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The $3tn Islamic finance industry is projected to grow by as much as 10 per cent in 2023-24, as higher digitalisation and fintech collaboration are expected to strengthen the industry’s resilience while creating new avenues for growth, according to S&P Global Ratings.
Despite the industry’s slow digitalisation compared to conventional financial services, a new wave of digital pioneers is reshaping how Islamic finance is evolving.
A study by the Islamic Development Bank and the UNDP revealed that Islamic financial institutions are embracing digital currencies and blockchain technologies amid a wave of digitalisation in the industry. Islamic finance operates on principles that prohibit interest, uncertainty, and involvement in speculative activities. Blockchain technology aligns well with Shariah principles by promoting transparency, reducing fraud, and facilitating decentralised transactions.
“Blockchain technology is becoming increasingly popular in the finance industry because of its ability to improve transaction efficiency, transparency, and security. It is used for tasks such as simplifying payments and money transfers and enhancing clearing and settlement systems,” says Bashar Al-Natoor, global head of Islamic Finance at Fitch Ratings.
Al-Natoor notes that the innovative technology is also used in trade finance for record-keeping, identity verification, and digital securities issuance.
The lack of standardisation in Islamic finance is a significant constraint on the industry’s growth. To attract interest from non-Islamic finance markets and drive growth, the industry is capitalising on technological opportunities and re-evaluating the issuance process while standardising Islamic bond- related standards.
Industry experts anticipate that blockchain technology will enhance transparency and security in financial transactions, while smart contracts can automate Shariah-compliant agreements and ensure adherence to Islamic principles.
HARMONISING ISLAMIC FINANCE
Islamic finance has been on the rise for many years across markets in the Middle East and...