healthtech investments cannot grow. This needs a re-think of how healthtech
companies and start-ups are invested in. Time for research, pivots and growth are
necessary in order to create true innovation and inventions. This is mirrored in the
story of the Dutch company Healthplus – a grant from the Dutch government and
introductions to incumbents such as Cerner enabled its algorithm to be perfected.
The lack of inventiveness in local health and telemedicine start-ups needs to
be bridged in order to break the barriers of the healthcare industry. Local ecosystems need to invest more into R&D and give breathing space to start-ups and
researchers to enable the unleashing of new technologies. A symbiosis between
research and entrepreneurship can create great global value in healthcare given
the strengths of the region both in its diversity and its human capital.
Barriers to entry
Private and public hospitals have high barriers to entry for any researcher to focus
on. An effort by incubators and government entities to open doors to healthcare
providers would be of great value to both parties. When knowledge and information is accessible, research becomes easier.
In addition to the natural barriers to entry to healthtech there are certain social
barriers as they pertain specifically to MENAP culture. Very often business is
done through a trust-chain. This results in the chances of an ‘outsider’ even with a
credible idea finding it hard to break into a new industry. Incubators and accelerators within the region aiming to bridge this divide actively and consciously have
found more success.
By reducing barriers to entry and increasing transparency, entrepreneurs and
investors know what problems are to be tackled – breakthrough technologies will
follow.
Patient money
Healthtech is mostly a B2B business – selling services to hospitals or incumbent
companies such as GE Health. In addition to the high barriers to entry and a lack
of R&D – the VC world in MENA is not inclined towards B2B businesses. This
is both because the slow but steady growth in B2B businesses cannot mirror the
20% month-on-month aggression VCs tend to push for and also because B2B
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Sarmad R. Ahmad
deals in the region are seen to be ‘too dependant on connections’ and ‘moods’ of
decision makers.
However, good HealthTech companies need patient money for research, implementation and longer sales cycles. Enterprise accelerators and investors are rare in
the region – and may well prove to be the winning strategy in a crowded VC market
searching for the next ‘Careem’ (sold to Uber for $3.1 billion) or ‘Souq’ (sold to
Amazon for $580 million). The next big success in a crowded VC market may be
the next ‘salesforce’ instead of Doordash i.e. enterprise SaaS or a B2B company.
Middle East’s globally unique e-health niches
The unique opportunity of hajj and pilgrimage
The Ministry of Hajj and the ‘Vision 2030’ programme related to the hajj and
pilgrimage ‘Doyoof Al-Rahman Program’ has been pushing for innovation in the
sector of hajj and umrah (pilgrimage). There has also been a drive for scalable
and successful business models to increase the involvement of the private sector
in this segment.
Every year, Saudi Arabia is host to over 300 ethnicities from almost every
country in the world to perform umrah (small pilgrimage) or the hajj (major
annual pilgrimage). These events not only necessitate technology and its usage
but also present a wonderful opportunity for research. Information on how multiple ethnicities and ages react to the stresses and physical activities of hajj can be
a hub for improving research into helping reduce, for example, diabetes. These
events can also feature as the hub for propagating preventative health programmes
all across the world.
Opportunities such as the hajj also mean that telemedicine and its usage can
improve the experience of the visitors – by reducing queues to clinics and allowing tour-operators to take vitals and do check-ups via remote tools. In addition,
simple apps and nudges via SMS can help people monitor their own health and
learn about simple tricks on hydration and nutrition. The opportunity for millions
of diverse visitors coming to a single place (Makkah) every year presents a chance
at innovation that few places can offer.
Investments from private sector companies into telemedicine units, IoT devices
for health and aspects for improving the health experience of pilgrims is one of
the greatest opportunities this region has to offer. The goal of the government is to
create an ecosystem where private investment is possible and telemedicine (along
with other start-ups in verticals such as tourism) can help the pilgrims in Makkah
to use their experiences to increase their footprint across the Muslim world. It is
Islamic impact investments in the heart of Islam that can have a global effect on
the health and delivery of healthcare.
The emotional and mental health movement
Emotional, behavioural and mental health are very dependent on culture. The way
an Indian boy will feel the pressure of pleasing his parents is not the same as how
Telemedicine and e-health 59
a Saudi girl will feel about it. Our behaviours are dictated by culture and perceptions. The mental health movement has not yet hit the shores of the Middle East
in the way that they have done in America and the UK.
While Calm became the first unicorn in mental health in February of 2019,
guided meditation apps do not have the same draw in the Middle East’s communal and religious culture. With COVID-19, the requirements and focus on
mental health have also come in sharp focus. The recently added investment into
Shezlong – MENA’s main mental health marketplace – and the increased uptake
on Saaya Health – MENA’s only digital employee assistance programme (‘EAP’)
service – shows this need closely.
Research needs to be done on what solutions can be created that are culturally relevant to the mental health of people in the region. The industry is ripe for
software-as-a-service (‘SaaS’) winners such as Headspace or Calm – but what this
SaaS would look like is yet to be seen.
Other avenues in SaaS and mental health include treatment software that
incorporates culturally sensitive material. Dr Yasmine (2019), a psychologist in
Saudi Arabia, commented, ‘The most common cause of OCD I see in Muslims
is wudhu (the cleaning with water before every prayer). They’re constantly
wondering if they did wudhu properly – and it can be very bad for people with
OCD’.
Exposure therapy in this case would involve VR goggles that simulate a person
doing wudhu slowly to learn to cope and overcome their ailment. Such solutions
and devices do not at the moment exist and would prove a boon to the one billion
Muslims globally.
A SaaS solution in mental health – an often ignored vertical with great growth
potential – is a lucrative niche given the Middle East’s young and moneyed
population.
The power of youth
The MENA region, especially if extended to Pakistan – MENAP – is a region rife
with possibility. With an average age in MENA at 28 and in Pakistan at 21 (GSMA
2019a), the region is rife for adoption of telemedicine and e-health practices.
A high population, good mobile internet penetration and a high percentage of
youth means:
··
··
··
··
Company staffing and training on new tech is not difficult.
Adoption rates for telemedicine will be high.
Distrust of technology is low.
The road to serious health issues (that come with age) is still long.
As mentioned above, R&D is important for healthtech solutions – and time is
needed for R&D. A young population gives you time. Health issues can be studied and mapped long before the majority of the population will need it. The time
is now for investment into healthcare R&D in the region. As adoption increases
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Sarmad R. Ahmad
and tech becomes more efficient – the datapoints collected today will serve for a
smooth transition into AI solutions for the future of healthcare.
This also means that the gap of supply of doctors or nurses can be reduced by
introducing preventative measures now, when the population is relatively healthy.
In addition, with high adoption and penetration rates – the Machine Learning
magic number of 25,000 data points is easier to achieve. It is with these high numbers of data clusters that AI and machine learning can be enabled.
Historically, Middle Eastern genetics and habits have not been well researched,
and this now has the chance to change.
IOMT (internet of medical things) for the region
MEA’s infrastructure, especially the GCC’s, is fast adopting to 5G. With gateways open to China and several Chinese venture funds in the region such as Gobi
Partners and MSA Capital, this means access to cheaper IoT devices.
The adoption of smart-home technology has been slow across MEA with most
products like Alexa and Google Home either not working in the local language or
not connected to the local ecosystems. IoT for health monitoring – such as Vsee’s
touchless sleep monitoring – may well be the best way of helping Arabian homes
adopt smart-home technology.
While other devices such as Fitbit are popular, health is a growing trend with
diabetes and other preventable diseases on the rise. Feeding into the growing
movement of health and exercise, smart fridges, menus and healthtech IoT is a
niche in the Middle East that is unique in its demand and can fill the growing need
of healthier living.
Future trends for e-health in the Middle East
Video consultations
Arguably, this is now the ‘present’ and ‘new normal’ trend post-COVID-19 and
not a futuristic one. The acceptance of video consults has been accelerated and
normalized. This trend will not be reversed once people understand the time and
hassle they saved from their trip to the doctor. This will lead to a decrease in hospital congestion but potentially a fatigue with doctors as more and more ‘apps’ try
to take their time for video consults. Time management of the limited doctors at
hand will potentially be dictated by their employers. Online consults may result
in lower cost but have the potential to create higher burnout as a doctor sees more
patients on-screen and has less time for breaks or human interaction.
Streamlining video consult operations and utilizing the cost benefits to improve
healthcare delivery will be paramount.
Enhanced diagnosis using AI
The value of data that comes with an increasingly adoptive phone and mobile
population is that with the right machine-learning algorithms, the data can be
Telemedicine and e-health 61
predictive. Artificial intelligence is set to change the speed and accuracy of diagnosis globally and the same is expected in the Middle East.
An example is Medicus AI, an Austria-based company with a presence in
Dubai. In their own words, Medicus AI is a
smart platform and app that interprets and translates medical reports and
health data into easy-to-understand, personalized explanations and health
insights, all in an interactive experience. Medicus AI’s smart coaching delivers health tips and actionable steps towards building sustainable healthy
habits.
The appetite for diagnostics and predictive prevention capabilities will grow as
AI’s abilities grow. Investing now in AI HealthTech will pay dividends in the
coming years.
Hyper-local virtual and augmented reality
Virtual reality (‘VR’) and augmented reality (‘AR’) are going to play a greater
role in healthcare in general. For the Middle East, the experiences have to be built
with local culture in mind. A few examples are given below.
··
··
··
··
VR for understanding surgical procedures: little has to change here except for
language; however, for procedures that are culturally sensitive, for example
ObGyn-related, more sensitive material will have to be created.
VR for elderly: the cultural treatment of the elderly is vastly different from
that in the West and would need appropriate designs.
VR for pain management: pain and distraction from it is a nuanced procedure
and would need appropriate design as well.
AR and VR for mental health therapy: as alluded to earlier, issues such as
social anxiety that may be solved by exposure therapy can only work if what
someone is being exposed to is the kind of social mingling that happens in
their culture – a Saudi man wearing VR goggles taking him to a cocktail party
will not have the desired effect as he would not relate to the social gathering
that causes him anxiety.
The market for localized content on VR and AR solutions is therefore one that
cannot be ignored and has the potential to grow in the coming years. Solutions
that are localized means there is room for local investment and companies to grow
since a ‘universal’ solution may not be enough to plug the market gaps.
Wearables and deep data
As per the insights of the International Data Corporation (IDC 2019), the MEA
wearable devices market saw tremendous year-on-year unit growth of 144.43% in
the second quarter of 2019.
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Sarmad R. Ahmad
This trend means deep data is going to be available across the MEA on health,
sleep patterns and other insights. This data, when harnessed by the correct experts,
can mean great efficiencies in healthcare provision and reduction in costs. Deep
data combined with an ever growing popular trend of DNA testing can make for
great research breakthroughs.
Government policy changes
UAE, Saudi Arabia and the GCC in general has been seeing a shift towards diversification of their economies and healthcare is a large part of leading efficiencies
as well as investments.
Saudi Arabia has formed a national AI body and UAE has an official AI strategy, backed with new laws from the Dubai Health Authority on IOMT and other
aspects. The healthcare services industry is set to boom with the help of improving regulations across the region.
The regulations for telemedicine and AI for health will determine the growth
of healthtech within the region and it is hoped that the more forward looking policies being implemented across the GCC will be copied by the rest of
MENAP.
Conclusions on the future of investments into healthtech
E-health in general has been a growing trend globally, now accelerated by the
COVID-19 pandemic. Within the cash-rich GCC region and the wider, populous
MENAP region, this trend can generate great returns for investors. The mindset
required for regulated businesses dealing in healthcare however has to shift from
the Silicon Valley VC ‘burn to grow’ model. In reality, the burn-to-grow model
has faced several roadblocks in the previous years and a shift to stronger focus
unit-economics is happening in general.
Within the GCC, the resources do exist to invest in R&D and slightly longerterm, sustainable growth business models. Health delivery within the region is
ready for an overhaul and a lot of the solutions needed require localized technology and know-how.
Localized tech can be divided into both:
··
··
Localized and culturally sensitive content – as with VR for exposure
therapy.
Localized execution – digitizing current practices to fit into the market’s
mould.
Investments into this space need to account for the nature of healthtech investments and the barriers of time, research and data that exist. A long view needs to
be taken by investors and entrepreneurs in this space – looking to impact society
in a positive way rather than looking for ‘quick exits’.
There are two important aspects of Islamic Finance that should be explored:
Telemedicine and e-health 63
··
··
Waqf – for centuries a source of healthcare investment (WIEF 2017), can be
brought into the 21st century and studied as a ‘founder friendly’ and ‘innovation-centric’ model which encourages R&D and social impact along with
profit.
Islamic venture capital – angel network groups such as The Falcon Network
in UAE are already focusing on ‘halal venture capital’ models while Gobi
Ventures has an increased focus on what they refer to as ‘taqwa tech’.
The above models will ensure a focus on ‘long-term’ strategies that can build
legacy businesses, encouraging innovation and research.
Incubators, investors and entrepreneurs that take a long view are needed to harness the potential of the MENAP population of more than 400 million.
The health of such a diverse population is an opportunity that begs to harness
deep data which can facilitate research and create truly life-altering solutions for
the future of humanity.
References
ATA (American Telemedicine Association) (2020) Policy. Available from: https://www
.americantelemed.org/policy/ [Accessed: 14th September 2020].
Buraik, Y. (2019) Conversation with Sarmad Ahmad. 25th January.
De Boysson, T. & Khouri, R. (2018). A healthcare prescription for the GCC. Investcorp
Insights. Available from: https://www.investcorp.com/wp-content/uploads/2020/01/H
ealthcare_WhitePaper_Mar18.pdf [Accessed; 14th September 2020].
Global Systems of Mobile Communications Association (2019a) The mobile economy.
Middle East & Africa 2019. Available from: https://www.gsma.com/mobileeco
nomy/wp-content/uploads/2020/03/GSMA_MobileEconomy2020_MENA_Eng.pdf
[Accessed: 14th September 2020].
IDC (International Data Corporation) (2019) Middle East & Africa sees huge increase
in demand for wearable technology. Available from: https://www.idc.com/getdoc.jsp
?containerId=prMETA45546619 [Accessed: 14th September 2020].
Magnitt (2020) 2019 MENA healthcare investment report. Available from: https://magnitt
.com/research/50709/2019-mena-healthcare-venture-investment-report Accessed: 14th
September 2020].
Market Data Forecast (2020) Middle East & Africa telemedicine market analysis. Available
from: https://www.marketdataforecast.com/market-reports/mea-telemedicine-market
[Accessed 14th September 2020].
McKinsey (2014) Offline and falling behind: Barriers to Internet adoption. Available
from: https://www.mckinsey.com/~/media/McKinsey/Industries/Technology%20Medi
a%20and%20Telecommunications/High%20Tech/Our%20Insights/Offline%20and%
20falling%20behind%20Barriers%20to%20Internet%20adoption/Offline_and_falling
_behind_barriers_to_internet_adoption_full%20report_FINAL.ashx. [Accessed: 14th
September 2020].
Trade Arabia (2020) GCC healthcare market ‘on track to hit $70bn. Available from: http:
//www.tradearabia.com/news/HEAL_363476.html [Accessed: 14th September 2020].
WIEF (World Islamic Economic Forum) Foundation (2017) The role of Islamic finance
and waqf in healthcare. Available from: https://infocus.wief.org/role-isl-fin-waqf-he
althcare/ [Accessed: 14th September 2020].
64
Sarmad R. Ahmad
Worldometer (2020) Worldometer. Available from: https://www.worldometers.info/popul
ation/asia/ [Accessed: 14th September 2020].
Zawya (2019) Middle East’s healthcare industry may attract $200bln investments in 5
years. Available from: https://www.zawya.com/mena/en/business/story/Middle_Easts
_healthcare_industry_may_attract_200bln_investments_in_5_years-SNG_155449704/
[Accessed: 14th September 2020].
6
Is a cryptocurrency a currency
or a product/commodity?
The case of bitcoin
Kaleem ALAM
Introduction
The founder of Reliance Industries, the late Dhirubhai Ambani, the father of the
two leading business tycoon brothers Mukesh Ambani (the richest man in India)
and Anil Ambani, was himself the son of a humble school teacher. He travelled to
Yemen to earn a living at the age of 16 (Saral Study 2016). The Economist writes:
He had made his first fortune in the port of Aden, in what is now Yemen. He
spotted that local coins had a face value less than the value of the silver from
which they were made. So he bought every coin he could, melted them down
and pocketed the difference.
(The Economist, 2011)
What he did was to melt coins (money/currency) into silver (commodity) and
profited from it.
So what is money/currency? Dr Kaleem defines it thus:
Money is a medium of exchange or agreed medium of exchange. In other
words, using money one can buy, sell, store it for future, agree to pay later. It
can be counted and stored safely.
(Alam 2017, p. 4)
‘Money’ has seen many innovations and patterns over centuries and millennia.
Commenting on the emergence of money as a means of exchange within civilizations, Murray Rothbard stated:
Money was a leap forward in the history of civilization and in man’s economic progress. Money – as an element in every exchange – permits man to
overcome all the immense difficulties of barter.
(Rothbard 2008, p. 5)
Money started its journey, first as gold and silver in the form of coins then it
assumed a representative form as promissory paper money and later it took the
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Kaleem ALAM
form of a government-backed currency as fiat money, a paper-based currency,
which unlike silver and gold coins had no intrinsic value. Fiat money progressed
in the electronic age to take the form of electronic money and plastic money and
developed even further along these lines as digital money and virtual money in the
technology-driven era but still representing the original fiat money that was legal
tender and government guaranteed.
In March 2010 a very different form of money emerged; a disruptive currency was born in the form of ‘bitcoin’ which was open for trade (Chowdhury
2019), although its origin can be traced to at least the year 2008 (Nakamoto 2008).
Nevertheless, for practical purposes, 2010 marks its launch, when on 22 May
2010, Laszlo Hanyecz made the first real-world transaction by buying two pizzas
in Jacksonville, Florida for 10,000 BTC (Mahankali 2019).
This disruptive currency is called ‘cryptocurrency’; in other words it is an
encrypted currency. It is disruptive because it knows no borders, nor is it affiliated to any existing central/federal banks of the existing global financial system.
It is private and decentralized. It is peer-to-peer and it is discreet. Due to the
sudden rise in its value, crossing the 1 BTC = 10,000USD threshold globally
(Woodhouse 2017), bitcoin was being viewed as a digital commodity for trading
purposes rather than for its original status as a ‘currency’. This change of perspective was due to the rise of bitcoin as a commodity for trading, which accounts for
its exponential increase in value.
In this paper, we will attempt to define and understand whether cryptocurrencies are actually currencies or digital assets/digital securities/digital products/
digital commodities. In other words, we want to know whether bitcoin, as a representative of cryptocurrencies, is, or is not, a currency.
How cryptocurrencies are defined
A number of definitions are now presented.
Marriam-Webster defines cryptocurrency as:
Any form of currency that only exists digitally, that usually has no central
issuing or regulating authority but instead uses a decentralized system to
record transactions and manage the issuance of new units, and that relies on
cryptography to prevent counterfeiting and fraudulent transactions.
(Merriam-Webster, 2018)
Cambridge Dictionary offers the following definition:
A digital currency produced by a public network, rather than any government, that uses cryptography to make sure payments are sent and received
safely.
(Cambridge English Dictionary, 2018)
Collins Dictionary sees cryptocurrency as:
Is cryptocurrency a currency or a product? 67
A decentralized digital medium of exchange which is created, regulated, and
exchanged using cryptography and (usually) open source software.
(Collins English Dictionary, 2018)
The Oxford Dictionary defines it thus:
A digital currency in which encryption techniques are used to regulate the
generation of units of currency and verify the transfer of funds, operating
independently of a central bank.
(Oxford Dictionaries, 2018)
Finally, the European Parliament defined the cryptocurrency in a study
‘Cryptocurrencies and blockchain: Legal context and implications for financial
crime, money laundering and tax evasion’ after studying the definitions provided
by the European Central Bank (‘ECB’), the International Monetary Fund (‘IMF’),
the Bank for International Settlements (‘BIS’), the European Banking Authority
(‘EBA’), the European Securities and Markets Authority (‘ESMA’), World Bank
and the Financial Action Task Force (‘FATF’). It defines cryptocurrency in these
words:
a digital representation of value that (i) is intended to constitute a peer-topeer (‘P2P’) alternative to government-issued legal tender, (ii) is used as a
general-purpose medium of exchange (independent of any central bank), (iii)
is secured by a mechanism known as cryptography and (iv) can be converted
into legal tender and vice versa.
(Houben & Snyers 2018, p. 23)
In all these definitions by prominent dictionaries and institutions, it is clear that
the objective of the cryptocurrency is to enable trade but only digitally, as cryptocurrencies do not exist in hard form.
Before testing the currency profile further, let us test if it fits for commodity
profiling.
Is a cryptocurrency a commodity?
‘Commodity’ is defined by the Cambridge English Dictionary as
a substance or product that can be traded, bought, or sold.
(Cambridge Dictionary, 2018)
Based on this definition, it seems as though cryptocurrency fits the commodity
definition. Since we are studying and exploring the nature of cryptocurrency, taking bitcoin as an example, we must test if it is congruent with the futures commodity market. So, in addition to the above definition, a commodity must possess
the following properties: homogeneity, durability, gradable, price fluctuation and
68
Kaleem ALAM
open supply (Rai, 2018). We will test the cryptocurrency by keeping the focus on
bitcoin to determine if it qualifies as a commodity.
1. Homogeneity:
A commodity must be homogeneous.
– Bitcoin is homogeneous and easily identifiable. Hence, it is easy to deal
with.
2. Durability:
Commodities acceptable in a futures market are those that are durable and not
quickly perishable.
– Bitcoin is not perishable.
3. Gradable:
An important feature of a commodity is that it can be graded and classified.
– Bitcoin is just one type of commodity and has just one grade.
4. Price fluctuation – open market:
In commodity futures, if the prices were not fluctuating it would not be attractive for investment nor worthy of holding, especially for speculators. In other
words, it must be open and not monopolized.
– Bitcoin has price fluctuation and is of great interest to speculators as there
are no central powers controlling or monopolizing it.
5. Open supply:
a. Large supply and demand. The commodity must have a large supply and
demand, which in fact decides its value and price.
– Bitcoin has a large demand and supply as well.
b. Uncertain supply and demand (Prentis 2015).Uncertainty is another
unique feature of a commodity in the futures market as it is this very
uncertainty which opens up room for speculations.
– Bitcoin is uncertain as it needs to be mined. Mining is dependent on solving
a problem. Dr Liew defines bitcoin mining in the following words:
Bitcoin mining is the process by which transactions are verified and added
to the public ledger, known as the block chain, and also the means through
which new bitcoin are released.
(Liew, 2020)
To mine bitcoins you need internet-connected computer(s). You are required to be
the first to answer the puzzle for which you are awarded with a coin. You would
be given the opportunity to complete the next block and be rewarded with part of
the transaction fee in the associated block. These rewards make the mining activity popular.
Anyone with access to the internet and suitable hardware can participate in mining. The mining process involves compiling recent transactions into blocks and
trying to solve a computationally difficult puzzle. The participant who first solves
Is cryptocurrency a currency or a product? 69
the puzzle gets to place the next block on the blockchain and claim the rewards.
The rewards, which incentivize mining, are both the transaction fees associated
with the transactions compiled in the block as well as newly released bitcoin.
P. Sargant Florence (2018) proposes seven qualities to be present in a commodity to qualify as ‘money’; these are: 1. value, 2. durability, 3. portability,
4. homogeneity, 5. divisibility, 6. cognizability (recognizable) and 7. stability of
value.
We will discuss some of the details in the next (currency) section. Before concluding on commodities, let me explain the issue of stability of value. Stability
in the value of a commodity or currency is not inbuilt, it fluctuates in accordance
with political and economic realities. There is hostility towards Iran, so the Iranian
Riyal starts falling in value. It applies to the oil and gold price fluctuations as well.
The same is true when it comes to bitcoin. There is considerable hostility towards
this unconventional currency and hence large fluctuations in its price are natural.
From the above it is clear that bitcoin fits the commodity definition as it meets
the requirements. Being virtual, its physical presence is not tangible. But that is
the reality of this new world.
Is a cryptocurrency (bitcoin) not a currency?
Let us now test the characteristic of money/currency to see if the cryptocurrency –
specifically bitcoin – fits its definition. The three basic fundamental characteristics
that must be possessed by money/currencies are: divisibility, portability and durability (Rochon & Rossi 2003).
1. Divisibility
Currency must be divisible – countable. This means that it must be easily
brought down to small numbers or parts to fit in with maximum value for
trade purposes. For example, a camel is too large to be considered as money,
but camel skin can be considered.
– Bitcoin is easily divisible as it is digital and numeric.
2. Portability
Currency must be portable – movable. This means that it must be capable of
being carried or moved to its desired destination with ease.
– Bitcoin has simplified the movement of the currency.
3. Durability
A currency must not be quickly perishable. It must be worth storing.
– Bitcoin is durable.
Besides the very basic characteristics listed above, the currency must have the
following four attributes: (For example, pebbles and shells can be currency in a
broader sense but do not fit in the current underpinning, so additional characteristics are warranted.)
70
Kaleem ALAM
1. Uniformity (Wolla 2019)
It cannot be different from the other, i.e. a Euro 100 currency must be same
as all others in size, colour, thickness, picture, etc. In other words, it must be
easily identifiable.
– Bitcoin is uniform. Despite its intangible nature it is a digital asset accessible by means of internet banking and it is uniform in that one bitcoin retains
its value everywhere at any given time.
2. Acceptability (Wolla 2019)
For a currency to be considered really as a currency it must have acceptability within a society. Acceptability, in fact, creates demand which ultimately
stores value in it as money/currency.
– Bitcoin is acceptable among many in the internet community. Nevertheless,
not all organizations accept it as a method of exchange for services or goods.
This is partly due to the hostility of governments to its use for exchange.
3. Limited supply
Many economists are of the view that money must be of limited supply, as
this tends to add to the value of the money. The power of quantitative easing
in fiat money hinders this concept.
– Bitcoin has a limited supply as a maximum of 21 million bitcoins only are
to be in existence at any given time (Hoberman 2018).
4. Non-counterfeitability
This is a new property denoted as a characteristic of money. It must not be
easily duplicated and easily created and supplied in the market. If it is easily
counterfeited, it is definitely bound to lose value.
– Bitcoin is built on a blockchain technology which involves a three entry
ledger requiring independent verification. Triple entry accounting is an
enhancement from the traditional double entry system in which all accounting entries involving outside parties are cryptographically sealed by a third
entry. Thus, it is very difficult to duplicate or counterfeit this currency.
A cryptocurrency (bitcoin) has all the characteristics required to be classified as
money. But can it function as money?
Can a cryptocurrency (bitcoin) function as currency?
There is a consensus among scholars that money has the following basic functions:
medium of exchange, unit of account (measure of value), store of value (purchasing power), standard of deferred payment and transfer of value (Mehta 2000).
1. A medium of exchange
The primary function of money is to be a facilitator of exchange, enabling the
buyer, seller, donor, receiver, etc., to be able to get what they wish with ease.
Perhaps this was one of the principal reasons for the money system replacing
Is cryptocurrency a currency or a product? 71
the barter system. In other words, money plays the role of an intermediary
among people.
– Bitcoin facilitates purchase and sales among the internet community. It
plays the role of a medium of exchange.
2. A unit of account (measure of value)
Money must be able to function as a unit of account. That is, money must
be able to measure the value of goods and services and record their value
with ease.
– Bitcoin functions as a measure of value as any product, small or large, can
be purchased by measuring their values in bitcoins.
3. A store of value (purchasing power)
Money should be of such a nature that it enables storability. One of the problems of the barter system was that people had perishable items/commodities
in their hands which could not be stored for long or for future use. Thus, it is
important that money should possess the quality of being storable in terms of
value, enabling future purchases.
– Bitcoin functions as a store of value. In fact, it functions as a very safe store
for the users of bitcoin despite its volatility.
4. A standard of deferred payment
Any form of money must be such that its deferment is acceptable, is accountable, is agreeable (being part of a contract) and is deliverable. Deferred payment or agreement to accept payment in instalments are all forms of deferred
payment which can be performed by currency.
– Bitcoin enables the above function of the money. One can agree to pay the
agreed amount at a deferred date.
5. A transfer of value
Among the characteristics of money is its portability. Hence, money should
be capable of being transferred to places, transferred to people and transferred at any time. This is an important function of money for ease of transfer.
This ease of transfer facilitates lending, borrowing, donating, gifting, sponsoring, etc. It is this function of the money which restricts its hoarding in the
economy.
– Bitcoin is easily transferable to fulfil any activities, though recent reports
have indicated a processing delay in its transferability.
Nevertheless, cryptocurrencies such as bitcoins are able to fulfil all the requirements of money and, thus, can fulfil all the basic functions of money.
So is it a commodity or a currency?
Having met the requirement of commodity and currency, it is difficult to decide
what it should be categorized as. In my view, it has to be considered as a currency
because:
72
Kaleem ALAM
··
··
It was intended for the purpose of functioning as currency.
Normally a currency/money is used to measure any and everything where a
price is involved. A commodity is not suitable for this purpose. A commodity is not strictly meant to be used as money, but if it needs to be used as
currency it requires indexing. For example, after the fall of gold standards if
anyone wishes to use gold as currency he/she must refer to the gold index in
the contract. This tends to complicate its usage, whereas bitcoin was created
for trade and for global usage. So bitcoin or any similar money should be
treated as currency.
Other popular cryptocurrencies
Besides bitcoin, there are other types of cryptocurrencies, two of which will be
briefly discussed here, namely ether and XRP.
Ethereum – Ether
Ethereum is another form of blockchain-based public ledger. It is developed to
allow others to develop their own blockchain products on the Ethereum platform.
The users of its platform have to use its currency called ‘ether’. Ether is a cryptotoken ‘necessary to develop, deploy and run apps on the Ethereum blockchain’
(Anurag 2018, n.p.). Unlike bitcoin, ether is not meant for all-purpose purchases;
it is for use only on the Ethereum platform. New Generation Applications (newgenapps) prefer to refer to Ethereum as a ‘cryptocommodity’(Anurag 2018), while
maintaining bitcoin as a ‘cryptocurrency’. One has to understand that although
ether is the second most used cryptocurrency, it was not created to be primarily a
digital currency payment network (Antonopoulos & Wood 2019). According to
Andreas and Gavin, ‘ether is intended as a utility currency to pay for use of the
Ethereum platform’ (Antonopoulos & Wood 2019). It is famous for executing
smart contracts.
Ripple - XRP
Ripple is both a digital currency and a payments protocol (Lewis 2014). Ripple
is defined as
a real-time gross settlement system, currency exchange and remittance network created by Ripple Labs Inc.
(Zetzsche et al. 2019, p. 194)
Its currency is XRP. It has gained popularity as payment gateways. One can use
the Ripple network for instant money transfer, such as ‘hawala’, but with the difference that ‘XRP’ acts as an intermediary. Perhaps Ripple is capable of replacing
the USD in its role as an international exchange currency. Everything can be priced
in Ripple, which is swift and secure. Today Ripple has, within its fold, banks such
Is cryptocurrency a currency or a product? 73
as MUFG Bank, Standard Chartered, American Express, MoneyGram, Axis Bank
(Ripple 2020), NCB (Ripple 2018), Al Rajhi Bank (Al Rajhi Bank 2017), etc.
These banks are using the services of Ripple primarily for international transfers.
In my opinion, Ripple acts as a token for use in transactions. XRP is the third
largest cryptocurrency. Ripple is prominent for use as payment settlements and
for international remittances such as SWIFT using its token XRP.
To conclude on cryptocurrency
Bitcoin and similar cryptocurrencies that intend to allow the general public to
engage in sales and purchases using its ‘currency’ can be classified as currency –
cryptocurrency. However, all others including ether and XRP should be classified
as cryptotokens, although according to a US ruling these cryptocurrencies qualify
to be treated as commodities. Perhaps cryptotokens can be placed under the heading of a commodity but I would disagree with cryptocurrencies such as bitcoin
being treated solely as commodities, as bitcoin was created as money to trade or
to do our daily transactions of in-retail purchasing and selling.
Cryptotoken is more appropriate for Ripple and Ethereum, as the currency or
tokens produced by them are not meant for public or for all purposes; they have
specific use with certain limitations to their use. It would be prudent for governments to bring cryptocurrencies and cryptotokens under foreign currency regulation. They should be included as income of the individual and of corporations so
that the government can tax them on the basis of their equivalents in local currencies. However, to date, no government has managed to exert control of cryptocurrencies. This is because cryptocurrencies are not legal tender in any country.
Nevertheless, Bill Gates has asserted that while banking is essential, banks are not
(Peters, Panayi & Chapelle 2015).
Cryptocurrency – bitcoin, is it permitted
from the Islamic perspective?
Many Sharia scholars have objections to it. But some have qualified it as a
currency.
Some of those having objection to bitcoin includes (Abu-Bakar 2017):
··
··
··
··
Grand Mufti of Egypt – Shaykh Shawki Allam.
Turkish government’s religious authority.
The Fatwa Center of Palestine.
Shaykh Haitam Alhaddad.
Some of those permitting it include (Abu-Bakar 2017):
··
··
··
The Fatwa Center of South African Islamic seminary, Darul Uloom Zakariyya.
Mufti Muhammad Abu-Bakar.
Monzer Kahf (Torchia & Vizcaino 2018).
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Kaleem ALAM
The objection to cryptocurrency – bitcoin
The objection includes:
··
··
··
··
··
··
Bitcoin is easily useable for illegal activities.
Bitcoin is intangible.
Bitcoin has no central authority that monitors its system.
Bitcoin is speculative and a type of gambling.
Cryptocurrency is not backed by anything, but rather it is created out of
nothing.
Cryptocurrency is not a legal tender.
If the existing national currencies are permitted, then there has to be no objection to cryptocurrencies such as bitcoin. What we need to understand is current
national currencies or legal tender are fiat money which has no intrinsic value
similar to cryptocurrencies. So if fiat money makes sense so does the cryptocurrency. Nevertheless, it must be admitted that cryptocurrency differs from national
currencies in that a national currency operates within certain exchange control
mechanisms which do not apply to cryptocurrencies.
Rebuttals to the above objections
The rebuttals to the objections are the following:
··
··
··
··
··
··
Bitcoin is used in illegal activities.
Which currency is not dirty? Are USD not used for drug financing or terrorism purposes? Or for that reason any national currency all would fall under
illegal activities.
It is intangible.
All electronic transactions are intangible. In the electronic age, tangibility is
not an issue. We are using plastic money and now digital wallets and even
mobile credit cards; so tangibility should not be an issue.
It has no centralized authority.
It is a decentralized system. It came to existence to challenge centralized
control.
It is speculative and a sort of gambling.
On which currency we cannot gamble or speculate? George Soros is known
for speculating on various national currencies. So, no wonder if people speculate on cryptocurrencies.
It is not backed by anything?
Is fiat money backed by anything?
It is not a legal tender.
For a currency to be a currency it doesn’t need to be forced currency; wider
acceptability is enough within an Islamic perspective to be considered a
currency.
Is cryptocurrency a currency or a product? 75
It was important to first establish that bitcoin was a currency to determine if it is
halal or not as money. And we conclude from an Islamic perspective that cryptocurrency can play a role similar to that of money. Though it has its own inherent
risk, risk does not disqualify it from being classified as currency/money.
Conclusion
It is very evident that any non-perishable commodity has the potential to become
a currency. Similarly, any currency with intrinsic value has the potential to be
converted to a commodity, as demonstrated by Dhirubhai Ambani. In September
2015, a US district judge ruled that the cryptocurrencies such as bitcoin should
be brought under the US Commodity Futures Trading Commission (‘CFTC’).
This was a case against coinflip, which was offering bitcoin derivatives to US
consumers (Marx 2015). It was in this case where the CFTC for the first time
declared bitcoin as a ‘commodity’. In March 2018, the Federal Judge upheld
the 2015 verdict (Pierson 2018). Bitcoin was never intended to play the role of a
commodity; rather it was created as an alternative currency. In September 2018,
a US Federal Judge ruled that initial coin offerings (‘ICO’) can be brought under
the US Securities and Exchange Commission (‘SEC’). The ruling is related to
a criminal case against promoting digital currencies backed by investments in
diamonds and real estate that did not exist (Hurtado, Bain & Russo 2018). The
regulations are being brought in for taxation and better services. In my view bitcoin’s status as ‘currency’ remains the same, as the above regulations are brought
in to have control and to regulate it. Some regulation was needed to control rising
fraud.
Accordingly, we conclude the following points regarding cryptocurrency – bitcoin:
··
··
··
··
··
··
··
Bitcoin and similar cryptocurrencies qualify as ‘currency’.
The end objective of the cryptocurrency (intention) is an important factor in
categorizing it as currency or not.
Bitcoin and similar cryptocurrencies cannot be classified as haram (prohibited). It is not intrinsically haram, although, like conventional money, it is
useable for haram activities.
Those cryptocurrencies which are not intended for general usage (all purpose) in the digital world could be classified as ‘cryptotokens’, such as ether
and XRP.
The digital era is facing a new disruptive technology – blockchain. We are
currently in transition to blockchain technology. Every transition has its own
risk and challenges. Nevertheless, this technology is for real.
As of now cryptocurrencies are high-risk currencies. It may be susceptible to
crash (Bianchetti, Ricci & Scaring 2018), but that does not mean that it does
not qualify as ‘currency’.
Cryptocurrency must be brought under foreign currency regulation so that
governments can tax their owners when they qualify for tax purposes.
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Kaleem ALAM
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7
DLT and capital-raising
in Islamic Finance
Sara Sánchez Fernández
Introduction
Over the past few years, the implementation of new technologies has deeply
transformed the financial sector. One of these technologies, arguably the most
disruptive, is the Distributive Ledger Technology (‘DLT’), whose paradigm is
blockchain. In brief, these are encrypted databases in which peer-to-peer transactions are recorded in a ledger ‘shared’ among all participants, called ‘nodes’
(Nakamoto 2008). Such nodes are, essentially, computers that run the software of
a specific blockchain. New transactions are entered into by participants that hold
an address, a public key and a private key, and validated by some of the nodes –
called ‘miners’ – through a consensus protocol. Once this occurs, the ledger is
updated in all nodes accordingly. Thus, the database is distributed: the whole
chain is kept in all nodes simultaneously, with no centralized register in which
to store the information (European Securities and Markets Authority (‘ESMA’)
2017; European Union Agency for Network and Information Security (‘ENISA’)
2016; Oudin 2017; Wright & De Filippi 2015).
DLT has many applications in finance. This contribution analyzes its use in
capital-raising through the issuance of Sharia-compliant financial instruments
registered in the blockchain, i.e. so-called cryptosecurities; specifically, I refer to
their legal framework in Europe, although some conclusions may be extrapolated
to other jurisdictions. This application of DLT has a number of benefits, which
may prove to be particularly relevant in the context of Islamic Finance.
On the one hand, it reduces costs and facilitates regulatory compliance and
risk management (ENISA 2016). In particular, DLT removes intermediary risk,
i.e. the risk of default or insolvency of the intermediary, and custody-chain risk,
given that it is an entirely disintermediated system (yet, intermediation may still
exist outside the platform, e.g. exchanges). Additionally, for the reasons discussed
below, the blockchain provides an environment beneficial for start-ups’ capitalraising, which may tap investors directly.
On the other hand, it enhances the access to investment by the public, especially
for investors interested in early stage businesses (ESMA 2019). This is particularly interesting for Islamic communities which have been traditionally unbanked
and with limited access to investment opportunities in many jurisdictions. In
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addition, where such instruments are negotiated in a secondary market, liquidity
is higher and enhances the possibilities to build a diversified portfolio.
In this contribution, I take as a point of departure the current means in Shariacompliant capital-raising in the capital markets, particularly by referring to sukuks.
I briefly address sukuk’s features from the Sharia perspective and the applicable
legal framework when sukuk issuances take place in Europe. In particular, the
regulatory requirements for public offerings and admission to trading (prospectus
rules) and securities registration requirements in order to access regulated markets
(book-entry form).
Subsequently I discuss the possibility to apply DLT to register sukuks and
explore its limitations from a legal standpoint and its advantages. In addition, I
refer to the issuance of new Sharia-compliant instruments by way of initial coin
offerings (‘ICOs’). In particular, I analyze these new instruments from a legal
perspective to determine to what degree the same regulatory framework applies.
Finally, I argue that the mainstream application of DLT depends on the reduction
of current legal uncertainties, relating, for instance, to categorizing the extremely
heterogeneous types of tokens issued. Ultimately, the goal is to avoid that such
issuances remain unregulated, while ensuring that issuers may anticipate their
obligations and liability arising from their breach.
Traditional capital-raising activity in financial markets
Sharia law perspective
Traditionally, Sharia-compliant capital-raising activity in the capital markets has
taken place by way of the so-called sukuk, which have been defined as ‘certificates
of equal value representing undivided shares in the ownership of tangible assets,
usufructs and services or (in the ownership of) the assets of particular projects or
special investment activities’ (Accounting and Auditing Organization for Islamic
Financial Institutions –‘AAOIFI’, standard n 17). As with any Sharia-compliant
product, there is a number of restrictions applicable to sukuk, including the prohibition of riba, gharar, gambling and certain assets and activities. In addition,
the most specific feature of sukuk from the Sharia perspective is the fact that the
sukuk holders have a share in the ownership of the underlying assets, i.e. the certificates represent property over certain assets, and the investors’ (sukuk holders’)
reward are the profits generated by such assets. This shows the spirit of income
being linked to risk-taking in Islamic Finance; there is no fixed remuneration but
rather it is dependent on the capability of the assets to generate cash flows (profit
and loss sharing value).
There are different ways to categorize sukuks. One classification distinguishes
between sukuks ‘asset based’, in which the originator retains the relevant assets in
its balance sheet and only transfers the beneficial ownership to the special purpose
vehicle (‘SPV’) (the sukuk issuer), and ‘asset backed’, in which, conversely, the
originator passes the legal title to the SPV. The latter can be understood as an
Islamic asset securitization.
DLT and capital-raising in Islamic Finance 81
Although the former structure has traditionally been dominant in the market,
scholars discuss whether it is Sharia-compliant or not (Al-Ali 2019). Of course,
each sukuk issuance has a fatwa (legal pronouncement) by at least one Sharia
board, certifying that such sukuk complies with Sharia law, but scholars take
approaches that may vary largely. In 2008, the AAOIFI declared that asset-based
sukuks are not Sharia-compliant (Abdullah 2018).
Other classifications are based on the structure underlying the issuance, e.g.
mudaraba, musharaka or wakala. Currently, the most common structures are
sukuk al-ijara, sukuk al-murabaha and sukuk al-mudaraba-wakala (Latham &
Watkins 2017). There is a relatively large number of examples of sukuk issuances in European capital markets, among which the recent FAB Sukuk Company
Limited $500,000,000 issuance on January 2020, structured as a wakala sukuk
(First Abu Dhabi Bank PJSC being the agent) and admitted to trading on the
London Stock Exchange (FAB n.d.). This will serve as an example to illustrate
the explanation below.
Sukuk legal framework in Europe
The above description of sukuk practice focuses only on features relevant from
the Sharia law perspective. As it is apparent, however, one also needs to consider
sukuks from the perspective of the national applicable legislation. Indeed, one
difficulty in the implementation of these structures is the necessary compliance
with both concurrent bodies of law (McMillen 2008). In this contribution, I take
mainly a European perspective, with a focus – whenever possible – on EU regulatory rules.
The first element to be considered from the regulatory perspective is whether
sukuks qualify as ‘transferable securities’ or not. Under MIFID II, ‘transferable
securities’ are defined as ‘those classes of securities which are negotiable on the
capital market, with the exception of instruments of payment’ (article 4(1)(44)).1
The MIFID II definition is, of course, quite wide and has been transposed differently in the different Member States. It is complemented with a non-exhaustive
list of examples of what should be considered securities, which include securitized debt. Generally, sukuks are freely tradable (they are very often admitted to
trading on a secondary market, making the instrument more attractive to investors
by enhancing liquidity, as shown by the FAB Sukuk Company Limited example,
in which sukuks were admitted on the London Stock Exchange). In addition, the
structure often resembles a conventional securitization. Therefore, they fall within
the scope of the MIFID II transferable securities definition.
Precisely because they are considered transferable securities for MIFID II
purposes, where such sukuks are offered to the public or admission to trading to
an EU-regulated market is requested, disclosure requirements established by the
European Prospectus Regulation apply: the issuer shall draw up a prospectus disclosing both financial information and the terms and conditions of the sukuks, highlighting associated risk factors, obtain the approval by the competent authority and
publish it.2 In the FAB Sukuk Company Limited example, a base prospectus and
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final terms were approved by the Financial Conduct Authority (‘FCA’), the English
competent authority. Note that in the UK, a relevant Islamic Finance hub, the EU
regulatory framework still applies (Withdrawal Agreement 2020),3 even though
the UK is no longer a Member State of the European Union. It remains to be seen
whether, in the near future, other relevant Islamic financial centres, i.e. Luxembourg
or Ireland, take over the role of the UK in the Islamic Finance activity in the EU.
In addition to the above, other requirements need to be met in order to access
secondary markets in the EU. Notably, to obtain admission to trading on a regulated market or a multilateral trading facility, EU law establishes that transferable
securities shall be registered in book-entry form within a central securities depositary (‘CSD’) (arts. 3.1 and 3.2 of the CSD Regulation).4
Furthermore, some jurisdictions mandate that transferable securities are initially registered in certificate form, e.g. in the form of a global certificate, with
a subsequent dematerialization in a CSD in book-entry form. In the FAB Sukuk
Company Limited case, the sukuks are registered in a global certificate deposited
with a common depositary for Euroclear and Clearstream and then dematerialized
in Euroclear/Clearstream, which are the corresponding CSDs. Sukuk holders hold
their interest in the global certificate in book-entry form in Euroclear/Clearstream,
where clearing and settlement of transactions takes place.
This approach to securities registration, very common in international markets,
is reflected in the AAOIFI definition of sukuk which, as highlighted above, refers
to the idea of ‘certificates’. However, the existence of a certificate depends on the
law applicable, as some jurisdictions do not require it but instead establish the
registration of transferable securities directly in book-entry form. For example,
under Spanish law, a sukuk to be admitted to trading on Spanish regulated markets (‘AIAF’) shall be dematerialized directly in book-entry form in Iberclear (the
Spanish CSD). Therefore, unlike the practice in Anglo-Saxon markets and others
(see the FAB Sukuk Company Limited example), there would be no (global) certificate (article 6.2 Spanish Securities Act).5
DLT and securities registration
Sukuk and DLT
The question arises as to whether, beyond traditional registration in certificate or
book-entry form, a sukuk can be registered, alternatively, in tokenized or digital
form in DLT. From the Sharia law perspective, there seems to be no reason why
the registration in one or another form would be relevant. The reference to the
term ‘certificate’ in the AAOIFI definition of sukuk, rather than mandating that
specific registration form, highlights that among sukuk’s core features is the fact
that they are freely tradable. As explained above, the use of the term ‘certificate’
seems only to reflect the most common practice in the market to obtain such transferability (see the FAB Sukuk Company Limited example). Indeed, the ‘device’
deployed by the law for that purpose (certificate, book-entry form, tokenized
form) should be irrelevant for Sharia compliance.
DLT and capital-raising in Islamic Finance 83
Rather, from the Sharia law perspective, the use of blockchain for registration
and subsequent transfers of sukuks may be even positive (Elasrag 2019). Certain
blockchain’s key attributes justify this assertion; the record is based on the idea
of ‘trust’ among participants, which cooperate with each other, instead of being
based on the participation of intermediaries and a central authority. In addition,
the ledger keeps a record of all past transactions (each of the blocks is a past
group of transactions), thus making the system more transparent and improving
accountability.
The problematic question, thus, is not whether such registration is possible
under Sharia law but whether it is possible from the perspective of secular law. At
a national level, there are already some examples of jurisdictions that are regulating registration in digital or tokenized form, but in all cases for non-listed securities. For example, France has regulated such a new possibility in the Ordonnance
du 8 décembre 2017.6 The Ordonnance equates the registration of securities in a
‘shared electronic recording device’ – referring to a DLT platform – to registration in book-entry form –dematerialized securities. Therefore, the application of
the same rules to registration and transfer of securities, regardless of the underpinning technology, is ensured (Vauplane 2018). Another example of the same
is Delaware law, which allows for DLT registration of non-listed securities (title
8 Delaware Code).7
Given that, to the extent of my knowledge, registration of securities in
tokenized form is, currently, only allowed for non-listed securities, the question
still pertains – mainly – to the realm of corporate law, rather than to regulatory
requirements of capital markets law. As explained above, access to EU-regulated
markets and multilateral trading facilities (e.g. London Stock Exchange in the UK,
AIAF in Spain) require registration in book-entry form in a CSD (e.g. Euroclear,
Iberclear). Thus, listed sukuks in such markets cannot be registered in tokenized
form. The traditional Sharia-compliant capital-raising activity by way of sukuk
issuance, i.e. sukuks issued by governments and large corporations, which are
typically admitted to trading on regulated markets and target large investors, will
still be based on the registration, clearing and settlement in CSD in book-entry
form. For the time being, DLT is not relevant for the industry.
Conversely, capital-raising through the issuance of sukuks in tokenized form in
a DLT (i.e. sukuks’ ICOs) is attractive for small and medium-size issuers (Elasrag
2019), in need for lower amounts of capital, for which conventional markets are
too complex and costly (S&P 2020) and which do not need to request admission
on regulated markets but instead aim at other trading venues. The capital raised in
exchange for the cryptosecurities may be either in fiat currency or in cryptocurrencies, e.g. bitcoin or ether; the latter option triggers additional Sharia compliance questions, which are covered by another contribution in this book (ALAM
2021).
This kind of capital-raising, alternative to crowdfunding, takes place entirely
online, which may prove to be particularly helpful in times of lockdown, as in
the current coronavirus pandemic. The platforms in which issuance and subsequent transfers take place may be: (i) permissioned blockchains, where access is
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granted only to authorized participants and transactions can only be validated by
certain nodes; or (ii) permissionless blockchains, e.g. Ethereum, where participation is not restricted and any node may validate transactions (for information on
the kinds of blockchain platforms see Finck 2019). In both cases, no intervention
of intermediaries is needed, thus lowering transaction costs, and any investor with
internet access can acquire tokenized sukuks. This should contribute to increase
the investor base and favour retail investors’ participation in sukuk capital-raising;
nonetheless, investors undeniably need to be somewhat tech savvy which, in turn,
limits such growth. In addition, many cryptosecurities are traded on DLT secondary markets (in 2019 between one third and one fourth, according to ESMA 2019),
enhancing investor liquidity and hence making the investment more attractive.
One example, known to be the first sukuk issuance in the blockchain, was
launched in 2019 via Blossom Finance’s SmartSukuk platform, built over
Ethereum as a public blockchain. The issuer was Baitul Maal wat Tamweel
(‘BMT’), a community-based microfinance in Indonesia, and the underlying
structure was a sukuk al-mudarabah, for which, however, there was no secondary
market (Blossom n.d.).
Corporations issuing sukuk registered in the blockchain must consider, prior to
launching the ICO, whether they need to comply with regulatory requirements or
not. Although the answer depends on the relevant jurisdiction, generally speaking
ICOs of tokens that qualify as securities are bound by regulatory requirements.
Some jurisdictions, however, have even established a ban, e.g. China and South
Kore (Lord Hodge 2018).
In the EU, the fact that a sukuk is registered in tokenized form, instead of certificate or book-entry form, does not modify its transferable security nature for
the purposes of MIFID II and therefore an offering of cryptosukuks to the public
triggers the same regulatory requirements as one of sukuks in certificate or bookentry form: to draw up, obtain approval and publish a prospectus. Indeed, ICOs
very often do qualify as public offerings, which are defined as communications
‘to persons in any form and by any means, presenting sufficient information on
the terms of the offer and the securities to be offered, so as to enable an investor
to decide to purchase or subscribe for those securities’ under article 2d of the
Prospectus Regulation. Similar prospectus requirements apply in other jurisdictions, for instance in the US, pursuant to Section 5 of the Securities Act 1933.
The above is particularly relevant, given that issuers frequently (and often
wrongly) turn to ICOs as being, if not unregulated, at least less cumbersome from
the regulatory perspective than traditional issuances. Yet, as discussed above, if
the offer is made to the public and unless an exception applies, the same prospectus obligations stand. The lack of regulatory compliance triggers the application
of liability rules, both in terms of administrative fines and private law rules (damages). Issuers should be aware of that.
This being said, it is true that some regulatory exceptions in prospectus rules
may be more relevant for issuers in the context of ICOs than they are in traditional
IPOs. For instance, where total consideration of the issuance is less than EUR
8,000,000 (article 3.2 Prospectus Regulation, but see also article 1.4j), there is no
DLT and capital-raising in Islamic Finance 85
prospectus obligation. Insofar as the issuer’s needs for capital are lower, the issuance falls under the exception, thus reducing costs associated to capital-raising.
Other Sharia-compliant instruments in tokenized form
Beyond the issuance of ‘traditional’ securities in tokenized form, e.g. shares,
bonds, securitized debt or sukuks, issuers, especially start-ups and other innovative businesses have commenced to raise capital through the issuance of a wide
variety of new instruments, generally referred to as ‘tokens’. It has been suggested that there are three main archetypes: currency tokens, utility tokens and
investment tokens (Hacker & Thomale 2018; Swiss Financial Market Supervisory
Authority – FINMA – 2018; English Financial Services and Markets Authority –
FSMA – 2017, Spanish National Commission for Capital Markets – CNMV –
2018). The first archetype, currency tokens, are mainly used as means of payment
for goods and services that may be provided outside the platform where these
tokens have been created, e.g. bitcoins or ethers. Utility tokens give the right to
obtain a good or service provided by the developers of the service, i.e. by the
token issuer itself. Hence their focus is on use or consumption. Finally, investment tokens grant the token holder rights to obtain economic distribution either in
the form of profit distribution or in the form of the resale in the secondary market
with a mark-up (Hacker & Thomale 2018). In practice, tokens often share components of more than one of the above categories, i.e. they are hybrid.
As stated above, these capital-raising instruments are new: they do not coincide with any of the traditional categories of legal systems, e.g. shares. For example, tokens may grant a right to pro rata distribution of profits and a right to vote
certain decisions and they may be resold in a secondary market, but they are
not, however, shares. They do not represent capital and token holders are not the
issuer’s owners (Garcimartín Alférez & Sánchez Fernández 2020).
ICOs may also be used for capital-raising in Islamic Finance; for the purpose
of putting into place a new business idea or to finance a specific project, an issuer
may decide to issue tokens that are designed as Sharia-compliant but which are
not, however, sukuks. The first requirement is, of course, that the issuer’s activity is halal. In addition, given the heterogeneity of these new instruments, the
determination of a token’s compliance with Islamic law needs to be assessed on
a case-by-case basis by Sharia scholars (Mohamed & Ali 2019). This may prove
problematic, as the technology is still in its infancy and Sharia scholars will be
confronted with an evolving environment. Ideally, as the technology consolidates,
some standardization will emerge, e.g. AAOIFI’s.
From the perspective of the issuer, ICOs’ lack of intermediation lowers transaction costs. Moreover, freedom to design completely new instruments – within
Maqasid al-Sharia – allow the new product to adapt to the corporation’s needs.
Indeed, the ICOs’ market is open to innovative products, and this is an opportunity for the Islamic Finance industry. As investors are more responsive to innovation, the investor base in Sharia-compliant capital-raising may be enlarged. In
addition, the geographical reach may be expanded, given that investors only need
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an internet connection and an e-wallet and can therefore be located anywhere in
the globe.
Most jurisdictions lack specific legislation regulating these new instruments,
although there are some prominent exceptions, such as, for example, Malta (see
the Virtual Financial Assets Act, 2018)8 or Malaysia (see Capital Markets and
Services (Prescriptions of Securities) (Digital Currency and Digital Token) Order
2019).9 In light of this, national regulators have issued warnings stating that at
least investment tokens may be considered securities in accordance with their
national laws, upon a case-by-case analysis (IOSCO 2019). In the EU, this analysis is carried out under MIFID II. Once again, where tokens are securities and they
are offered to the public, prospectus obligations apply. This of course increases
the costs of the issuance. Conversely, if the conclusion is that the focus is on
consumption and therefore the token qualifies as a utility token, capital market
obligations do not apply. Certainly, this lowers the costs of the transaction and,
therefore, issuers have the temptation to claim that their tokens are indeed utility
tokens.
Be it as it may, in practice regulators are facing difficulties in this categorization and are taking inconsistent approaches (even within the EU). The final result
is that many ICOs are left unregulated.
An additional and (even) more acute problem is that of DLTs’, and consequently ICOs’, cross-border nature. Tokens are issued in permissionless blockchains, which are composed of a number of nodes that keep an identical copy of
the ledger that may be located anywhere around the globe. As a consequence, any
issue arising in this context is transnational in nature and poses the question of the
applicable regulatory requirements, which, as stated above, vary largely across
jurisdictions (from a total ban to a permissible approach).10
In the EU, the delimitation of capital markets law is expressly established in
several instruments. With certain variations, the key element is whether the EU
market has been affected, as the main underlying policy goals are financial stability in the EU, market integrity and protection of investors in the EU markets. For
example, according to article 1.1 of the Prospectus Regulation, its rules apply
‘when securities are offered to the public or admitted to trading on a regulated
market situated or operating within a Member State’. Therefore, by choosing the
market, the issuer is indirectly choosing the law applicable (i.e. by choosing to target EU markets with an ICO of cryptosecurities, the issuer is choosing the application of EU regulatory requirements). This is also the approach followed in Malta
under the recently enacted Virtual Financial Assets Act 2018 (see section 11: ‘the
offering of virtual financial assets … in a country outside Malta shall be subject
to the laws of that country’). The place where the issuer is incorporated or other
elements are irrelevant (note, however, that the system for offerings within the EU
is simplified though the rule of mutual recognition). A similar albeit not identical approach is followed in other jurisdictions (see for example US law: general
statement r.901 of Regulation S provides for an exemption for registration under
Section 5 of the Securities Act 1933 for offers and sales that take place outside
the US).
DLT and capital-raising in Islamic Finance 87
Before the use of DLT, the determination of the affected market and the corresponding applicable regulatory requirements was only relatively problematic.
For instance, in the case of IPOs, arguably the market is delimited as the place of
commercialization of securities, which may be relatively easy to locate by taking
into account the marketing activity by way of e.g. road shows, mailing information or TV and radio commercials (Sánchez Fernández 2015). This allows the
ability to narrow down the number of affected markets and, as a consequence, of
applicable regulatory requirements.
In ICOs the relevant element would possibly be the same, i.e. cryptosecurities commercialization (CNMV 2018), at least from the theoretical perspective.
However, none of the above activities exist (e.g. road shows), since marketing is
strictly online via webpage and social media, accessible from any jurisdiction.
Therefore, the definition of the scope of application of securities law is ill-suited
for DLT and cryptosecurities; the affected markets are (at least potentially) any
around the globe, thus triggering the application of a high number of regulatory
rules that would be cumulatively applicable and potentially incompatible. This
poses an excessive burden on financial players in terms of regulatory compliance and hampers the development of DLT in the realm of finance. From the
perspective of the State, it is equally problematic; even where they consider their
market affected and national laws apply, they face severe difficulties in enforcing
their rules, as conduct typically takes place somewhere else or in many different
countries at the time, due to the ubiquitous nature of DLT where cryptoassets are
registered-.
In IPOs, some jurisdictions, namely the US, allow the ability to limit the number
of affected markets by way of a disclaimer (Securities Exchange Commission –
‘SEC’ – 1998).11 In principle, there are no reasons to understand that the approach
will be different in ICOs of tokens that qualify as securities. Although there is no
similar provision under EU law, token issuers also include express statements
restricting the offer in Member States in order to avoid the application of EU
prospectus rules. Yet, as I have argued in previous papers, including a disclaimer
should not be considered enough to prevent the application of EU securities law
(Garcimartín & Sánchez Fernández 2020; Sánchez Fernández 2019). Given that
technology allows for blocking the access to a webpage from a given jurisdiction,
it is in the issuer’s hands to impede the acquisition of tokens by investors located
in the EU. Only where access from computers located in the EU is blocked could
an issuer avoid the application of EU prospectus rules. A mere statement should
be insufficient. Such an approach may be extended beyond the primary market.
The truth, however, is that for the time being, many regulators do not take ‘access’
to acquisition from a jurisdiction as relevant, but instead only ‘commercialization’
in that jurisdiction (CNMV 2018).
In the realm of Islamic Finance there are, thus, two sources of complexity:
added to the above problems, posed by the a-national nature of DLT and the
consequent need to determine the applicable regulatory requirements (and to
comply with them), it is necessary to guarantee that a specific issuance is indeed
Sharia-compliant, in an evolving context where general guidelines have not been
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Sara Sánchez Fernández
issued. While DLT has the potential to boost the Islamic Finance industry in the
area of capital-raising, uncertainties are particularly acute and may hinder its
development.
Concluding remarks
DLT offers a number of benefits in Sharia-compliant capital-raising, among
which are the cost reduction, mitigation of intermediary risk, enlargement of
investor base and expansion of the geographical reach. In the EU, given that registration in the blockchain of securities admitted to trading on regulated markets
or multilateral trading facilities, typically the case of sukuks, is not allowed, ICOs
are currently relevant for small and medium-size issuers willing to issue sukuks
aiming at different trading venues, or for issuers, typically tech start-ups, issuing
other Sharia-compliant tokens.
The development of DLT’s full potential in Sharia-compliant capital-raising,
however, depends on the reduction of legal uncertainty surrounding its application. Not only legal systems are struggling to provide a clear (and, at least to a
certain degree, consistent) answer to key questions such as whether tokens should
be considered securities, but also the previous step, i.e. which is the legal system
that will provide such answer in the first place, still remains largely unattended.
Additionally, Muslim investors need clear information on the issuer’s business,
the use of the proceeds and certainty regarding compliance with Sharia law by the
instrument being offered. Only by reducing such uncertainties may DLT unleash
its potential in Islamic Finance.
Notes
1 Directive 2014/65 on markets in financial instruments and amending Directive 2002/92
and Directive 2011/61, OJ L 173, 12.6.2014 (MiFID II).
2 Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June
2017 on the prospectus to be published when securities are offered to the public or
admitted to trading on a regulated market, and repealing Directive 2003/71/EC, OJ L
168, 30.6.2017 (Prospectus Regulation).
3 Agreement on the Withdrawal of the United Kingdom of Great Britain and Northern
Ireland from the European Union and the European Atomic Energy Community, OJ L
29, 31.1.2020 (Withdrawal Agreement).
4 Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July
2014 on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation
(EU) No 236/2012, OJ L 257, 28.8.2014 (CSD Regulation).
5 Real Decreto Legislativo 4/2015, de 23 de octubre, por el que se aprueba el texto refundido de la Ley del Mercado de Valores (Spanish Securities Act).
6 Ordonnance number 2017-1674 du 8 décembre 2017 relative à l'utilisation d'un dispositif d'enregistrement électronique partagé pour la représentation et la transmission
de titres financiers.
7 Del. Code Ann. tit. 8, § 224 (2017).
8 Act No. XXX of 2018 – Virtual Financial Assets Act 2018, Government Gazette of
Malta No. 20,028.
DLT and capital-raising in Islamic Finance 89
9 www.sc.com.my/api/documentms/download.ashx?id=8c8bc467-c750-466e-9a8698c12fec4a77.
10 Note that the issuance of ‘traditional’ securities in tokenized form, covered in the previous section, often take place in permissioned platforms. In these cases, nodes may be
located in the same jurisdiction, which makes cross-border problems less acute.
11 “Interpretation: Re: Use of Internet Web Sites to Offer Securities, Solicit Securities
Transactions, or Advertise Investment Services Offshore (Release Nos 33-7516,
34-39779, IA-1710, IC-23071)” (March 1998).
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8
The role of Islamic crowdfunding
in the new economy
Umar Munshi
The crowdfunding model
Crowdfunding is a Fintech model that has emerged and grown to a significant
scale, already reaching hundreds of billions of dollars in the US and China and
in the tens of billions in a number of others. Its popularity in these countries has
led to new platforms sprouting in numerous other countries. Regulators are also
getting in on the action – introducing or considering regulations and guidelines
to manage risks and maximize potential benefits. The term ‘crowdfunding’ is
loosely used to describe online platforms that match funds to specific projects or
campaigns for investment, to render support or for charitable purposes.
Although modern-day crowdfunding has been around for more than a decade, most notably the launch of pioneer platforms Indiegogo and Kickstarter in
2007 and 2009 respectively, it has yet to make a significant impact in the world
of Islamic Finance. Early platforms in the Muslim world were first observed in
2012–2014 in the Middle East, Asia and the US. From these early platforms, two
pioneers stand out, having weathered the tougher early years and achieved significant traction today. US-based Launch Good leads Islamic charity crowdfunding
with more than US$150m of funds processed, and Malaysia-based Ethis Group
leads investment crowdfunding having obtained multiple licences for Shariacompliant investment crowdfunding in 2019 in Malaysia and Indonesia, and in
Dubai for property crowdfunding. A number of other platforms have also experienced rapid growth and traction including Indonesian platforms Kapital Boost,
Ammana and Alami Syariah, while another pioneer Yielders in the UK continues
to progress strongly. Fursa Capital, the first Islamic equity crowdfunding platform
in the US, is another exciting newcomer to watch in 2020.
In 2019, the Muslim world started to rise out of its crowdfunding slumber,
with a number of member countries of the Organization of Islamic Countries
from Bahrain to Brunei implementing regulations or announcing plans to regulate
crowdfunding. This is indeed a positive and exciting development for crowdfunding since regulations are a critical factor to enable platforms to start and scale up
in a particular territory. As more countries embrace and regulate crowdfunding,
it is expected that other countries too will become more open and keen to support their own local crowdfunding sector. Especially due to the Covid-19 virus
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pandemic, there has been an even greater push by regulators and industry for
Fintech and crowdfunding to provide alternative solutions to revive the economy
and create jobs.
While being late to the party may seem disadvantageous, there are many lessons that can be learned from the experiences of the countries that were early
movers, which provide valuable insights into the potential pitfalls and challenges
that come with the huge promise of crowdfunding. China’s dramatic rise and fall
of the sector, where belated government intervention resulted in rampant fraud
costing billions of dollars of losses mainly borne by the general public, caused
strife and social problems for millions of middle-class investors. In late 2019,
China announced that it will cease to allow crowdfunding platforms to operate
in the country, forcing the larger platforms with millions of users to pivot their
models to become full-scale digital banks, obtain other lending approvals or to
partner with incumbent banks hungry to access their immense reach to investors and fundraisers. At its peak, China had more than 3,500 P2P (lending-based)
crowdfunding platforms. In 2013, China’s P2P market volume was US$6bn, and
this just exploded to reach US$358bn in 2017 (Cambridge Centre for Alternative
Finance 2018).
Crowdfunding is essentially an online marketplace that matches fundraisers
and fund contributors. For simplicity and uniformity, all types of fundraising projects will be called ‘campaigns’. In essence, the crowdfunding model can be used
to raise funds for any purpose, from donations to individuals, to supporting startups, to small and medium-sized enterprise (‘SME’) financing and even property
investment. Contributors give money for the specific identified campaign, facilitated by or directly on platforms. There are many forms, types and variances of
crowdfunding, with each platform differentiated in its own way. The nature of the
activity on the platform will also determine the need for regulatory approvals and
licensing.
Charity platforms are altruistic in nature, with donors not getting any tangible
returns outside of satisfaction, happiness and spiritual benefit for the religious
ones, and are largely unregulated worldwide. Reward crowdfunding gives benefits to supporters in the form of gifts or tokens such as t-shirts or even thank-you
videos, or discounted pre-ordered products. These are also typically not regulated
as there is no direct monetary benefit to the crowd. In the US, however, there have
been documented cases of campaign owners creating snazzy concepts and content
that attracts the crowd to provide funds, without the actual intention to deliver on
promises (Fredman 2015). While it is unknown what proportion of campaigns are
fake or end up as failures, leading platforms have started to take measures to weed
out such frauds and prevent abuse.
Investment crowdfunding can be broadly categorized into two types – equity
crowdfunding and debt-based crowdfunding, also referred to as peer-to-peer
(‘P2P’) lending or financing in some countries. This categorization is based on the
treatment of the investment funds, the first as shareholder capital and the latter as
a liability to be paid back. It is useful to note that while regulators strive to differentiate the two in terms of their form and function, there are various overlapping
Role of Islamic crowdfunding in the new economy 93
areas in their practical application, with some progressive regulators taking the
approach of regulating the two forms in the same way or under the same licence.
There are also hybrid models which do not conveniently fit into these categories –
technology has a knack of blurring the lines. As crowdfunding evolves, we can
expect to see increasingly creative and innovative financing structures and models
implemented to serve the wide array of financing needs and gaps in the market.
Crowdfunding – throwback to the old?
The concept of crowdfunding is deeply embedded in human civilization, where
groups of people come together to pool and share resources for a specific need.
Such social cooperation is natural and common, especially pre-urbanization where
communities lived and grew up together in a village, where they forged strong
bonds, cultural ties and blood relations with each other. Most of these activities
were centred on social and public needs, such as the pooling of donations for religious facilities, public facilities such as wells or to help those in need. It was the
bonds of kinship and care for each other that led to the pooling of funds – offline
crowdfunding. Today such activities continue mainly for charitable and religious
purposes.
Investing as a group in projects and companies is also not uncommon in the
past and continues today, although this was and continues to remain the exclusive
preserve of the wealthy. Significant business projects of the past would call on
the resources of the wealthy and today business groups commonly form consortiums to invest together, and wealthy individuals engage in private ‘club deals’.
Investment ‘crowdfunding’ offline before platforms arrived was mainly available
for the wealthy. The masses, due to a lack of sizeable capital and logistical constraints, were usually excluded. Small investors could only seek to invest in small
businesses within the immediate community or area, typically with family and
friends, or were limited to investing in financial products such as unit trusts and
dabbling in the stock market.
The world today is radically different. The acceleration of urbanization, globalization and now hyper-digitalization has made us one giant global village, but
it has also come at a cost to human relations. Most urbanites interact mainly with
those we work or do business with, and to a lesser extent, our families and relatives, and these relationships are increasingly pushed online especially with the
shift to remote working. The village bonding and community spirit has eroded
and all but disappeared. This author believes that it is this loss that has resulted in
a yearning to connect with other like-minded individuals or those with common
interests online. The internet is the ideal platform for this, where one can easily
become part of a ‘tribe’ through social media groups, community forums, gaming
fraternities and the like.
At the fundamental level, it is the same basic impetus that drives today’s
online crowd to step up together and give from their own pockets to campaigns
on crowdfunding platforms. Of course, for investment-focused platforms the
appeal of good returns is a major pull for investors (and conversely the capacity
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of a platform’s investor base attracts good projects). Still, it is observable that
the platform’s branding and identity, which is rooted in its ethics and community
focus, is a key factor in determining the size, capacity and loyalty of its users.
Well-positioned platforms that demonstrate social impact or support for specific
communities will pull those who resonate with its campaigns.
In short, crowdfunding is a modern-day manifestation of the communal pooling of funds for common interest and objectives, inspired by empathy and fraternity, and for investment platforms coupled with commercial benefit. People come
together on platforms to give money to campaigns they are attracted to or believe
in, and are as such motivated to help that campaign achieve its funding goal.
Key factors for the crowdfunding boom
It is the strong community element in crowdfunding that harnesses the power of
the much sought-after ‘network-effect’, the force that catapulted tech platforms
such as Facebook, WhatsApp, Uber and Amazon to global domination. The network effect is a phenomenon where a platform becomes more valuable as more
people use it (Banton 2019). For example, while there are other chat apps with
arguably better features and functions compared to WhatsApp, new users decide
to use WhatsApp since it is what ‘everyone is using’, thus rendering the better
features of other apps as less valuable since you’d be using it to communicate
with fewer people.
This is a key reason why in mature crowdfunding markets there are clear market leaders that are significantly larger than others. At the same time, the wide
range of implementation and use-cases of crowdfunding, from the nature of
financing activity, to the sector and geographical focus, has resulted in there being
a wider variety and larger pool of top platforms, as opposed to the ‘winner-takesall’ outcome observed in other tech-platform segments mentioned earlier, which
generally have more superficial differentiators from their competitors. Licences
also create strong barriers-to-entry for investment platforms seeking to expand
to new markets, making it more difficult for a leading platform in one country to
expand to another. While investors come from across borders, most regulators
only allow locally domiciled campaigns.
Investment crowdfunding has already broken into the big league. The ability to super-diversify investment capital via crowdfunding platforms has even
caught the attention of the whales of the investment world – institutional funds.
Future-ready fund managers have jumped in the crowd-investment bandwagon,
dripping out their large capital base to many campaigns, giving rise to the emergence of ‘crowdfunding funds’ where an investment management company or
fund manager sets up special funds with the mandate to invest in crowdfunding campaigns based on pre-approved criteria. Since crowdfunding platforms are
typically allowed to match funds to campaigns and not actually hold or manage
funds, the crowdfunding fund plays the role of manager. In the US, a number of
platforms have pivoted away from the original approach of crowdfunding to serve
this large source of funds, and decided to focus exclusively on institutional funds
Role of Islamic crowdfunding in the new economy 95
and accredited investors, cutting out the retail crowd in the process. In Indonesia,
there is the industry-recognized concept of ‘super-lenders’, which are essentially
institutions who provide investment or debt funds to platforms to spread out to
their campaigns.
Step by step
Project owners submit information and content to platforms, including the campaign story and facts, images and videos along with any benefits promised to the
crowd. Platforms then apply varying levels of screening and scrutiny before listing
them as open campaigns to be viewed by its user traffic. Some platforms implement rigorous screening and due diligence on campaigns applying to raise funds,
developing deep proprietary methods and algorithms to select the best campaigns.
On the other hand, others seek to be pure platform technology providers by
providing an open marketplace with only very basic screening of campaigns in
which registration proof and self-declarations from campaign creators are all
that’s needed to start fundraising. There are even platforms that go a step further
by providing tools to allow fundraisers to create and curate their own campaigns.
The moderation and control of campaigns on the more open platforms is left to
the crowd itself to review and validate. The idea is that low-quality or dubious
campaigns will not gain support or buy-in from the crowd, leading to low traction
and funding, eventually not achieving the funding target.
It is important to note that there are two main approaches when it comes to
fundraising targets – the ‘all-or-nothing’ or ‘take-what-is-raised’ approach. As
the phrases suggest, the first is stricter, with campaigns not getting any funds if
the funding target is not reached in the given timeframe. Various levels of allowances and flexibility may be accorded in such cases, with some platforms allowing
limited time extensions, and some platforms having a success threshold set at less
than 100%, for example at 70 or 80%.
Platforms that focus on investment funds tend to have a more robust screening
and onboarding process and are also subject to any relevant prevailing financial
regulations, and in some countries specific regulations introduced for crowdinvesting. Some platforms profess and take on the responsibility of due diligence
on campaigns, again with various levels of scrutiny, some merely by verifying
information received, others by collecting commercial and historical data and
then quantifying the risk or quality of projects with a score or rating. Even with
deep due diligence, platforms do so to allow for investors to make more informed
decisions. Crowd-investors always participate at their own risk, with platforms
not legally responsible for the expected outcome of the investment.
An increasing number of countries now have specific regulations for investment crowdfunding – some issuing a limited number of licences, such as the case
in Malaysia, which was the first to regulate crowdfunding in Southeast Asia back
in 2016, while others have a more nuanced ‘sandbox’ or testing regime for a
softer entry into the market, a more popular approach that was implemented in
Saudi Arabia, Dubai and Kazakhstan in 2019. In countries which do not formally
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regulate crowdfunding, it can be explicitly disallowed as is the case in a number
of African countries or on the other hand platforms can be left in a grey-zone to
operate until regulations are in place, such as the case of Indonesia before formal
regulations were implemented in late 2016.
The amount of content and information provided is also different from platform to platform. Typically, basic information is made available for casual web
traffic. To gain access to full details, users will need to sign up and log in. Again,
there will be differences between platforms, with some giving access from just an
email or social media login signup, while on the other extremely strict platforms
require the proper onboarding of funders including uploading of identification
documents and other forms of compliance checks.
Investment crowdfunding for financial inclusion
The global financial system today has strayed from its fundamental reason for
existence, which is to organize and support the circulation of wealth for society.
Banks are unwilling or unable to provide finance to those who truly need it. The
prevailing credit assessment methods result in banks providing funds to only a
very limited spectrum of borrowers – those deemed to be low risk. The majority of fund managers and private equity firms chase returns for shareholders and
stakeholders by investing in big companies to grow even bigger. Although today
there is an increasing trend and effort for sustainable and responsible investing, the
masses are still left out and miss out on such wealth-creation. Casting a shadow
over the entire financial system is the dark abyss that is the financial economy,
where speculation rules. Inflation rains on the people as markets are manipulated
by the suppliers and holders of money. These continue to worsen the yawning
inequality we face today, widening through cycles of economic recessions and
crises. It is this that instigated and inspired the mass support and adoption of
Fintech – in the hope that a new ecosystem will emerge, one that is grounded in
and driven by the people for the people.
Enter crowdfunding. Nimble and people-powered, it can be implemented
in a multitude of forms to serve a wide range of real-world financing needs.
Crowdfunding is already facilitating existing flows of funds to be more effective and efficient, through greater variety, speed, transparency and accountability.
Crowdfunding also activates new, traditionally untapped sources of funds. The
wide range of campaigns and low minimums capture the attention of large audiences, attracting various pools of funders to participate. With technology bringing
quick access and easy experiences, and with social media amplifying the spread of
popular campaigns, crowdfunding is growing rapidly across the globe, projected
to reach US$1trillion by 2025 (Statista 2020). If well regulated and implemented,
it holds the promise of unprecedented financial inclusion across the globe by circulating money based on the needs and preferences of the people. Yet, as we have
seen in the case of China, risks remain especially in the early adoption phase
where fraud may creep in to take advantage of the unsuspecting crowd that decide
based on herd instinct and new media influence, rather than collective wisdom.
Role of Islamic crowdfunding in the new economy 97
Let us dive in to explore a few innovative applications of investment crowdfunding to demonstrate how crowdfunding can be a precise approach for financial
inclusion, in contrast to the blunt application of the incumbent banks and traditional capital markets. In the US, there is an observable trend of revenue-sharing,
while profit-sharing crowdfunding is the choice approach for a number of Islamic
crowdfunding platforms. In these campaigns, funds are generally treated as debt
since the crowd has no equity ownership. Investors have direct participation in the
performance of the business itself, which brings in the element of sharing risks
and rewards. This form of debt encourages and supports businesses to go through
tough periods, while providing greater upside to investors when a business performs well. A creative implementation of equity crowdfunding, commonly used
for property investment and project financing, is the issuing of shares in specificuse or limited-time special purpose vehicles (‘SPVs’). This allows for the retail
crowd to gain access to fractional ownership of previously inaccessible projects
or assets. Such a structure can also be implemented for micro-financing, where
a cluster of micro-enterprises can be grouped into an SPV which is then funded
by the crowd. This can lower the risk of investing in such a sector, while also
creating a sense of responsibility for these enterprises to perform as a co-funded
community.
Crowdfunding can bridge the many gaps for business financing, especially for
micro-enterprises, social enterprises and SMEs. In many countries and especially
the Muslim world, these businesses have very few options and are not able to
get much financing from banks or financial institutions. The lack of financing
is directly due to the risks or perceived risks of investing in this sector. Where
established financial institutions shy away, how and why then can crowdfunding succeed? There is no simple answer or secret sauce for successful small and
micro-business financing, although there are a number of successful crowdfunding platforms with encouraging success in doing so. A key reason for crowdfunding platforms to achieve better results in this sector is more innovative and
flexible alternative credit analysis and business viability methods that tend to
utilize non-traditional data and harness community or social intelligence and
trust. Platforms also typically have less regulatory requirements and constraints,
which allow them to be more nimble in forming partnerships and collaborations
to improve their ability to source for and onboard campaigns for funding. Data
is the source of intelligence, and crowdfunding platforms can partner with other
tech providers that have useful data, such as e-commerce platforms, point-of-sale
or enterprise resource planning software. Especially with increased adoption of
open-APIs (application programming interfaces) to allow for data sharing, such
partnerships are likely to form a significant component of business financing via
crowdfunding.
My own company Ethis gained prominence through the creative implementation of P2P financing to fund social housing development projects in Indonesia.
We implemented a hybrid model, where crowd-investors invest through Islamic
Finance contracts. Our most common model utilizes the istisna’ contract where
an SPV would purchase under-construction houses. Capital is disbursed over two
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Umar Munshi
to three payments based on project progress milestones. Completed units are then
sold to Islamic banks, which then sell them to homebuyers through a government
program for subsidized home financing. The crowd provides the funds to these
SPVs, which are appointed as nominees for the crowd in the construction project.
We also utilize a musharakah or joint-venture contract where the SPVs become
direct partners in projects, providing funds and project management services
(Ethis n.d.). In both instances, physical assets are pledged to investors as collateral. In our proof-of-concept phase which ended in Q3 2019, Ethis matched more
than 1,200 crowd-investments from 60 countries to 50 campaigns. The housing
projects funded will provide more than 8,000 houses to low-income families,
bringing them a huge leap closer towards breaking out of poverty, while also
giving investors healthy returns typically above 10% in a year. On the investorside, this is new and unprecedented user behaviour that was accomplished purely
through organic reach.
Charity crowdfunding to uplift humanity
Charity crowdfunding, although seemingly less significant, holds immense opportunity for a huge impact. Islamic social finance – the institutions of zakah (or
zakat) and waqf, and of general charity by Muslims (sadaqah) hold huge promise
to bring a large and lasting impact on social and economic well-being. Effective
use of zakat and waqf are in theory more than sufficient to provide for the needs
of, and eventually empower the lower strata of our global village to break out of
poverty on a mass scale. There are, however, significant barriers, which I believe
technology can help to reduce and overcome, unleashing the potential of Islamic
social finance to benefit humanity.
First let us look at zakat, which is a compulsory annual tax of 2.5% on wealth
or savings kept in a year, with unique calculations for some forms of income from
farming, real estate and others. Zakat is one of the four basic pillars of Islam and
is a duty for Muslims who qualify based on their wealth. In essence, it is a means
to purify wealth, while also penalizing the hoarding of wealth, which encourages
investment and business to grow one’s wealth. If savings are kept idle and not
earning any income or profit, it will totally deplete in 40 years from the 2.5%
yearly zakat deductions. Practicing Muslims should thus be active investors.
What is the size of zakat contributions? An estimate by the Islamic Development
Bank puts it at more than US$500billion every year, with some estimates putting
it at close to a trillion (Islamic Development Bank 2014). Such a huge figure, if
effectively mobilized, should easily eradicate extreme poverty for humanity. Yet
more than two billion people still live in extreme poverty – on less than US$2 a
day. Where did things go wrong?
While there are definitely many people and organizations doing important
work with zakat across the globe, the fact is that zakat has not had the impact
and reach it needs to and definitely should have. This is a complex issue with a
multitude of challenges. Crowdfunding has the potential to increase two crucial
elements that can bring tremendous benefits – transparency and accountability.
Role of Islamic crowdfunding in the new economy 99
The market forces inherent in crowdfunding have the ability to put positive
pressure on campaign fundraisers to provide information and even reports to
gain credibility and trust from donors and contributors. Visual content including
videos are also proven to attract more funds and creates a stronger connection
between the users of a platform. Similar to how e-commerce and online shopping
platforms provide information and update, increasingly crowdfunding platforms
also provide an avenue for donors to track the use and eventual impact of their
funds. This has the potential to create a virtuous cycle when such impact reports
inspire and encourage users to donate again. On our platform Global Sadaqah,
this repeat donor behaviour is clearly observed in many campaigns, especially in
a series of campaigns to raise zakat-eligible funds for Rohingya refugee childrens’
boarding school fees (Global Sadaqah n.d.). Then an update was sent to donors,
with a prompt to donate to another child in need, and many decided to donate
again. By providing a centralized platform for the exchange of such information,
crowdfunding enforces accountability which in turn creates a more enduring relationship between crowdfunder and fundraiser.
There is also a lot of interest to utilize crowdfunding for waqf – a form of
endowment where assets are given away or pledged as a religious act, where the
benefits derived or generated by these assets go to specific beneficiaries or for
general use to bring social benefit or family well-being. A waqf is meant to be
permanent and bring perpetual benefit to the beneficiary, and holds a special place
in Islam since it is a form of Sadaqah Jarriyah, one of three activities identified
in authentic sayings of the Prophet Muhammad (pbuh) that can continue to bring
benefit to Muslims after death. Historically and till today, land and physical assets
are the most common waqf, although there are various unique assets given as waqf
throughout the Ottoman empire, most notably as cash assets. Today, cash waqf
is seen as an important way forward to revive and rejuvenate this underutilized
Islamic social finance institution.
Waqf in many countries face similar challenges as zakat, including a lack of
transparency, understanding and management capabilities. In addition to waqf
land, there is also typically a lack of suitable or available financing options, in
many cases due to issues in the ownership status of the land in the local legal
framework mainly revolving around the financier’s claim to the land assets should
there be a default or failure of the project. In some countries, the religious authorities also have a critical role, especially if they are the official or sole authority over
waqf in that jurisdiction.
Crowdfunding has been identified as a viable avenue to activate and pool
funds for waqf itself, and also investment funds to develop or support waqf projects and initiatives. With greater transparency, understanding and a more rigorous approach, more investors, especially Muslin investors, will be motivated to
invest in waqf. There are huge tracts of underutilized or dormant land in many
countries that were pledged as waqf but are not developed or made productive.
With some investment and good management, even land in less commercial locations can be activated for agriculture or even to house solar farms to generate
electricity.
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Umar Munshi
I believe that crowdfunding for Islamic social finance can definitely help individual campaigns large or small to get funded and to thrive. But the true value and
change that crowdfunding can bring about will more likely happen when there is
widespread aggregation of campaigns on one platform, which can then result in
more effective identification of relative needs, and thus more effective distribution
of available funds. For example, if a mosque-focused platform manages to get all
the mosques in a region to come onboard, then users and mosques themselves
can channel more funds to the more needy mosques instead of continuing to fund
mosques that have sufficient financial resources. In this way, donors can ensure
that their funds go to the mosque that is most in need. This approach is yet to be
implemented at scale, with two main platforms Launch Good (www.launchgood
.com) and Kita Bisa (https://kitabisa.com/) in Indonesia the only ones with sufficient scale to potentially implement this redistribution mechanism.
In the Ethis group, we have Global Sadaqah, which was launched in 2018 as
a platform for Islamic social finance crowdfunding with a strong focus on partnerships with incumbent Islamic Finance and religious institutions and organizations. The journey has been challenging yet enriching, with a lot of learning and
adjustments made to allow for the platform to serve these large and mostly traditional entities more effectively. It is encouraging that a number of Islamic banks
and religious bodies have been onboarded to our platform, although a lot more
needs to be done to bring the ecosystem together at a scale that makes a difference.
The future
‘Nothing can be closer to Islamic Finance than Crowdfunding’ – declared the
renowned Islamic Finance scholar, Sheikh Professor Mohamed Ali Elgari at
the World Islamic Banking Conference 2015 in Bahrain.
(Elgari 2015)
As crowdfunding continues to gain traction and prominence, and more precedents
of success emerge, the Islamic Finance industry and its customers will start to
become more aware and understand its relevance and wide-ranging applications
in both social finance and investment. Large incumbents are already increasingly pressured by opposing forces – on one side regulations make them more
risk-averse and rigid in their activities and services, while on the other side the
economy and society has an increased need for funds especially at the ‘riskier’
lower end of the spectrum. Many governments have a strong focus on financial
inclusion, which banks may be unable or unwilling to address. Concurrently public funds for social welfare is depleted or depleting in many countries. At the
macro-level, the classic fallback economic tools of monetary and fiscal policy
are increasingly toothless in the face of unprecedented challenges to the world
economy amid historically low interest rates. This has created the perfect storm
for new solutions to be brought to the fore.
True Islamic Finance has a myriad of solutions for humanity. Islamic investments are more participatory, responsible and sustainable. Islamic social finance
Role of Islamic crowdfunding in the new economy 101
taxes the wealthy through zakat and empowers generations through waqf. When
combined effectively and synergistically, the ability to effect real sustainable and
inclusive change is immense. While not perfect, Islamic crowdfunding is a suitable
model to be implemented at scale using Islamic Finance principles and contracts
to circulate money and wealth to the masses, with universal ethics embedded in
its modus operandi, enshrined in the Islamic principles that underpin it. Platforms
can aggregate various funding sources from all stakeholders to fund a marketplace
or real-world campaigns.
I foresee strong web and mobile-driven growth at the retail level, similar to
how Indonesia’s crowdfunding sector saw a growth from zero to US$10bn in just
four years. As the masses in other countries start to come onboard into crowdfunding in a larger way, so too will network effects to increase the rate of adoption. A critical tipping point that will further accelerate the growth and impact of
crowdfunding is when the large incumbent financial institutions decide to jump
on the bandwagon, and bring their capital, customers and resources to this sector.
There are significant examples of large institutions partnering with, investing in
and even acquiring crowdfunding platforms in the more developed Western markets and I believe the same will happen in a big way for Islamic crowdfunding in
the next couple of years.
With Islamic crowdfunding, humanity has the rare opportunity to circulate
wealth directly to the real economy, while avoiding the pitfalls of the financial
economy and the nefariousness of an interest-based economy.
References
Banton, C. (2019) Network effect. Available from: https://www.investopedia.com/terms/n/
network-effect.asp [Accessed: 20th September 2020].
Cambridge Centre for Alternative Finance (2018) The third Asia pacific region alternative
finance industry report. Available from: https://www.jbs.cam.ac.uk/wp-content/
uploads/2020/08/2019-04-3rd-asia-pacific-alternative-finance-industry-report.pdf
[Accessed: 20th September 2020].
Elgari, M.A. (n.d.) World Islamic Banking Conference, 1st December 2015, Bahrain.
Ethis (n.d.) How it works. Available from: https://ethis.co/id/how-it-works [Accessed: 20th
September 2020].
Fredman, C. (2015) Fund me or fraud me? Crowdfunding scams are on the rise consumer
reports shows you how to spot a hoax. Available from: https://www.consumerreports.or
g/cro/money/crowdfunding-scam [Accessed: 20th September 2020].
Global Sadaqah (n.d.) Rohingya refugees: Education support for Yasir. Available from:
https://globalsadaqah.com/campaign/rjrec20-yasir/ [Accessed: 20th September 2020].
Islamic Development Bank (2014) Islamic social finance report 2014. Available from:
https://irti.org/product/islamic-social-finance-report-2014/ [Accessed: 20th September
2020].
Statista (2020) Value of global peer to peer lending from 2012 to 2025. Available from:
https://www.statista.com/statistics/325902/global-p2p-lending/
[Accessed:
20th
September 2020].
9
Crowdfunding in Spain
under Sharia rules
Antonio Gabriel Aguilera
Introduction: what is crowdfunding?
According to Serrano (2016), crowdfunding or micro-patronage is the form of
financing of a certain project of a physical or legal person (promoter) carried out
by a plurality of people (crowd) through a web page (crowdfunding platform) in
which it is announced.
The internet, through crowdfunding, is often used to finance efforts and initiatives of other people or organizations. Crowdfunding is aimed at a plurality of
people who are linked only by their participation in the project, and thus do not
need to know each other.
Micro-patronage can be used for many purposes, from artists seeking support
from their followers, to politicians financing their campaigns, people financing
with debt, helping build housing, schools or dispensaries or even for the creation
of companies or small businesses. It acts as a substitute or alternative to the socalled ‘seed capital’.
The micro-patronage, crowdfunding or collective financing is a collaborative project financing system. This system runs away from traditional financial
intermediation and focuses on bringing into contact promoters of projects that
demand funds through the issuance of social participation or through loan applications, with investors or bidders of funds that seek to obtain a return from their
investment.
This activity is characterized by two fundamental features:
··
··
The massive or, at least, plural union of investors who finance certain projects
with greater or lesser amounts of money.
The existence of greater or lesser investment risk that is intended to be
reduced with the plurality of investors.
In general terms, crowdfunding requires a public dissemination of the project in
order to attract investors, donors or lenders that make possible the development of
the project or the joint investment. This fundamental feature is achieved through
the use of the internet, where collective financing platforms are housed.
In this contribution, we will analyze from the Spanish legal point of view the
elements that intervene in the crowdfunding phenomenon, as well as the different
Crowdfunding in Spain under Sharia rules
103
configurations that can be adopted in Spanish law and especially those that are or
can be admitted from the point of view of Sharia or Islamic law.
Subjective elements that intervene and
determine the concept of crowdfunding
In the crowdfunding phenomenon, we can find the following subjective elements.
The owners or promoters of the project
The holders or promoters are normally a natural person or a plurality of natural
persons or legal persons who want to carry out a project for which they need a
monetary contribution that is requested through a collective financing platform
on the internet.
Such legal persons or entities may adopt the form of corporations, communities of assets, associations or foundations of any kind. In some cases, in order to
carry out this request for funds, it will be necessary that each type of legal person
has the mandatory permits or agreements from the corresponding administrative
body or management. In other cases, as we shall see later, due to the chosen
legal form, only corporations may be promoters of the project. For example, only
capital companies may issue loans with a retribution or with participation of the
profits.
The plurality of investors
The purpose of the promoters and/or holders of the project is to obtain an amount
of money, previously determined and announced, that allows them to achieve
their objective. That amount of money comes from a plurality of parties, so risk
decreases in case the project fails. That is, the risk of a project when the money
comes from a plurality of parties or investors is divided between the parties, so
every one of them takes a little part of the benefits but, also, a little part of the
total risk.
These parties that act as investors may have different profiles. This implies that
there are different protections for each of them, as well as different objectives or
purposes sought by each of them.
Among the different profiles that we can find, we can distinguish those investors who are natural persons, for example, consumers who occasionally invest
in this type of project and who will enjoy the protection that the laws grant to all
consumers and users, and that logically is a different protection from that enjoyed
by companies that are professionally dedicated to investing in projects financed in
the crowdfunding modality.
The more information the holder of the project offers to potential investors
about said project, its advantages and difficulties, as well as potential risks and
benefits, the more likely they will be successful and will obtain the necessary
financing. Among this information the most relevant is the business plan of the
104 Antonio Gabriel Aguilera
project, the terms and conditions of funding or the forms of compensation to the
investors, among others.
At this point we must distinguish between the information that is offered by the
holders of a project to give the best possible image of the project, and that we can
assimilate to the information that a start-up can offer in a financing round and that
other information that According to Title V of the Law 5/2015, of 27th of April, of
promotion of business funding, under the heading ‘Legal regime of the participative funding platforms’ (BOE number 101, of 28th of April), which is mandatory
to offer it to potential investors.
In this second case, the holders of a project are obliged to provide a concise
description of the project, the maximum amount of financing, as well as the term
to achieve it (Articles 69 and 70 of the Law 5/2015, of 27th of April, of promotion
of business funding).
In the event that the financing is obtained through loans, the amount thereof,
repayment terms and the rights and guarantees linked to said loan must be stated
(Articles 74 and 76 of the Law 5/2015, of 27th of April, of promotion of business
funding)
If financing is obtained through the issuance of shares, participations or other
securities representing capital, the promoters must describe the promoter company, its corporate bodies, activities plan, as well as financial situation and structure of the capital stock and indebtedness (Article 78 of the Law 5/2015, of 27th
of April, of promotion of business funding).
The crowdfunding platform
The crowdfunding platform is the most characteristic and specific element of the
crowdfunding phenomenon, and basically it is the instrument through which holders of the ideas or projects inform potential investors about the essential project characteristics. Not only do they inform about their idea; they also propose
potential rewards or benefits and estimate the duration of the project. Later in this
contribution we will make a brief description of the different types of benefits that
investors can obtain.
These platforms are hosted on websites. This is what really differentiates this
phenomenon from other classical project financing alternatives, like banks or venture capital. The differences between financing through crowdfunding and bank
financing, for example, lie in the fact that through the former, the holders of the
project can address a plurality of potential investors and not just one, as would
happen if they go to a bank. Another difference is the minimization of costs that
makes it possible to go to a financing platform through the internet compared to
a bank, as well as the lower demand regarding the provision of guarantees by the
holders of the project.
These websites may be owned by the project or idea holders or belong to a
natural person, legal person or entity whose job is to connect, through said website, the holders of ideas and projects with parties seeking to finance those projects
or ideas, the latter being the most common practice.
Crowdfunding in Spain under Sharia rules
105
There are many examples of said platforms, such as www.kickstarter.com;
www.apontoque.com; www.goteo.org; www.verkami.com; and www.ulule
.com. The crowdfunding financing market is a market in full growth, and as happens in all markets in this phase, there are a large number of platforms that little
by little, as the market matures, will specialize in sectors, projects or countries.
Thus, we can find platforms in the United States (Kickstarter, for example) that
support projects in various countries, as long as they are related to art, games,
music, etc.
In the cases in which an international platform finances a project that is to
be developed in Spain, it must comply, on the one hand, with US legislation
(Jumpstart Our Business Startups Act 3606) (‘JOBS Act’), as well as the applicable Spanish regulations (Civil Code, Commercial Code and Title V of the Law
5/2015, of 27th of April, referred to above).
The reward or benefit obtained by investors
The purpose of each of the investors who provide money to the holders of the
idea or project through the crowdfunding platform is to obtain a benefit, normally
monetary, in the event of the project’s success.
This benefit can be obtained through different modalities that will depend on
the nature of the project and the crowdfunding modality chosen. Thus, the benefit
may consist of getting back the money invested plus an interest or in the transfer
of a good or, in certain projects, in a privilege or advantage granted to the investors through the crowdfunding platform. For example, in the case of a crowdfunding campaign to get the money to record a musical album, the reward may be a
CD or album signed or dedicated especially to the funder or a limited and special
edition of the product. In the event that the benefit is not merely economic or valued in money, that benefit will be called a reward, advantage or prize.
Crowdfunding modalities
Crowdfunding exists under several modalities, which in case of Spanish law are
the following:
Equity crowdfunding
In the modality of equity crowdfunding, the investors, in exchange for the money,
subscribe a number of shares of the company seeking financing, thus becoming
shareholders. The economic profit investors obtain is related to the future dividend distribution obtained from the success of the venture or the capital generated
from the future sale of their shares.
Crowdfunding through the realization of loans without interest
In this modality, the investors give an amount of money to the holders of the
project, who agree to pay back such amount of money in the future. Additionally,
it is possible to agree that the money is returned by a different type of payments,
106 Antonio Gabriel Aguilera
like an asset or service valuated in the same amount of money. The key feature
of this modality is that no interest is charged by the investors to the crowdfunder.
This modality is frequent in cases of seed capital fund, when the holders are
family or friends of the project holders.
Crowdfunding through a loan with a retribution
The concept of a loan is known and universally accepted, both in the Occidental
and Islamic economy. In this case, crowdfunding involves an amount of money
given by investors to a person or people holder of the project, who agree to pay
back such amount of money plus an amount on top of the original amount. This
amount can be freely agreed between the parties, which normally comes in the
form of financial interest.
In turn, the loan can adopt the form of stricto sensu loan or an issuance of bonds
by the corporation which is seeking financing to carry out the project. Later in this
contribution we will study both options from the point of view of Sharia-compliant.
Crowdfunding integrated loans with the participation
of the profits generated by the project
In this form, the starting point is equal to that in the last point, giving money to the
person or people holders of the project who will pay back such amount of money
only in function of profits of the company.
Crowdfunding by donation
In crowdfunding by donation, the investors give, gratis et amore, altruistically, a
determinate amount of money, asset or service to the person or people holders of
the project, without these people being subjected to any obligation of returning
the funds. This modality can be frequent when the project has a social character
and not just a business one; for example, obtain money to install solar panels in
a school.
Crowdfunding by reward
In crowdfunding by reward, investors give an amount of money, asset or service
to the person or people holders of the project who are obligated to give back an
asset, money or service previously agreed with the investors.
That good or service with which investors are rewarded, in this type of crowdfunding, may consist of a good (for example, a dedicated photo or a signed book
from the holders) that will only be possible to obtain by participating in this type
of financing.
Regulation of collective funding platforms
The collective financing platforms are a new and recent phenomenon that have
different regulations in different countries. Regarding the Spanish regulation, the
Crowdfunding in Spain under Sharia rules
107
main law applicable to this case is, as already mentioned, in Title V of the Law
5/2015, of 27th of April.
Of course, there are other countries where the crowdfunding phenomenon is also regulated. For example, in the US there is the JOBS Act, enacted
by President Obama on 15th April 2012. In Italy, we can find the Testo
Unico dell´Intermediazione Finanziaria, like the regulation developed by the
Commissione Nazionale per le Societa e la Borsa (‘CONSOB’), enacted on 26th
June 2013. This regulation was updated afterwards in 2016 by revision of the
Regolamento CONSOB. In the United Kingdom, in the FCA’s Policy Statement
14/4 (2014).
At a European Union level, there is a proposal for a European Regulation, in the
procedure 2018/0048/COD Proposal for a Regulation of the European Parliament
and of the Council on European Crowdfunding Service Providers (‘ECSP’) for
Business. The European Union, with this regulation, aims at creating a common
and equal rule on crowdfunding for all countries, which must accommodate their
national regulations to the European Union.
The Spanish law essentially aims at protecting investors who invest in crowdfunding platforms in the form of loans with interest, and for this purpose, the
Spanish law establishes certain obligations within the platforms, e.g. an authorization system, as well as mandating the registration of these platforms, their holders
and the projects.
According to the explanatory statements, the aim of the law is to regulate the
crowdfunding platforms which the investor hopes to receive a pecuniary remuneration for their participation. Therefore, other crowdfunding modalities, e.g.
donation, fall outside the scope of application of this law.
This is openly stated in the 46.2 of the said law:
The companies that carry out the activity referred to in the last section will
not be considered a participative funding platform when the promoters obtain
the funding obtained exclusively through:
a) Donations.
b) Sale of services and assets.
c) Interest-free loans.
Therefore, there is a dual regime of crowdfunding related with the two requirements of authorization, register and amounts that can be received from the investors; thus, we can distinguish:
1. Investment modalities in crowdfunding platforms regulated by Title V of the
5/2015 Law, of 27th April:
·· Investment via acquisition of shares.
·· Investment via loans with an interest rate or via issuance of bonds.
·· Investment via loans with interest reintegrated with the participation in
the profits generated by the project. As we have said before, in this form
the holders of the project only will pay back such amount of money
108 Antonio Gabriel Aguilera
in function of profits of the company, unlike the previous modality, in
which the money will be returned (in whole or in part) regardless of the
results of the company.
2. Investment modalities in crowdfunding platforms not regulated by Title V of
the 5/2015 Law, of 27th April:
·· Investment via donations.
·· Investment via sale of assets and services.
·· Investment via loans without an interest rate.
These modalities are regulated by the Spanish Civil Code, and more specifically
in articles 618–65 of book III dedicated to donations and in articles 1088–1976 of
book IV dedicated to obligations and contracts (Royal Decree of 24 July 24 1889,
BOE 206, of 25 July 1889). We can also find some applicable rules in articles
1–15; 50–63, 239–280; 311–324 and 942–955) of the Spanish Commercial Code
(Royal Decree of 22 August 22 1885, BOE 289, of 16 October 1885).
In the following section, we analyze the compatibility of each one of these
modalities with the Sharia or Islamic law, but we will first briefly describe the
general aspects of Sharia law that are of relevant for the purposes of this paper,
in order to establish which of the crowdfunding modalities described above are
compatible with Sharia.
Overview of Sharia law elements relevant
to the crowdfunding phenomenon
There are several general principles, some of which are negative (prohibitions)
and others positive (mandatory), that must be taken into account in any Shariacompliant transaction. These prohibitions and mandatory rules are the following:
Prohibition of ‘riba’ (riba = financial interest
in the Western understanding)
One of the best-known rules of Islamic Finance is the riba ban. The term means
‘excess’. This prohibition is absolute and unconditional. It is mentioned many
times in the Quran, but the exact meaning of riba does not require specification in
the verses since its meaning was known to most people.
Riba's concept can be divided into two categories:
Riba al-naseeyah, also known as riba al-Quran and riba al-jahiliyyah
This type of riba is the equivalent of interest paid on loans. It consists of the addition to the principal amount of a predetermined premium, which is paid to the
lender in exchange for the loan or in exchange for extending the loan repayment
time. It is linked to the amount paid and the duration of the loan. The prohibition of the riba al-naseeyah has been established in the Quran, the Sunna of the
Prophet and by the consensus of Muslim scholars of all schools of Koranic legal
thought (sura 275–9 Quran).
Crowdfunding in Spain under Sharia rules
109
Riba al-fad or riba al-hadith and riba al-byuoo
This concept of riba takes place when the value of the assets offered by one of
the parties is superior, ostensible and without justification, to the value of those
offered by the other. The prohibition of this type of riba means that any exchange
of money (or commodities that are considered money) should only be treated at
the same value. Therefore, al-fadl riba arises when the parties exchange products
of a similar type at a different value. Riba al-fadl, for example, would be applicable when two people exchange blocks of gold of the same weight but where one
block is nine carats and the other 18, and therefore of different values, or when the
exchange is not at the same time (Schacht 1913–1936; Watt 1956).
We would be facing a case of riba al-fadl when we exchange a car for money
(by buying and selling it) when we deliver the car to the buyer on the spot, but the
buyer pays within six months, because there is no fairness in the deal since while
the buyer can enjoy the car from its delivery, the seller cannot enjoy the money
for another six months.
Gharar ban
The meaning of gharar is cheat, trick, attract as bait, tempt, seduce and uncertainty in the transaction or contract. Under Spanish law and other civil law systems, gharar can be assimilated to the sale of a good with hidden defects, or to a
sale in which the parties do not know perfectly all the characteristics of the good
subject to the transaction or the conditions of the transaction (price, term and
amount of each term, for example). The lack of transparency and clarity in business is also a type of gharar (Schacht 1982).
Protection against the gharar is similar to the protection established under
European laws in favour of consumers and users in terms of guarantee of the
good offered and transparency in the transaction. In Spanish law, we can see this
protection in Royal Legislative Decree 1/2007, of 16 November, approving the
revised text of the General Law for the Defense of Consumers and Users and
other complementary laws ( article 114 ‘The seller is obliged to deliver to the
consumer and user products that are in accordance with the contract, responding to him for any lack of conformity that exists at the time of delivery of the
product’).
Ban on gambling (qimar) and speculation (maysir)
Qimar (gambling) and maysir (speculation) are prohibited in Islam. In a transaction involving qimar or maysir, one of the parties may either suffer a total loss
based on chance or make a substantial gain without any effort. Qimar has an element of gharar but not everything that is gharar is qimar. An example of qimar in
modern finance would be the purchase and sale of any type of financial derivative
products for speculative purposes (Quran 2:219, al-Baqara). Maysir's ban is very
relevant, since it means that instruments such as options and futures contracts cannot be used under the rules of Sharia due to their speculative nature.
110 Antonio Gabriel Aguilera
Obligation to share losses and profits
As a consequence of the prohibition of the riba, understood as financial interest
in Islamic law, the figure of the financial creditor is not allowed, which is the person who lends money and intends to participate in the benefits of the project, but
without being affected by losses.
Under Sharia rules there is an obligation to share losses and gains, that is, both
parties in a transaction participate in the profits or benefits proportionally and
therefore they may eventually suffer a loss due to business risk.
Compatibility of projects financed by participative
financing platforms or crowdfunding with Sharia law
Based on the above analysis, where the fundamentals of Sharia principles, mandatory rules and prohibitions were described, this section is devoted to analyze,
compare and contrast the different crowdfunding modalities under Spanish law,
with those allowed under Sharia.
Equity crowdfunding
This modality is perfectly compatible with the Sharia, as long as the corporate purpose of the company is also compatible with the Sharia (for example,
it cannot be a company whose corporate purpose is the transformation of pork
products).
Loan crowdfunding without interest
This modality is compatible with Sharia law. There are two options.
The first option consists of delivering an amount of money for the crowdfunding project, which its promoters commit to pay back in the future. It is important
that both the delivery amount and the date on which the money will be returned
are clearly determined in order to avoid uncertainty (gharar), which can vitiate
the contract.
The second option consists of structuring the investment contract by adding an
additional obligation to it, so that under the terms and conditions agreed by the parties, the company or project that receives the investment can satisfy it by returning
the money delivered, or replace it, exclusively at the will of the promoter of the
crowdfunding project, with the delivery of some product or service, to which the
parties agree to give it the same value as that delivered by the investor.
An example would be the following agreement:
The parties expressly agree that the investor will receive the amount of XX
on the XXX day of the year XXX. However, the parties agree that the borrowing company at its sole discretion, may extinguish the debt by delivering
to the investor XX. Similarly, the parties expressly agree that the value of the
Crowdfunding in Spain under Sharia rules
111
product or service that the crowdfunding project promoter company is equal
to that delivered by the investor.
Loan crowdfunding with interest
The concept of financial interest is strictly prohibited because it is considered
riba, so this type of investment through crowdfunding is not allowed by the
Sharia law.
Crowdfunding of loans repaid with the participation
in the benefits generated by the project
Within this mode of investment, we can find several forms that are compatible
with Sharia law.
The first is the investment in crowdfunding projects through the figure of participatory loans.
The figure of participatory loans is regulated under Spanish law in article 20 of
Royal Decree 7/1996, of 7 June, which establishes that these loans include loans
with a variable interest, which will be determined in function of the evolution of
the activity of the borrowing company. The criteria to determine the evolution of
said interest may be the net profit, the volume of business, the total equity or any
other freely agreed by the contracting parties. In addition, they may agree on a
fixed interest regardless of the evolution of the activity. Therefore, in this kind of
loan, the repayment to the lender is based on the performance of the company.
The second modality allowed by Sharia law in the investment in crowdfunding
projects is through the figure of the sukuk (plural of sakk). A sukuk is a Shariacompliant bond, which has the following characteristics.
The bonds or sukuks are represented as a certificate of holdership of a part of an
asset belonging to the company that issues the bonds or sukuk. The holder thereof
will obtain a benefit based on the performance of the underlying asset with which
it is related. It is not, therefore, a financial creditor in the strict sense of the word,
because it participates in profits and losses, this being a requirement established
in Sharia law (Quran 2:283; Usmani 2007; Morrison 2017).
The issuance of these bonds called sukuk, which under Spanish law will take
the form of obligations or debts, can only be carried out by commercial companies
and is subject to compliance with the specific regulations, which were modified by
the Fifth Additional Provision of Law 5/2015 of 27 April of Promoting Business
Funding.
Donation crowdfunding
Crowdfunding through donation is perfectly compatible with the Sharia, as long
as the project for which said money is delivered is also compatible with Sharia
principles. We repeat the example of the pork. Sharia would not be compatible
either with a donation aimed at weapons research, for example.
112 Antonio Gabriel Aguilera
Crowdfunding by rewards
In this modality of investment in projects financed through crowdfunding, we find
the delivery of an amount of money to the project in question, which is repaid not
through the return of the same money, but with a retribution in kind.
The agreement between the parties can be regulated with an agreement similar
to the following, set forth by way of example:
The parties expressly agree that the investor will receive the amount of XX
annually on the XXX day of the year XXX. However, the parties agree that
the borrowing company may extinguish the debt by offering the investor an
appearance and a phrase in the film that constitutes the investment project.
Similarly, the parties expressly agree that the value of the product or service
of the company promoting the crowdfunding project is equal to that delivered
by the investor.
As an example, we can cite as ideal projects to be financed through crowdfunding
projects in their form of ‘rewards’, the following: projects of the so-called ‘creative economy’, cultural, tourism microprojects, shooting of short films, software
development and in general ideas of entrepreneurs who in most cases do not need
much funding since the higher cost of the project is that of the workforce of the
entrepreneur (sunk cost and lost fund) as well as the essential to start it up, since
the publicity and distribution of these projects has been greatly reduced by the
generalization of the use of the internet and new technologies.
These projects can be the perfect target to be financed in the form of rewards,
fully compatible with the Sharia because they meet all the requirements established in it:
··
··
··
They do not fall into the prohibition of the riba.
They can be determined from an initial moment, thus avoiding gharar and
maysir.
The object thereof is not prohibited from the point of view of Sharia.
Conclusion
The financing of projects through crowdfunding under Spanish law can be a new
way to raise funds Sharia-compliant for projects that are also Sharia-compliant.
A project under the Spanish law (either the specific law on business financing
of 2015 or the general law of the Civil Code and Commercial Code) can attract
said funds if it chooses any of the following modalities:
··
··
··
··
··
Participation in the equity of the company that owns the project.
Invest in the project money that will be reimbursed without paying interest.
Invest money that will be refunded depending on the results of the company.
It invests money that will be repaid through the delivery of a good or service
to which the parties give the same value as the money invested.
Donate money to the project.
Crowdfunding in Spain under Sharia rules
113
The general theory of obligations and contracts of Spanish law has deep historical roots, and therefore has a broad base of Islamic origin, due to the 800 years
of permanence of Muslims in Spain, which gives it all the flexibility necessary to
reconcile the requirements of Islamic law with Spanish, and therefore, European
legislation.
References
FCA (Financial Conduct Authority) (2014) The FCA′s regulatory approach to crowdfunding
over the internet, and the promotion of non-readily realisable securities by other media
Feedback to CP13/13 and final rules. Available from: https://www.fca.org.uk/publica
tion/policy/ps14-04.pdf [Accessed: 26th September 2020].
Moreno Serrano, E. (2016) Configuración jurídica del crowdfunding como forma
alternativa de financiación. In Moreno Serrano, E. & Cazorla, L. (eds.) Crowdfunding:
Aspectos Legales. 1st ed. Cizur Menor, Spain: Thomson Aranzadi.
Morrison, S. (2017) Law of Sukuk: Shari'a Compliant Securities. 1st ed. London: Sweet &
Maxwell, p. 233.
Schacht, J. (1913–1936) Riba. In Houtsma, M.Th., Arnold, T.W., Basset, R. & Hartmann,
R. (eds.) Encyclopedia of Islam. 1st ed. Leiden, The Netherlands: Brill.
Schacht, J. (1982) An Introduction to Islamic Law. 4th ed. Clarendon Paperbacks. Oxford,
United Kingdom: Oxford University Press.
Umani, M.T. (2007) Sukuk and their contemporary applications. Available from http://alq
alam.org.uk/wp-content/uploads/2017/07/Mufti-Taqi-sukuk-paper.pdf [Accessed: 26th
September 2020].
Watt, W.M. (1956) Muhammad at Medina. 1st ed. Oxford: Oxford University Press.
10 Anti-money laundering
from the Islamic perspective
in the digital era
Gonzalo Rodríguez Marín
Introduction
Money laundering is the process by which criminals create the illusion that the
money they are spending is actually theirs to spend (Stessens 2000). In other
words, money laundering is the conversion of illegal cash into another asset, concealing the source of the illegally acquired proceeds and creating the perception of
legitimacy of source and ownership. But above all, money laundering is a threat
to the economy and social well-being of societies.
The discussion of this phenomenon, especially in the so-called Islamic Fintech,
is the subject of this chapter. We will briefly address the existing digitization
process and the most relevant characteristics in the Islamic Finance industry, with
particular emphasis on the role of education, cryptocurrencies or control entities
that guarantee security in the industry.
Banking is one of the most highly regulated sectors and anti-money laundering
(‘AML’) one of its key aspects. Throughout the years, banking has changed and
continues to change, and digital transformation is going to result in a complete
paradigm shift with implications for the business model affecting banks, but it
also involves managing new challenges arising from this digital transformation,
which also affects AML policies. The coronavirus pandemic during 2020 will
cause this entire process to be sped up.
If banking is going to be primarily digital in the next few years, how will this
affect AML policies? How will it affect Fintech?
A paradigm shift
The fact that we are experiencing a paradigm shift towards an increasingly digital
world is evident. This process has also been especially promoted during the year
2020 as a consequence of the dramatic pandemic that has plagued all nations and
that is going to give a boost to digitization.
The worldwide banking model has changed and will continue to change, especially from the year 2020. The interaction between clients and their banks will
take place in a primarily digital context. It is also generally believed that new
non-banking players that carry out banking activities will emerge. This fact has
Anti-money laundering 115
obvious effects on the AML policies to be implemented by banks or those that
supplant their activity, i.e. those platforms that without being banks perform
banking functions, as we will see later. Banking has traditionally been one of the
sectors most resilient to change. As stated by McKinsey & Company:
banks have built robust businesses with multiple moats: ubiquitous distribution through branches; unique expertise such as credit underwriting underpinned by both data and judgement; even the special status of being regulated
institutions that supply credit, the lifeblood of economic growth, and have
sovereign insurance for their liabilities (deposits). Moreover, consumer inertia in financial services is high.
(2016, p. 6)
Traditionally, the consumer has easily avoided changing financial providers.
Especially in developed countries, consumers have established stable and lasting
relationships, usually for several generations, with their bank or financial provider,
even during times of crisis. In other words, until now, the relationship between
consumers and financial providers has been one of loyalty and conservatism.
But this situation is changing; the emergence of the digital era is unstoppable
and the relationship of most users with the financial services they need in the
coming decades is transitioning to a digital context. This, together with the rise of
Fintech players, start-ups and other companies that use technology to conduct the
basic functions provided by financial services, influencing how consumers store,
save, borrow, invest, move, pay and protect money, undoubtedly represents the
future of the financial sector, both in the Islamic world and globally.
Many of the financial activities hitherto carried out only by banks are already
being offered by different players, including telephone companies, insurance
companies or social media. It is not a secret that telephone companies, social networks, even some energy companies or department stores, offer financing, loans,
bank cards or other products that we can traditionally consider exclusive to banks.
In Spain, for example, the main telephone operators or even some major energy
companies are in an aggressive process of offering products that until now only a
bank could offer.
One example of a player that is not a bank but that intends to carry out banking
activities with a major impact worldwide is Facebook. In 2019, the well-known
social network announced the creation of a new virtual currency and this could
only represent the first step towards the creation of a range of products that could
replace the basic functions of a bank. The first Libra Association white paper was
published in June 2019 and is available at libra.org.
This new currency, called libra, is possibly the best indicator of what the future
holds. Libra threatens the entire financial system by posing a direct threat to traditional banks that could lose a significant market share in payment transactions.
Joachim Wuermeling, member of the Deutsche Bundesbank Board, recently
warned about this situation (2019). He fears exchange rate and default risks for
libra users. In addition, Facebook could hoard huge amounts of government bonds
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Gonzalo Rodríguez Marín
and thus develop into a large creditor of states, believes the Bundesbank board,
which estimates that: ‘It would only take 100 million of the 2.7 billion Facebook
users participated, Libra would already have more clients than the entire German
banking market’ (Wuermeling 2019, n.p.).
This new currency or any similar initiative clearly raises two questions. Firstly,
which regulator can exercise its functions over this currency and who will control
it, particularly to avoid allowing this new platform to become a marketplace for
money laundering. And secondly, the Sharia-compliant basis of similar initiatives. I will start now by addressing the first question.
With regard to libra, the association founded by Facebook and 27 other organizations, such as Visa, Mastercard, PayPal, PayU or Stripe, that intends to promote
the construction of this new global financial infrastructure and issue a new cryptocurrency from it (the ‘Libra Association’), states its commitment to combating
money laundering and mentions, as a point in its favour, that the technical platform, being built on blockchain technology, will be accessible to everyone and
may be analyzed by third parties to identify and prevent illegal transactions. Libra
(2020) recognizes the importance of building anti-money laundering, combating
the financing of terrorism, sanctions compliance mechanisms and mechanisms for
the prevention of illicit activities to effectively address threats and risks. But this
does not appear to be more than a statement of intent. It is very difficult to know
who is going to regulate and control all these kinds of initiatives.
This is precisely the first issue I would like to address. If we are inevitably
faced by new players that are going to replace or even improve the range of financial products and services hitherto offered by banks, we will have to work on
how to deal with the control of these giants that operate in numerous different
jurisdictions, with a host of regulators involved and in an increasingly smaller
global world.
Clearly, this is a challenge for the new economy, and it requires strict compliance with legislation in every jurisdiction in which it exists. My recommendation
is clear in relation to AML legislation, that is, to comply with the highest possible
control standards in accordance with the most renowned supranational institutions. I will therefore refer to some of the latter below.
The Islamic Finance framework
This bring us to the second question: are these new digital models Shariacompliant? Let us assume that the social network considered is Islamic and therefore Sharia-compliant and will offer Islamic financial products or even Islamic
cryptocurrency.
On this issue, we should remember that Islamic Finance, as we know it today,
is a relatively recent phenomenon that emerged as an industry in the 1970s. This
was done by professionals under the conventional banking mindset of that time.
However, banking and finance in general appears to be one of the sectors that will
undergo the greatest change in the coming years as a result of this major shift in
the global model that digitization will bring about. There is already a wealth of
Anti-money laundering 117
literature on this subject in Islamic Finance; from Islamic cryptocurrencies to the
role blockchain will play in the industry.
It is clear that there may be major difficulties in considering a particular cryptocurrency or a complex financial product offered through a social network as
Sharia-compliant and even discrepancies depending on the particular jurisdiction
or Islamic legal school concerned. The problem is therefore significant since it is
not a question of opening a business in a particular country or countries but rather
of establishing a business model or digital service in cyberspace, where it is much
more difficult to limit its use.
Evidently, given the idiosyncrasy of Islam and the lack of uniformity in the
interpretation of Sharia, together with the novelty of these new technologies and
the difficulty in understanding their functioning and potential, make the challenge
even greater. However, there are jurisdictions that are particularly well prepared
for this change, such as Malaysia. A good example of this is the recent introduction of a new subsidiary legislation to regulate cryptocurrencies within Malaysia.
The law, Capital Markets and Services (Prescriptions of Securities) (Digital
Currency and Digital Token) Order 2019, which regulates all initial coin offerings
(‘ICOs’) and cryptocurrencies, came into force on the 15th of January 2019.
Cryptocurrencies are of particular relevance in relation to any AML and terrorist financing prevention regulation since they could be used for precisely that
purpose. It is therefore very important to establish effective control and supervision mechanisms in the case that any cryptocurrencies may be presented as
Sharia-compliant.
Once again we can see that Malaysia appears to be a country that is prepared
to lead the digital future and innovation in the Islamic digital world, and the fact
that Fintech has the potential to obtain effective AML and Know Your Customer
(‘KYC’) policies could be of major importance. Similarly, Artificial Intelligence
(‘AI’) can effectively help counter-terrorism financing (‘CTF’), as well as screening or employee misconduct detection efforts, by replacing costly functions that
are currently done manually by humans. However, despite the difficulties, it is
clear that technology applied to AML policies can be very effective.
According to Schenider et al. (2016), the banking sector can achieve a 10%
headcount reduction with the introduction of blockchain in KYC procedures. This
amounts to around US$160 million in cost-savings annually. Blockchain will also
reduce the amounts of budgetary resources allocated for employee training; there
will be a 30% headcount reduction amounting to US$420 million. Overall operational cost savings are estimated to be around US$2.5 billion dollars. AML penalties will also be reduced by an estimated US$0.5 to US$2 billion dollars.
As Mohamed and Ali state:
Fintech start-ups including Chainalysis and IdentifyMind Global are helping
banks comply with KYC (Know your Customer) and AML (Anti Money
Laundering) regulations in the deployment of blockchain for banking
services.
(2019, p. 58)
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One thing that is certain is that some of the most important global banks such
as Santander and UBS or some of the most important in the Gulf Cooperation
Council (‘GCC’) such as the National Bank of Abu Dhabi are working with
Ripple’s technology. Many others are already using blockchain. Blockchain has a
big potential for the payment industry as it can benefit the payment industry with
efficiency, disintermediation and transactions-cost reduction, but also can provide
an alternative to use a bank or an intermediator entity for cross-border payments.
Ensuring that this technological revolution is Sharia-compliant is not easy,
fundamentally due to the lack of uniformity in the interpretation of Sharia as well
as the difficulty of understanding new technologies in themselves. Furthermore,
the lack of properly trained scholars adds another difficulty that will take us to the
next point of this chapter.
Education
Another essential variable in the creation of a digital environment around the
Islamic Finance industry is education.
To understand innovative structures that are difficult to comprehend and create
solutions in a digital environment, the Islamic Finance industry needs professionals trained at top universities. The role of education is paramount and business
schools should see the enormous opportunity they have; Islamic Finance and,
in particular, the Islamic digital economy urgently needs professionals trained
under the best professors with an understanding of the Islamic financial model
and its characteristics. It is going to be crucial to understand and adjust to the new
financial models that are currently emerging and that will emerge in the future and
adapt them to the needs of Islamic Finance. The Sharia boards of institutions need
professionals who fully understand these products and can then study them and
issue their opinions and recommendations. Implementing effective AML/CFT
policies in a Sharia-compliant digital environment requires top professionals with
new ideas.
We will see the re-emergence of the old debate within the industry about the
harmonization of opinions, the lack of experts and the need for supranational
authorities to understand and create security in the emerging new scenario.
If the industry does not adapt with appropriate speed required by this technological revolution, the risk is disappearing or being irrelevant. The need to have
professionals who understand this new era, and who provide value, ideas and discussions, is essential. Universities, business schools and supranational institutions
like the ones I analyze in the next point are a fundamental piece in this regard.
Supranational institutions
If new players are going to replace some of the functions that until now have been
performed by Islamic financial institutions (‘IFIs’) in the digital environment in
the short or medium term, it is important to know what AML preventive measures
exist and which institutions can serve as a guide or reference.
Anti-money laundering 119
The existence of reputable institutions is essential to establish uniform frameworks for action. One of them is the Financial Action Task Force on Money
Laundering (‘FATF’).
The G-7 industrial group established the FATF as a global money-laundering
watchdog as a response to money laundering. It is an inter-governmental body established in 1989 by the Ministers of its Member jurisdictions. The objectives of the
FATF are to set standards and promote effective implementation of legal, regulatory
and operational measures for combating money laundering, terrorist financing and
other related threats to the integrity of the international financial system. The FATF
is therefore a ‘policy-making body’ which works to generate the necessary political
will to bring about national legislative and regulatory reforms in these areas.
The FATF has developed a series of recommendations that are recognized
as the international standard for combating money laundering and the financing
of terrorism and proliferation of weapons of mass destruction. They form the
basis for a coordinated response to threats that affect the integrity of the financial system and help ensure a level playing field. First issued in 1990, the FATF
Recommendations were revised in 1996, 2001 and 2003 and most recently in
2012 to ensure that they remain up-to-date and relevant, and they are intended to
be of universal application (FATF 2019).
While not all countries are members of the FATF, its recommendations are of
particular relevance to the subject of this chapter. Some of the member countries
are Spain, Saudi Arabia, Malaysia, Turkey, the United Kingdom and the United
States. The FATF Recommendations for financial institutions to be implemented
by the member countries are set out in detail in the documents that are regularly
issued by the FATF Board. An example of good governance in this area is once
again Malaysia.
The Central Bank of Malaysia (‘CBM’) has issued a directive known as
‘Guidelines on Money Laundering and Know Your Customer Policy’ (n.d.). This
directive is derived from one of the FATF’s 40 recommendations. These ‘Forty
Recommendations’ are viewed as the leading framework of measures for combating money laundering and terrorist financing. All reporting institutions including
IFI must comply with this CBM directive.
With regard to new technologies, that is to say, basically the new tools that
are currently emerging and that are going to emerge in the future, primarily in the
digital environment, the FATF stipulates that countries and financial institutions
should identify and assess the money laundering or terrorist financing risks that
may arise in relation to:
··
··
The development of new products and new business practices, including new
delivery mechanisms.
The use of new or developing technologies for both new and pre-existing
products. In the case of financial institutions, such a risk assessment should
take place prior to the launch of the new products, business practices or the
use of new or developing technologies. They should take appropriate measures to manage and mitigate those risks.
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Regarding virtual assets, FATF recommends ensuring that all the service providers are regulated for AML/CFT purposes.
Two other essential organizations to be taken into account when looking for
references and sources regarding any issue of governance of Islamic financial
institutions are the Islamic Financial Services Board (‘IFSB’) and The Accounting
and Auditing Organization for Islamic Financial Institutions (‘AAOIFI’).
The IFSB is an international standard-setting organization that promotes and
enhances the soundness and stability of the Islamic financial services industry by
issuing global prudential standards and guiding principles for the industry, broadly
defined to include banking, capital markets and insurance sectors. The AAOIFI
is an autonomous international Islamic non-profit corporate body that prepares
accounting, auditing, governance, ethics and Sharia standards for Islamic financial institutions and the industry.
Both organizations will serve as a guide and benchmark when attempting to
harmonize and standardize the key aspects of the Islamic Finance industry, and
therefore as a basis for new digital players seeking to take over the role of traditional IFIs.
Another important body to be used as a guide is the Basel Institute on
Governance and its Basel AML Index, which can be used to assess the current
international situation in this area. Established in 2003, the Basel Institute on
Governance is a non-profit Swiss foundation dedicated to working with public
and private partners around the world to prevent and combat corruption. In its
Basel AML Index 2019, the Institute establishes a country ranking and review of
money laundering and terrorist financing risks around the world. This index is an
independent annual ranking that assesses the risk of money laundering and terrorist financing around the world.
The index has been published since 2012 by the Basel Institute on Governance
and it provides risk scores based on data from 15 publicly available sources
such as the FATF, Transparency International, the World Bank and the World
Economic Forum. The risk scores cover five domains: Quality of AML/CFT
Framework, Bribery and Corruption, Financial Transparency and Standards,
Public Transparency and Accountability and Legal and Political Risks.
In its August 2019 edition, it ranks countries from highest to lowest level of
risk, making a comparison of 2018 and 2019 results. Negative scores identify
progress made (lower risks for the country) and positive scores demonstrate an
increase in ML/TF risks (Basel Institute on Governance 2019).
The analysis of results, as reflected in the report itself, shows:
··
Some progress – but very slow: more countries showed slight improvements
in their risk scores in 2019 than last year, but there have been no substantial
changes indicating significant progress in tackling ML/TF. This confirms the
general trend observed over the eight years since the Basel AML Index was
first calculated: most countries are slow to improve their resilience against
ML/TF risks.
Anti-money laundering 121
··
··
··
Only minor improvements: between 2018 and 2019, 27% of the countries
listed in the Public Edition (34/125) improved their scores by more than 0.1
point. However, only one country (Tajikistan) managed to improve its score
by more than one point.
Some countries are still going backwards: the risk scores of 13% of the countries (16/125) deteriorated by more than 0.1 point. Colombia, Latvia, Finland
and China demonstrated the highest deterioration in risk scores.
Most countries are at significant risk: 60% of the countries in the 2019 Public
Edition ranking (74/125) have a risk score of 5.0 or above and can be loosely
classified as having a significant risk of ML/TF. The mean level of risk,
though marginally better than 2018, remains above this (5.39 in 2019 compared to 5.63 in 2018).
While there is no country with a zero risk of money laundering, the best performing countries according to the Basel AML Index in 2019 are Estonia, Finland and
New Zealand. None of the latter are in the Islamic scope, but it is interesting to
observe that the top five improving countries are Tajikistan, Cambodia, Egypt,
Indonesia and Portugal. Three of them are Islamic countries and all of them have
demonstrated the greatest improvements in the Public Edition of the Basel AML
Index 2019 (Basel Institute on Governance 2019).
According to the Basel Institute of Governance, there are various reasons to
explain the improvements. Tajikistan has undergone a huge decrease in its ML risk
score due to a much more positive FATF assessment in December 2018, which
produces a score of 5.53 compared to the previous rating of 9.35. The country also
shows slightly improved scores in corruption and political/legal risks. Similarly,
Indonesia’s updated FATF assessment from September 2018 shows an improvement from 6.32 to 4.73 in its FATF score. Making such significant progress in
FATF assessments under the fourth-round methodology is rather exceptional;
in general, the fourth-round assessments show a deterioration in country scores.
Improvements in the risk score for Cambodia, Egypt and Portugal are mainly due
to them being dropped from the United States of America’s Department of State’s
International Narcotics Control Strategy Report list of major money laundering
countries. Cambodia also shows slight improvements in terms of public transparency and accountability.
According to the data analysis provided by the aforementioned report, there are
five countries that stand out for having a particularly high performance. These are
Spain, the United Kingdom, Belgium, Malaysia and Vanuatu. Spain is undoubtedly one of the countries most committed to AML banking regulation, and again
Malaysia appears to be one of the countries that provide the most security and
where Islamic Finance tends to develop most disruptively.
Another flagship institution is the Bank for International Settlements (‘BIS’).
The mission of the BIS is ‘to serve central banks in their pursuit of monetary and
financial stability, to foster international cooperation in those areas and to act as a
bank for central banks’ (BIS n.d.).
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Established in 1930, the BIS is owned by 60 central banks, representing countries from around the world that together account for about 95% of the world’s
GDP. Its head office is in Basel, Switzerland, and it has two representative offices
in Hong Kong SAR and in Mexico City.
As part of the BIS’s work in the area of monetary and financial stability, they
regularly publish related analyses and international banking and financial statistics that underpin policymaking, academic research and public debate. The last
report (BIS 2019) contains some interesting facts and considerations. Specifically,
the report discusses how new technologies can assist AML/CFT supervisors.
Detecting AML and CFT violations is one field where data analytics tools seem
more advanced. The enormous amount of data that financial institutions have to
deal with is a challenge in terms of the technological capacity of the institutions,
but also a great advantage in terms of time, effort, security and cost savings.
Data privacy and confidentiality
Other aspects that the new digital players must take very seriously is data privacy
and confidentiality. It is obvious that the digital revolution has brought data processing on the map.
Data privacy and confidentiality requirements provide safeguards that authorities must consider, including which information they can use. This aspect is
important because it means that the organization of the company or financial
institution concerned must be able to confirm with its respective legal department
whether or not it can analyze or use certain data from its users or clients for AML/
CFT purposes.
For instance, the European Union’s Regulation (‘EU’) 2016/679, General Data
Protection Regulation (‘GDPR’) (OJ L 119, 4.5.2016), limits the use of some personal information for AML/CFT for authorities’ profiling activities. The GDPR is
one of the most relevant pieces of legislation affecting European technology companies whose activity is essentially digital. As the authorities impose heavy fines
for non-compliance, there is growing consumer awareness in favour of increasing
control over personal data held by companies or financial institutions. This reality
can be extrapolated to other jurisdictions.
Therefore, the management of these two elements, compliance with AML/
CFT and data protection legislation, is not easy and may even be an obstacle when
trying to make the most out of the tools that new technologies offer to companies
or financial institutions.
Basic AML/CFT recommendations in
Islamic digital environments
If we are clear that the future of the financial industry will be predominantly digital, it would be wise to establish what AML/CFT elements any app or company
operating in the digital environment and providing Islamic financial services
should have. In my opinion, the following would be the most important:
Anti-money laundering 123
··
··
··
··
··
··
··
··
A Sharia board: although the Sharia board is not the body responsible for
AML/CFT matters, any Islamic financial institution must have a competent
Sharia board or Sharia committee, of recognized standing, with sufficient
qualifications in accordance with the international standards of the AAOIFI
and the IFSB, which we have already described, and with the ability to
understand, analyze and supervise all the institution’s products, contracts and
transactions. Only in this way will they be able to give advice and consultancy to the institution.
A responsible compliance officer (‘RCO’). It should be noted that a Fintech
may operate in various jurisdictions where different AML/CTF standards
apply. The RCO should seek to apply the most restrictive legislation in all
transactions. However, this may not be possible, for example, if one jurisdiction requires information about a suspicious financial transaction to be
reported in contravention of another jurisdiction’s data protection regulation.
In any event, it is important for the compliance department or officer to be
independent and able to act at all times without pressure from the management of the business or any other kind of pressure.
Establish an effective AML programme, strong policies and procedures to be
complied with by all members of the organization.
Establish a training programme to be complied with by all members of the
organization, consisting of training against money laundering and terrorist financing, which is now called for by the regulators (e.g. in Egypt, the
Egyptian Money Laundering Combating Unit (‘EMLCU’), the entity overlooking money laundering combating in financial institutions, calls for professional training and monitors it on a quarterly basis). AML/CTF staff and
AML/CTF auditors have to be well trained, qualified and preferably certified
(e.g. CAMS or CAMS-Audit).
AML and compliance staff should have the desired level of experience and
be able to assess the risks and set controls. Senior management, the board and
AML/CFT and audit staff should also be conversant with Islamic products.
Ensure the computational capacity of the organization to deal with large volumes of data.
Ensure a strong data privacy and confidentiality policy.
Conclusion
The paradigm shift we are undergoing is unstoppable. Digitization and new technologies are going to lead to a profound change of scenario in all societies. This
change of model will have a major impact on Islamic banking and finance, whose
very survival will depend on the ability to adapt to this challenge.
The coming generations will understand finance in a very different way from
how it has been understood until now. They will be mostly ‘digital natives’ and this
will make it necessary for the business model of Islamic Finance to adapt itself.
As Naguib Chowdhury said at a working meeting at the Islamic Development
Bank: ‘Innovate or evaporate!’ (2019).
124
Gonzalo Rodríguez Marín
It remains to be seen if this new paradigm, faced by Islamic Finance, will
achieve greater inclusiveness of unbanked social sectors or if, on the contrary,
there will be a greater digital divide that will make financial inclusion even more
difficult. My view in this regard is clear; the simplification of financial models
and the emergence of new non-banking players in the financial sector will make it
possible for large portions of the population that previously did not have access to
the standardized financial system to become part of the banking system.
Clearly this is a huge challenge in many respects, including the one we have
briefly discussed in this chapter: how to effectively control AML/CFT in the new
digital models of the Islamic economy. In this regard, we face several problems,
including the lack of uniformity in Islamic legal schools and the multiactivity
of the same digital player offering financial solutions in different jurisdictions.
Therefore, this contribution is limited to offering a number of recommendations
in this regard, always seeking to provide the greatest legal certainty and the best
consumer protection.
The history of the Islamic digital economy is yet to be written. It is therefore
necessary to achieve greater uniformity and legal certainty, working towards high
standards of protection against the risks inherent to these new financial models.
References
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-become-a-major-government-creditor--800042 [Accessed: 20th September 2020].
Index
Page numbers in bold denote tables.
Aaminou, M.W. 9
Abdullah, A.K. 81
Abu-Bakar, M.M. 73
Accounting and Auditing Organisation for
Islamic Financial Institutions (AAOIFI)
80–82, 85, 120, 123
Al-Ali, S. 81
Al Rajhi Bank 73
Alam, K. 36, 65, 83
Alam, N. 36, 83
AM Best 40–41
American Telemedicine Association
(ATA) 52
anti-money laundering (AML) 114–118,
120–124
Antonio, M.S. 19
Antonopoulos, A.M. 72
Anurag 72
application programming interface
(API) 97
Ar-Raysoûnî, A. 4
artificial intelligence (AI) 2, 9, 37, 55–57,
60–62, 117
assets under management (AUM) 45, 48
Asutay, M. 8
augmented reality (AR) 61
awqaf 8–9, 52
Ayub, M. 8
Bancatakaful 38, 40
Bank for International Settlements (BIS)
67, 121–122
Bank Negara 3, 21, 28
Banton, C. 94
Bedoui, H.E. 4, 11
Bertelsmann Stiftung 1
Bianchetti, M. 75
bitcoin 66–75, 83, 85
blockchain 2, 9–11, 18, 24, 33, 37, 54, 67,
69–70, 72, 75, 79, 83–84, 86, 116–118
Blossom 24, 33, 84
Blossom Finance 24, 26–27, 84
bonds 47, 85, 93, 106–107, 111, 115
business-to-business (B2B) 48, 56–58
business-to-consumer (B2C) 48, 56
Cambridge Centre for Alternative Finance
88, 92
Cambridge English Dictionary 66–67
capital markets 8, 18, 21, 27, 80–81, 83,
85–86, 97, 117, 120
Central Bank of Malaysia (CBM) 21,
28, 119
central securities depositary (CSD) 82–83
Chaker, F. 8
Chance, C. 9
Chang, A.M. 10
Chapra, M.U 18–19
Cheung, C. 2
Chowdhury, N. 66. 123
Clark, G. 17
Climate Action in Financial Institution 27
Collins English Dictionary 67
Comisión Nacional del Mercado de
Valores (CNMV) 85, 87
Commissione Nazionale per le Societa e la
Borsa (CONSOB) 107
commodity 47, 64, 66–69, 71–73, 75, 109;
crypto- 72; digital 66; futures 68; market
67; prices 20; profiling 67
Commodity Futures Trading Commission
(CFTC) 75
Compound Annual Growth Rate (CAGR)
53–55
128
Index
consumers 10, 27, 42, 48, 49, 75, 103, 109,
115; awareness 122; base 33; behaviour
6; inertia 115; protection 17, 124
Coordinating Ministry for Economic
Affairs of the Republic of Indonesia 30
counter-terrorism financing (CTF)
117, 123
COVID-19 55, 59–60, 62, 91
crowdfunding 11, 23, 83, 91–107, 110–
112; campaigns 94, 105; charity 91, 98;
debt-based 92; donation-based 9, 106,
111; equity 11, 24, 91–92, 97, 105, 110;
financing market 105; investment 9,
91–97; loan 110–111; local 91; modality
103, 105, 107–108, 110; model 92;
offline 93; phenomenon 104, 107–108;
platform 23, 92–94, 97, 99, 101–102,
104–105, 107–108; property 24, 91; real
estate 23; reward 92, 106, 112
cryptocurrency 11, 66–70, 72–75, 116–117
cryptosecurity 79, 83–84, 86–87
cryptotoken 72–73, 75
currency 65–67, 69–75, 115–116;
alternative 75; digital 11, 67, 72;
disruptive 66; encrypted 66; exchange
72; fiat 83; forced 74; foreign 73, 75;
government-backed 66; national 74;
paper-based 66; tokens 85; utility 72;
virtual 115; see also cryptocurrency
Dahl, A.L. 3
De Boysson, T. 43, 54
Deneulin, S. 3
Di Benedetta, G. 48
DinarStandard 9
Distributed Ledger Technology (DLT)
79–84, 86–88
Dubai Islamic Economy Development
Centre 31
The Economist 65
ecosystem 1–2, 9–10, 30, 51, 56, 58,
96, 100; digital 10; healthcare 56;
innovation 10; local 57, 60; sectorial 8;
start-up 55–56; vitality 7
education 1, 5, 7, 10, 26, 114,
118childhood 8; financial 17, 50;
institutions 51; lack of 23, 26;
opportunity 7; participation 7; quality 8;
standards 7; systems 50
e-health 52–53, 56–60, 62
Elasrag, H. 83
Elgari, M.A. 100
ELIPSES 37, 42
Enviromental Performance Index (EPI) 7
environmental, social and governance
(ESG) 9, 16–23, 25, 29–31, 33
Er, B. 50
Ernst & Young (EY) 2
Ethereum 72–73, 84
ethical: activists 26; alignment 20; banking
22; decision-making framework 25;
investors 23; obligations 25; outcomes
16; perspective 8; principles 21;
proposition 22; purpose 24; system 32;
trade finance platform 25
ethics 8; business 2; Sharia 16
Ethis 9, 23–26, 31, 91, 97–98, 100
Ethis Indonesia 31
EthisCrowd 9, 23
European Banking Authority (EBA) 67
European Central Bank (ECB) 67
European Investment Funds (EIF) 50
European Parliament 67, 107
European Securities and Markets Authority
(ESMA) 67, 79, 84
European Union Agency for Network and
Information Security (ENISA) 79
exchange traded fund (ETF) 46–50
Facebook 11, 94, 115–116
falah 18
FILOS 38–40, 40, 42
Financial Action Task Force (FATF) 67,
119–121
Financial Conduct Authority (FCA) 82, 107
Financial Services and Markets Authority
(FSMA) 85
Financial Services Authority (FSA) 29–31
Finck, M. 84
Fintechnews 31
Finterra 9
First Abu Dhabi Bank (FAB) 81–82
Florence, P.S. 69
Floyd, D. 44, 48
fraud 66, 75, 92, 96
Fredman, C. 92
Friede, G. 17
funds 45, 67, 91–100, 102–103, 106, 112;
compulsory charity 8; exchange traded
(EFTs) 46–47; expensive 45; hedge
44–45, 47, 49; indexed 45; institutional
94; investment 20, 45, 48, 92, 95, 99;
Islamic endowment 8; managed 44–45,
47–49; pension 45, 47; private equity
48; public 100; venture 50–51, 60;
see also awqaf; crowdfunding; zakat
FwU 36–40, 42
Index
Galvin, J. 18
Garcimartín Alférez 85, 87
gender equality 1, 5
General Data Protection Regulation
(GDPR) 122
gharar 80, 109–110, 112
Al-Ghazali, A.H. 4
Global Impact Investing Network 17, 30
Global Sadaqah 9, 99–100
Global Systems of Mobile Communications
Association (GSMA) 54, 59
Gulf Cooperation Council (GCC) 38,
53–54, 56, 60, 62, 118
Gupta, L. 36
Hacker, P. 85
hajj 58
Haniffa, R. 8
Hayen, R. 2
health 18, 52–53, 55, 57–58, 60, 62–63;
data 61; delivery 62; environmental 7;
experience 58; informatics 52; insights
61; issues 59; long-term 17; mental
58–59, 61; monitoring 60; poor 25;
preventative 58; public 53; records 52,
55; status 52; -tech 53, 55–57, 59–60,
62; tips 61; see also e-health
healthcare 1, 5–7, 52–53, 55–62; -coach
56; delivery 58, 60; ecosystem 56;
expenditure 7; industry 52–53, 57;
investment 63; performance indicators
7; services 7; start-ups 55
Hoberman, S. 70
Hodge, P (Lord) 84
Hong Kong Exchanges and Clearing
Company (HKEX) 2
Hong Kong Steering Group on Financial,
Technologies 2
Houben, R. 67
Hurtado, P. 75
Ibn Ashur, M.A.-T. 4
ICD–Thomson Reuters 37
IFC (International Finance Corporation
(IFC) 1
IFI 119
Indexa Capital 45, 47, 50
information technology(IT) 10, 31, 38
initial coin offering (ICO) 75, 80,
83–88, 117
initiatives 9–10, 27, 50, 99, 102, 116;
environmental 8; finance 8; social 8;
strategic 11
insurance 8, 37–42, 53, 56, 115, 120
129
Internal Rate of Return (IRR) 45
International Data Corporation (IDC) 61
International Monetary Fund (IMF) 1, 67
International Organization of Securities
Commissions (IOSCO) 86
internet of medical things (IOMT) 55,
60, 62
internet of things (IOT) 56, 58, 60
Islamic Banking Finance (IBF) 21–22
Islamic Develepment Bank (IsDB) 5
Islamic Finance News 9, 22
Islamic Finance Services Industry (IFSB)
8–9, 37, 120, 123
Islamic Financial Services Board (IFSB)
8–9, 20, 30, 37, 120, 123
Ives, C.D. 4
Jaconetty, M. 47
Know Your Customer (KYC) 117, 119
KPMG 31
labour market 1, 5–7
Laldin, M.A. 20
Latham 81
Lewis, A. 72
Libra Association 115–116
Liew, V. K. 68
Maali, B. 8
Magnitt 55
Mahankali, S. 66
Maqasid 4, 10, 17–20, 22–23,
26–33Sharia 1, 3–4, 16, 18–19, 28, 32,
52, 85
Market Data Forecast 55–56
Marx, J.P. 75
maysir 109, 112
McKinsey & Company 53, 115
McMillen, M. 81
MedTech 52
Mehta, D.B.K. 70
Merriam-Webster 66
Middle East and Africa (MEA) 52, 54–56,
60–61
Middle East and North Africa (MENA)
6–7, 9, 12, 53, 57, 59
Middle East, North Africa, Afghanistan
and Pakistan (MENAP) 52–53, 56–57,
59, 62–63
MIFID II 81, 84, 86
Miskam, S. 2
Mohamed, H. 11, 85, 117
Mohammed, M.O. 19
130
Index
Mohd Nor, S. 8
Moreno Serrano, E. 102
Morrison, S. 111
mudarabah 19, 84
Munshi, U. 23
musharakah 19, 98
Al-Najjar 4
Nakamoto, S. 66, 79
Narayanan, Y. 3
Niyah Bank 27
Nobanee, H. 8
OECD 37
Omar, E.M. 3
open banking system 49–51
Organization of Islamic Cooperation (OIC)
1, 5–8, 11, 20
Organization of Islamic Cooperation (OIC)
1, 5–8, 11, 20, 91
Oseni, U.A. 36–37
Oudin, P. 79
Oxford Dictionaries 67
paradigm 16, 79, 124; finance 25; shift
114, 123
peer-to-peer (P2P) 9, 18, 66–67, 79,
92, 97
Peters, G.W. 73
Pierson, B. 75
Prentis, M. 68
profit-loss-sharing (PLS) 19, 27
Prospectus Regulation 81, 84, 86
qard hassan 8
qimar 109
Rai, D. 68
regulators 10–11, 17, 19, 21, 24, 28–29,
31, 45, 50, 86–87, 91–94, 116, 123
religion 1, 3–4
research and development (R&D) 55–57,
59, 62–63
Reserve Bank of India 2
Responsible Finance & Investment
Foundation (RFI) 20–21
riba 80, 108–112
Ripple 72–73, 118
robo-advisors 11, 45–50
Rochon, L.-P. 69
Rothbard, M.N. 65
S&P 47, 50, 83
Sachs, J.D. 1
Sánchez Fernández, S. 85, 87
Saral Study 65
Schacht, J. 109
Schenider, J. 117
Schmidt-Traub, G. 2
securities 81, 84, 86–88; blockchain of 88;
commercialization of 86; dematerialized
83; digital 66; law 87; non-listed 83;
registration 80, 82–83; traditional 85;
transferable 81–83
Securities Act (1933) 84, 86
Securities and Exchange Commission
(SEC) 75, 87
securitized debt 81, 85
shareholders 19, 21, 28, 96, 105
shares 47, 85, 97, 104–105, 107; market 8,
48; undivided 80
small and medium-sized enterprises (SME)
23, 27, 92, 97
socially responsible investment (SRI) 17,
47–48
Soualhi, Y. 19
Spanish Securites Act 82
special purpose vehicle (SPV) 80, 97–98
stakeholders 3, 10, 16–17, 19, 28, 96, 101
Standing Committee for Economic
and Commercial Cooperation of the
Organization of Islamic Cooperation
(COMCEC) 8
start-ups 2, 10–11, 31, 55–58, 79, 85, 115;
aggregator 55; Fintech 9, 11, 18, 29,
117; healthcare 55; technology 16, 88;
telemedicine 56–57
Statista 48, 96
Statistical, Economic and Social Research
and Training Centre for Islamic
Countries (SESRIC) 5–7
Stefik, M. 9
Stessens G. 114
sukuk 24, 80–85, 88, 111; al-ijara 81; almurabaha 81, 84; al-mudaraba-wakala
81; asset-based 81; capital-raising 84;
crypto- 84; issuance 80–81, 83–84; legal
framework 81; listed 83; Smart 24, 84;
tokenized 84; wakala 81
Sustainable Development Agenda
(2030) 1
Sustainable Development Goals (SDG)
1–3, 5, 10–11, 20, 24, 26, 28–30, 32–33
Sustainable Development Solutions
Network 2
Swensen, D.F. 47
Swiss Financial Market Supervisory
Authority (FINMA) 85
Index
Takaful 36–42
Teek Taka 25–26
telemedicine 52–59, 62
Thomson Reuters 8, 20
tokens 73, 80, 84–88, 92; acquisition
of 87; investment 85–86; Shariacompliant 88; utility 85–86;
see also currency
Torchia, A. 73
Trade Arabia 53
umrah 58
United Arab Emirates (UAE) 22, 36, 38,
40, 41, 41–42, 52, 54–55, 62–63
United Nations Global Compact 16
United Nations High Commissioner for
Refugees (UNHCR) 5
United Nations Principles for Responsible
Investment (UNPRI) 16–18
United Nations Sustainable Development
Goal (UNSDG) 1
value-based intermediation (VBI) 21
Vauplane, H. 83
venture capitalists (VCs) 10, 48, 57
Virtual Financial Assets Act
(2018) 86
virtual reality (VR) 59, 61–62
131
wakala 38, 81
waqf 10, 21, 52, 63, 98–99, 101; cash 99;
donors 99; management 9
Warde, I. 20
water 1, 5–6, 59; availability 6; demand 6;
quality 7; resources 6; supply 6; use 2
Watt, W.M. 109
Wolla, S. 70
Woodhouse, A. 66
World Bank Group 18
World Economic Forum 2, 8, 120
World Islamic Economic Forum
Foundation (WIEF) 52, 63
World Population Review 30
World Summit on Sustainable
Development 4
World Wildlife Fund (WWF) 2
Worldometer 54
Wright, A. 79
Wuermeling, J. 115–116
XRP 72–73, 75
zakat 8–10, 98–99, 101
Zameni, A. 36
Zawya 53
Zetzsche, D. 72
Zubair Mughal, M. 37