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Islamic finance set to embrace metaverse and cryptos

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The IslamicMarkets.com report surveyed 346 Islamic finance professionals working across sectors from banking to fintechs
  • Study shows 63% predict increase in adoption of digital assets
  • Some 70% are enthusiastic about the metaverse
  • Up to 90% believe open banking will increase by 2025
  • Some sceptics say findings driven by market trends

The Islamic finance industry is ripe for growth in the fields of crypto, digital assets and open banking, according to new research published by IslamicMarkets.com.

A study published this week by the platform found that nearly two-thirds (63 percent) of Islamic finance professionals predict the sector’s level of adoption of crypto and digital assets will increase over the next five years, with 16 percent expecting a dramatic increase.

Respondents were even more enthusiastic about the metaverse, with 70 percent seeing an increase in adoption within the Islamic finance over the next three years, with 20 percent forecasting a dramatic rise. 

While traditionally many in the Islamic finance sector have been sceptical about crypto and digital assets, the study found that a reason for their growing adoption was that there are elements of cryptocurrencies that appeal to conservative Muslims, such as not paying interest in the case of Bitcoin.

Growing acceptance by more mainstream institutional investors has also convinced some sceptics, as well as improvements in custodial services in the digital and crypto sector, along with dramatic improvements in regulation.

The fact that leading Muslim-majority countries such as the UAE and Saudi Arabia have increasingly become key players in the crypto and digital asset sector is also helping to overcome scepticism.

The study was conducted among 346 leading Islamic finance professionals working across sectors including banking, insurance, asset management, asset ownership, private equity, regulation and fintechs by IslamicMarkets.com during August 2022.

“It’s great to see such confidence in digital assets as too often the halal/haram confusion can slow adoption – leaving Islamic Finance behind in terms of innovation,” said Khalid Howladar, a partner in Acreditus, a boutique advisory focused on fintech, crypto and Islamic economy sectors, as well as chairman of MRHB DeFi, the world’s first halal web3 ecosystem.

“The key drivers of growth are pretty simple – we are heading into a web3 / blockchain / metaverse world where all value can be transacted frictionlessly peer-to-peer on chain.”

Khalid Howladar, partner in Acreditus, an advisory focused on fintech, crypto and Islamic economy sectors

Other research carried out by IslamicMarkets.com found that 90 percent of Islamic finance professionals believe the adoption of open banking by financial institutions, governments, fintechs and other stakeholders will increase by 2025, with nearly two out of five (38 percent) expecting a dramatic rise in adoption.

Islamic finance professionals believe that the key benefit of open banking in the Islamic finance industry is to meet strong customer demand and offer more choice with the ability of banks to offer more innovative products.

Areeb Siddiqui, founder and CEO of Kestrl, told AGBI: “As one of the few, if not only, Islamic finance fintechs to be fully open-banking enabled, Kestrl has seen the strong desire among Muslim consumers to use functions offered by multiple applications, instead of just committing to a single bank/investment account.

“Open banking APIs [application programming interfaces] enable Kestrl’s users to view all of their finances in one place, and then for Kestrl to use this data to build personalised experiences for them, for example, bespoke budgeting, saving and investment recommendations, in a way that a non-API enabled bank relying on a single source of data would struggle to accomplish.”

Launched in March 2020, Kestrl is the first UK Islamic fintech to be open banking-enabled. While other fintechs have relied on customers using their own debit card or robo advice tool, Kestrl links a customer’s bank accounts together to provide complete oversight of their finances.

Between 2020 and 2022, the fintech raised roughly £500,000 ($565,776) over two funding rounds, primarily from angel investors and high net worth individuals. 

It recorded a surge in users in the year to June, with a 50 percent monthly growth to 15,000 active users on its app. 

“Open APIs allow third-parties like fintech startups to seamlessly access customer funds held in banks,” said Howladar.

“This is quite important in breaking the ‘sticky’ customer moat around banks that helps insulate them from more innovative and consumer-centric competition.

“I feel open banking is moving slower in the [Middle East] region than in mature markets given the lobbying power of banks with regulators and other stakeholders.”  

Areeb Siddiqui, CEO of Kestrl (right) with co-founder and COO Daeng Termizi

The open banking study conducted by IslamicMarkets.com also found that Islamic finance professionals working across a wide range of sectors believe open banking will mean greater use of fintech innovations in Islamic finance such as Waqf, Zakat and Sadaqah. 

More than half (62 percent) of those questioned strongly agree open APIs will enable the platforms to access customer accounts in Islamic finance, with the result that customers can make contributions through the platforms.

“We’ve definitely started to see this already,” said Siddiqui.

“Muslim consumers often use multiple bank accounts for different purposes, and as a result calculating Zakat and other charitable donations like Sadaqah can be time-consuming to do manually.

“Kestrl is able to calculate Zakat for its customers by plugging in multiple bank accounts and saving them time and effort as a result.”

Some industry experts remain circumspect about the findings of the research conducted by IslamicMarkets.com.

“As in the early evolutionary stage of the internet, it’s hard to tell today what the future use cases will be for crypto and digital assets,” Harris Irfan, chairman of UK Islamic fintech panel, CFO of Gateway Global, and CEO of Cordoba Capital, told AGBI.

“Certainly, as far as crypto as a form of money is concerned, only Bitcoin meets the criteria for a sound money, and one which is perfectly aligned with the Islamic economic model.

“As for other digital assets, perhaps there are other technology applications such as smart contracts, which might one day prove useful in, for example, small cap sukuk transactions.

“However, I fear that some of the bullishness by Islamic finance professionals seems to be driven by following a market trend, rather than a tangible business case.

“The metaverse, for example, has no clear definition, and tends to capture the imagination of speculative investors.”

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