‘The book can be considered a guiding companion for those who are concerned

about fintech.’
Dr Mohd Daud Bakar, Founder of Amanie Group &
International Islamic Finance Advisor

‘The book provides students, academics, scholars, and practitioners with a

detailed description of theoretical and philosophical speculations on digital
­
transformation in Islamic finance.’
Abu Umar Faruq Ahmad, Chair, Shariah Governance
Curriculum Review Committee, AAOIFI

‘The book offers an important insight as to how technology is going to shape the
future of finance.’
Professor Dr Mohammad Hashim Kamali, ­Founding CEO,
International Institute of Advanced Islamic Studies (IAIS), Malaysia
DIGITAL TRANSFORMATION IN
ISLAMIC FINANCE

The ongoing digital transformation is shaping the Islamic mode of fnancial

intermediation and the impact on the faith-based fnancial mode has been mul-
tifaceted. This has raised a host of interesting questions: what is the degree of
penetration of Islamic fnance in the fntech industry? Are Islamic fnancial insti-
tutions (IFIs) or banks ready to embrace fntech? Is fntech an enabler or barrier
to achieve the intended purpose of Islamic fnance? Will technology narrow
the division between Islamic and conventional fnance in the future? These are
existential questions for Islamic fnance and the book endeavors to examine the
impact of fnancial technology on the industry.
The book assesses various fntech business models and how they could be a
threat or an opportunity. It also examines whether fntech provides IFIs an edge
to serve clients following the Shariah norms and how the adoption of fntech
in the Islamic mode is required for meeting the maqasid Al Shariah. The book
discusses applicability of fntech like blockchain, digital currency, big data, and
AI to diferent branches of Islamic fnance.
This book will interest students, analysts, policymakers, and regulators who
are working on Islamic fnance, fnancial economics, Islamic economics, and
development fnance.

Yasushi Suzuki is a Professor at Ritsumeikan Asia Pacifc University, Japan.

Mohammad Dulal Miah is an Associate Professor at the University of Nizwa,

Oman.
Islamic Business and Finance Series
Series Editor: Ishaq Bhatti

There is an increasing need for western politicians, fnanciers, bankers, and

indeed the western business community in general to have access to high quality
and authoritative texts on Islamic fnancial 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 feld all over the world.
The series will be pitched at a level to appeal to middle and senior manage-
ment 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 brief-
ings on important topics; for the academics, postgraduates, business communi-
ties, 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.

Institutional Islamic Economics and Finance

Edited by Ahsan Shafq

Islamic Finance in the Financial Markets of Europe, Asia and America

Faiza Ismail

The Informal Economy and Islamic Finance

The Case of Organization of Islamic Cooperation Countries
Shabeer Khan

Digital Transformation in Islamic Finance

A Critical and Analytical View
Edited by Yasushi Suzuki and Mohammad Dulal Miah

For more information about this series, please visit: www.routledge.com/

Islamic-Business-and-Finance-Series/book-series/ISLAMICFINANCE
DIGITAL
TRANSFORMATION IN
ISLAMIC FINANCE
A Critical and Analytical View

Edited by
Yasushi Suzuki and
Mohammad Dulal Miah
First published 2023
by Routledge
4 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
605 Third Avenue, New York, NY 10158
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2023 selection and editorial matter, Yasushi Suzuki and Mohammad
Dulal Miah; individual chapters, the contributors
The right of Yasushi Suzuki and Mohammad Dulal Miah to be
identifed as the authors of the editorial material, and of the authors for
their individual chapters, has been asserted in accordance with sections
77 and 78 of the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced
or utilised in any form or by any electronic, mechanical, or other
means, now known or hereafter invented, including photocopying and
recording, or in any information storage or retrieval system, without
permission in writing from the publishers.
Trademark notice: Product or corporate names may be trademarks
or registered trademarks, and are used only for identifcation and
explanation without intent to infringe.
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Names: Suzuki, Yasushi, editor. | Miah, Mohammad Dulal, editor.
Title: Digital transformation in Islamic fnance : a critical and
analytical view / edited by Yasushi Suzuki and Mohammad Dulal Miah.
Description: First Edition. | New York, NY : Routledge, 2023. |
Series: Islamic business and fnance series | Includes bibliographical
references and index. |
Identifers: LCCN 2022036670 | ISBN 9781032200910 (hardback) |
ISBN 9781032200934 (paperback) | ISBN 9781003262169 (ebook)
Subjects: LCSH: Finance—Islamic countries. | Banks and banking—
Technological innovations—Islamic countries. | Financial institutions—
Technological innovations—Islamic countries.
Classifcation: LCC HG187.4 .D54 2023 | DDC 332.091767—dc23/
eng/20221006
LC record available at https://lccn.loc.gov/2022036670

ISBN: 9781032200910 (hbk)

ISBN: 9781032200934 (pbk)
ISBN: 9781003262169 (ebk)

DOI: 10.4324/9781003262169
Typeset in Bembo
by codeMantra
CONTENTS

List of figures xi
List of tables xiii
List of contributors xv
Foreword xix
Preface xxiii
Acknowledgements xxv

Introduction 1
Yasushi Suzuki and Mohammad Dulal Miah

Part I
Theoretical and philosophical speculations on digital
transformation in Islamic finance 13

1 Digital transformation in Islamic finance: a critique of

perfectionist’s views on Islamic fintech 15
Yasushi Suzuki and Mohammad Dulal Miah

2 A typology of financial business models on digital

transformation (‘DX’): expected impacts on commercial banks 44
Yasushi Suzuki and Mohammad Dulal Miah

3 Fintech, technomania, and persistent socio-civilizational

challenges 64
Mohammad Omar Farooq and Muhammad Dulal Miah
viii Contents

Part II
Empirical studies 81

4 Business risk mitigation through “Value-Chain Integrated”

financing in Islamic Peer-to-Peer Lending in Indonesia:
PT Qazwa Mitra Hasanah’s experience 83
Sigit Pramono, Dikry Paren, M. Iqbal Ramadhan and
Muhammad Razikun

5 Prospects and opportunities of Islamic crowdfunding in

Bangladesh 101
S. M. Sohrab Uddin, Rima Akter and
Md Imran Hossain Anik

6 Empirical assessment on digital transformation in Islamic

banking 118
Abideen Adeyemi Adewale and Rifki Ismal

7 Fintech in Islamic banking in Bangladesh: opportunities

and threats 142
Md. Joynal Abedin, Syed Mahbubur Rahman and Riyashad Ahmed

8 Exploring digital banking patronage in the Netherlands 154

Muhammad Ashfaq, Abdul Rauf, Mai Tran
and Rashedul Hasan

9 Can Islamic FinTech best serve the migrants’ interest in

remittance services? The South and Southeast Asian
perspective 172
S. M. Sohrab Uddin and Tasfika Khanam

10 The impact of central bank digital currency (CBDC) on

the operations of Islamic Banks 190
A.K.M. Kamrul Hasan

11 Takafultech reflects the Maqasid al-Shariah ethos in takaful 203

Amirul Afif Muhamat and Norfaridah Ali Azizan

12 Digital transformation and IFRS 17 accounting issues in

takaful industry: the case of Indonesia 218
Ersa Tri Wahyuni
 Contents ix

13 Dilemma and challenges for fntech application in Waq f

administration/regulation in contemporary Muslim
majority countries: a case of Bangladesh 235
A. K. M. Kamrul Hasan

14 Breaking the barriers of Zakat management system

through Islamic Fintech: the case of Bangladesh 251
S. M. Sohrab Uddin and Afroza Sultana

15 An inquiry into the application of artifcial intelligence

on Fatwa 273
Ali Polat, Shoaib Khan and Usman Bashir

Conclusion 288
Yasushi Suzuki and Mohammad Dulal Miah

Index 297
FIGURES

Chapter 1
1 Functions and components of a fnancial system 20
2 Category of Gray-Zones in Islamic Finance 27
Chapter 4
1 Indonesia’s Fintech compositions by business model 86
2 AFTECH members from 2016 to Q2 2020 86
3 P2P lending business scheme 90
4 Qazwa’s “value-chain integrated” fnancing approach 94
5 Supply chain–fnancing model workfow 96
Chapter 5
1 Reward-based crowdfunding model 111
2 ECF model 112
Chapter 6
1 Reasons why IBs engage in digital transformation 121
2 Proportion of IBs that ‘Strongly Agree’ with Reasons for
Digitalisation 122
3 Status of IBs Implementation of Digital Transformation 124
4 Proportion of IBs digital operation and most recent IT budget spent 124
5 Technological advances adopted by Islamic Banks 126
6 Technological advancement being currently expended on
as part of IBs’ digital transformation process 129
7 Digital transformation risks facing IBs 130
8 Challenges to IBs’ digital transformation 133
9 Regulatory approaches to digital transformation 135
Chapter 8
1 Trends in the Dutch banking sector 157
2 Digital banking account holders across gender 160
xii Figures

3 Digital payments by gender 161

4 Digital payments by age 162
5 Digital banking patronage among consumers with
technological expertise 163
Chapter 9
1 Drawbacks of SWIFT system 183
2 Blockchain based remittance transfer reducing the drawbacks of
traditional SWIFT system 184
3 Contribution of Islamic FinTech in Transferring Remittance
under Blockchain 186
Chapter 10
1 Liquidity management dilemma for IFIs 196
Chapter 11
1 Death rate from suicides 2017 206
2 Major maqasid al-Shariah and their link to the takafultech 216
Chapter 12
1 Optimism level on overall insurance industry 219
2 Takaful models used globally 220
3 Top countries in Islamic Finance Assets 2019 222
4 Timeline of accounting standards for insurance contracts
in Indonesia 229
Chapter 13
1 Parties involved in waq f estates management 241
2 Administrative structure of the Ofce of the Waq f Administrator 242
3 Decision-making process at the Ofce of Waq f 242
4 Adaptation of fntech in cash waq f 246
5 Adaptation of fntech in non-cash waq f 247
TABLES

Chapter 1
1 Domestic credit (by banks) to private sector (% of GDP) in 2020 19
Chapter 2
1 The working Fintech taxonomy and classifcation by CCAF 45
2 Expected impacts of digital lending on commercial banks 49
3 Expected impacts of digital capital raising on commercial banks 50
4 Expected impacts of digital banking on commercial banks 51
5 Expected impacts of digital savings on commercial banks 52
6 Expected impacts of digital payments on commercial banks 53
7 Expected impacts of digital assets exchange on commercial banks 54
8 Expected impacts of digital custody on commercial banks 55
9 Expected impacts of Insurtech on commercial banks 55
10 Expected impacts of Wealthtech on commercial banks 57
Chapter 4
1 List of Indonesia’s Fintech regulations 87
2 Fintech lending company overview 90
Chapter 5
1 CFPs in Bangladesh 106
2 Volume of alternative fnance in South Asian countries 109
3 NPL and ROA of diferent banks 110
4 Crowdfunding regulatory policies of diferent countries 113
Chapter 7
1 Profle of the respondents 147
Chapter 9
1 Year-wise remittance collection through formal sector from
year 2015 to year 2020 178
xiv Tables

2 Country-wise inward remittance and remittance percentage of

GDP at the end of 2020 178
Chapter 10
1 Core features of CBDC 192
2 Implication of Shariah-based CBDC 198
Chapter 11
1 Benefts of drone in takaful operation 211
Chapter 12
1 Total Islamic insurance industry players in fve years 223
2 The adoption of IFRS 17 on takaful contract across some
jurisdictions 227
Chapter 13
1 Salient features of Waq f Ordinance 1962 240
Chapter 14
1 Zakat collections and disbursements (rounded in a million) of
key representatives of the member countries of the World Zakat
Forum 255
2 Contributions of Islamic banks of Bangladesh to the zakat
funds for the last ten years (fgures are rounded to a million) 265
Chapter 15
1 Shari’ah conformity matrix 279
CONTRIBUTORS

Md. Joynal Abedin is an Assistant Professor at the Department of Finance,

American International University-Bangladesh.

Abideen Adeyemi Adewale is the Head of Research – Islamic Financial Services

Board (IFSB).

Riyashad Ahmed is an Assistant Professor at BRAC Business School, BRAC

University, Dhaka, Bangladesh.

Rima Akter is an undergraduate student at University of Chittagong, Bangladesh.

Md Imran Hossain Anik is an undergraduate student at University of Chittagong,

Bangladesh.

Muhammad Ashfaq is a Lecturer in Business Administration at Wittenborg

University of Applied Sciences University, the Netherlands.

Norfaridah Ali Azizan is a Postgraduate Student, Universiti Teknologi, MARA,

Malaysia.

Usman Bashir is an Assistant Professor, University of Bahrain, Sakhir, Kingdom

of Bahrain.

Mohammad Omar Farooq is an Assistant Professor at Gulf University, Kingdom

of Bahrain.
xvi Contributors

A. K. M. Kamrul Hasan is a Senior Lecturer of Finance at School of Business and

Economics, Westminster International University Tashkent, Uzbekistan.

Rashedul Hasan is a Lecturer at Coventry University, United Kingdom.

Rifki Ismal is a Deputy Director – Bank Indonesia and Assistant Secretary-

General – Islamic Financial Services Board (IFSB).

Shoaib Khan is an Assistant Professor, University of Ha’il, Kingdom of Saudi

Arabia.

Tasfka Khanam is a Lecturer at the Department of Business Administration in

Finance & Banking, Bangladesh University of Professionals, Bangladesh.

Mohammad Dulal Miah is an Associate Professor at the University of Nizwa,

Oman.

Amirul Aff Muhamat is an Associate Professor at Universiti Teknologi, MARA,

Malaysia.

Dikry Paren is a CEO and Founder of Qazwa Mitra Hasanah, Indonesia.

Ali Polat is an Associate Professor, Ankara Yildirim Beyazit University, Ankara,

Turkey.

Sigit Pramono is a Chairman at SEBI School of Islamic Economics, Indonesia.

Syed Mahbubur Rahman is Associate Professor at BRAC Business School,

BRAC University, Bangladesh.

M. Iqbal Ramadhan is a CFO of Qazwa Mitra Hasanah, Indonesia.

Abdul Rauf is a Lecturer in HRM at Wittenborg University of Applied Sciences

University, the Netherlands.

Muhammad Razikun is a Founder of MUC Consulting Group and Lecturer at

SEBI School of Islamic Economics, Indonesia.

Afroza Sultana is a Lecturer at the Department of Business Administration,

Premier University, Chattogram, Bangladesh.

Yasushi Suzuki is a Professor at Ritsumeikan Asia Pacifc University, Japan.

 Contributors xvii

Mai Tran is graduate student, Wittenborg University of Applied Sciences

University, the Netherlands.

S. M. Sohrab Uddin is a Professor, Department of Finance, University of

Chittagong, Bangladesh.

Ersa Tri Wahyuni is an Associate Professor in Accounting at the Faculty of

Economics and Business, Universitas Padjadjaran, Indonesia.
FOREWORD

The global fnancial crisis (GFC) of 2007–2009 caused an unprecedented

sufering for the fnancial world. While fnancial institutions were concentrating
on restoring themselves overcoming the adversaries resulted from the GFC, it
was the COVID-19 pandemic that hit the global economy and fnancial system
again. Restrictions on people’s movement, frequent lock-down of national econ-
omies, and prolonged closure of production and distribution wrecked a serious
havoc on real and fnancial activities globally. Despite the devastating efects
unfolded by these two consecutive events within a decade, the fnancial world
has proved its resilience and learned how to survive, thanks to its continuous
innovative capacity to utilize technology in designing and delivering fnancial
products and services. The use of technology to enable and support fnancial
products and services is simply known as fntech.
Fintech is the buzzword of the time. Blockchain, crowdfunding, robo-
advising, artifcial intelligence (AI), cloud-computing are just few examples of
how technology is constantly shaping fnance world. Although it is difcult to
accurately estimate the size of fntech market owing to its wider scope, KPMG
estimates that global fntech market reached US$210 billion in 2021. Digital pay-
ment is the leading and major element of fntech in terms of transaction amount.
Another report published by US-based Grand View Research shows that AI in
the global fntech market is estimated to reach US$41.16 billion between 2022
and 2030, a cumulative annual growth rate of about 16.5%. Venture capital and
private equity frms are the major investors in Fintech, the report shows.
The penetration of technology in the fnancial market is believed to disrupt
the traditional fnancial system. Although the impacts of fntech on conventional
banking and fnance have explored extensively, the same is not observed for
Islamic fnance industry. The applicability of technology in Islamic fnance and
xx Foreword

its repercussion for the industry have remained largely unexplored. In particular,
the adoption of fntech by Islamic fnancial institutions (IFIs) may raise numerous
concerns. Among them, the primary is the Shariah compliance. Hence, it raises
a host of interesting questions as such: how IFIs cope with the disruptive trend
of fntech? Is technology going to be an enabler or barrier to IFIs? How IFIs can
utilize the promising features of technology to harness their competitive edge
and successfully compete with tech-based and quasi-fnancial institutions? This
edited volume is a novel attempt to answer these questions and follows a holistic
approach to achieve this objective. It helps readers understand the broader pic-
ture of fntech applied in IFIs. Moreover, the arguments raised in this book are
substantiated by necessary data and statistics.
As a Professor of Islamic fnance and editor of several academic journals, I
have found Professor Suzuki Yasushi and Mohammad Dulal Miah passionate
contributors, avid readers, and keenly interested in Islamic fnance. They always
strive to update them about the changes taking place in their relevant felds.
Professor Suzuki has accumulated signifcant practical experience working in the
industry for a long time and gained knowledge by contributing intellectually to
the literature of Islamic banking and fnance though regularly publishing books
and articles. This has enabled him to efectively integrate contemporary theories
with practice, which has been refected in this edited volume.
The chapters are well organized, written in a plain language, and equally
suitable for specialized and non-specialized readers. Moreover, a fne balance
between theory and practice has been maintained. Cases are carefully selected
from Muslim majority countries to illustrate practical applications of fntech and
explore other potentials fntech has to ofer for Islamic fnance industry. From
this vantage point, I can say that the book would be a timely collection for grad-
uate and undergraduate students of Islamic banking and fnance as a reference
book. Moreover, policymakers may fnd the book an interesting guide for appro-
priate policy intervention.

M. Kabir Hassan
Professor of Finance
University of New Orleans
2016 IsDB Prize winner in Islamic
banking and fnance
 Foreword xxi

When I am writing this foreword, the market for cryptocurrency, one of the
most obvious examples of fntech, experienced yet another tumultuous phase.
Bitcoin, the leader of crypto market, saw a plunge in its price to the lowest since
November 2020. In a span of less than three months until June 2022, Bitcoin
(most other cryptos as well) lost more 60% value. As many central banks world-
wide are contemplating to introduce digital currency, it raises a concern as to
how fnancial institutions, particularly Islamic banks which are prohibited to
deal with Riba (interest) and Gharar (uncertainty), can deal with digital currency
and other such sophisticated technologies. This book is an insightful attempt
to raise such practical issues which are pertinent to Islamic fnance and require
careful observation from the policymakers and regulatory authorities for materi-
alizing the benefts ofered by the trend of current digital disruption.
Fintech is making an inroad into our daily lives. Mobile payment is now an
everyday phenomenon; money transfer using blockchain is a new reality. Texting
a Chatbot embedded with a customer care software of a fnancial service pro-
vider is not surprising at all. Paying bills by cryptocurrency has been gaining
momentum despite numerous hurdles. Figuring out customers’ buying patterns
from a large pool of data using complex algorithm and ofering products and
services matching their preferences are now easier and more realistic than ever
before. Delivery of actuarial service relying on data stored in a cloud platform
is more efcient and efective than the traditional one. These examples, which
are nothing but the tips of a large iceberg of fntech, imply that technology is
destined to usher in a new era for fnance.
The intellectual curiosity of Professor Suzuki Yasushi and his associate, Dr.
Mohammad Dulal Miah, has motivated them to capture a snapshot of how fn-
tech is shaping Islamic fnance. The current project, seemingly a well-timed
and trending in fnance, is not their frst endeavor to edit a volume; rather, the
duo has successfully accomplished numerous projects including several edited
volumes as well as research monographs. In addition, they have widely published
about Islamic fnance and banking. The distinctive feature of their works relies
on the ability to examine contemporary issues of fnance through the prism
of practicality. As students of new institutional economics, Professor Suzuki
and Dr. Miah have always attempted to introduce new facts and evidence in an
unconventional and holistic manner. They have followed the same tradition in
this book as well. Apart from contributing several chapters on their own, the
editors were meticulous in selecting chapters. Care has been taken to ensure that
selected cases expose readers to new facts and ideas that would hopefully enrich
their understanding about fntech in Islamic fnance.
As usual, certain limitations apply to this project. Readers may perceive that
some concepts, including regulatory issues about Shariah compliance of fntech,
ethical concerns, and political economy of digital transformation of Islamic
fnance, could have been given more space. However, the editors have set the
scope of the book at the outset. They focus on bringing practices of fntech
among IFIs including banks, micro-fnance institutions, insurance companies,
xxii Foreword

etc. In addition, the book explores the future potentials of technology that would
positively afect IFIs. The book emphasizes that IFIs should seriously consider
tapping those potentials for modernizing their services and successfully com-
peting with the conventional banking system. If the book is assessed through
the lens of the above-articulated goals, it has certainly met the stated objectives.
Therefore, the book could be a useful read for those who wish to know more
about the applicability and future prospects of fntech in IFIs.

Professor Yasushi Kosugi

Director, Asia-Japan Research Institute
Ritsumeikan Asia-Japan Research Organization
Ritsumeikan University
PREFACE

The trend of Digital Transformation (DX) is likely to give a critical impact on the
geography of Islamic fnance because the information & communication technol-
ogy (ICT) is considered to de-territorialize human experience in general. ICTs
have made regional borders porous or, in some cases, entirely irrelevant. Perhaps,
the Islamic mode of fnancial intermediation is open to anyone, irrespective of
their religious belief, who are engaged in commercial transactions – mu’amalat.
In practice, however, the shari’ah-compliant mode of fnancial intermediation
has been developed and thoroughly used in the Muslim community. On the one
hand, the Islamic mode of fnancial intermediation is expanding beyond a sov-
ereign territorial unit, while the DX in Islamic fnance is expected to intensify
the penetration of the shari’ah-compliant mode in the Muslim community. On
the other hand, the trend of DX in fnancial contracts – fnancial technology
(Fintech) – is exposing severer competitions to IFIs in competing with conven-
tional fnancial institutions both in domestic and international fnancial markets,
beyond the geography of Muslim community. The adoption of technologies is
considered an essential endeavour for any fnancial service provider to remain
competitive in the post-pandemic period. In other words, fntech is going to be
a decisive factor in determining the success and failure of fnancial service pro-
viders in the future.
Scholars and practitioners of Islamic fnance are concerned about how the
on-going DX would shape the Islamic mode of fnancial intermediation and
services, specially, during the time of ‘globalization’ as well as ‘internationali-
zation’ of fnancial services. The argument on ‘what is feasible’ (reality) should
be outweighed rather than that on ‘what is desirable’ (idealistic expectations).
This book aims to analyze how DX is giving a critical impact on the faith-based
fnancial mode in multifaceted ways. Part I of this book is addressed to provide
xxiv Preface

theoretical and philosophical speculations on DX in Islamic finance, while Part

II collects 12 empirical studies related to digital lending, digital capital raising,
digital banking, digital payments, takaful-tech (insurtech), waq f-tech, zakat-tech,
shari’ah-tech (legaltech). We would be happy if this book facilitates further dis-
cussions on the ‘reality’ faced by the Islamic mode of financial intermediation, as
well as discussions on how it is essential to adopt the DX in financial contracts –
‘Fintech’ – for a harmonious co-existence with the internationally prevailing
mode, that is, the conventional mode of financial intermediation and services.

Yasushi Suzuki and Mohammad Dulal Miah

June 2022
ACKNOWLEDGEMENTS

The editors would like to thank Routledge/Taylor & Francis Asia Pacifc for
their guidance and continuous support towards the publication of this book.
Yasushi would like to acknowledge that his work was supported by JSPS Grant-
in-Aid for Scientifc Research (C), Grant Number, 19K01749. He would like
to thank Akiko Suzuki for her constant support and motivation. Special thanks
go to Professor Yasushi Kosugi whose deep and insightful thoughts of Islamic
Studies always inspire the editors. Dulal would like to thank Prof. M. Kabir
Hassan, Dr. Samsul Alam, Dr. Md. Nurul Kabir, and Dr. Md. Safullah for shar-
ing their views and ideas about Islamic fnance. He would also like to thank Mir
Ferdousi for her continuous support and motivation.
INTRODUCTION
Yasushi Suzuki and Mohammad Dulal Miah

Digital revolution, digitalization, and digital transformation (DX) have become

the most frequently used phrases in this last decade. The term ‘digital trans-
formation’ has no universal defnition because it encompasses a diverse set of
concepts like digital supply chain, digitalization of services and products, and so
on (Hazik and Hassnian, 2019). Solis and Szymanski (2014) defne DX as ‘the
realignment of, or new investment in, advanced technology and business models
to more efectively engage digital customers at every touchpoint in the customer
experience lifecycle’.
Financial institutions are, perhaps, the pioneers in embracing the ongoing
DX with an aim to harness their efciency and performance. Moreover, the
adoption of technologies is considered an essential endeavor for fnancial ser-
vice provider to remain competitive and survive in the market. As a result,
technology-enabled fnancial transactions such as wealth management, robo-
advising, peer-to-peer (P2P) lending, crowdfunding, and digital payments have
spawned recently. According to Forbes, digital banking amounted to US$7.7
billion in 2019, whereas digital insurance (insurtech) recorded transactions
amounting to US$6.8 billion, and the digital payment summed up to US$15.1
billion at the same time.
Although the DX has received enormous attention worldwide especially
during and after the COVID-19 pandemic, fnancial institutions attempted to
modernize services throughout the ages. History shows that the building of
Transatlantic Cable in 1858 between the UK and the USA and the introduction
of Fedwire in 1918 marked the beginning of the modernization of fnancial ser-
vices. They were the early steps that facilitated the electronic transfer of funds
using information technology. Subsequently, the introduction of the frst ATM
in 1967 by Barclays Bank changed the course of fnancial transactions people

DOI: 10.4324/9781003262169-1
2 Yasushi Suzuki and Mohammad Dulal Miah

used to know them before. Furthermore, the establishment of NASDAQ in 1971

added a new dimension to stock trading because it paved the way for online
trading of fnancial assets. This was followed by the introduction of SWIFT in
1973 which brought a revolutionary change in interstate transfer of funds. Since
then, the fnance world experienced an increased penetration of technologies
which can be attributed to the invention of mainframe computers in the 1980s.
As a result, remarkable changes have been observed in payment systems, fund
transfers, cashless transactions, etc.
The global fnancial crisis of 2007–2009, triggered by the US subprime
mortgage crisis, changed the landscape of modern fnance. In particular, the role
of fat money has been challenged on the ground that the centralized control of
fat currency distorts its intrinsic value by changing the supply of money single-
handedly by the central bank, sometimes at a consideration that does not mean to
enhance social welfare. In addition, the regulatory control over fat money limits
the freedom of money transfer because all transfers through formal fnancial
system must seek approval from the relevant authority. In addition, the conven-
tional process of fnancial transactions is time-consuming and expensive. With
the promise to mitigate such problems, Satoshi Nakamoto (pseudonym) invented
Bitcoin in 2009, followed by thousands of other cryptocurrencies subsequently.
At its peak, the market capitalization of Bitcoin alone surpassed trillion-dollar
mark. This particular invention is considered the biggest disruptive technology
related to fnance and vows to redefne the payment system (Thakor, 2020).
Undoubtedly, the COVID-19 pandemic has accelerated the adoption of fntech
at an unprecedented pace. During the peak of the pandemic, countries across the
world were forced to introduce home-ofce, nationwide lockdown, and social
distancing. This ‘new normal’ economic circumstance required business organ-
izations to extensively rely on technology-based solutions. For example, busi-
ness and individuals relied on cashless transactions to avoid physical contact as
an attempt to restrict the spread of Novel Coronavirus. Fu and Mishra (2022)
estimate that the rate of daily download of fnance-related mobile applications
during the pandemic increased between 21% and 26%. They further show that
more than half of the downloads belonged to the traditional incumbents and
about half of the top downloads pertain to general banking apps. Among other
popular fnance apps, lending, payment, investment, and insurance were highly
demanding apps during the pandemic. Najaf et al. (2021) report that the volume
of P2P lending increased by 23% on average between January 2019 and June
2020 compared to the pre-pandemic period.
How does the ongoing technological disruption afect the course of fnancial
landscape we used to know it? The development of fntech and its increased
application during the COVID-19 has created a general perception among
people that banks can provide better services through greater use of technology.
With the onset of the post-pandemic new normal, such perception is deemed to
persist and customers will no longer be interested in leaving the use of technol-
ogy and returning to the traditional transacting system using physical facilities.
 Introduction 3

This has a signifcant repercussion for the overall fnance industry, in general,
and banking system, in particular. Banks, which have set up more branches by
adopting branch expansion strategies to capitalize on the competitive advantage
ofered by the economies of scale, are believed to have more fxed assets than they
require in the new normal. As a result, banks with huge sunk cost invested in
property and plant are perceived to sufer from excess and unused capacity which,
in turn, hampers their cost-cutting strategy. While large banks may be plagued
by excess physical capacity, small and medium-sized banks, which are much
weaker in terms of fnancial strength, tend to face mounting challenges in inte-
grating information technology with fnancial services. At the same time, com-
mercial banks are likely to face intense competition from technology-enabled
non-banking fnancial institutions as well as fntech-based startups. These types
of fnancial services providers are gradually turning into direct competitors to
mainstream commercial banks by capitalizing on the advantage of fntech.
Increased competition brought about by fntech is believed to provide cus-
tomers with better services in terms of reducing time and cost of transactions.
On the service providers end, fntech is likely to enhance efciency and squeeze
traditional-style physical facilities, paving the way for the emergence of boutique
banks in the future. Moreover, technology-driven P2P lending, use of apps to
pay fees and bills, robo-advising, crowdfunding, direct transfer of funds using
block chain technologies as well as cryptocurrencies imply less demand for tradi-
tional banking services, which may result in fnancial disintermediation. Hence,
the survival of the banking sector hinges critically on the adoption of technolo-
gies or establishing a link with the tech-based frms.
While the impacts of fntech on conventional banking system are well
documented in the contemporary fnance literature, much less is known as to
how the ongoing DX afects Islamic banking system. Islamic fnancial institu-
tions (IFIs) co-exist with their conventional counterparts and hold a commend-
able market share worldwide. According to Islamic Financial Services Board’s
(IFSB, 2019) stability report, Islamic fnancial service industry’s total worth grew
remarkably over the last few years to reach an accumulated amount US$2.44
trillion as of the second quarter of 2019. The ongoing DX is, undoubtedly, going
to impact the faith-based fnancial mode in multifaceted ways. Hence, scholars
and practitioners of Islamic fnance are concerned about how the DX would
reshape the Islamic mode of fnancial intermediation and services, especially,
during the time of ‘globalization’ as well as ‘internationalization’ of fnancial
services. Globalization, in this context, refers to the trend in which the Islamic
mode of fnancial intermediation and services is being expanded on a global
scale. On the other hand, ‘internationalization’ means the trend that the Islamic
mode of fnancial intermediation and services needs a harmonious co-existence
with the internationally prevailing mode, i.e. the conventional mode of fnancial
intermediation and services.
The trend of DX is likely to give a critical impact on the geography of Islamic
fnance because the information & communication technology (ICT) is
4 Yasushi Suzuki and Mohammad Dulal Miah

considered to de-territorialize human experience in general. As Floridi (2014)

points out, ICTs have made regional borders porous or, in some cases, entirely
irrelevant. Perhaps, the Islamic mode of fnancial intermediation is open to
anyone, irrespective of their religious belief, who are engaged in commercial
transactions – mu’amalat. In practice, however, the shari’ah-compliant mode of
fnancial intermediation has been developed and thoroughly used in the Muslim
community. On the one hand, the Islamic mode of fnancial intermediation is
expanding beyond a sovereign territorial unit, while the DX in Islamic fnance
is expected to intensify the penetration of the shari’ah-compliant mode in the
Muslim community. In parallel, the trend of DX in fnancial contracts – fnancial
technology (fntech) – is exposing severer competitions to IFIs in competing with
conventional fnancial institutions both in domestic and international fnancial
markets, beyond the geography of Muslim community. The adoption of tech-
nologies is considered an essential endeavor for any fnancial service provider to
remain competitive in the post-pandemic period. In other words, fntech is going
to be a decisive factor in determining the success and failure of fnancial service
providers in the future. Intuitively, we would say that the trends of globalization
as well as internationalization of Islamic mode of fnancial intermediation and
services should be promoted. However, what is the justifcation for promot-
ing the globalization as well as internationalization of Islamic mode? To what
extent the globalization as well as internationalization of Islamic mode should
be promoted? Is fntech going to be an enabler or barrier to achieve the intended
purpose of Islamic fnance, Maqasid Al shari’ah? Is fntech going to narrow the
division between Islamic and conventional fnance in the future?
These questions are existential for Islamic fnancial service industry because a
delay in the adoption of technology is feared to throw IFIs out of the competition.
On the other hand, IFIs must flter the compatibility of technology-enabled
fnancial techniques through the lens of shari’ah norms. The extant literature on
fnance focuses extensively on the benefts fntech may ofer to the society. While
it is always welcoming to decipher the benefts of new technology, we should,
at the same time, attempt to assess the broader picture of the impacts. As men-
tioned earlier, fntech would provide customers with cost-reducing, timely, and
intervention-free transaction experience. However, DX may lead to fnancial
disintermediation. How benefcial would such disintermediation be for Islamic
fnance industry which is still at its developing stage?
Islamic perfectionists emphasize the fact that transactions such as P2P lending
can avoid fnancial intermediaries; crowdfunding can help increase equity-based
fnance instead of intermediary-based lending; cryptocurrency can facilitate the
transfer of funds beyond the formal banking channel. These processes increase
compliance with shari’ah compared to traditional banks-based system. On the
other hand, digitalization can accelerate the rate of wealth transfer but may
erode the possibility of wealth creation through the help of fnancial intermedi-
aries. Hence, there is debate as to whether Islamic fnancial system has already
created enough wealth to facilitate its transfer or IFIs should concentrate on
 Introduction 5

creating wealth through the formal banking system instead of accelerating

fnancial disintermediation. Bakar (2021) calls for bridging a divide between
the ‘temporary solution approach’ for the needs of the contemporary Muslim
society and the society’s – seemingly mainstream – ‘perfectionists’ expectation
for a complete proft and loss sharing (PLS)-based Islamic fnancial system. Bakar
insists that maqasid shari’ah could potentially be the most powerful device in
shari’ah orientation, not only to spur a new policy and value proposition but also
to change certain established policies and standards in Islam. The knowledge of
maqasid shari’ah is overwhelmingly backed by ‘collective, cumulative and com-
pounding’ insights of a bundle of Divine texts (Bakar, 2021, p. 13). To ensure the
‘collective, cumulative and compounding’ perspective, in other words, in order
to avoid any ‘personally-and-emotionally biased perspective’, Bakar proposes,
‘the knowledge of maqasid shari’ah should be fairly structured, quantifed, and
most importantly scientifc (Bakar, 2021, p. 14).
The above discussion entails that fnancial technology is essential for IFIs not
only for achieving operational efciency and competitiveness but also for tran-
sition from a ‘temporary solution’ for the needs of the contemporary Muslim
society to an ideal PLS-based Islamic fnance. In other words, the question is not
if IFIs should adopt fntech or not, the right question is how Islamic fnancial
intermediaries can continue their primary task of wealth creation utilizing the
trend of DX without compromising shari’ah guidelines. This book attempts to
contribute to this stream of literature. It aims to examine if DX provides IFIs
with an edge to serve clients following shari’ah norms. Simultaneously, this book
aims to critically assess how each DX in the Islamic mode is required for meeting
the maqasid objectives for society.
To achieve the above-stated objectives, this book collects evidence through
case studies from a diverse set of countries. It focuses on the applicability of fnan-
cial technology including blockchain and digital currency, big data, and artifcial
intelligence (AI) to versatile areas of Islamic fnance including Zakat funds, Waqf
management, Islamic SMEs, crowdfunding, P2P lending, remittance fow, etc.
In addition, Islamic fnance is basically a faith-based system founded on Islamic
principles which strongly embody ethical and moral values. On the other hand,
technology generates a host of ethical concerns as far as fnancial transactions are
concerned. Hence, ethics has been considered an important element in assess-
ing the feasibility of adopting fnancial technology for Islamic fnancial service
providers.
The feld of Islamic fnance and economics is expanding at a rapid pace due
to its relevance to the development and social justice issues not only in Muslim
majority countries but also in other parts of the world. This edited volume is a
noble attempt to help fostering Islamic fnance further by identifying strengths
and weaknesses in integrating fnancial technology to harness their operation.
Inferences and arguments made in this book are substantiated by theory and
evidence. The frst part of the book lays the theoretical foundation by dis-
cussing several theories relevant to Islamic fnance and critically evaluates the
6 Yasushi Suzuki and Mohammad Dulal Miah

feasibility of clubbing fnance with technologies. The second part of the book
provides evidence analyzing cases drawing from a diverse area of Islamic fnance.
Moreover, the cases are collected mostly from the Muslim majority countries
where Islamic fnance claims a signifcant share of fnancial assets so that the
selected cases unveil what is happening on the ground. These distinctive features
of the book make it a useful read for students, analysts, policymakers, and regu-
lators interested in Islamic fnance, fnancial economics, Islamic economics, and
development fnance.

Structure of the book

Part I of the book comprises three chapters. Chapter 1 critically evaluates the
impact of fntech on the fnancial industry. The computing power of digital
systems is becoming stronger, faster, and cheaper at an exponential rate. How
feasible it is to achieve the socio-economic objectives through Islamic fnancing
powered by technology? It is certain that the scope of operation of fnancial
intermediaries is going to shrink in the future when high-tech frms would take
a signifcant share of fee and commission-based operations of banks. In addition,
intense competition from shadow banking as well as tech-based frms would
erode bank’s earning capacity. In such a circumstance, Islamic banks would
struggle to capture ‘rent’ required to ensure shariah compliance of their product.
While Islamic perfectionists strongly advocate a shift of fnancial activities from
traditional fnancial intermediaries to technology-enabled frms, the motto of
wealth creation in the society is overshadowed by wealth distribution. Critics
of contemporary Islamic fnance, however, have paid much less attention to this
fundamental issue than it really deserves. In Chapter 1, the authors attempt to
fnd an explanation in which this divide can be bridged.
Fintech embodies a wider scope. Hence, it is difcult to precisely conceptu-
alize the term. Chapter 2 aims to review the working taxonomy and proposes
a typology of ‘Fintech’ business models, to provide a platform for further aca-
demic and professional debate toward predicting how fntech and DX in fnan-
cial contracts would reshape the current mode of fnancial intermediation and
fnancial contracting. This working taxonomy is believed to help understanding
the scope of fntech activities. The authors particularly, focus on identifying the
major stakeholders (who have a keen interest) in promoting each fntech business
model. In addition, the authors assess the impacts of fntech on commercial banks
through the lens of these major stakeholders.
One of the critical aspects of integrating technology with fnance is that
sometimes the hype of technology may overshadow the intrinsic values and prin-
ciples on which society’s foundation is built. Everyone is now enamored with
the prospect of fntech, and no one wants to be left behind. In light of the past
contributions and impacts of technology in general, there might be good reasons
to be excited about fntech too. However, just like technology can reshape our
lives and the services and conveniences we enjoy, there can also be technomania,
 Introduction 7

obsessive enthusiasm about technology. To beneft from fntech properly and

adequately, it is important that fntech does not succumb to technomania.
Chapter 3 explores what potentials fntech may ofer to mankind beyond ease,
convenience, sophistication, efciency, and diversity of the ways to do things.
The humanity and the Muslim world face some ongoing challenges, including
few existential ones. The authors have pointed out few key challenges, examined
how fntech may or may not contribute toward addressing those challenges, and
suggested some parameters that might enable fntech to properly interact with
the ongoing and persistent human challenges.
The empirical part of the book starts with a case, P2P lending experience of
an SME, in Chapter 4. The authors provide an overview of the recent progress
of online ‘P2P’ fnancing platforms for supporting SMEs in Indonesia. As men-
tioned earlier, the P2P lending mechanism has emerged as a potential alternative
to mainstream fnancing which eliminates the need for intermediation. Some
attractive features of P2P lending include quick processing, low-cost transactions,
and ease of management. Through the prisms of these features, the experience
of PT Qazwa Mitra Hasanah Indonesia, which aims at linking Islamic fnance
with the technology, has been assessed. In addition, the authors have explored
how Qazwa’s ‘value-chain integrated’ fnancing scheme plays a critical role in
mitigating associated business risks. The authors further prescribe some policy
recommendations which may ameliorate the persistent problems hindering the
expansion of P2P lending especially in SMEs.
Like P2P lending, crowdfunding has been growing profusely, though small in
scale. Chapter 5 discusses the scenarios of Islamic crowdfunding in Bangladesh.
The history of crowdfunding of the country, as the chapter highlights, is rather a
new phenomenon. Due to lack of enthusiasm among people, and perhaps lack of
trust about the success of funding initiatives, the frst attempt of crowdfunding
in Bangladesh apparently failed. However, there are evidence that some projects
have been able to manage funds successfully. Analyzing the success and failures
of crowdfunding in Bangladesh, this chapter recommends for establishing proper
infrastructure, enacting investors-friendly rules and regulations, and creating
appropriate investment opportunities for the potential entrepreneurs for a thriv-
ing crowdfunding environment in Bangladesh. The chapter further points out
that the Islamic fnancial industry will be revolutionized by the implementation
of crowdfunding if a legit and convenient platform of investment for the general
people can be ensured.
Chapter 6 conducts an empirical analysis to identify antecedents that motivate
Islamic banks to adopt technology. The authors conduct a survey that covers 80
Islamic banks across 21 jurisdictions to assess the rationales for digitalization,
current status, and the technologies being adopted by Islamic banks. The chapter
further investigates the regulatory approaches, challenges, prudential risks, and
fnancial stability implications of digitalization of Islamic banking. Analysis shows
that the Islamic banking digitalization process is still in progress but has gained
momentum since the outbreak of the COVID-19 pandemic. Survey responses
8 Yasushi Suzuki and Mohammad Dulal Miah

show that strengthening competitiveness, enhancing operational efciency, and

improving customer satisfaction are the main driving force of Islamic banks’
digitalization drive. However, some obstacles such as legal infrastructure, lack
of requisite human resources, and open banking infrastructure impede Islamic
banking digitalization drive.
While questionnaire survey provides valuable insights about the drivers
facilitating the adoption of technologies by Islamic banks, Chapter 7 embarks
on an interview method to explore opportunities and threats for launching and
innovating Fintech in Islamic banks in Bangladesh. To achieve this objective, the
chapter collects data through in-depth interviews with relevant bank ofcials.
Analysis shows that awareness about fntech among the bankers is confned to
mobile banking services only. Lack of technological expertise has been pointed
out as a hinderance toward promoting Fintech in Islamic banks. While the
central bank of the country does not force banks to adopt technologies, custom-
ers are found to be demanding for tech-based banking services. The interview
further reveals that bankers perceive digitalization as a potential driver that helps
minimize banks’ operating costs. Moreover, a lack of skilled human resources is
identifed as a barrier toward digitalizing banking services. Based on these critical
fndings, the chapter ofers some policy options for regulatory authorities.
So far, we have presented cases from Muslim majority countries. How is the
experience of fntech in non-Muslim majority countries where the penetration
of Islamic fnance is relatively low but expanding at a good pace? Chapter 8
presents the case of the Netherlands. Adopting a qualitative research method-
ology and a case study approach, the chapter critically reviews the development
of Islamic digital service delivery in the Netherlands. A distinct contribution of
this chapter relies on its systematic analysis of security threats stemming from the
adoption of technology by fnancial institutions. Analysis shows that customers’
suspicion about data protection keeps them away from using fntech. This distrust
is a function of customers’ technical knowledge. Customers’ adequate technical
knowledge is a positive factor impacting their perception about data protection
quality, which in turn, results in increased use of digital banking services.
While the above-mentioned security concern is real, technology has
advanced well to mitigate such problems. Blockchain as a disruptive technology
has appeared to tighten the security concern embedded with the technology.
Under the blockchain mechanism, a transaction is recorded in a ledger once it
occurs. Each page of this ledger is like a block. The number of pages created
will continue to be added to the ledger as a chain-like block. Everyone who
uses blockchain technology has their own copy of the ledger to create an inte-
grated transaction record. The software records each new transaction exactly
as it happens and updates each copy of the new blockchain at the same time,
keeping all records uniform and accurate. Because every transaction has a digital
record and signature that guarantees identifcation, validity, preservation, and
sharing, blocks are protected from the risk of deletion, tampering, or any other
changes. Although the blockchain was initially meant for cryptocurrency, its use
 Introduction 9

has been extended to other areas of businesses as an attractive technology to solve

real-world problems. Chapter 9 assesses how this promising technology (block-
chain) can facilitate cross-border payment, remittance, in a timely, transparent,
and cost-efective manner. Considering South Asia as a case, the chapter argues
that blockchain-enabled transfer payments can reduce the fraudulent activities in
the system as the operations of Islamic banks and other fnancial institutions are
profoundly supervised and monitored by shari’ah Supervisory Board.
The blockchain-based cryptocurrency shows the promise to make P2P transac-
tions quick, economic, and hassle-free without compromising the confdentiality
of the transaction and interference from the central authority. If cryptocurrency
becomes successful and earns trust from users, it would be an existential threat
for the traditional fat money. Central banks would lose control over money
supply, which sometimes may prove augur ill for the overall economy. To avoid
such awkward future circumstances, some central banks have already initiated
or declared to issue digital currency known as Central Bank Digital Currency
(CBDC). China is the pioneer in piloting a CBDC, and the Fed is seriously
considering introducing central bank-backed stable-coin. Chapter 10 examines
how the CBDC would afect the operations of Islamic banks. The chapter asks:
is the use of CBDC going to augment Gharar (uncertainty), for Islamic banks?
If so, how can Islamic banks address increased uncertainty? The chapter derives
its logic from shari’ah scholars’ divided opinion (in favor and against) regard-
ing Shariah compliance of cryptocurrency. CBDC would share some common
features with cryptocurrency. The chapter points out that price fuctuation
in CBDC may be a shari’ah concern for IFIs due to Gharar. The author, thus,
recommends Islamic banks to use asset-backed CBDC as a potential safeguard
against CBDC-embedded uncertainty.
The impact of technology on banks usually receives a wide coverage in the
literature due to the scope and scale of banking sector in the industry compared
to other subunits of a fnancial system. For instance, the insurance industry is an
integral part of any fnancial system. Like their banking counterparts, insurance
companies are also believed to be afected signifcantly by the ongoing digital
disruption. Chapter 11 takes this issue into account and attempts to discuss the
potentials of takafultech (Takaful+technology) to bring closer takaful (Islamic
terminology of insurance) operator to fulfl the shari’ah objective (maqasid
al- shari’ah). The analysis in this chapter focuses on takaful participants or the
policyholders who, although not part of the management, are one of the princi-
pals in the takaful operations. Moreover, policyholders are concerned about the
rise of their liabilities such as payment of higher premium. Based on this analyt-
ical underpinning, the chapter identifes challenges which need to be addressed
for a thriving technology-enabled takaful industry.
Undoubtedly, accounting issue would be a critical challenge for takaful
industry in the Muslim world. Chapter 12 examines how DX poses a threat to
accounting issue of takaful industry in Indonesia. The chapter fnds analyzing
survey data that DX in the takaful industry is much slower than the conventional
10 Yasushi Suzuki and Mohammad Dulal Miah

insurance. One of the critical reasons highlighted in the chapter is the lack of
insurtech ecosystem in most Muslim countries including Indonesia. The small
size of the industry may have contributed to the lack of appetite to invest in
the IT system to embrace the insurtech opportunity. The chapter further shows
that takaful industry in Indonesia faces a greater uncertainty stemming from
the adoption of International Financial Reporting Standard (IFRS) 17, which
must be implemented by 2025. Since takaful operators in Indonesia are mostly
the wing of conventional insurance companies, a diferent system for the takaful
wing will complicate the implementation of IFRS 17. The chapter also points
out some strategies as remedies for this problem.
Chapter 13 focuses on the Waq f administration. The existing regulations and
administration of the Waqf estates in most of the Muslim majority countries
(especially which are in the developing economies category) are obsolete, so to
say. This chapter frst explores the historical background of the Waq f system, the
regulations, monitoring arrangement, and how it works in Bangladesh. Second,
the chapter explores avenues for modernizing Waq f administration by adopting
technologies. Specially, the chapter brings forth the issue of monitoring and gov-
ernance costs of Waq f management. Hence, the chapter illustrates how adoption
of fntech in waq f administration can minimize monitoring costs and ensure
transparent governance.
Like waq f management, Zakat (obligatory payment) management is also a
critical issue in Muslim society. Zakat is the most infuential Islamic social fund
and a powerful Islamic economic instrument to achieve equitable distribution of
wealth and poverty alleviation. Chapter 14 shows that fntech has the potential
to help Zakat Management by campaigning, calculating, collecting, distribut-
ing, and ensuring shari’ah compliance of Zakat. Furthermore, this chapter is of
the opinion that fntech can help ensure fexible, efcient, timely, and less costly
services in the fnancial services industries. Moreover, fntech might solve the
challenges of low performance, mismanagement, weak governance, and inef-
ciency of the Zakat system.
In Shariah-based transactions, certain issues require scholarly interpretation
regarding their compliance with Shariah because Quran and Hadith do not
explicitly articulate a clear guideline about them. Only qualifed Islamic scholars
(Fiqh scholar) can assess compliance or non-compliance of a particular fnan-
cial transaction with Shariah. The entire Islamic fnancial industry sufers from
shortage of Fiqh scholars who can issue fatwa. As a result, it is quite common that
one Fiqh scholar sits in multiple boards of Islamic banks worldwide. This prac-
tice has been widely criticized in the contemporary Islamic fnance literature.
Fintech has ushered a possibility that AI can reduce the work requirements of
Fiqh scholars. The fnal chapter (Chapter 15) of the book assesses the feasibility
of introducing AI in fatwa issue. In addition, this chapter analyzes how Islamic
scholars can use fntech in delivering fatwa and whether issued fatwas can be
analyzed using AI to assess their applicability in multiple area of Islamic fnance.
 Introduction 11

Hence, analysis of this chapter is critically important because of its pragmatic

policy relevance.

References
Bakar, M. D. (2021). Maqasid Shariah: The face and voice of Shariah embedded with big
data analytics & artifcial intelligence. Kuala Lumpur: Amanie Media Sdn Bhd., in
press.
Floridi, L. (2014). The fourth revolution: How the infosphere is reshaping human reality. Oxford
University Press, Oxford.
Fu, J., & Mishra, M. (2022). Fintech in the time of COVID-19: Technological adoption
during crises. Journal of Financial Intermediation, 50, 100945. https://doi.org/10.1016/j.
jf.2021.100945
Hazik, M., & Hassnian, A. (2019). Blockchain, Fintech, and Islamic Finance: Building the
Future in the New Islamic Digital Economy. Berlin: Walter de Gruyter.
Islamic Financial Services Board. (2019). Islamic Financial Services Stability Report,
2019.
Najaf, K., Subramaniam, R. K., & Atayah, O. F. (2021). Understanding the implications
of FinTech Peer-to-Peer (P2P) lending during the COVID-19 pandemic. Journal of
Sustainable Finance & Investment, 12(1), 87–102.
Solis, B., Li, C., & Szymanski, J. (2014). The 2014 State of Digital Transformation. Altimeter
Group.
Thakor, A. V. (2020). Fintech and banking: What do we know? Journal of Financial
Intermediation, 41, 100833. https://doi.org/10.1016/j.jf.2019.100833
PART I

Theoretical and philosophical

speculations on digital
transformation in Islamic
fnance
1
DIGITAL TRANSFORMATION IN
ISLAMIC FINANCE
A critique of perfectionist’s views on Islamic
fntech

Yasushi Suzuki and Mohammad Dulal Miah

1 Introduction
Financial institutions are the pioneers in embracing the on-going ‘digital
transformation’ (DX) with an aim to harness their efciency and performance.
Though the term ‘DX’ does not have a universal defnition due to its diversity
in meaning, the term encompasses various dimensions like digital supply chain,
digitalization of services and products, and so on (Hazik and Hassnian, 2019).
The adoption of technologies by fnancial institutions – shortly termed ‘FinTech’
– is considered an essential endeavor for any fnancial service provider – including
Islamic fnancial institutions – to remain competitive and survive in the market.
Defned broadly, FinTech encompasses advances in technology and changes in
business models that have the potential to transform the provision of fnancial
services through the development of innovative instruments, channels, and
systems (CCAF, 2020, p. 24).
FinTech-enabled business models invented so far are overwhelming and
diverse. A recent study – The Global Covid-19 FinTech Market Rapid Assessment
Study – by Cambridge Centre for Alternative Finance developed a working
taxonomy that brings together a coherent conceptualization of FinTech activities
while appreciating the sector’s diversity and diferentiated business models (see
Table 1 in Chapter 2). This working taxonomy includes 13 discrete primary
FinTech verticals and 103 sub-verticals. These have been further categorized into
two overarching groups – Retail Facing (providing fnancial products and services
with a focus on consumers, households, and micro, small- and medium-sized
enterprises [MSMEs], and more likely to be B2C) and Market Provisioning (those
which enable or support the infrastructure or key functionalities of FinTech and/
or Digital Financial Services markets, thus more likely to be B2B).

DOI: 10.4324/9781003262169-3
16 Yasushi Suzuki and Mohammad Dulal Miah

DX has become the most frequently used word in the last decade.1 Islamic
fnancial providers are also exposed to the trend of DX under the name of
‘Islamic FinTech’. Hence, it is logical to ask: is there any uniqueness in Islamic
FinTech compared to conventional FinTech? In other words, can we diferentiate
technologies based on the type of fnancial institutions, Islamic or conventional,
adopted them? Oseni and Nazim Ali (2019) insist that fntech is merely a means
to an end and not the end itself; therefore, it should not necessarily carry the
full ‘Islamic’ label. We concur to this view. Oseni and Nazim Ali (2019, p. 5)
further state ‘the Shari’ah principles will only apply to each of the components
or applications after a careful study of the specifc details rather than the generic
term “Fintech”’. From this viewpoint, the terms ‘Islamic FinTech’ is used as the
terms of ‘Shari’ah-compliant Fintech’ or ‘DX solutions in Islamic fnance’, rather
than to demonstrate the uniqueness of fntech solutions in Islamic fnance.
On the other hand, we observe that many Islamic scholars tend to expect
that fntech is a natural form of Islamic fnance. Oseni and Nazim Ali (2019,
p. 6) contend ‘the ability to mobilize funds for a common or communal cause
through crowdfunding, which in some cases is more of donation or interest-free
loans, presents a new mode of fnancing that mirrors the traditional Islamic
principles of social fnance’. Some experts say fntech fnancing is inherently
Islamic, as it connects owners (rabb al-mal) and users of capital directly (Gassner
and Lawrence, 2019). Moreover, Islamic fnance is concerned with the wellbe-
ing of the community and the transparency of the transaction (De Anca, 2019).
Among Islamic scholars, it is believed that fntech has the potential of promoting
fnancial inclusion. Accordingly,

Islamic fnance has more areas of convergence with the socially responsible
investment (SRI) movements than any other fnancing model and auto-
mating such processes through fntech will help to emphasize and promote
the social element in Islamic fnance as it relates to the higher objectives of
Islamic law, maqasid al-Shari’ah.
(Oseni and Nazim Ali, 2019, p. 7)

It is widely believed among Islamic economists that Islamic banks must not only
follow the Shari’ah principles as the legal system of pragmatism and conveni-
ence but also uphold the guiding spirit of maqasid al-Shari’ah. From the Islamic
economic perspective, maqasid can be observed in two dimensions: the Shari’ah
(law) and the objective of mukallaf (religiously responsible or accountable).
Obviously, most Islamic banks comply with the Shari’ah. However, they must
refect the spirit of Shari’ah on their performance by striving to achieve justice,
equity, and fairness. Dusuki and Abozaid (2007, p. 144) states, ‘the values which
prevail within the ambit of the Shari’ah, are expressed not only in the details of its
transactions but also in the breadth of its role in realizing the maqasid al-Shari’ah’.
Unlike conventional banks, the maxim of proft-maximization alone is unsuited
to maqasid al-Shari’ah; but rather, proft should be accompanied by justice and
 Digital transformation in Islamic fnance 17

fairness at all levels of human interaction (Chapra, 2000). In this sense, Islamic
banks must not exploit their customers ex-ante and ex-post. As Qur’an mentions,
‘Allah has imposed no hardship (haraj) upon you in religion’ (22:78). And again,
‘Allah does not burden a soul beyond its capacity’ (2:286). Qur’an reiterates,
‘Allah desires not to infict any hardship upon you’ (5:6).
This belief leads us to ask; to what extent – rather automatically or structurally –
could we expect the Shari’ah-compliant FinTech to help achieving the maqasid
al-Shari’ah? This chapter aims to critically assess the mainstream and ‘perfection-
ist’ or ‘idealist’ view on Islamic fntech. In so doing, the chapter brings an array
of concepts that are at the core of achieving maqasid al-Shari’ah and how FinTech
can facilitate or obstruct achieving this goal by Islamic fnancial institutions.
The rest of the chapter is structured as follows: Section 2 assesses the impact
of Fintech on Shari’ah-compliance fnancial disintermediation and how does it
afect the society. Section 3 examines the impact of fntech and DX on the per-
formance of Islamic fnance. Section 4 analyzes if Shari’ah compliance is both
a necessary and sufcient condition for maqasid al-Shari’ah. Section 5 identifes
potential areas where Islamic banks can focus to materialize the benefts ofered
by the on-going digitalization. Section 6 points out some issues, such as altruism
and reciprocity, that may afect or be afected by the adoption of Fintech. This is
followed by a brief conclusion that summarizes the chapter.

2 Is Shari’ah-compliant fnancial disintermediation

good for societies?
Most of the Islamic fnance industry is concentrated in banking assets and the
Islamic fnance industry is primarily defned by products developed and sold
by banks. According to an investigation by the Islamic Finance Development
Report, Islamic banking is continuously the largest sector in the Islamic fnance
industry amounting to US$1.99 trillion, which accounts for 69% of the industry’s
assets in 2019. Many Islamic ‘perfectionist’ views cast doubt on its debt-focused
nature and its deviation from the pure mode of proft-loss sharing (PLS) that
is suggested by the contractual structures, musharakah (investment partnership)
and mudarabah (investment partnership where one party is named the manager
of capital) (Irfan and Ahmed, 2019). More perfectionists propose that fnancial
technology (fntech) which leads to ‘disintermediation’ may be better suited than
the banking industry to achieve the objectives of Shari’ah. ‘Fintech has the advan-
tage of democratizing the provision of fnance, disrupting the standard business
models of banks and allowing for risk-sharing asset classes to emerge, all three
of which are lacking in the present-day model of Islamic banking’ (Irfan and
Ahmed, 2019, p. 24).
From the viewpoint of ‘temporary solution approach’, for instance, Bakar
(2021) laments the newest trend and phenomenon of maqasid shari’ah in Islamic
fnance which have been skewed toward putting a lot of expectation on PLS
and the equitable distribution of wealth. He criticizes the trend in which many
18 Yasushi Suzuki and Mohammad Dulal Miah

Muslim thinkers have relied extensively on maqasid shari’ah – as they call it – to

argue that Islamic fnance must attain this maqasid shari’ah.

According to them [Muslim thinkers], all Islamic fnancial institutions

must incorporate this maqasidic feature of proft and loss sharing in their
product oferings. Otherwise, there could potentially be a structural prob-
lem within Islamic banking practice. As far as maqasid shari’ah and Islamic
fnance are concerned, would this be a fair and legitimate expectation?
(Bakar, 2021, p. 317)

The temporary solution approach or the ‘pragmatist’ view gives a warning that
Islamic economics advocate ‘wealth distribution’ while forgetting a much more
important element, ‘wealth creation’. Bakar (2016) casts doubt on the naive
conclusion by Islamic economists that equity-based fnancing be prioritized to
debt-based fnancing upon the naive assumption that mudarabah and musharakah
fnancing can be provided on a big scale without afecting the capital adequacy
requirement. For instance, the participatory fnancing of Islamic banks is risker
than the debt-like fnancing which implies that an increase in this mode of
fnance is likely to increase risk-weighted assets at a higher percentage. This
literally implies that Islamic banks which have substantial share in the partici-
patory mode of investment would be required to maintain a higher amount as
statutory reserve. Since banks are not earning any return on statutory deposit
but pay proft to depositors, the overall cost of banks tends to rise. Thus, under a
regulatory environment in which Islamic and conventional banks must maintain
a fxed capital adequacy ratio, it is rational for Islamic banks not to dedicate too
high of an amount to the participatory mode of fnance.
Apparently, the perfectionist expectation on the Shari’ah-compliant fnancial
disintermediation underestimates the correlation between fnancial deepening
(in particular, bank credit penetration) and economic development. It is widely
argued that the economic development is associated with fnancial deepening
through the function of credit (money) creation by commercial banks.
Table 1 demonstrates that the stage of economic development has a correlation
with the level of domestic credit to private sector. We can see that the fnancial
deepening level in developed countries is, in general, higher, while the fnan-
cial deepening in developing countries stays at a lower level. The average ratio
of domestic credit to private sector in OECD members reached 161.9% of their
GDP, while that ratio in Arab World stays at 57% of their GDP in 2020. Except
Malaysia, fnancial deepening in Asian Muslim-majority countries including
Bangladesh, Indonesia, and Pakistan stays at a low level.
Banks play the role as fnancial intermediaries of mediating idle or, in the
Marxian term, stagnant money in the household sector to fnancing mainly the
investment by corporate sector. In addition to this role of fnancial intermedia-
tion, commercial banks are expected to be engaged in the role of ‘credit (money)
creation’ because the majority of bank deposits is originally created by banks
 Digital transformation in Islamic fnance 19

TABLE 1 Domestic credit (by banks) to private sector (% of GDP) in 2020

Countries Financial deepening level

Bangladesh 45.2 (45.1)

China 182.4 (182.4)
Egypt 27.3 (27.3)
Indonesia 38.7 (33.2)
Iran 66.1 (66.1) [in 2016]
Japan 194.6 (120.4)
Malaysia 134.1 (134.1)
Oman 75.1 (75.1) [in 2019]
Pakistan 17.1 (17.0)
Singapore 132.7 (132.7)
United Kingdom 146.4 (145.9)
United States 216.3 (54.4)
[Average]
World 149.6 (99.1)
OECD members 161.9 (84.7)
LDC 30.2 (29.5)
Arab World 57.0 (54.9)

Source: World Bank (2021).

issuing new loans. This function of credit creation is backed by the central bank
which is the primary source of money supply in an economy through the circu-
lation of currency.2 The circulation as well as the process of credit creation are
based on the public confdence on the banking system such that each commer-
cial bank’s liquidity risk is well-monitored and mitigated through the so-called
‘last-resort facilities’ by the central bank or the government to avoid potential
chain bankruptcies of banks or bank runs.
Digital lending is the process of ofering loans that are applied for, disbursed,
and managed through digital channels, in which lenders use digitized data to
inform credit decisions and build intelligent customer engagement (Stewart
et al., 2018). The online platform enables individuals and companies to lend
and borrow money by connecting lenders with borrowers ‘directly’ through an
online peer-to-peer (P2P) lending platform. The fundamental nature of P2P
lending is ‘direct fnance’ (see Figure 1). Here, we should note the mode of direct
fnance (fnancial disintermediation) cannot be automatically replaceable from
the mode of indirect fnance (fnancial intermediation through banks backed by
the last-resort facilities by the central bank). The developing countries, in gen-
eral, with the lack of capital accumulation, need the function of credit creation
by banks. In other words, a certain accumulation of capital in societies is a pre-
requisite for transforming toward the mode of direct fnance. At least, P2P lend-
ing is to be backed by large and diversifed investors who are willing to absorb
various types of credit risks and uncertainties as well as to absorb the associated
20 Yasushi Suzuki and Mohammad Dulal Miah

Equity and
Bond Markets

Direct financing
Excess Units Direct Units
(Savers/ providers (Investors/ Users
of Funds) of funds)
Indirect financing

Financial
intermediaries

FIGURE 1 Functions and components of a fnancial system.

Source: Wanniarachchige et al. (2017).

transaction cost of screening and monitoring. Otherwise, a shallow banking and

fnancial market, which often interlocks the economic backwardness in develop-
ing countries, would be just succeeded by a shallow P2P lending market. Around
$2.88 trillion of assets were attributed to the global Islamic fnance industry in
2019. Even on the global scale, within that asset base, the Shari’ah-compliant
asset-management industry – an expected substitutable fnancial base for P2P
lending – represents only 4% of the total assets (World Bank, 2021).
It would be naïve to just expect the P2P lending under the slogan of ‘fnancial
inclusion’ to function as a substitute for the mode of indirect fnance. In passing,
we should note that the market size of P2P lending seems still limited. According
to International Banker, Lending Club as the P2P lending industry leader
arranged about 56,600 loans totaling only US$0.79 billion in the frst quarter of
2014, while the US commercial bank of JP Morgan Chase delivered consumers
loans with no less than US$47 billion over the same time frame. The size may
depend on further capital accumulation in the risk-averse investors and/or fur-
ther provision of proper credit information to shift their risk preference closer
to risk-neutral. Rather, in our view, it should be outweighed to argue on how
to incubate the Islamic banking industry to facilitate its fnancial penetration in
the Muslim-majority countries for accumulating and mobilizing more fnancial
resources in their societies. At least, the argument of Islamic banking penetration
should be argued simultaneously with the movement of fnancial disintermedi-
ation upon FinTech.
It is reported through various media that the market share of Islamic
banking assets to the total banking system in Malaysia reached 34.2% in 2020.
In Bangladesh, the market share of Shari’ah-based banks in the country’s bank-
ing sector increased to 27.5% in the January–March quarter of the year 2021
as two more conventional banks have started Islamic banking since January
2021. In Pakistan, the market share of Islamic banking assets and deposits in the
overall banking industry stood at 17.0% and 18.7%, respectively in June 2021.
Reportedly, Islamic fnancial institutions contribute up to 9.03% to the fnancial
 Digital transformation in Islamic fnance 21

system in Indonesia as of April 2020. Taking into account the overall fnancial
(banks) deepening ratio in Table 2, the estimated impact (% of GDP) of Islamic
banking penetration can be calculated; 45.8% (134.1% × 34.2%) in Malaysia,
12% (45.1% × 27.5%) in Bangladesh, 2.9% (17.0% × 17.0%) in Pakistan, and
2.9% (33.2% × 9.03%) in Indonesia. As is suggested by Irfan and Ahmed (2019),
whether there is a maturing process that Islamic fnance must undergo in order
to become truer to the spirit of Shari’ah remains to be seen. Except Malaysia, so
far, we have to say that the impact of Islamic banking and fnance has been very
limited or marginal at its national level even in Asian Muslim-majority nations.
Even in Malaysia, the so-called ‘murabahah and tawarruq syndrome’ – the con-
servative credit portfolio strategy by Malaysian Islamic banks – has been long
criticized by Islamic perfectionist scholars. It is observed that more than 90%
investment of Islamic banks take the form of murabahah (mark-up or cost-plus
investment) which includes bai murabaha, bai muajjal, and ijara. PLS modes of
fnance such as musharakah and mudarabah constitute only a small percentage of
the total investment. To be specifc, the share of these fnancing remains only at
1.7% by the end of 2019 (Miah, Suzuki and Uddin, 2021).
We should be instrumentally rational for attempting to bridge a divide
between the ‘temporary solution approach’ for the needs of the contemporary
Muslim society and the society’s ‘perfectionists’ view. It is impractical to expect
the acceleration of the participatory fnancing without preserving a much higher
margin for security to cover further PLS risk. Shari’ah scholars, the regulatory
authority, and other professionals need to design an appropriate fnancial archi-
tecture which can create diferent (and socially acceptable) levels of margin
opportunities for Islamic banks to avail the beneft from the variety of Islamic
fnancing as declared by Shari’ah.
How feasible is it to achieve the socio-economic and Shari’ah objectives through
Islamic fnancing under the contemporary Islamic epistemological foundation as
well as fnancial set-up? The concurrent interpretation of Islamic epistemology
does not convincingly clear an apparent paradox generated by Islamic fnancing
principles. For instance, Islam encourages PLS fnancing. At the same time, it
prohibits associated uncertainty (gharar). An attempt to increase PLS fnancing
implies embracing fundamental uncertainty of entrepreneurs. Critics, however,
have paid much less attention to this fundamental issue than it really deserves.
So far as a sufcient level of wealth and capital has been accumulated in the
society and the sufcient number of investors are ready and willing to absorb
various types of credit risk and uncertainty, the P2P mode of fnancial interme-
diation and services would be feasible and, perhaps, desirable for including more
ultimate investors and users of fnancial products and services. As was discussed
earlier, one of the questions here is that if such a sufcient level of wealth and
capital has not yet been accumulated, particularly observed in developing coun-
tries, can we simply conclude that the trend of digitalization would be desira-
ble? In developing countries, we may still need the role of commercial banks as
fnancial intermediaries by mediating idle/stagnant funds held by households to
22 Yasushi Suzuki and Mohammad Dulal Miah

the industrial sector in a considerably large scale. In theory, so far as a sufcient

level of wealth and capital has been accumulated enough to meet the fnancial
demand on a global scale including that in developing countries, the trend of dig-
italization would be feasible. However, there is no guarantee of always ensuring
the stable and sufcient circulation and fows of fund from an investor to a user
of fund.

3 How would fntech affect the performance of Islamic banks?

FinTech and Digitalization would give other fnancial servicers a chance to
penetrate the traditional fnancial products and services monopolized by the
commercial banking unit in the past; in particular, deposit taking (Digital Savings),
payment settlement (Digital Payments), and mediating fnancial resources from depositors
to corporations (Digital Lending). Also, the services related to money dealing (cash
and exchange) would be penetrated by newcomers in Digital Banking, Digital
Asset Exchange, and Digital Custody. The ‘P2P’ fnancial services would erode
the monopolistic/oligopolistic market in lending, payments, and money dealing
operated so far mainly by commercial banks.
On the other hand, FinTech and Digitalization would give commercial banks
an opportunity to expand the scope of business as well as to diversify risks and
uncertainty with ultimate investors. In our view, (1) the lending business upon
securitization (Collateralized Debt Obligation) and crowdfunding (Digital
Lending and Digital Capital Raising) for diversifying credit risks, (2) the sale
and utilization of the accumulated credit/client information to other fnancial
service providers and platforms (Digital Banking and Digital Asset Exchange),
(3) the business related to ‘Private Banking’ (wealth management) upon FinTech
(Wealth Tech) for reducing the fund management cost would give commercial
banks an opportunity to seek for a new proft base. We should note that the shift to
the lending business upon securitization and crowdfunding would mean that the
business of commercial banks would be shifted from ‘indirect’ to ‘direct’ fnance.
At the same time, the sales and utilization of credit information would bring com-
mercial banks a ‘fee’ based business opportunity. Also, we should note that the
wealth management (private banking), in its nature, is an ‘investment banking’.
Roughly speaking, the P2P mode of fnancial intermediation and services
would make traditional commercial banks extremely difcult to earn a sufcient
proft (bank rent) to maintain their franchise value. Some innovative commercial
banks may reshape their mode of business for their survival with the direction to
P2P and ‘direct-fnance’ mode of fnancial intermediation and services upon the
technology of digitalization. However, such innovative commercial banks would
not be called ‘commercial banks’ anymore.
The analysis of bank rents has provided an efective tool as an institutional
approach to investigating the important role of banks. According to the def-
nition by Khan (2000), rents refer to ‘excess incomes’ which, in simplistic mod-
els, should not exist in efcient markets. More precisely, ‘a person gets a rent if
 Digital transformation in Islamic fnance 23

he or she earns an income higher than the minimum that person would have
accepted, the minimum being usually defned as the income in his or her next-
best opportunity’ (Khan, 2000, p. 21). The widely known ‘fnancial restraint’
regulation of creating bank rent opportunities (Hellmann, Murdock and Stiglitz,
1997) was an important institutional setting, for instance, in the Japanese tra-
ditional fnancial system. This institutional setting contributed to creating and
maintaining an efective monitoring system in which the Japanese main banks
played important roles as prudent fnancial intermediaries and monitors in the
heyday of the system. Meanwhile, the stability in the Japanese main bank system
was partly achieved by interest rate controls, with a wide margin between deposit
and lending rates, so that the major banks could earn profts (Aoki, 1994; Suzuki,
2011). In the same fashion, Islamic banks must earn profts to maintain their
‘franchise value’ as prudent monitors. This leads us to ask; under the Islamic mode
of fnancial intermediation, how do Islamic banks earn profts to preserve their
‘reputation’ as prudent Shari’ah-compliant (Islamic law-compliant) lenders?
Suzuki and Uddin (2014) proposed a fairly new conceptualization of the
‘Islamic bank rent’ that is defned as the extra profts enough to compensate for
the unexpected loss and the displaced commercial risk to which Islamic banks
are facing. In other words, the excess proft is required for maintaining banks’
franchise value and reputation as prudent Shari’ah-compliant lenders. The unex-
pected loss is associated with the difculty in sharing PLS and hence, can also be
regarded as ‘PLS sharing risk’. As an illustration, the displaced commercial risk
and the PLS sharing risk are associated with the ‘α’ in the following equation:

Spread earned by Islamic banks = (risk-adjusted) risk premium + α,

where spread = rate of proft received – rate of proft paid.

We call ‘α’ as ‘Islamic bank rent’ (in a narrower sense) in terms of the extra
profts to cover the PLS sharing risk and the transaction cost for the Shari’ah
compliance in order to maintain the franchise value as prudent Islamic fnancial
providers. Risk premium in the equation should be refected in the credit risk
of each borrower. If the bank acquires perfect skills of screening and pricing,
in theory, no bank rent opportunity may exist. However, since perfect screen-
ing is impossible under conditions of uncertainty, all the commercial banks are
expected to earn the extra profts by adding the subjective risk premium to cover
the unmeasurable risk or uncertainty that the banks are exposed to. Islamic banks
are also exposed to the general uncertainty. Therefore, they also must charge the
risk-adjusted risk premium covering the measurable risk plus associated uncer-
tainty as the conventional banks charge. Beyond the premium, Islamic banks
are assumed to earn the extra profts to maintain the franchise value as prudent
Shari’ah-compliant lenders (we may call this additional risk premium to cover the
uncertainty plus ‘α’ in the equation also as Islamic bank rent in a broader sense).
It is, thus, hypothesized that the spread in total earned by Islamic banks should
be larger than that by conventional banks.
24 Yasushi Suzuki and Mohammad Dulal Miah

Linking this Shari’ah/PLS sharing risk with the current lending practice of
Islamic banks, it is highly likely that they choose low-risk assets for their portfolio
so far as the risk-adjusted return is still satisfactory. Of course, PLS sharing modes
of investments are highly recommended under Islamic Shari’ah, even though
Zaher and Hassan point out, ‘Islamic banks are not expected to reduce credit
risk by systematically requiring collateral or other guarantees as a pre-requisite
for granting proft-and-loss-sharing facilities’ (Zaher and Hassan, 2001, p. 176).
But, from the practical point of view, asset-based modes including murabaha are
more contributing for protecting their rents compared to fully Shari’ah-driven
mudarabah and musharakah, although the asset-based lending, in particular, the
credit exposure uncovered by the collateral, does not always ofset the PLS shar-
ing risk of Islamic banks. Moreover, in this competitive and liberalized market
framework, Islamic banks have to compete with their conventional counterparts
in spite of the fact that the risk management tools commonly applied in con-
ventional banking are not applicable to Islamic banking (El-Hawary, Grais and
Iqbal, 2007, p. 779). In other words, the credit risk management tools in Islamic
banking stay behind to those used in conventional banking. In addition, unlike
conventional banking, participatory mode of lending requires some other activi-
ties including prior determination of PLS sharing ratio and frequent monitoring
and supervision for ensuring better governance (Sundararajan and Errico, 2002,
p. 4). These additional activities may accelerate the transaction costs for Islamic
banks and accordingly, the ‘α’ factor stated earlier, encourages them to choose
low-risk assets for their portfolio.
Islamic fnancial service providers face severe competition stemming not only
from Islamic fnancial institutions but also from conventional fnancial service
providers upon Fintech. The ubiquity of the smartphone, for example, allows
access to retail fnancial products on an unprecedented scale. Similarly, while
small and medium enterprises lack access to fnding via traditional channels,
technology has the power to standardize due diligence and contracts in order
to accelerate the provision of venture capital to them. ‘Although conventional
venture capital and angel investing have found a foothold in conventional (non-
Islamic) fnance, there are very few examples of Shari’ah-compliant venture capi-
tal conducted through e-platforms’ (Irfan and Ahmed, 2019, pp. 26–27).
Wilson (2019, p. 33) points out that the increasing pace of technological
advance has major implications for how Islamic fnancial services are delivered,
with signifcant implications for staf and their clients. The efect is equally
destructive for conventional fnancial services, with threats of closure of branch
ofces as clients increasingly transact their businesses online rather than face to
face.

Given the disruption resulting from technological innovation, there needs

to be continuous monitoring of existing Islamic fnancial products by
Shari’ah boards to ensure they do not deviate from the approved templates.
Monitoring can be undertaken by internal Shari’ah audit staf by random
 Digital transformation in Islamic fnance 25

sampling of the contracts to verify compliance. It would be time consum-

ing and costly to examine every contract.
(Wilson, 2019, p. 34)

Can Islamic fnance providers earn the extra proft (Islamic bank rent) enough
to cover the cost of Shari’ah compliance under an intense competition further
intensifed upon the trend of DX among Islamic fnancial institutions – including
the so-called ‘Islamic windows’ of major conventional fnancial institutions – as
well as with conventional fnancial providers? The answer is probably negative.
As Wilson (2019) points out, with fntech, there are high fxed costs, but low
variable costs. It is considered that newly established Islamic banks face high
entry costs, given client expectations regarding the necessity of technologically
intensive fnancial services.

Economies of scale and scope are facilitated with online platforms which
can serve millions of clients. There are few Islamic banks which have mil-
lions of clients however, and it is much costlier per customer to provide
technological intensive fnancial services when there are at best thousands
rather than millions of clients.
(Wilson, 2019, p. 36)

Besides, the Shari’ah aspect of fnancial transactions can be a hurdle to digitalize

the process (Alam, Gupta and Zameni, 2019).

4 Is Shari’ah-compliance a necessary and suffcient condition for

realizing the maqasid al-Shari’ah?
Scholars suggest that fntech-led fnancial intermediation would lead to better
Shari’ah compliance and address the issue of fnancial inclusion as well as bet-
ter fnancing of SMEs who have hitherto been unable to access mainstream
fnancial market (Nisar and Farooq, 2019, p. 65). Although some studies have
rightly pointed out that Islamic banking should be moral and more concerned
about social issues, the literature, however, does not shed light on the issue as to
how Islamic fnancial institutions can play more social role under the existing
socio-cultural environment. An idealist view may require that Islamic fnancial
institutions should switch completely to Shari’ah-based fnancing abandoning
completely the currently practiced Shari’ah-complaint techniques.
One of the salient features of Islamic fnance that distinguishes it from
conventional fnancial model is that the former complies, in objectives and oper-
ations, with Shari’ah (Islamic law). Prohibition of riba (interest) is one of the
major prohibitions in the Shari’ah principles. Qur’an (2:275–276) clearly states
that dealing with riba – proft on loans – is ‘sinful’. However, it is still difcult to
get explicit Qur’anic text on the logic as to why interest is prohibited because the
rationales are more implicit than explicit. Albeit, Islamic scholars, for instance,
26 Yasushi Suzuki and Mohammad Dulal Miah

Siddiqi (2004) analyzing the context of various Qur’anic verses summarize

fve broader reasons: (i) interest corrupts society, (ii) interest implies improper
appropriations of other’s property, (iii) interest slows down the growth of real
sectors, (iv) interest demeans and diminishes human personality, and (v) interest
is simply unjust. Though the Qur’an does not provide a detailed analysis of the
rationale of prohibition of interest, the primary rationale regarding the prohibi-
tion of riba that can be sensed from the Qur’anic verse is related to ‘exploitation’
or ‘injustice’ (Suzuki and Miah, 2018a, p. 14). It is stated in the Qur’an, ‘deal not
unjustly (by asking more than your principal) and you shall not be dealt with
unjustly’ (2:279).
In general, the proft on sales has no ceiling, may be determined by the market
competition or technology. If we consider murabaha as trade, the associated proft
also should have no limit. Meanwhile, in the conventional fnance, ‘usury’ is
prohibited. Usury is referred to as a rate of interest greater than the one which the
law or public opinion permits (Looft, 2014). For instance, in Japan, the law pro-
hibits the lender operating as a business unit to form any contract to receive an
annual interest of exceeding 20%. The lender which breaches the law is subject
to imprisonment with work for not more than fve years, a fne of not more than
10 million yen, or both. This lends us to ask: how is the Islamic lender prohibited
to charge a proft margin in the Shari’ah-compliant murabaha transaction greater
than the one which is equivalent to the ‘usury’ referred in the conventional
fnance? This point is understated in the academic as well as practitioner’s debate
in Islamic fnance.
Suzuki and Miah (2021) propose to set up two benchmarks to judge whether
a particular fnancial transaction is acceptable or not in the context of Islamic
fnance; ‘Shari’ah-compliant’ benchmark and ‘Shari’ah-based’ raf’al-haraj (the
removal of hardship) benchmark. The former benchmark is addressed to ensur-
ing that a transaction brings ‘profts on sales’, not ‘profts on loans’. The latter
benchmark should be addressed to ensuring that a transaction does not exploit
anyone. Is Shari’ah-compliance a necessary and sufcient condition for realizing
the maqasid al-Shari’ah? Perhaps, most Islamic scholars may wish to believe that
these two benchmarks are identical in a sense that the Shari’ah-compliance would
bring the desired outcome toward social justice. However, even in the Shari’ah-
compliant murabaha transaction, the lender still possesses the discretion to pos-
sibly exploit the borrower by pricing upon an extraordinarily high mark-up,
resulting in giving unnecessary hardship to the borrower.
The Shari’ah-compliant benchmark is a necessary condition but not always a
sufcient condition. Financial transactions in Islamic fnance should be monitored
not only on the Shari’ah-compliant but also on the Shari’ah-based benchmark.
Unlike conventional banks, the maxim of proft-maximization alone is unsuited
to maqasid al-Shari’ah; but rather proft should be accompanied by justice and
fairness at all levels of human interaction (Chapra, 2000). In this sense, Islamic
banks must not exploit their customers ex-ante and ex-post. As Quran mentions,
‘Allah has imposed no hardship (haraj) upon you in religion’ (22:78). And again,
 Digital transformation in Islamic fnance 27

‘Allah does not burden a soul beyond its capacity’ (2:286). Quran reiterates,
‘Allah desires not to infict any hardship upon you’ (5:6).
We may bring taysir (ease) and raf’al-haraj (the removal of hardship) which
are identifed as objectives (maqasid) rather than rules of specifc application.
Making things easier for people and removing unnecessary hardship from them
are among the cardinal objectives (maqasid) of the Shari’ah, and these principles
tend, in many ways, to characterize Islam itself (Kamali, 2000). This can be
attributed to the fact that

… each is inherently dynamic and comprehensive and tends to involve a

process capable of continuous application and refnement. In this sense,
the two principles are as relevant to the conditions of society today as they
were in the early days of Islam.
(Kamali, 2000, p. 70)

Figure 2 shows the category of ‘gray-zones’ in Islamic banking upon diferent

combinations of Shari’ah-compliant benchmark and Shari’ah-based raf’al-haraj
benchmark. The net social beneft would be the highest in quadrant I where
Islamic fnanciers are well-contributing to the removal of hardship in borrowers
upon the Shari’ah-compliance. In quadrant II, Islamic fnanciers are complying
the Shari’ah, but less contributing to the removal of hardship in borrowers. From
the perspective of Islamic ‘perfectionist’ economists who respect the pure mode
of PLS, the so-called ‘murabaha syndrome’ could be considered to fall into this
quadrant. On the other hand, from the Islamic ‘pragmatist’ view of emphasizing
upon the element of ‘wealth creation’, the Shari’ah-compliant murabaha, if it is
still contributing to the removal of hardship in borrowers through the function
of wealth creation, can be categorized as a contract in quadrant I. Here, quad-
rant II suggests a gray-zone. If Islamic fnanciers charge a proft margin in the
Shari’ah-compliant transaction greater than or equivalent to the usury referred in
the conventional fnance, the transaction with the excess rate of proft would be
considered as ‘usurious trade’ to exploit the borrowers. Meanwhile, the oppor-
tunity of charging a high but socially permissible proft margin or less usurious
trade may create a gray-zone in the quadrant of less contributing to the removal
of hardship in borrowers. Then comes quadrant III as the worst contract which is

Less contributing to raf’al-haraj Shari’ah based contributing to raf’al-haraj

Shari’ah-compliant (II) Shari’ah-compliant but less (I) Shari’ah-compliant and contributing to

contributing to the removal of improving social justice
hardship
(III) Controversial on compliance (IV) Controversial on compliance but
Controversial on and less contributing to the removal contributing to the removal of hardship
compliance (or non- of hardship
compliance)

FIGURE 2 Category of Gray-Zones in Islamic Finance.

Source: Suzuki and Miah (2021).
28 Yasushi Suzuki and Mohammad Dulal Miah

either controversial on the Shari’ah compliance or non-compliance while being

less contributing to the removal of hardship in borrowers. The transactions in
this quadrant – most likely upon ‘opportunism’ – are difcult to justify, turning
out to be ‘black’.
This fgure suggests another gray-zone in Islamic fnance. In quadrant IV,
the transactions or contracts Islamic fnanciers ofer are still controversial on the
Shari’ah-compliance, but they are contributing to the removal of hardship in bor-
rowers through the function of wealth creation. Suzuki and Miah (2021) refer to
the issue of tawarruq which is prohibited in Indonesia. Most scholars particularly
in Indonesia believe that the transaction of tawarruq is not Shari’ah-compliant. We
can say that the quadrant IV type gray-zone in Indonesia’s Islamic banking seems
narrower, partly undermining the proft base for Islamic banks in Indonesia. In
other words, the quadrant IV type gray-zone in Malaysia can be considered to be
wider to create and maintain the level-playing feld between conventional and
Islamic banks (see Alkhan and Hassan, 2019). The width of gray-zones might be
diferent in each Muslim-majority country.
Upon the element of asymmetric information, fraud, no-confdence, and
distrust between counterparties, a trade-party is possible to be exploited. The
potential ‘usurious’ trade should be prohibited in the context of raf’al-haraj (the
removal of hardship) as the cardinal objective (maqasid) of the Shari’ah. If the
usurious trade is to be prohibited, the usurious pricing on the murabaha contract
by Islamic fnanciers should be prohibited, too.
To what extent – rather automatically or structurally – could we expect
the Shari’ah-compliant FinTech to help achieving the maqasid al-Shari’ah? The
Shari’ah compliance is a necessary condition in the Islamic mode of fnance.
However, in our view, the Shari’ah-based raf’al-halaj benchmark should be con-
sidered as a complimentary condition to judge if an Islamic fnancial product
upon FinTech would meet the maqasid al-Shari’ah of realizing social justice in
societies and communities.
Human beings should aim to conform, in intention and action, to the truth
prescribed in the Qur’an. However, creatures of omniscience must act, with
their limited computational capacity, in an environment full of uncertainty and
unknowns. It is important to scrutinize Islamic products through the lens of
shari’ah principles. On the other hand, merely trying to meet the way of Shari’ah
compliance without seeking for the rationale can be construed as procedural
rationality. This means that we have to match the Shari‘ah principles with the
pragmatic benefts of the society under the broader objectives of social justice and
equity. In parallel, we have to consider that removal of hardship or raf’al-haraj can
be another dimension in judging if a particular transaction is acceptable or not
especially when there is a doubt about Shari’ah compliance.
How can we avoid the ‘usurious trade’ which may have exploited the buyers
or borrowers? Perhaps, one of the options would be to wait for a general con-
sensus (ijma) on the maslahah (public interest) of prohibiting a margin of proft in
trading greater than that which the public opinion permits. However, as Wilson
 Digital transformation in Islamic fnance 29

(2019) points out, there is no single ‘ideal’ maslahah, since given the diversity
of Muslim-majority countries in terms of stages of development and economic
fundamentals, it is inappropriate to argue that there is a universal maslahah.
Usury is prohibited on conventional fnancial institutions. Usury is referred to
a rate of interest greater than the rate which the law or public opinion permits.
As was mentioned earlier, in Japan, the law prohibits the lender operating as a
business unit to form any contract to receive an annual interest of exceeding
20%. In theory, so far as a free and fair competitive market between Islamic
and conventional fnanciers is being operated, no Islamic lender would charge a
proft margin in the murabaha transaction greater than that which is equivalent to
the usury referred in the conventional fnance, because any higher proft margin
would not at all attract their clients to sign any contract of murabaha. In other
words, the prohibition of usury on conventional fnancial institutions would be
infuential, at least ‘indirectly’, on Islamic fnanciers as an important regulation
for preventing them from exploiting their clients. For instance, in Bangladesh as
one of Muslim countries, ‘usurious’ loans are regulated to give additional powers
to Courts to deal in certain cases with usurious loans of money or in kind; The
Usurious Loans Act, 1918 (Act no. X of 1918) in Bangladesh.
Even in Muslim countries, the term ‘usury’ is empirically used as a com-
pletely unacceptable or illegal transaction. For instance, in Indonesia, ‘business
based on Shari’ah principles’ is regulated as the business which does not contain,
including but not limited to, the element of usury, maisir, gharar, haram, and zalim
(Article 2, Elucidation to the Act of the Republic of Indonesia Number 21 of
2008 concerning Sharia banking). Here ‘usury’ is defned as

illegally obtain additional income (batil) among others the exchange

transaction of similar types of goods but of diferent quality, quantity,
and delivery time ( fadhl), or in lending transaction requiring the Facility
Receiving Customer to repay the fund received exceeding the principal
due to the passing of time (nasi’ah).

The defnition of usury in the regulation is still ambiguous to judge how is the
Islamic lender prohibited to charge a proft margin in the Shari’ah-compliant
murabaha transaction greater than that which is equivalent to the usury referred
in the conventional fnance.
From a Muslim viewpoint, the Shari’ah compliance should be a necessary
and sufcient condition for realizing the maqasid al-Shari’ah including the mit-
igation of exploitation in societies. Our economic activities are subject to our
bounded rationality because we are not the absolute existence with omniscience
and omnipotence, but human being with the brain of limited computational
capacity. In order to get closer to the truth, it is quite rational for the believers
to pay their best efort as an exercise of ijtihad to understand and incarnate the
logic and rationales implicit in the Qur’anic text. This exercise of ijitihad can be
treated as being ‘instrumentally’ rational to get closer to the Truth. On the other
30 Yasushi Suzuki and Mohammad Dulal Miah

hand, our behavioral pattern aims to be instrumentally rational at the beginning.

However, as more complex factors are encountered, the pattern would quite
often change to be limitedly instrumental, eventually become ‘procedurally’
rational at best.
As for a mean to the objective of mitigating the potential usurious pricing in
murabaha, the Muslim community can utilize the regulation on the prohibition
of usury over conventional fnancial institutions. As mentioned earlier, so far as
a free and fair competitive market between Islamic and conventional fnanciers
is being operated, any Islamic lender would not charge a proft margin in the
murabaha transaction greater than that which is equivalent to the usury referred
in the conventional fnance. This suggests that the harmonious coexistence with
conventional fnance and the maintenance of free and fair competitive market
would amount to be an important strategy for mitigating the exploitation in
societies, consequently realizing the maqasid al-Shari’ah.

5 A policy option: Islamic fntech in merchant fnancing

Some scholars insist that the extent of fnancial exclusion is high within the
Muslim community because Muslims have traditionally stayed away from the
fnancial sector owing to Islamic prohibition of riba, gharar, and maysir. These
scholars expect Fintech solutions to facilitate crowdfunding and P2P lending,
consequently automating and enhancing Islamic fnancial inclusion (Nisar and
Farooq, 2019). As discussed earlier, the precondition of capital distribution is
the capital accumulation. Unless there is a substantial accumulation of capital
and wealth in the community, the smooth transformation to the mode of direct
fnance including crowdfunding and P2P lending would be infeasible. Taking
into consideration the low level of banking and fnancial deepening in Arab
countries and Asian Muslim-majority nations, we should not too much expect
Fintech solutions to facilitate the mode of direct fnance. Rather, the debate on
how to utilize Fintech solutions to facilitate the expansion of Islamic banking
asset should be outweighed.
Some scholars expect the advanced technologies such as blockchain, distrib-
uted ledger technology (DLT), and smart contract to reduce the prevalence of
moral hazard and agency problem in mudarabah and musharakah contracts. These
technologies are expected to ‘reduce information asymmetry and the trust
gap and can help improve transparency and reporting and thus, help improve
compliance and ultimately reduce cost, which can make these contracts more
competitive and Shari’ah-compliant’ (Nisar and Farooq, 2019, p. 73). This ‘New-
Keynesian’ claim overlooks an important credit rationing or credit crunch which
can be caused by other types of information problems. From the ‘Post-Keynesian’
perspective, the credit crunch or the volatility in credit market are stemming
from lenders’ ‘uncertainty’ in credit risk screening, which is one of the most cru-
cial factors making their screening and monitoring activities extremely difcult
and inefective. According to this view, the credit risk involved is a subjective
 Digital transformation in Islamic fnance 31

judgment, and this can vary across persons making the judgment based on their
experience and knowledge of subtle and unquantifable aspects of a situation.
The formulation of subjective probability judgments is what Frank Knight
describes as decision-making under uncertainty. Uncertainty – ‘unmeasurable
risk’ in the Knightian term – may be more or less ignored or, alternatively, sub-
ject probabilities may be applied, together with a risk premium to cover unspec-
ifed adverse events. Since there is no precise economic theory of how decisions
are made under uncertainty, agents tend to observe each other’s responses and
do not deviate widely from the norm regarding which factors should be taken
into account and how much weight should be assigned to them (Suzuki, 2011).
But ‘when the crowd is wrong ex-post, there is the making of a fnancial crisis’
(Davis, 1995, p. 135).
The absorption of various types of risk and uncertainty depends on each
country’s capacity of capital accumulation enabling to absorb and diversify the
risk and uncertainty. In this sense, it would make sense to observe why the P2P
lending market has developed in the United States (see the ratio of domestic
credit to private sector in the United States in Table 1). Gassner and Lawrence
(2019) report that ‘Lendingclub’ in the United States is one example, besides,
the most thriving country for P2P lending is China in the context of its ‘shadow
banking’.
Islam is a religion born in the Arabian Desert, where trade constituted the
most important, ‘perhaps even the sole economic activity, favours merchants,
property rights, free trade and market economy’ (Çizakça, 2011, p. xv). In this
context, Islam is called the religion for merchants (Ayub, 2007). The business
ethics in the Islamic mode of transactions are related to the civilized urban way
of life at the birth of Islam. The holy Prophet had spent half of his life working as
a merchant in Mecca, where the urban culture was fourished and the values for
facilitating fair transactions among the merchants in equal positions were shared
(Okawa, 2008). Perhaps, the primary principles in the Islamic mode of fnancial
intermediation including the prohibition of riba should be understood in the
historical context that ‘trade’ constituted nine-tenth of the livelihood of early
Muslims. In fact, of the four righteous Caliphs, Abu Bakr was a cloth merchant
and Uthman was an importer of cereals (Çizakça, 2011, p. xiv).
From another perspective, we may say that Islamic fnancial institutions are
expected to provide the necessary working capital for ‘merchants’. We hypothesize
that, in particular, Islamic banks as the core institutions in the Islamic mode of
fnance are, more or less, expected to take the role as a provider of merchant’s
capital. Here, the term ‘merchant’s capital’ reminds us the Marxian tradition on
the identifcation of the circuit of merchant’s capital separated from the circuit of
interest-bearing capital (see Miah, Suzuki and Uddin, 2021).
One of the salient features in the Marxian view on money is to diferentiate
between the circuit of merchant’s and industrial capital and the circuit of
interest-bearing capital. There is a defnite relationship between the two functions
of money in capitalism, since the exchanges of simple commodity circulation
32 Yasushi Suzuki and Mohammad Dulal Miah

and of industrial production are ultimately connected, ‘most notably when we

recognize that C-M (money as capital and money as money) for one agent is
M-C for another’ (Fine and Saad-Filho, 2004, p. 136). Further, both the use of
money as money and as capital can involve credit relations as money is lent and
borrowed to facilitate the acts of exchange involved.
In a capitalist economy, commercial capital buys and sells commodities and
remains entirely within the sphere of exchange. ‘Commercial profts accrue
through the resale of the commodities originally bought by merchants, and not
through the employment and exploitation of labor power’ (Itoh and Lapavitsas,
1999, p. 69). With the development of capitalist production, the acts of buying
and selling become the specialized tasks of particular capitalists (for example,
transport, storage, retailing, and wholesale), thereby creating a division of ‘labor’
among capitalists. In this case, industrial capitalists rely upon specialized merchant
capitalists to undertake the realization of (surplus) value. Furthermore, certain
functions arising from the commodity form of production become the special-
ized activity of money dealers. These include book-keeping, the calculation and
safeguarding of a money reserve, and the rules of cashiers and accountants (Fine
and Saad-Filho, 2004).
One of the themes running through Marx’s treatment of capital in exchange is
that there is a crucial distinction to be made between money as money and money
as capital. Money functions as money when it acts simply as a means of exchange
between two agents, hence mediating commodity exchange, irrespective of the
position of those agents in the circulation of capital as a whole – whether they
are capitalists engaging in production or capitalists and workers engaging in con-
sumption. Hence, the role of money as money is understood by reference to
simple commodity circulation, C – M – C. By contrast, money as capital is
understood by reference to the circuit of capital, M – C...P...C′ – M′, where
money is employed for the specifc purpose of producing surplus value (Fine and
Saad-Filho, 2004, pp. 135–136).
Basically, in the Marxian context, there is the division between industrial
capital that produces surplus value, and merchant’s capital that circulates it and
facilitates the transition between the commodity and money forms of capital,
which indirectly increasing the efciency of industrial capital and consequently
the mass of surplus value produced (Fine and Saad-Filho, 2004). For Marx, both
commercial and banking capital as the advanced capitalist form are integral parts
of the sphere of circulation in the circuit of total social capital. As capitals are
integral to the circuit, they take part in the redistribution of total surplus value
on the same footing as industrial capital. Interest-bearing capital, on the other
hand, is continually formed outside the circuit and enters and exits the latter.
By so doing, interest-bearing capital mobilizes the spare money funds present in
the course of accumulation and reallocates them among the capitals, integral to
the circuit (thus, also accelerating the turnover of these capitals). Consequently,
interest-bearing capital also earns a share of the total surplus value, but not on the
 Digital transformation in Islamic fnance 33

same basis as industrial, commercial, and banking capital (Itoh and Lapavitsas,
1999, p. 70). The Marxian dichotomy of money circulation has, interestingly, a
compatibility with the Islamic perspective on capital.
Merchants’ capital is an ancient form of capital that has always had extensive
connections with interest-bearing capital in the Marx’s term. In general, in the
Islamic mode of fnancial intermediation, interest-bearing capital is prohibited.
Marx attempted to show that concentration of ‘idle’ money is systematically
generated in the course of the reproduction of total social capital. Temporarily
idle profts, the depreciated funds of fxed capital, precautionary reserves, and
reserves that allow the continuity of the turnover of capital as production and
circulation alternate are all purely capitalist forms of money hoarding (Itoh and
Lapavitsas, 1999). Needless to say, even in the Islamic mode of fnancial inter-
mediation, constantly creating and mobilizing idle money in the course of cap-
italist reproduction as a foundation for both commercial and banking credit is
a very important challenge. While following the principle of prohibition of
interest-bearing capital, the Islamic banking system is expected to be a mecha-
nism for the internal reallocation of spare funds among industrial and commer-
cial capitalists.
As mentioned earlier, Marx observed the division between industrial capi-
tal which produces surplus value, and merchant’s capital which circulates it and
facilitates the transition between the commodity and money forms of capital,
indirectly increasing the efciency of industrial capital and, therefore, the mass
of surplus value produced. The Marxian tradition on the identifcation of the cir-
cuit of merchant’s capital is, in our view, suggestive for identifying and reviewing
the expected role of Islamic banks. From the Islamic historical perspective, we
hypothesize that Islamic banks are expected to take the role as a provider of
merchant’s capital. Of course, as Marx pointed out, merchant’s capital is subject
to mobility with industrial capital, because industrial capitalists can move into
trading, and vice versa.
Miah, Suzuki and Uddin (2021) investigate the sectoral distribution of invest-
ment of various types of Bangladeshi banks by the end of December 2019.
According to the data, the majority of the fnancing goes to trade and commerce
for almost all types of banks, except for specialized and foreign banks. In the case
of Islamic banks, 40.58% of the fnancing goes to trade and commerce, which
is the highest among all types of banks. The rate is even higher than the rate of
35.35% of other private banks excluding Islamic banks. The combined propor-
tion of working capital fnancing for industries and trade and commerce portrays
that about two-thirds of Islamic banking sector’s asset is concentrated on these
two sectors. Most importantly, 41.26% and 25.63% of income for Islamic banks
come from trade and commerce and working capital fnancing, respectively. This
leads to an aggregate income from these two sectors a total of 66.89% for Islamic
banks, which is the highest in the banking sector. This pattern of fnancing of
Islamic banks conforms to the Marxian circuit of merchant’s capital.
34 Yasushi Suzuki and Mohammad Dulal Miah

Besides, remittance is considered a major pillar for the economy of Bangladesh.

Islamic banks account for more than 35% during the whole period and their
share remained higher than private banks excluding Islamic banks, that is,
conventional private banks. Among all banks, Islami Bank Bangladesh Limited
has secured the frst position by holding 19.6% of the total market share (Miah,
Suzuki and Uddin, 2021).
To satisfy their major clients and customers, it would make sense for Islamic
banks to pay their best efort to apply advanced technologies such as blockchain,
DLT, and smart contract, frst, to their business focuses of trade fnance and
remittance. DX in trade fnance and digital remittance should be put their prior-
ity in the promotion of Fintech.
Nisar and Farooq (2019) insist that the Islamic fnancial institutions remain
elitist and, in spirit, follow the segregation from the real economy.

Over the years, Islamic fnance has come to be known more as a conscience
keeper rather than a real economic movement focusing on distancing itself
from riba, supporting the real economy and spreading economic fruits to a
wider section of the society.
(Nisar and Farooq, 2019, p. 65)

Islamic fnance scholars ask; why do Islamic banks not actively participate in
equity-like fnancing instead of their current debt-like fnancing? This is a right
question but wrongly directed because suggesting banks to take more risk asso-
ciated with participatory fnance is contrary to the long-standing practice of the
banking industry. It is rational for the greater stability of a fnancial system that
Islamic banks simply should not be encouraged to accept higher risk because
the bankruptcy of a single bank can lead to a county-wide or world-wide bank
run which in turn, through its ripple efect, may trigger fnancial and economic
crisis. In the case of bankruptcy of a depositary corporation, it is usually the
depositors who lose their deposit asset beyond the amount insured under the
deposit insurance. On the other hand, they are ultimately the taxpayers who
would pay the socio-economic cost for insurance. Even worse, once it happens,
depositors lose their confdence on the fnancial system, which would often lead
to the disintermediation of fnancial resources resulting in economic slowdown
(Suzuki and Miah, 2018b).
Under the PLS contract, banks’ function is confned merely to fnancial
intermediaries. Ideally, they bear no risk of clients because they can transfer the
risks associated with the borrowers to the depositors (for instance, investment
account holders). This structure would, however, cause serious principal-agent
problems between depositors (investors) and Islamic banks, which actually drain
the ‘risk fund’ as resources that are needed for participatory fnancing. More
importantly, the depositors of Islamic banks like their conventional counterparts
are mostly small savers who are assumed to be risk averse. A wholesale transfer
 Digital transformation in Islamic fnance 35

of risk may keep this group of depositors away from the formal fnancial system.
The operation of Islamic banks can be seen as complementary, to a great extent,
to the conventional banking model at least, in regard to fnancial inclusion and
fnancial stability (Suzuki and Miah, 2018b).
Given the nature of commercial banks as depository corporations, it makes
sense for Islamic banks to concentrate on the mark-up fnancing on their attempt
to protect the welfare of depositors. The ‘division of work’ and ‘specialization’
strategy by Islamic banks would contribute to mediating more ‘safety’ idle money
from the general risk-averse depositors who are limitedly willing to absorb risk
and uncertainty, as well as meeting the still strong demand of asset-based invest-
ment, partly contributing to further economic development through the credit
multiplier (Suzuki and Miah, 2018b).
In our view, Islamic banks should pay their best efort to apply the advanced
technologies such as blockchain, DLT, and smart contract, frst, to their business
focuses of trade fnance and remittance. Their division of work and speciali-
zation strategy would be the most feasible and, perhaps, the most desirable for
themselves and societies, provided that (1) a certain harmonious coexistence with
conventional fnancial institutions can be expected, because the other full range
of fnancial products and services except trade fnance and remittance should be
provided for societies by conventional fnance providers, and (2) a certain level
of competitive edge in trade fnance and remittance by Islamic banks toward
conventional banks can be preserved.
Conventional banks also pay their efort to apply the advanced technologies
to their business of trade fnance and remittance. Under a cut-throat competition
with conventional banks, Islamic banks may face the difculties in creating a
level of profts enough to maintain their franchise value as prudent providers and
servicers of trade fnance and remittance for their clients. In addition to the proft
base, as was discussed earlier, Islamic banks need to earn an extra proft – Islamic
bank rent – to cover the cost of Shari’ah compliance as well as raf’al-haraj compli-
ance which conventional banks do not require to pay. Islamic banks may face the
difculties in surviving under an unfettered competitive market.
A certain fnancial support from waq f/zakat or Islamic multinational fnancial
organizations or donors who have the incentives to incubate and enhance the
Islamic banking industry is to be considered in the Muslim community. ‘An
efcient fnancial intermediary will mobilize funds from savers to those seek-
ing these funds for more productive use at an afordable cost to help accelerate
the growth and development of the economy’ (Nisar and Farooq, 2019, p. 66).
However, the Muslim community is, at the beginning, expected to consider how
to incubate and develop an efcient Islamic banking and fnancial intermediary.
While avoiding the occurrence of potential free-riding and moral hazard prob-
lems, the Islamic bank rent opportunity for improving the efciency in dealing
with trade fnance and remittance to compete with conventional banks should
be argued.
36 Yasushi Suzuki and Mohammad Dulal Miah

6 Remaining issues in the trend of FinTech

Should the lender be altruistic to the borrower? In general, the lenders as finan-
cial intermediaries are expected to pay the best effort to maximize the benefit of
the stakeholders, in particular, the depositors and/or investors as fund providers
to lenders. In the context of Islamic finance upon PLS, the answer may depend
on how altruistic those fund providers to lenders are. In theory, if the fund
providers to lenders are concerned more about ‘wealth distribution’ rather than
‘wealth creation’, the general altruism in lending behavior might be observed.
What can we expect Fintech to install the general altruism in fund providers?
Altruism is a vibrant concept that may inculcate the motive to assist the poor.
However, if altruism interacts with a sense of strong reciprocity, the meaning of
altruism may take a different form. Bowles (2012, pp. 145–146) clarifies

strong reciprocators wish to help those who try to make it on their own
but who, for reasons beyond their own control, cannot, and they wish to
punish, or withhold assistance from, those who are able but unwilling to
work hard or who violate other social norms.

Bowles further points out that both unconditional altruists and strong reciprocators
may support redistribution to the poor. In arguing so, Bowles refers to ‘strong
reciprocity’ which is a propensity to co-operate and share with others similarly
disposed, even at personal cost, and a willingness to punish those who violate
co-operative and other social norms, even when punishing is personally costly
and cannot be expected to result in net personal gains in the future (Bowles,
2012). Bowles is concerned about strong reciprocity as a driving force of mak-
ing people willingly help the poor but withdraw support when they perceive
that the poor may cheat or not try hard enough to be self-sufficient and morally
upstanding.

Never shall you attain the highest state of virtue unless you spend (in the
cause of Allah) out of that which you love; and whatever you spend. Allah,
indeed, knows it well.
(Qur’an 3:92)

Islamic altruism appears to depend on the reciprocity backed by mutual belief in

the omnipotence and omniscience of the absolute power. In the Muslim society,
there is the powerful concept of Allah’s ownership of all wealth and that human
beings are mere ‘trustees’ of this wealth (Qur’an 3:180, 57:10). In contrast, it is
mentioned by Nagel (1970, p. 3), in the tradition of western political philosophy,
altruism itself depends on a recognition of the reality of the other persons, and on
the equivalent capacity to regard oneself as merely one individual among many.
In our view, the capacity as economic and financial ‘power’ enabling them to
make altruistic behaviors (also make necessary penalties or sanctions if necessary)
 Digital transformation in Islamic fnance 37

should be sought and taken into consideration in Islamic independent reasoning

in the mu’alamat. As was mentioned earlier, the lenders as fnancial intermediaries
are expected to pay the best efort to maximize the beneft of the stakeholders,
in particular, depositors and/or investors as fund providers to lenders. In reality,
the ‘unconditionally altruistic’ fund is not ample. Therefore, the practice of PLS
should be based on an efective power retained by the lender to discipline the
borrower. However, we should ask if the retention of the power by the lender
would not breach maqasid al-Shari’ah.
Wealth creation should be outweighed to realize a collaborative economy or
sharing economy. Wealth in essence is khair or something good (Qur’an 2:215
and 2:272). According to Izutsu (2000), khair is a very comprehensive term,
‘meaning as it does almost anything that may be considered in any respect valua-
ble, benefcial, useful, and desirable’ (Izutsu, 2000, p. 222). Mustafa and El Amri
(2019) demonstrate a framework based on maqasid al-Shari’ah for measuring the
fntech business activities in Islamic fnance. Three dimensions are identifed:
development of Mal (wealth), Shari’ah value proposition, and socio-economic
welfare. ‘The dimension of the development of al-Mal is the means to achieve the
other two dimensions, Shari’ah value proposition and socio-economic welfare’
(Mustafa and El Amri, 2019, p. 109). Allah is the sole owner of mal and people
are entrusted to vicegerents to utilize this wealth in a manner ordained by Allah
(Qur’an 27:40). In another instance, mal is regarded as a test from Allah for man
(Qur’an 6:165). ‘In dealing with wealth, people are urged by the Qur’an to avoid
negative elements such as hoarding, inequitable circulation of wealth and its con-
centration in a few hands’ (Mustafa and El Amri, 2019: 100).
Kamali (2000) points out that the position of the shari’ah in the area of
mu’amalat is predicated on the prevention of conficts, exploitation, and injustice
among people. Kamali (2000) insists that this is an important shari’ah principle
that is sometimes neglected by those who maintain that the intellect and human
reason have no place in the shari’ah. Many problems in the felds of Islamic eco-
nomics, banking, and fnance arise from this inability to understand the proper
role of reason in the shari’ah (Kamali, 2000, p. 78).
Ijtihad (independent reasoning), according to Kamali (2000), is the main vehi-
cle by which the shari’ah can be adjusted so as to accommodate social change,
and it relies, to a large extent, on the proper understanding and application of
ta’lil (ratiocination). The law concerning mu’amalat is generally founded on their
rational, efective cause and beneft. This means that the law in this area is open
to rational analysis, enquiry, and evaluation (Kamali, 2000, p. 78).
From a liberal point of view, the ratiocination in the Qur’an means that the
laws of shari’ah outside ibadat are not imposed for their own sake but in order to
realize certain benefts (Kamali, 2000, p. 82). This pragmatic viewpoint, in our
view, can be reinforced by the reorganization of the concept of hilm in the con-
text of independent reasoning in the mutual economic activities among us, that
is, in the human relation – from man to man. Hilm is considered as calmness,
balance mind, self-control, and steadiness of judgment (Izutsu, 2015, p. 211).
38 Yasushi Suzuki and Mohammad Dulal Miah

Izutsu insisted that hilm is not a passive quality, but a positive and active power
of the soul that is strong enough to curb her own impetuosity that may drive
the man headlong to folly and calm it down to patience and forbearance. It is a
sign of the power and superiority of the mind (Izutsu, 2015, p. 213). The con-
cept of hilm itself had to disappear from the stage as a basic religious attitude of
man toward God. In our view, the concept of hilm should be resurrected in the
process of independent reasoning for facilitating and monitoring commercial
transactions.
Islamic economies are concerned about fulflling the socio-economic
objectives of ‘social justice’ in accordance with the objectives of shari’ah, like as
the ‘altruism’ of the Medinan Muslims was praised by Allah in the Qur’an (Qur’an
59:9). In the Muslim society, there is the powerful concept of Allah’s ownership
of all wealth and that human beings are mere ‘trustees’ of this wealth (Qur’an
3:180, 57:10). As is summarized by Naqvi (2003, p. 105), what this means is
that the individual’s right to spend his wealth is limited in several ways: (a) he
must spend it according to Divine wishes (Qur’an 57:10), (b) he cannot hoard
it, especially when there are urgent social needs to be met (Qur’an 3:180), (c)
he must give it to the poor not as charity but as a matter of the latter’s acknowl-
edged right in his wealth (Qur’an 70:24–25), and (d) he must spend wealth only
in moderation because being spendthrift is both a social waste and a cardinal sin
(Qur’an 17:26–27). Many scholars including Mawdudi (2011) and Naqvi (2003)
point out that the Islamic right of the poor to receive their share in the wealth of
the rich strengthens altruism signifcantly in running efciently and equitably an
essentially individualistic economy, and it minimizes the free-riding and assur-
ance problems. The Holy Qur’an unambiguously states that the poor have a due
share in the wealth of the rich.
We should argue that to ensure the poor’s right in society, the rich man’s
accumulation of wealth must be a pre-requisite in a sense that no wealth
distribution can be done before wealth creation. It implies that the Muslim
individuals should be encouraged to become those who can aford to supply
a part of their earnings for realizing social justice. We may say that the Muslim
individuals should be encouraged to become hilm (or halim) toward man in the
mu’amalat. This dimension in Islamic altruism should be more argued. Perhaps,
this dimension is related to the issue of enhancing the supply of participatory
fnance (musharakah) or venture capital for entrepreneurs who face difculties in
fund-raising. As hilm is essentially based on the concept of ‘power’ (qudrah), eco-
nomic and fnancial ‘power’ is construed as an essential force for incubating new
ventures and realizing social justice.
As the scholars have generally characterized, the Shari’ah should be the legal
system of pragmatism and convenience (Kamali, 2000, p. 70). Here, we would
propose that the concept of hilm toward man should be argued as a supplementary
value in the process of creating ijma (general consensus), maslahah (public good),
and fatwa (juristic opinion) which often originate in the customs and living expe-
rience of the Islamic community. The application of advanced technologies is
 Digital transformation in Islamic fnance 39

to be argued from the viewpoint of contributing to the ‘wealth creation’ to

bring ‘ease’ (taysir) and ‘the removal of hardship’ (raf’al-haraj) in borrowers, simul-
taneously enhancing the economic and fnancial ‘power’ as their capacity for
contributing to the ‘wealth distribution’ to society in the next round.
The regulators need to consider an appropriate legal framework for creating
the Islamic bank rent opportunity and protecting the efective power by the
lenders. The retention of efective power by the lender is less argued in design-
ing the regulatory framework of the Islamic mode of fnancial intermediation.
As discussed earlier, the conceptualization of resurrected hilm toward the other
persons can be regarded as the process of seeking for a hybrid way of thinking
of Islamic altruism. We propose that the practice of PLS should be based on an
efective power retained by the lender to discipline the borrower. The retention
of the power by the Islamic lender does not necessarily breach maqasid al-Shari’ah,
so far as the power is well-managed and monitored upon the concept of hilm. The
regulator is expected to take the role as the monitor to see if the economic and
fnancial power retained by the Islamic lender contribute to the ‘wealth creation’
to bring ‘ease’ (taysir) and ‘the removal of hardship’ (raf’al-haraj) in borrowers.
Another issue is that the P2P mode of saving and payments would put the
existing centralized (monopolized) mode of savings and payments, which has
been highly regulated and monitored by the regulators under the current mode
of supervising the banking industry for ensuring fnancial stability to an end.
How will the decentralized/P2P mode of savings and payments afect the fnan-
cial stability? In theory, as more commercial banks are shifting their mode of
business to investment banking by diversifying credit risk, the regulators would
be less concerned about the accumulation of non-performing loans which would
trigger the bank run. However, the regulators may be more concerned about a
liquidity shock in a respective level of diversifed investors, which may trigger
the chain reaction of the shortage of liquidity in diversifed types of currency and
money upon digitalization. How will the regulators respond to the diversifed
and P2P mode of savings and payments? The response is becoming an important
challenge for the regulators to respond to the trend of FinTech and Digitalization
of fnancial products and services.

7 Concluding comments
We aimed in this chapter to assess critically how FinTech and DX in fnancial
contracts reshape the current mode of fnancial intermediation and Islamic
mode of fnancial contracting. Obviously, there are positive and negative efects
FinTech would bring to Islamic fnancial institutions. We have argued that so far
as P2P lending provides less bankable individuals and MSMEs with the oppor-
tunities to raise fund, it would contribute to fnancial inclusion. It implies that
P2P lending would not necessarily cast a threat to conventional commercial
banks, because those less bankable and marginalized individuals and MSMEs
are not their main clients. On the other hand, it implies that if the expansion of
40 Yasushi Suzuki and Mohammad Dulal Miah

P2P lending includes the bankable individual clients and frms, in particular, the
secured loan backed by residential or commercial property as collateral (P2P/
Marketplace Property Lending) would cast a threat to conventional commercial
banks. In other words, we may say that it would give an opportunity for them
to diversify the associated risk and uncertainty as well as to create a new agency/
arrangement fee business by fund arrangement upon online and mobile banking
platform.
Second, we have illustrated that the efect of Fintech is equally destructive
or creative for both conventional and Islamic banks. The P2P mode of fnan-
cial intermediation and services would make traditional commercial banks –
irrespective of conventional or Islamic banks – extremely difcult to earn a
sufcient proft (bank rent) to maintain their franchise value. Some innovative
commercial banks may reshape their mode of business for their survival with
the direction to P2P and ‘direct-fnance’ mode of fnancial intermediation and
services upon the technology of digitalization. We have highlighted that Islamic
banks are required to earn extra proft, what we call as ‘Islamic bank rent’, to
maintain the franchise value as prudent Shari’ah-compliant lenders, while com-
peting with innovative conventional banks. In an unfettered competitive mar-
ket, in theory, the survival of Islamic banks in the banking industry would be
extremely difcult.
Third, the infrastructure of Islamic fnance, including Islamic banking, is
necessary for facilitating investment and economic transactions for Muslim
depositors and investors. If the infrastructure is not available, they would have
to pay more transaction costs for Shari’ah compliance at individual levels. If they
are aware (or unsure) that the proceeds from their investment had not complied
with the Shari’ah principles, Muslim investors would consider the need for the
proceeds to be ‘purifed’, for instance, by donating to charity or zakat institu-
tions. This circumstance may discourage them from engaging in investment. In
other words, the infrastructure of Islamic fnance could possibly mobilize more
funds from Muslim investors, which would also contribute to the national eco-
nomic growth and development, consequently, not only for Muslims but also for
non-Muslims (Pramono and Suzuki, 2021).
Fourth, we have identifed a potential area in which FinTech can provide a
competitive edge to Islamic fnancial institutions. We have shown that incubat-
ing the Islamic banking industry with a focus on the DX in the fnancial products
related to ‘merchant’s capital’ in trade fnance and remittance would contribute
to the national economic growth and development. Simultaneously, the Muslim-
majority countries should opt for a DX of the Islamic mode of fnancial inter-
mediation while keeping a harmonious coexistence with conventional fnancial
providers under a fair and competitive condition. This argument underlies the
rational that it is not always feasible for the Muslim-majority countries to auto-
matically transform into the P2P direct-fnance mode for several reasons. The
argument on ‘what is desirable’ (wealth distribution) as a pious work might be a
belief or worship from the religious perspective. Simultaneously, we propose that
 Digital transformation in Islamic fnance 41

the Muslim community recognize that the argument on ‘what is feasible’ (wealth
creation) is equally welfare relevant. The pragmatist view on Islamic fntech
should be argued in parallel to achieve the maqasid al-Shari’ah.
Finally, our analysis suggests that it is not always feasible for the Muslim-
majority countries to automatically transform into the P2P direct-fnance mode.
In our view, the Muslim-majority countries should opt for a DX of the Islamic
mode of fnancial intermediation while keeping a harmonious coexistence with
conventional fnancial providers under a fair and competitive condition, simulta-
neously, seeking a consensus in the Islamic community for incubating (providing
a certain fnancial support) the Islamic banking industry with a focus on the
DX in the fnancial products related to ‘merchant’s capital’ in trade fnance and
remittance.

Notes
1 Technology-enabled fnancial transactions such as wealth management, robo-
advising, peer-to-peer lending, crowdfunding, and digital payments have spawned
very recently. According to Forbes, digital banking amounted to US$7.7 billion
in 2019 whereas digital insurance (insurtech) recorded transactions amounting to
US$6.8 billion, and the digital payment summed up US$15.1 billion at the same time.
2 The process of credit creation is also known as ‘credit multiplier’. In theory, the total
credit creation is determined by the amount of original deposit and the reciprocal
number of ‘cash reserve ratio’ (1/r). If the cash reserve ratio is 10% (0.1), the credit
multiplier efect would be 10 times (1/0.1).

References
Alam, N., Gupta, L. and Zameni, A. (2019) Fintech and Islamic Finance: Digitalization,
Development, and Disruption, Cham: Springer Nature Switzerland.
Alkhan, A. M. and Hassan, M. K. (2019) ‘Tawarruq: Controversial or Acceptable?’, Arab
Law Quarterly, 33(4), 307–333.
Aoki, M. (1994) ‘Monitoring Characteristics of the Main Bank System: An Analytical
and Developmental View’, in M. Aoki and H. Patrik (eds.), The Japanese Main Bank
System: Its Relevance for Developing and Transforming Economies (pp. 109–141), New York:
Oxford University Press.
Ayub, M. (2007) Understanding Islamic Finance, Chichester: John Wiley & Sons.
Bakar, M. D. (2016) Shariah Minds in Islamic Finance: An Inside Story of A Shariah Scholar,
Kuala Lumpur: Amanie Media.
Bakar, M. D. (2021) Maqasid Shariah: The Face and Voice of Shariah Embedded with Big Data
Analytics & Artifcial Intelligence, Kuala Lumpur: Amanie Media Sdn Bhd., in press.
Bowles, S. (2012) The New Economics of Inequality and Redistribution, New York: Cambridge
University Press.
Cambridge Centre for Alternative Finance (CCAF) (2020) The Global Covid-19 FinTech
Market Rapid Assessment Study.
Chapra, M. U. (2000) The Future of Economics: An Islamic Perspective, Leicester: The Islamic
Foundation.
Çizakça, M. (2011) Islamic Capitalism and Finance, Cheltenham: Edward Elgar.
Davis, E. P. (1995) Debt Financial Fragility and Systemic Risk, Oxford: Clarendon Press.
42 Yasushi Suzuki and Mohammad Dulal Miah

De Anca, C. (2019), ‘Fintech in Islamic Finance: From Collaborative Finance to

Community-Based Finance’, in U. A. Oseni and S. Nazim Ali (eds.), Fintech in Islamic
Finance: Theory and Practice (pp. 47–63), New York: Routledge.
Dusuki, A. W. and Abozaid, A. (2007) ‘A Critical Appraisal on the Challenges of
Realizaing Maqasid Al-Shariaah in Islamic Banking and Finance’, International Journal
of Economics, Management and Accounting, 15(2), 143–165.
El-Hawary, D., Grais, W. and Iqbal, Z. (2007) ‘Diversity in the Regulation of Islamic
Financial Institutions’, The Quarterly Review of Economics and Finance, 46, 778–800.
Fine, B. and Saad-Filho, A. (2004) Marx’s Capital, London: Pluto Press.
Gassner, M. and Lawrence, J. (2019) ‘Fintech in Islamic Finance: Business Models and
the Need for Legal Solutions’, in U. A. Oseni and S. Nazim Ali (eds.), Fintech in Islamic
Finance: Theory and Practice (pp. 174–182), New York: Routledge.
Hazik, M. and Hassnian, A. (2019) Blockchain, Fintech, and Islamic Finance: Building the
Future in the New Islamic Digital Economy, Berlin: Walter de Gruyter.
Hellmann, T. F., Murdock, K. C. and Stiglitz, J. E. (1997) ‘Financial Restraint: Toward
a New Paradigm’, in M. Aoki, H.-K. Kim and M. Okuno-Fujiwara (eds.), The Role
of Government in East Asian Economic Development: Comparative Institutional Analysis
(pp. 163–207), Oxford: Clarendon Press.
Irfan, H. and Ahmed, D. (2019) ‘Fintech: The Opportunity for Islamic Finance’, in U. A.
Oseni and S. Nazim Ali (eds.), Fintech in Islamic Finance: Theory and Practice (pp. 19–32),
New York: Routledge.
Itoh, M. and Lapavitsas, C. (1999) ‘Interest-Bearing Capital: The Distinctive Marxist
Approach’, in M. Itoh and C. Lapavitsas (eds.), Political Economy of Money and Finance
(pp. 59–80), Basingstoke: Macmillan.
Izutsu, T. (2000) The Structure of Ethical Terms in the Quran, Chicago: ABC International
Group, Inc.
Izutsu, T. (2015) [originally published in 1964] God and Man in the Koran: Semantics of the
Koranic Weltanschauung, Tokyo: Keio University Press.
Kamali, M. H. (2000) Islamic Commercial Law, Cambridge: The Islamic Texts Society.
Khan, M. H. (2000) ‘Rents, Efciency and Growth’, in M. H. Khan and J. K. Sundaram
(eds.), Rents, Rent-Seeking and Economic Development: Theory and Evidence in Asia
(pp. 21–69), Cambridge, UK: Cambridge University Press.
Looft, M. (2014) Inspired Finance, Palgrave: Macmillan, Basingstoke.
Mawdudi, S. A. A. (2011) First Principles of Islamic Economics, translated by Ahmad Imam
Shafaq Hashemi, Leicestershire: The Islamic Foundation.
Miah, M. D., Suzuki, Y. and Uddin, S. M. S. (2021) ‘The Impact of COVID-19 on
Islamic Banks in Bangladesh: A Perspective of Marxian “circuit of merchant’s
capital”’, Journal of Islamic Accounting and Business Research, 12(7), 1036–1054.
Mustafa, O. M. and El Amri, M. C. (2019) ‘Fintech in the Light of Maqasid al-Shari’ah’,
in U. A. Oseni and S. Nazim Ali (eds.), Fintech in Islamic Finance: Theory and Practice
(pp. 93–112), New York: Routledge.
Nagel, T. (1970) The Possibility of Altruism, Princeton, NJ: Princeton University Press.
Naqvi, S. N. H. (2003) Perspectives on Morality and Human Well-Being, Leicestershire: The
Islamic Foundation.
Nisar, S. and Farooq, U. (2019) ‘Financial Intermediation, Fintech and Shari’ah
Compiance’, in U. A. Oseni and S. Nazim Ali (eds.), Fintech in Islamic Finance: Theory
and Practice (pp. 64–74), New York: Routledge.
Okawa, S. (2008) Kaikyo Gairon, Tokyo: Chikuma Shobo (in Japanese).
Oseni, U. A. and Nazim Ali, S. (2019) ‘Fintech in Islamic Finance’, in U. A. Oseni and S.
Nazim Ali (eds.), Fintech in Islamic Finance: Theory and Practice (pp. 3–15), New York:
Routledge.
 Digital transformation in Islamic fnance 43

Pramono, S. and Suzuki, Y. (2021) Growth of Islamic Banking in Indonesia: Theory and
Practice, New York: Routledge.
Siddiqi, M. N. (2004) Riba, Bank Interest and the Rationale of Its Prohibition, Jeddah, Saudi
Arabia: Islamic Research and Training Institute.
Stewart, A., Lamont, K. and Yaworsky, K. (2018) Demystifying Digital Lending. Available at:
https://www.fndevgateway.org/sites/default/fles/publications/fles/1123_digital_
lending_r10_print_ready.pdf [Accessed July 7, 2021].
Sundararajan, V. and Errico, L. (2002) ‘Islamic Financial Institutions and Products in the
Global Financial System: Key Issues in Risk Management and Challenges Ahead’,
IMF Working Paper IMF/02/192, 1–27. Washington: International Monetary Fund.
Available at http://kantakji.com/fqh/Files/Markets/y144.pdf.
Suzuki, Y. (2011) Japan’s Financial Slump: Collapse of the Monitoring System under Institutional
and Transition Failures, Basingstoke: Palgrave Macmillan.
Suzuki, Y. and Miah, M. D. (2018a) ‘Heterodox vs. Islamic Views on Interest and
Uncertainty’, in Y. Suzuki and M. D. Miah (eds.), Dilemmas and Challenges in Islamic
Finance (pp. 11–27), New York: Routledge.
Suzuki, Y. and Miah, M. D. (2018b) ‘Alternative Views Upon the “Division of Work”
and “specialization” towards a New Mode of Proft-Loss Sharing’, in Y. Suzuki and
M. D. Miah (eds.), Dilemmas and Challenges in Islamic Finance (pp. 177–189), New York:
Routledge.
Suzuki, Y. and Miah, M. D. (2021) ‘Shari’ah-Compliant Benchmark and Shari’ah-based
“raf ’al-haraj” Benchmark on Prohibition of Riba’, International Journal of Islamic and
Middle Eastern Finance and Management, 14(1), 151–163.
Suzuki, Y. and Uddin, S. (2014) ‘Islamic Bank Rent: A Case Study of Islamic Banking in
Bangladesh’, International Journal of Islamic and Middle Eastern Finance and Management,
7(2), 170–181.
Wanniarachchige, M. K., Miah, M. D. and Suzuki, Y. (2017) ‘Banks as Financial
Intermediaries and Their Roles in Economic Development’, in Y. Suzuki et al. (eds.),
Banking and Economic Rent in Asia (pp. 26–37), New York: Routledge.
Wilson, R. (2019) ‘Implications of Technological Advance for Financial Intermediation
in Islamic Finance’, in U. A. Oseni and S. Nazim Ali (eds.), Fintech in Islamic Finance:
Theory and Practice (pp. 33–64), New York: Routledge.
World Bank (2021) ‘Domestic credit (by banks) to private sector (% of GDP)’, available
at: https://data.worldbank.org/indicator/FS.AST.PRVT.GD.ZS (accessed on 12
November, 2021)
Zaher, T. S. and Hassan, M. K. (2001) ‘A Comparative Literature Survey of Islamic
Finance and Banking’, Financial Markets, Institutions & Instruments, 10(4), 155–199.
2
A TYPOLOGY OF FINANCIAL
BUSINESS MODELS ON DIGITAL
TRANSFORMATION (‘DX’)
Expected impacts on commercial banks

Yasushi Suzuki and Mohammad Dulal Miah

1 Introduction
Digital transformation (DX) has become the most frequently used word in this
last decade, though the term ‘DX’ has no universal defnition due to its diversity.
It encompasses many dimensions like digital supply chain, digitalization of ser-
vices, products and so on (Hazik and Hassnian, 2019). Solis, Li, and Szymanski
(2014) defne DX as ‘the realignment of, or new investment in, advanced tech-
nology and business models to more efectively engage digital customers at every
touchpoint in the customer experience lifecycle’. Financial institutions are the
pioneers in embracing the ongoing DX with an aim to harness their efciency
and performance. Moreover, the adoption of technologies is considered an essen-
tial endeavour for fnancial service provider to remain competitive and survive
in the market. As a result, technology-enabled fnancial transactions such as
wealth management, robo-advising, peer-to-peer lending (sometimes referred
to as P2P lending or abbreviated to P2PL), crowdfunding, and digital payments
have spawned recently. According to Forbes data, digital banking amounted to
US$7.7 billion in 2019, whereas digital insurance (Insurtech) recorded transac-
tions amounting to US$6.8 billion, and the digital payment summed up US$15.1
billion.
Defned broadly, Fintech encompasses advances in technology and changes
in business models that have the potential to transform the provision of fnan-
cial services through the development of innovative instruments, channels, and
systems (CCAF, 2020, p. 24). In fact, more and more Fintech business mod-
els are proposed. A recent study [The Global Covid-19 FinTech Market Rapid
Assessment Study] by Cambridge Centre for Alternative Finance (CCAF) devel-
oped a working taxonomy that brings together a coherent conceptualization
of Fintech activities, while appreciating the sector’s diversity and diferentiated

DOI: 10.4324/9781003262169-4
 A typology of fnancial business models on digital transformation 45

TABLE 1 The working Fintech taxonomy and classifcation by CCAF

Fintech vertical/
Category Sub-verticals/business models included in each vertical
business model

Retail facing Digital lending P2P/Marketplace Consumer Lending, P2P/

(consumers, Marketplace Business Lending, P2P/Marketplace
households Property Lending, Balance Sheet Consumer
and Lending, Balance Sheet Business Lending, Balance
MSMEs) Sheet Property Lending, Debt-based Securities,
Number of Invoice Trading, Crowd-led Microfnance,
respondents Consumer Purchase Financing/Customer Cash
1,122 advance, Digital Merchant – cash Advance Solutions
Digital capital Equity-based Crowdfunding, Real Estate
raising Crowdfunding, Revenue/Proft Share
Crowdfunding, Reward-based Crowdfunding,
Donation-based Crowdfunding
Digital banking Fully Digitally Native Bank (Retail), Fully Digitally
Native Bank (MSME), Marketplace Bank
(Retail), Marketplace Bank (MSME), BaaS,
Agent Banking (Cash-in/Cash-out)
Digital savings Digital Money Market/Fund, Digital Micro Saving
Solutions, Digital Savings Collective/Pool, SaaS
Digital Digital Remittances (Cross Border-P2P), Digital
payments Remittances (Domestic-P2P), Money transfer
(P2P, P2B, B2P, B2B), eMoney Issuers, Mobile
Money, acquiring services providers for
merchants, Points of access (PoS, mPoS, online
PoS), Bulk Payment Solutions – Payroll, Grants
etc., Top-ups and refll, Payment gateways,
Payment aggregators, API Hubs for Payments,
Settlement and clearing services providers
Digital asset Order book, DEX relayer, Single dealer platform/
exchange OTC trading, Trading bots, HFT services,
Advanced trading services, Brokerage services,
Aggregation, BTM, P2P marketplaces, Clearing
Digital custody Software Wallet (Mobile Wallet/Tablet Wallet/
Desktop Wallet), Web Wallet (eMoney Wallet),
Vault services, Key management services,
Hardware Wallet
Insurtech Usage-based, Parametric-based, On-Demand
Insurance, P2P Insurance, Technical Service
Provider (TSP), Digital Brokers or Agent,
Comparison Portal, Customer Management,
Claims & Risk Management Solutions, IoT
(including telematics)
Wealthtech Digital Wealth Management, Social Trading,
Robo-Advisors, Robo Retirement/Pension
Planning, Personal Financial Management/
Planning, Financial Comparison Sites
(Continued)
46 Yasushi Suzuki and Mohammad Dulal Miah

Fintech vertical/
Category Sub-verticals/business models included in each vertical
business model
Market Regtech Profling and due diligence, Blockchain forensics,
provisioning Risk Analytics, Dynamic Compliance,
Number of Regulatory Reporting, Market Monitoring
respondents Alternative Alternative Credit Rating Agency, Credit Scoring,
306 credit & data Psychometric Analytics, Sociometric Analytics,
analytics Biometric Analytics
Digital identity Security & Biometrics, KYC Solutions, Fraud
Prevention & Risk Management
Enterprise API Management, Cloud Computing, AI/
technology ML/NLP, Enterprise Blockchain, Financial
provisioning Management and Business Intelligence, Digital
Accounting, Electronic Invoicing

Created on CCAF (2020).

business models. This working taxonomy includes 13 discrete primary Fintech

verticals and 103 sub-verticals. These have been further categorized into two
overarching groups – Retail Facing (i.e., providing fnancial products and services
with a focus on consumers, households and micro, small & medium enterprises
(MSMEs), and more likely to be B2C) and Market Provisioning (i.e., those which
enable or support the infrastructure or key functionalities of Fintech and/or
Digital Financial Services markets, thus more likely to be B2B) (Table 1).
This chapter aims to review the working taxonomy by CCAF and to propose
a typology of ‘Fintech’ business models, to provide a platform for further aca-
demic and professional debate towards predicting how the Fintech and DX in
fnancial contracts would reshape the current mode of fnancial intermediation
and fnancing contracting. In particular, we are concerned about the future of
the ‘commercial banking unit’ which still plays a signifcant role under the cur-
rent mode of fnancial intermediation and services. Commercial banks are, more
or less, protected under the banking regulation for the regulatory objectives of
maintaining fnancial stability (preventing potential bank runs) while promoting
sound fnancial intermediation. While we identify who has a keen interest in
promoting each Fintech business model, we argue how each Fintech business
model would cast ‘threat’, ‘opportunity’ or ‘remain neutral’ to the commercial
banking unit. Simultaneously, we argue what kinds of ‘incentives’ are held by the
stakeholders for promoting each Fintech business model.

2 Analyses of working taxonomy of Fintech by CCAF

The Global Covid-19 FinTech Market Rapid Assessment Study was conducted as a
joint initiative of CCAF at the University of Cambridge Judge Business School,
 A typology of fnancial business models on digital transformation 47

the World Bank Group, and the World Economic Forum. Between June 15th
and August 18th, 2020, the joint research team designed an online questionnaire
and surveyed 1,385 unique Fintech frms operating in 169 countries. This study
draws on a rapid global survey of Fintech. A major contribution of this study is
further standardization towards a commonly acceptable taxonomy when dis-
cussing an array of diferentiated Fintech activities both for market analysis and
regulatory context. According to their working taxonomy of Fintech activities,
the survey respondents were from 13 diferent primary verticals, and 103 sub-
verticals representing both retail-facing and market-provisioning activities (CCAF,
2000, p. 16).
This working taxonomy is useful for understanding the scope of Fintech
activities, however, rather too comprehensive. Here, our concern is to predict
how the Fintech and DX in fnancial contracts would reshape the current mode
of fnancial intermediation and fnancing contracting. To answer this ques-
tion, we clarify who are the major stakeholders (who have a keen interest) in
promoting each Fintech business model. Under the current mode of fnancial
intermediation and services, we raise the following players: (a) commercial banking
unit, being mainly engaged in deposit-undertaking, dealing with payment set-
tlement, and mobilizing savings to fnance bankable clients (indirect fnancing),
(b) investment banking unit, being mainly engaged in underwriting & distributing
securities (direct fnance), fund management, private banking, and (c) other fnan-
cial units, including microfnance institutions mobilizing the fund from donors to
empowering the marginalized people, non-bank consumer fnance companies,
insurance companies and so on.
This section aims to argue how the Fintech business models classifed into
Retail Facing that provides fnancial products and services with a focus on con-
sumers, households and MSMEs: (1) Digital lending, (2) Digital capital raising,
(3) Digital banking, (4) Digital savings, (5) Digital payments, (6) Digital asset
exchange, (7) Digital custody, (8) Insurtech, (9) Wealthtech, would reshape the
current mode of fnancial intermediation and services.

2.1 Digital lending

Digital lending is the process of ofering loans that are applied for, disbursed, and
managed through digital channels, in which lenders use digitized data to inform
credit decisions and build intelligent customer engagement (Stewart, Lamont,
and Yaworsky, 2018). ‘P2P/Marketplace lending’ (referring to the sub-verticals
of P2P/Marketplace1 Consumer Lending, Business Lending and Property
Lending) is one of the characteristic fnancial forms in digital lending. P2PL is a
form of loan provision centred on an online marketplace forum structure. The
online platform enables individuals and companies to lend and borrow money by
connecting lenders with borrowers ‘directly’ through an online P2PL platform.
The fundamental nature of P2PL is ‘direct fnance’ (see Figure 1 in Chapter 1).
P2PL is to be backed by large and diversifed investors who are willing to absorb
48 Yasushi Suzuki and Mohammad Dulal Miah

various types of credit risks and uncertainty as well as to absorb the associated
transaction cost of screening and monitoring. So far, as P2PL provides ‘less bank-
able’ individuals and MSMEs with the opportunities to raise fund, it would con-
tribute to the so-called ‘fnancial inclusion’. In other words, it implies that P2PL
would not necessarily cast a ‘threat’ to conventional commercial banks, because
those ‘less bankable’ and marginalized individuals and MSMEs are not yet their
main clients of mainstream banking system.
On the other hand, it implies that if the expansion of P2PL includes the
‘bankable’ client individual and frms, in particular, the secured loan backed
by residential or commercial property as collateral (P2P/Marketplace Property
Lending), it would cast a ‘threat’ to mainstream commercial banks. Or, we
may say that it would give an ‘opportunity’ for them to diversify the associated
risk and uncertainty as well as to create a new agency/arrangement fee busi-
ness opportunity by the fund arrangement upon online and mobile banking
platforms.
In passing, we should note that the market size of P2PL is still limited.
According to International Banker, Lending Club, the P2PL industry leader,
arranged about 56,600 loans totalling only US$790 million in the frst quarter of
2014, while the US commercial bank of JP Morgan Chase delivered consumers
loans with no less than US$47 billion over the same period. The size may depend
on further capital accumulation in the risk-averse investors and/or further provi-
sion of proper credit information such as debt-to-income ratio, credit history and
credit profle of the candidate borrowers to shift those investors’ risk preference
closer to risk-neutral.
The working taxonomy refers to the sub-verticals of ‘Balance Sheet’ Consumer
Lending, Business Lending, and Property Lending. Balance sheet lending is a
loan that a lender retains on their own asset instead of selling it of to another
fnancial institution or to individual investors (Schmidt, 2020). The fundamental
nature of balance sheet lending is considered ‘indirect fnance’ (see Figure 1 in
Chapter 1). The lender in this case is the platform per se. In practice, balance sheet
lending usually requires that the platform should obtain a banking license.
The working taxonomy refers to the sub-vertical of Debt-based Securities,
which is a debt instrument such as bonds and fxed-income securities in the form
of digital securities (Fernando, 2020). Perhaps, it refers to the digitalized collat-
eralized debt obligations (CDO), which securitize debt obligations in lenders
(typically in conventional commercial banks) to distribute the CDO to investors
so that banks may diversify the associated credit risk and uncertainty.
The sub-vertical of Invoice Trading allows business units to sell individual
invoices, in order to free up cash, to an online community of investors (Hecht,
2018). The concept takes the principle of P2PL and applies it to invoice fnance.
This fnancing form per se is almost the same as the traditional fnancing upon
‘bill discounting’ or ‘factoring’ which are dealt with by non-bank fnancial
companies.
 A typology of fnancial business models on digital transformation 49

The sub-vertical of Crowd-led Microfnance also applies the principle of

P2PL and crowdfunding (including donation) to microfnance for empowering
the poor and marginalized clients.
The working taxonomy refers to Consumer Purchase Financing/Customer
Cash advance. The sub-verticals also apply the principle of P2PL to the tradi-
tional fnancing to consumers such as auto loans and car fnancing/payday loans
which charge exorbitantly high rates of interest. The sub-vertical of Digital
Merchant-cash Advance Solution also applies the principle of P2PL to the quick
but very-high–interest rate (close to ‘usury’) loans/promissory notes discounting
to small-business units in fnancial trouble. The above-mentioned ‘factoring’ and
consumer purchase fnancing are dealt with by non-bank fnancial companies
under the current mode of fnancial intermediation and services. They are using
their own balance sheet for these fnancings. The Fintech platform would change
the nature of risk absorption from ‘indirect fnance’ to ‘direct fnance’ to diver-
sify the associated risk and uncertainty, possibly giving an ‘opportunity’ to the
commercial banking unit for the new frontier of its business. Table 2 summarizes
our analyses of ‘digital lending’ of the working taxonomy.

TABLE 2 Expected impacts of digital lending on commercial banks

Sub-verticals Stakeholders in Nature of risk Impact on Incentives for the

the current mode absorption commercial banks platform

P2PL (Property Commercial Direct Threat Creation of

Lending, banks (Indirect in alternative
Lending to Balance fnancial
bankable Sheet route to seek
clients) Lending) for profts
P2PL to Investment Direct Neutral Diversifcation
marginalized banks of investors
clients, (venture
Crowd-led- fund),
microfnance Microfnance
institutions
Debt-based Commercial Direct Opportunity Diversifcation
securities banks/ of risks/
investment investors
banks
Invoice trading, Commercial Indirect (-> Opportunity Diversifcation
consumer banks/ Direct) of risks/
purchase non-bank investors
fnancing consumer
fnance
companies
50 Yasushi Suzuki and Mohammad Dulal Miah

2.2 Digital capital raising

Digital capital raising is explained as an investment platform which employs
powerful and scalable technology that connects entrepreneurs and investors, ena-
bling companies to raise capital digitally (Businesswire, 2020). Needless to say,
lending and fund raising are two sides of the same coin. The working taxonomy
here focuses on ‘crowdfunding’.
The history of crowdfunding can be traced back to the 1700s. The concept
of displaying the names of the donors was an ‘age-old’ technique that was dis-
played by Alexander Pope back in 1713 to translate an ancient Greek poetry into
English. Nearly more than half a century later, an identical attempt was done by
Mozart to crowdfund his three piano concertos. At frst, his proposal got rejected
by the potential donors. A year later, he made another attempt and obtained
grants from 176 donors. In exchange for their contributions, their names were
listed in the concertos’ manuscripts (Bashir and Banze, 2020). Comparably, the
notion of Zakat and Sadaqah (voluntary charity) of Muslim teachings has existed
in the Middle East to alleviate the less fortunate.
The original form of crowdfunding is ‘donation’ (Donation-based
Crowdfunding). The modern form includes the P2PL (Debt Crowdfunding)
or investment in the equity share in an early-stage company, which means the
sub-vertical of Equity-based Crowdfunding.
The sub-vertical of Real Estate Crowdfunding refers to the one for fnancing
a temporary liquidity problem in the process of investing in real estate projects.
The sub-vertical of Revenue/Proft Share Crowdfunding is the proft-sharing
model as a particular form of crowdfunding model in which contributors receive
a share in the profts of the business or royalties of the artist (Bellefamme, 2014).
The sub-verticals of Reward-based Crowdfunding is a type of small-business
fnancing in which entrepreneurs solicit fnancial donations from individuals in
return for a product or service (Zimmermann, 2020). Table 3 summarizes our
analyses of ‘digital capital raising’ of the working taxonomy.

TABLE 3 Expected impacts of digital capital raising on commercial banks

Sub-verticals Stakeholders in Nature of risk Impact on Incentives for the

the current mode absorption commercial banks platform

Real estate Commercial Indirect -> Opportunity/ Diversifcation

crowdfunding banks/ Direct threat of risks
non-bank
fnancial
companies
Other Crowdfunding Direct Neutral Diversifcation
sub-verticals platform, of investors
NGO
 A typology of fnancial business models on digital transformation 51

2.3 Digital banking

The term ‘digital banking’ essentially combines online and mobile banking ser-
vices under one umbrella (Napoletano and Foreman, 2021). These sub-verticals
in the working taxonomy – Fully Digitally Native Bank/Marketplace Bank – are
traditional banking business models improved with the latest digital technologies
to ofer a better banking experience for lower cost (PwC, 2017). The sub-vertical
of Agent Banking (Cash-in/Cash-out) refers to Cash-in/cash-out (CICO) net-
works which play a critical role in a country’s transition from cash-based to fully
digital fnancial systems such as ‘mWallet’. Mobile Wallet or Wallet is also known
as digital wallet or eWallet. It basically refers to a mobile technology that is used
the same as a real wallet (Goyal, 2020).
The sub-vertical of Banking as a Service (BaaS) is a model in which licensed
banks integrate their digital banking services directly into the products of other
non-bank businesses, enabling a non-bank business to ofer its customers digital
banking services such as mobile bank accounts, debit cards, loans and payment
services, without needing to acquire a banking license of their own 2 (Dolan,
2021). Table 4 summarizes our analyses of ‘digital banking’ of the working
taxonomy.

2.4 Digital savings

Digital Money Market/Fund refers to digital money which is the digital rep-
resentation of value. The public sector can issue digital money called central
bank digital currency – essentially a digital version of cash that can be stored and
transferred using an internet or mobile application. The private sector can also
issue digital money. Some forms can be redeemed for cash at a fxed face value.
These are fully backed with very safe and liquid assets and are usually referred to
as eMoney (Adrian and Mancini-Grifoli, 2021). The most successful and widely
used form of digital money is the cryptocurrency, Bitcoin.

TABLE 4 Expected impacts of digital banking on commercial banks

Sub-verticals Stakeholders in Nature of risk Impact on Incentives for the

the current mode absorption commercial banks platform

Fully digitally Commercial N.A. Threat Penetration

native bank, banks into banking
marketplace services
bank, agent
banking
BaaS N.A. N.A. Opportunity Expanding
the scope of
business
52 Yasushi Suzuki and Mohammad Dulal Miah

TABLE 5 Expected impacts of digital savings on commercial banks

Sub-verticals Stakeholders in Nature of risk Impact on Incentives for the

the current mode absorption commercial banks platform

Digital money Digital money N.A. Threat Penetration

market/fund platform into saving/
deposit
taking
business
Digital Microfnance N.A. Opportunity Expanding
microsaving fnancial the scope of
solutions, institutions, business
digital NGO
savings
collective/
pool
SaaS As a service by N.A. Threat/ Penetration
commercial opportunity into private
banks, banking
investment business
banks (related to
Wealthtech)

Digital Micro Saving Solutions is the DX of microsavings as a form of

microfnance where organizations and fnancial institutions encourage indi-
viduals to save money (Davis, 2012). A mobile-based solution enables banks,
SACCOs, or mobile wallet operators to attract the unbanked or underbanked
population to open a savings account and earn interest from it (Moran, 2021).
Digital Savings Collective/Pool is another service for fnancial inclusion where
groups of 15–30 members pay into a common platform, at any time, from the
‘mobile wallet’ of their choice (Aga Khan Development Network, 2017). These
savings are pooled for purposes of issuing loans within the group.
The sub-vertical of Savings-as-a-service (SaaS) aims to provide the level
of customer services to which only the private banking client has access (Bell,
2020). Table 5 summarizes our analyses of ‘digital savings’ of the working
taxonomy.

2.5 Digital payments

Generally speaking, the sub-verticals in Digital payments are related to a trans-
action that takes place via digital or online modes, with no physical exchange of
money involved. For instance, the defnition of digital remittance is when send-
ing money is performed either online, via mobile, or app. The second feature of
digital remittance is that the transfer does not involve the use of cash with funds
usually sent from a bank account or other electronic wallet (Shubhangi, 2020).
 A typology of fnancial business models on digital transformation 53

TABLE 6 Expected impacts of digital payments on commercial banks

Sub-verticals Stakeholders in Nature of risk Impact on Incentives for the

the current mode absorption commercial banks platform

All the sub- Payment N.A. Threat Penetration

verticals processors/ into Payment
except the service settlement
two below providers business
Bulk payments, Payment N.A. Neutral Betterment
settlement processors of paying
and clearing methods and
service management
providers

Cross-border/Domestic P2P payment services such as Google Pay/Paypal’s

Venmo are provided.
The sub-vertical of Point of access refers to PoS (point of sale) and mPoS
(Mobile PoS). It is a mobile device, smartphone or tablet that works as a cash
register or traditional PoS terminal wirelessly.
The sub-verticals of Bulk Payment Solution/Top-ups and Refll/Payment
Gateways/API (Application Programming Interface) and integration/Payment
aggregators are also addressed to the DX of payment services. Modern payment
gateways ofer a robust and fexible API and strong integration capabilities with
fnancial, accounting, tax and eCommerce platforms (Patiño, 2020). Table 6
summarizes our analyses of ‘digital payments’ of the working taxonomy.

2.6 Digital assets exchange

The Fintech business model of ‘Digital Asset Exchange’ is related to a P2P or
closed/private ‘exchange’ of digital assets. ‘Digital assets’ are defned as ‘digital
representations of value, made possible by advances in cryptography and distrib-
uted ledger technology. They are denominated in their own units of account and
can be transferred from peer-to-peer without an intermediary’ (He, 2018). The
working taxonomy refers to several types of digital asset exchange: Order book,3
DEX relayer,4 Single dealer platform, OTC trading,5 Crypto trading bots,6
Brokerage services, Aggregation, Bitcoin Teller Machines (BTM), Clearing.
Table 7 summarizes our analyses of ‘digital assets exchange’ of the working
taxonomy.

2.7 Digital custody

Custody at a digital exchange typically results in transfer of the possession of
the digital assets to the exchange, which manages its own private keys in hot
and cold storage. In return, a customer’s account is credited for the transferred
54 Yasushi Suzuki and Mohammad Dulal Miah

TABLE 7 Expected impacts of digital assets exchange on commercial banks

Sub-verticals Stakeholders in Nature of risk Impact on Incentives for the

the current mode absorption commercial banks platform

Order Book, Brokers/traders N. A Neutral Facilitating the

DEX relayer (Exchange) origination
and marketing
SDP/OTP Investment N.A. Neutral Reducing
trading, banks, (Exchange) transaction
Brokerage brokers/ cost
Services traders
Crypto trading Cryptocurrency N.A. (Payment Threat Facilitating the
bots/BTM – brokers/ settlement) origination
traders and marketing
Aggregation Non-bank N.A. Opportunity Diversifcation of
fnancial (Exchange) risks/investors
institutions, Facilitating the
microfnance origination
institutions and marketing
Clearing Brokers/traders N.A. (Payment Threat Seeking for new
settlement) proft base

digital assets (e.g. cryptocurrency). Most commonly, digital exchanges employ

an omnibus model that results in comingling of customer assets across several
private keys. Digital assets are an increasingly popular asset class among inves-
tors. Custodians – Key management services – are expected to ft a key role as
this space matures with investors demanding a full suite of oferings inclusive of
trading, lending, and staking (Walker et al., 2021).
The working taxonomy refers to Software Wallet. Wallets are distinguished
by a set of supported cryptocurrencies and software platforms such as Windows,
Mac and other operating systems. The taxonomy also refers to Web Wallet
which is a widely used modern-day term that refers to an online wallet. There
are two diferent versions of web wallets. One of those two types is commonly
referred to as an eWallet. These are used for storing our everyday fat currency
and some of the most popular ones are Skrill, PayPal and Neteller. Other types of
web wallets are the ones that can be used to send and receive cryptocurrencies.
They’re a software program that stores public and private keys and interacts with
blockchain (SoftGamings, 2019).
The taxonomy also refers to Hardware Wallet. It is a key component of the
blockchain ecosystem (Relay, 2019). They provide security and utility when
interacting with blockchains. A hardware wallet is a type of cryptocurrency
wallet. Table 8 summarizes our analyses of ‘digital custody’ of the working
taxonomy.
 A typology of fnancial business models on digital transformation 55

TABLE 8 Expected impacts of digital custody on commercial banks

Sub-verticals Stakeholders in Nature of risk Impact on Incentives for the

the current mode absorption commercial banks platform

Software wallet Custodian, N.A. Threat Enhancing the

(mobile wallet/ operators of infrastructure
tablet wallet/ platform for Fintech
desktop wallet), business models
web wallet
(eMoney
wallet),
hardware wallet
Vault services, key Custodian, N.A. Neutral Enhancing the
management operators of infrastructure
services platform for Fintech
business models

2.8 Insurtech
Insurtech is a combination of the words ‘insurance’ and ‘technology’ inspired
by the term ‘Fintech’. Insurtech is technology developed or used specifcally for
insurance operations applications and is mentioned more and more in industry
publications (Hargrave, 2021). Insurtech is exploring avenues that large insurance
frms have less incentive to exploit, such as ofering ultra-customized policies,
social insurance and using new streams of data from Internet-enabled devices to
dynamically price premiums according to observed behaviour (Hargrave, 2021).
Table 9 summarizes our analyses of ‘insurtech’ of the working taxonomy.
The working taxonomy refers to ‘On-Demand Insurance’ as a sub-vertical,
which allows policies to be purchased online without directly interacting with
a broker or a company representative. Customers can buy insurance using their
smartphones. There are generally no long-term contracts, no lengthy forms and
no need to speak to a representative over the phone, making insurance coverage
literally a simple swipe on a smartphone. Premiums for these micro-duration

TABLE 9 Expected impacts of Insurtech on commercial banks

Sub-verticals Stakeholders in Nature of risk Impact on Incentives for the

the current mode absorption commercial banks platform

All the Conventional N.A. Neutral Facilitating the

sub-verticals insurance origination
companies of new types
of insurance
56 Yasushi Suzuki and Mohammad Dulal Miah

policies are paid in-app and claims are typically fled using a mobile chat inter-
face (NAIC, 2021).
P2P insurance is a risk-sharing network where a group of individuals pool
their premiums together to insure against a risk. P2P insurance may also be
referred to as ‘social insurance’. The innovative nature of P2P insurance has
presented some challenges for insurance regulators who consider the P2P model
diferent from the traditional one. Similar concerns across regulatory bodies that
are seeing technology disrupt the traditional norm in the fnancial industry have
given rise to a new group of companies called Regtech. Regtech uses innovative
technology to help companies and industries partaking in digital advancements
efciently comply with industry regulators (Frankenfeld, 2021).
Another sub-vertical here is the Internet of Things (IoT), which is a network
of internet-connected devices transmitting, collecting, and sharing data. Among
the most mature and fast-growing IoT applications involve connected vehicles
using telematics, smart home devices (e.g., Amazon Alexa), and wearable devices
(e.g., Fitbit) (NAIC, 2020).
IoT-connected insurance uses the data from internet-connected devices to
improve the understanding of risks. Advances in IoT can improve productivity,
overall proftability of the business and the risk profle of the portfolio. Through
IoT, insurers can better connect with consumers adding important touch points
in particularly sensitive phases, like acquisitions, and claims. Moreover, IoT
advances can be realized for the full range of products and lines of business, from
commercial, to life, property and casualty and health (NAIC, 2020).

2.9 Wealthtech
Wealthtech stands for wealth and technology and is one of the subsections of fntech.

Just as fntech combines fnance with technology to change the way we

organize, spend, and receive our money both as individuals and as compa-
nies, wealthtech unites wealth and technology with the goal of providing
digital solutions to enhance personal (and professional) wealth manage-
ment and investing.
(Cheng, 2019)

The working taxonomy of wealthtech refers to the sub-verticals of Social Trading

(also known as Copy Trading),7 Robo-Advisors,8 Robo Retirement/Pension
Planning, Personal Financial Management/Planning, Financial Comparison
Sites. These sub-verticals can be categorized by their characteristics of service:
platform and software service. Platform services such as Social Trading and
Financial Comparison Sites, and software solutions such as Digital Wealth and
Robo-Advisors both are backed by diversifed individual investors who are will-
ing to absorb risks and uncertainty. As such, the fundamental nature of wealth-
tech is ‘private banking’.
 A typology of fnancial business models on digital transformation 57

TABLE 10 Expected impacts of Wealthtech on commercial banks

Sub-verticals Stakeholders in Nature of risk Impact on Incentives for the

the current mode absorption commercial banks platform

Financial Investment N.A. Neutral Reducing the

comparison sites, banks asymmetry
social trading Private banks of
Other players information
Digital wealth Investment N.A. Opportunity Reducing the
management, banks transaction
Robo-advisors, Private banks cost
Robo retirement/ through
pension planning, automation
Personal fnance and
management/ algorithm
planner

While the fundamental nature of those services is the same, the impact on
the commercial banks is the opposite. Services that are provided in the form of
the platform allow people to compare and contrast diferent services that various
fnancial institutions provide. Such platforms reduce the asymmetry of infor-
mation by displaying collected prices and specifcations. Platform services with
strong network efects grow into a big platform provider. Since commercial
banks are not incentivized to provide such comparison and run the platform, the
platform services come as a threat to commercial banks.
On the other hand, software services that are characterized by machine learn-
ing and artifcial intelligence (AI) pose more opportunity to commercial banks.
The essence of what the software service provides is diminishing transaction costs
through the algorithm and automation (Deloitte, 2016). Written and automated
algorithms form the software that produces insights and strategies for better deci-
sion-making to investors after understanding their behaviours by collecting deci-
sion-making patterns and preferences. Many investment banks are leveraging this
technology to grow their businesses. Unlike the platform service, commercial
banks are also capable of facilitating and are incentivized to implement this tech-
nology to enhance their businesses. By doing so, commercial banks can maximize
the opportunity to expand their businesses by capturing investors who would
prefer not to take direct risk but still want to enjoy the perks of the powerful AI
tool. Table 10 summarizes our analyses of ‘wealthtech’ of the working taxonomy.

3 Is the trend of DX a threat or opportunity for

commercial banks?
As mentioned earlier, commercial banks are, more or less, protected under
the banking regulations for the regulatory objectives of maintaining fnancial
58 Yasushi Suzuki and Mohammad Dulal Miah

stability (preventing potential bank runs) while promoting sound fnancial

intermediation. So far, we argued how each Fintech business model would cast
‘threat’, ‘opportunity’ or ‘remain neutral’ to the commercial banking unit. Now,
it is time to sum up our argument.

1 The Fintech business models/sub-verticals which would cast a ‘threat’ to

commercial banking unit:
P2PL (Property Lending, Lending to bankable clients) (Digital lending)
Fully Digitally Native Bank, Marketplace Bank, Agent Banking (Digital
banking)
Digital Money Market/Fund (Digital savings)
SaaS (Digital savings/Wealthtech)
Most of sub-verticals in Digital payments
Crypto trading bots/BTM (Digital asset exchanges)
Clearing (Digital asset exchanges)
Software Wallet (Mobile Wallet/Tablet Wallet/Desktop Wallet), Web
Wallet (eMoney Wallet), Hardware Wallet (Digital custody)

2 The Fintech business models/sub-verticals which would cast a ‘neutral’ to

commercial banking unit.
P2PL to marginalized clients, Crowd-led-microfnance (Digital lending)
Most of sub-verticals in Digital capital raising
Order Book, DEX relayer (Digital asset exchanges)
SDP/OTP trading, Brokerage Services (Digital asset exchanges)
Vault services, Key management services (Digital custody)
Insurtech

3 The Fintech business models/sub-verticals which would bring an ‘opportu-

nity’ to commercial banking unit:
Debt-based securities (Digital lending): Diversifcation of risks and
investors
Invoice Trading, Consumer Purchase Financing (Digital lending):
Diversifcation of risks and investors
Real Estate Crowdfunding (Digital capital raising): Diversifcation of risks
BaaS (Digital banking): Expanding the scope of business
Digital Micro Saving Solutions, Digital Savings Collective/Pool (Digital
savings): Expanding the scope of business
Aggregation (Digital asset exchanges): Diversifcation of risks/investors/
Facilitating the origination and marketing
Digital Wealth Management,
Robo-Advisors, Robo Retirement/Pension Planning, Personal fnance
management/planner (Wealthtech): Reducing the transaction cost
through automation and algorithm
 A typology of fnancial business models on digital transformation 59

Needless to say, Fintech and digitalization would give other fnancial servicers
a chance to penetrate into the traditional fnancial products and services which
have been monopolized by the commercial banking unit; in particular, deposit
taking (Digital savings), payment settlement (Digital payments) and mediating fnan-
cial resources from depositors to corporations (Digital lending). Also, the services related
to money dealing (cash and exchange) would be penetrated by the newcomers in
digital banking, Digital asset exchange and digital custody. The ‘P2P’ fnancial
services would erode the monopolistic/oligopolistic market in lending, payments
and money dealing operated by commercial banks in the past.
On the other hand, Fintech and digitalization would give commercial banks
an opportunity to expand the scope of business as well as to diversify risks and
uncertainty with ultimate investors. In our view, (1) the lending business upon
securitization (CDO) and crowdfunding (Digital lending and Digital capital
raising) for diversifying credit risks, (2) the sale and utilization of the accumu-
lated credit/client information to other fnancial service providers and platforms
(Digital banking and Digital asset exchange), (3) the business related to ‘Private
Banking’ (wealth management) upon Fintech (Wealthtech) for reducing the fund
management cost would give commercial banks an opportunity to seek for a new
proft base. We should note that the shift to the lending business upon securiti-
zation and crowdfunding would mean that the business of commercial banks
would be shifted from ‘indirect’ to ‘direct’ fnance. At the same time, the sales
and utilization of credit information would bring commercial banks a ‘fee’ based
business opportunity. In addition, we should note that the wealth management
(private banking), in its nature, is a business in ‘investment banking’.
Roughly speaking, the ‘P2P’ mode of fnancial intermediation and services
would make traditional commercial banks face the difculty in earning a
sufcient proft (bank rent) to maintain their franchise value. Some innovative
commercial banks may be able to reshape their mode of business for their survival
with the direction to ‘P2P’ and ‘direct fnance’ mode of fnancial intermediation
and services upon the technology of digitalization. However, such innovative
commercial banks would not be called ‘commercial banks’ anymore.
One of the dominant principles of Islamic fnance is the prohibition of riba or
interest, while, no doubt, interest is an essential element of fnance and is embed-
ded in our fnancial system. A theory of the rate of interest is still debatable. For
the classical economists the rate of interest is the price at which saving out of
revenue (understood as real output not consumed) becomes equal to investment.
Keynes postulated that interest is the price at which the demand for money,
driven by liquidity preference, is equal to a given supply of money. The process
of determining the liquidity preference is, according to Keynes, refected in
‘uncertainty’ and ‘expectation’. On the other hand, Marx accepted that interest
is a part of total proft and argued that it is also the price at which the supply of
loanable capital (interest-bearing capital) equals the demand; such capital typi-
cally assumes the money form and is not equivalent to real resources saved and
reinvested (Itoh and Lapavitsas, 1999, pp. 212–213). The Marxian view on the
60 Yasushi Suzuki and Mohammad Dulal Miah

process of determining the rate of interest is based on the ‘class struggle’ between
lenders and borrowers. In the context of the PLS mode in Islamic fnance, fur-
ther arguments on how reasonably (or poorly) the associated risk and uncertainty
would be refected in the expected rate of proft as well as on how appropriately
(or with bias) the rate of proft would be shared between lenders and borrowers
are necessary. Chapter 1 provides several points for the arguments.
So far, as a sufcient level of wealth and capital has been accumulated in the
society and the sufcient number of investors are ready and willing to absorb
various types of credit risk and uncertainty, the P2P mode of fnancial inter-
mediation and services would be feasible and, perhaps, desirable for ultimate
investors and users of fnancial products and services. One of the questions here is
that if sufcient level of wealth and capital has not yet been accumulated, widely
observed in developing countries, can we simply conclude that the trend of dig-
italization would be desirable? In developing countries, we may still need the
role of commercial banks as fnancial intermediaries by mediating idle/stagnant
funds held by households to the industrial sector in a considerably large scale. In
theory, so far, as the sufcient level of wealth and capital has been accumulated
enough to meet the fnancial demand in a global scale including that in devel-
oping countries, the trend of digitalization would be feasible. However, there is
no guarantee of always ensuring the stable and sufcient circulation and fows
of fund from an investor to a user of fund. Perhaps, the process of determining
the rate of proft or the rate of interest is still supposed to be based on the ‘class
struggle’ between lenders and borrowers.
Another question is that the P2P mode of savings and payments would put
the existing centralized (monopolized) mode of savings and payments to an end,
which has been highly regulated and monitored by the regulators under the
current mode of supervising the banking industry for ensuring fnancial stability
(for avoiding the potential bank runs). How will the decentralized/P2P mode of
savings and payments afect the fnancial stability? In theory, as more commercial
banks are shifting their mode of business to investment banking by diversifying
credit risk, the regulators would be less concerned about the accumulation of
non-performing loans which would trigger the bank run. However, the regula-
tors may be more concerned about a liquidity shock in a respective level of diver-
sifed investors, which may trigger the chain reaction of the shortage of liquidity
in diversifed types of currency and money upon digitalization. How will the
regulators respond to the diversifed and P2P mode of savings and payments? The
response is becoming an important challenge for the regulators to respond to the
trend of Fintech and digitalization of fnancial products and services.

Acknowledgement
Yasushi would like to thank Mizuki Amagai, Yasha Athalladhira, Francisca
Diandra S, Mahmudul Islam Fahim, Mahmud Hasan, John Kim and Satrio
Komang for their various contributions to the data collection and discussions.
 A typology of fnancial business models on digital transformation 61

Notes
1 The terms P2P/Marketplace are often used interchangeably today, but there are
technical diferences between the two. Pure P2PL is applied when individuals lend to
borrowers, whereas marketplace lending platform is applied when it allows institu-
tions to loan out money alongside individuals (Friedman, 2016).
2 BaaS is also often referred to as ‘white-label banking’, since the banking services are
delivered through the branded product of the non-bank (Dolan, 2021).
3 The transaction of ‘Order-book’ is a list of current buy and sell orders used by an
exchange to fll orders on a specifc market. The order book consists of both orders to
buy or sell at a fxed price (‘limit’ orders) and orders to buy or sell at the best avail-
able price (‘market’ orders). But since market orders only appear in the order book
momentarily, they aren’t shown in the publicly viewable order book (Handa and
Schwartz, 1996).
4 The main property of a decentralized exchange (DEX) is giving custodianship to
users/traders of their own assets. Unlike a centralized crypto exchange (e.g. coinbase,
binance) where the exchange stores a user’s private key, in DEX, private keys always
remain with the users, hence the user is always in control of his own asset (Agrawal,
2019). A Relayer hosts an of-chain order book. Using relayers, users can fnd, cre-
ate, fll or cancel orders. Relayers help traders discover counter-parties and move
cryptographically orders between them. A relayer can talk to other relayers and create
a pool of orders to increase liquidity (Agrawal, 2019).
5 Over-the-counter (OTC) refers to the process of how securities are traded via a
broker-dealer network as opposed to on a centralized exchange (Murphy, 2021).
6 Crypto trading bots are a set of programs designed to automate cryptocurrency
trading.
7 Social trading is a form of dealing that enables traders or investors to copy and exe-
cute the strategies of their peers or more experienced traders. While most traders
perform their own fundamental and technical analysis, there is a class of traders that
prefer to observe and replicate the analysis of others. Copy trading allows traders in
social networks to receive information on the success of other agents in fnancial
markets and to directly copy their trades (Apesteguia, Oechssler and Weidenholzer,
2020).
8 Robo-advisors (also spelled robo-adviser or robo advisor) are digital platforms that
provide automated, algorithm-driven fnancial planning services with little to no
human supervision (Deloitte, 2016). Better information is available in the report.

References
Adrian, T. and Mancini-Grifoli, T. (2021) A new era of digital money. [online] International
Monetary Fund. Available at: https://www.imf.org/external/pubs/ft/fandd/2021/06/
online/digital-money-new-era-adrian-mancini-grifoli.htm [Accessed July 7, 2021].
Aga Khan Development Network (AKDN). (2017) Digital Savings Groups: Low-Cost,
Mobile, Paperless. p. 2.
Agrawal, G. (2019) ‘A beginner’s guide to building A RELAYER with 0x protocol’.
Medium. Available at: https://medium.com/crowdbotics/a-beginners-guide-to-
building-a-relayer-with-0x-protocol-c725c45f0b2f [Accessed July 27, 2021].
Apesteguia, J., Oechssler, J. and Weidenholzer, S. (2020) ‘Copy Trading’, Management
Science, 66(12), pp. 5608–5622.
Bashir, I. and Banze, R. (2020) Crowdfunding: The Story of People. Project Nile 20.
Bell, M. (2020) Fintech Raisin Launches Savings as a service software for U.S. banks and
credit unions. [online] Raisin. Available at: https://www.raisin.com/us/press/fntech-
raisin-launches-us-market/ [Accessed July 7, 2021].
62 Yasushi Suzuki and Mohammad Dulal Miah

Bellefamme, P. (2014) Crowdfunding: Giving rewards or sharing profts? [online]

Available at: http://www.ipdigit.eu/2014/05/crowdfunding-giving-rewards-or-
sharing-profts/ [Accessed July 7, 2021].
Businesswire. (2020) Digital capital raise on Netcapital platform sells out in less than 24 hours.
[online] Available at: https://www.businesswire.com/news/home/20201208005274/
en/Digital-Capital-Raise-on-Netcapital-Platform-Sells-Out-in-Less-Than-
24-Hours/ [Accessed July 7, 2021].
CCAF [Cambridge Centre for Alternative Finance]. (2020) The Global Covid-19 FinTech
Market Rapid Assessment Study. Cambridge Centre for Alternative Finance.
Cheng, M. (2019) The future of Wealthtech. Forbes. Available at: https://www.forbes.com/
sites/margueritacheng/2019/02/19/the-future-of-wealthtech/?sh=315e84cf35e6
[Accessed 2 January, 2021].
Davis, D. (2012) Microsavings: Opening the door for individuals to invest in themselves.
[online] Federal Reserve Bank of St. Louis. Available at: https://www.stlouisfed.
org/publications/bridges/summer-2012/microsavings-opening-the-door-for-
individuals-to-invest-in-themselves [Accessed July 7, 2021].
Deloitte. (2016) The Expansion of Robo-Advisory in Wealth Management. Deloitte.
Dolan, S. (2021) How the banking-as-a-service industry works and BaaS market outlook
for 2021. [online] Business Insider. Available at: https://www.businessinsider.com/
banking-as-a-service-industry?r=AU&IR=T/ [Accessed July 7, 2021].
Fernando, J. (2020) Debt security. [online] Investopedia. Available at: https://www.
investopedia.com/terms/d/debtsecurity.asp [Accessed July 7, 2021].
Frankenfeld, J. (2021) Peer-to-peer (P2P) insurance. Investopedia. Available at: https://
www.investopedia.com/terms/p/peertopeer-p2p-insurance.asp [Accessed July 27,
2021].
Friedman, A. (2016) WTF is marketplace lending? [online] Tearsheet. Available at: https://
tearsheet.co/wtf/what-is-marketplace-lending/ [Accessed July 7, 2021].
Goyal, S. (2020) What is mobile wallet and how does it work? [online] Available at:
https://www.jagranjosh.com/general-knowledge/what-is-mobile-wallet-and-how-
does-it-work-1538043252-1/ [Accessed July 7, 2021].
Handa, P. and Schwartz, R.A. (1996) ‘Limit Order Trading’, Journal of Finance. Available
at: https://econpapers.repec.org/article/blajfnan/v_3a51_3ay_3a1996_3ai_3a5_3ap
_3a1835-61.htm [Accessed July 27, 2021].
Hargrave, M. (2021) Will insurtech disrupt the insurance industry? [online] Investopedia.
Available at: https://www.investopedia.com/terms/i/insurtech.asp [Accessed July 7,
2021].
Hazik, M. and Hassnian, A. (2019) Blockchain, Fintech, and Islamic Finance. Boston, MA:
Walter de Gruyter Inc.
He, D. (2018) ‘Monetary Policy in the Digital Age’, Finance & Development, 55 (2).
Available at: https://www.imf.org/external/pubs/ft/fandd/2018/06/central-bank-
monetary-policy-and-cryptocurrencies/he.htm [Accessed July 27, 2021].
Hecht, J. (2018) 4 business loans that work well with invoice fnancing. [online] Forbes.
Available at: https://www.forbes.com/sites/jaredhecht/2018/01/29/4-business-loans-
that-work-well-with-invoice-fnancing/?sh=6ab196964d9a [Accessed July 13, 2021].
Itoh, M. and Lapavitsas, C. (1999) Political Economy of Money and Finance. Basingstoke:
Palgrave Macmillan.
Moran, N. (2021) How e-money issuers may be the biggest challengers to banks yet.
Bobsguide. Available at: https://www.bobsguide.com/articles/how-e-money-issuers-
may-be-the-biggest-challengers-to-banks-yet/ [Accessed July 27, 2021].
 A typology of fnancial business models on digital transformation 63

Murphy, C.B. (2021) Over-the-counter (otc). Investopedia. Available at: https://www.

investopedia.com/terms/o/otc.asp [Accessed July 27, 2021].
NAIC. (2020) Internet of things (iot). National Association of Insurance Commissioners.
Available at: https://content.naic.org/cipr_topics/topic_internet_things_iot.htm
[Accessed July 27, 2021].
NAIC. (2021) On-demand insurance. National Association of Insurance Commissioners.
Available at: https://content.naic.org/cipr_topics/topic_ondemand_insurance.htm
[Accessed July 27, 2021].
Napoletano, E. and Foreman, D. (2021) What is digital banking? [online] Forbes. Available
at: https://www.forbes.com/advisor/banking/what-is-digital-banking/ [Accessed
July 7, 2021]
Patiño, D. (2020) Why is digital remittance replacing traditional money transfer? Rocket
Remit. Available at: https://www.rocketremit.com/2020/11/02/digital-remittance-
is-replacing-traditional-money-transfer/ [Accessed July 27, 2021].
PwC. (2017) Bank to the future: fnding the right path to digital transformation. [online]
PwC. Available at: https://www.pwc.com/us/en/industries/fnancial-services/
library/digital-bank-transformation.html [Accessed July 7, 2021].
Relay, R. (2019) Hardware wallets explained. Medium. Available at: https://medium.
com/radartech/hardware-wallets-explained-da8bd93ce801 [Accessed July 27, 2021].
Schmidt, J. (2020) P2P lending explained: Business models, defnitions & statistics.
[online] P2PMarketData. Available at: https://p2pmarketdata.com/p2p-lending-
explained/ [Accessed July 7, 2021]
Shubhangi, B. (2020) Digital payments: Defnition and methods – razorpay payment
gateway. Razorpay Learn. Available at: https://razorpay.com/learn/digital-payments-
india-defnition-methods-importance/ [Accessed July 27, 2021].
SoftGamings. (2019) Web wallet. SoftGamings. Available at: https://www.softgamings.
com/casino-glossary/web-wallet/ [Accessed July 27, 2021].
Solis, B., Li, C. and Szymanski, J. (2014) The 2014 State of Digital Transformation. Altimeter
Group.
Stewart, A., Lamont, K. and Yaworsky, K. (2018) Demystifying digital lending. [online]
Accion. Available at: https://www.fndevgateway.org/sites/default/fles/publications/
fles/1123_digital_lending_r10_print_ready.pdf. [Accessed July 7, 2021].
Walker, R., et al. (2021) ‘The Unique and Complex Considerations of Digital Asset
Custody’, Journal of Securities Operations & Custody, 13(2), pp. 150–162.
Zimmermann, J. (2020) Rewards-based crowdfunding: What it is, when it works.
[online] Nerdwallet. Available at: https://www.nerdwallet.com/article/small-business/
rewards-based-crowdfunding [Accessed July 7, 2021].
3
FINTECH, TECHNOMANIA, AND
PERSISTENT SOCIO-CIVILIZATIONAL
CHALLENGES
Mohammad Omar Farooq and Muhammad Dulal Miah

1 Introduction
Modern life is shaped and dominated by technology. While technological change
has always been present as a constant in the evolution of human civilization, the
pace and extent to which technology now not just shapes, but also controls our
individual and collective life is unprecedented. According to Harvard sociologist
Daniel Bell (1980:20), “technology like art is a soaring exercise of the human
imagination. … Technology is the instrumental ordering of human experience
within a logic of efcient means, and the direction of nature to use its powers for
material gain.”
We are continuously pushing the frontier and, due to technological change
among other things, drastically changing the way we live. The positive, expan-
sive impact of technology is undeniable. Standard of living has phenomenally
increased. The pace of life has picked up at a mind-boggling level. The art
of problem-solving, in many areas, has become cutting edge and fast-paced.
As part, the expansive presence of technology afecting all aspects of life, one area
that also has emerged as a dominant sub-feld is fnancial technology, Fintech,
in short.
As a nascent feld, it is already impacting various aspects of our fnancial
life and is expected to touch our lives more closely as it evolves. There is a
lot of excitement in the air, as Fintech, based on breakthrough technologies,
such as blockchain, artifcial intelligence (AI), machine learning, big data, robo-
advisory, smart contracts, and so on (Arslanian and Fischer, 2019), we might be
in an unchartered territory. Arvind Sankaran, a global business leader, has stated
about the Fintech revolution, a creative destruction of what we know and have:
“we’re witnessing the creative destruction of fnancial services, rearranging itself
around the consumer. Who does this in the most relevant, exciting way using

DOI: 10.4324/9781003262169-5
 Socio-civilizational challenges 65

data and digital, wins!” (Haq, 2020). This is not just a change, it’s being viewed
as part of the fourth industrial revolution (Miller and Wendt, 2021), changing the
“DNA of fnance” (Phadke, 2020).
While Muslims, in general, and Islamic fnance, in particular, are not part
of leading technology creation and development, Islamic fnance is trying to
take advantage of the emerging Fintech revolution and through the relevant
technology adoption and difusion (Alam and Ali, 2020). However, as Islamic
fnance is mainly a prohibition-driven industry so far, it is largely disconnected
from the broader, positive socioeconomic aspirations (Farooq, 2012). In this
chapter, we explore some deeper socio-civilizational challenges that not only
afect the humanity from socioeconomic perspective, but also some of which at
the civilizational level that relate to fnance as well as Islamic fnance (Mihalcova
et al., 2019). Therefore, the analysis presented here applies to Islamic fnance
as well.
The rest of the chapter is organized as follows: section two underpins the
primary philosophy of Fintech. Section three discusses technological changes
and the resulting technomania. Some persistent problems such as climate change,
rising inequality and the resulting poverty, gender gap, etc. are afected by the
advancement of technology. Chapter 4 assesses the potential impact of Fintech
on these critical elements, considering the interlinked nature of those problems.
The chapter also highlights how can Fintech play a decisive role in subsiding the
adverse efects of Fintech on the foundation of society. This is followed by a brief
conclusion.

2 Value proposition and underlying philosophy of Fintech

Fintech is poised to revolutionize the entire fnancial services sector, covering
banks, insurance, and asset management, while addressing fve key issues:
improving fnancial inclusion; enhancing customer experience; providing
targeted or customized support and guidance aided by AI and data analytics;
increasing transparency; and security and compliance (KPMG, 2017). We will
briefy explore these issues.
Financial inclusion is one of the major aspects of Fintech, touching the lives
of a lot of people who are otherwise left out from the mainstream banking and
fnance. The computer, wireless technology, internet, and smartphone were cru-
cial in laying the foundation for Fintech revolution. There are many disadvan-
taged people in the world, who have low education and lack computers and
the relevant skills; but a good portion of them now not only use internet and
smartphone for communication, but also access many modern services, including
fnancial services. Andree Simon (2020), President and CEO of FINCA Impact
Finance, identifes four key emerging trends related to Fintech and fnancial
inclusion: (a) the gender gap is closing; (b) banking, instead of banks, is getting
more attention; (c) collaboration, instead of traditional competition, between
banks and tech-based frms is bringing together economic forces to facilitate
66 Mohammad Omar Farooq and Muhammad Dulal Miah

greater participation; and (d) Fintech is enhancing a “human touch … culturally,

technologically, and operationally.”
Educated and technology-savvy customers are already experiencing enhanced
capabilities, such as chatbots, cloud computing, etc. On the transparency issue,
it is undeniable that the champions of Fintech were deeply motivated by the
lack of transparency in traditional banking and fnance, and they desire to bring
positive disruptions. However, opportunities from Fintech also come with new
risks (IMF, 2019). Considering the opportunities and risks, let’s consider one of
the hottest areas of Fintech: cryptocurrency. A key feature of cryptocurrency
is the transparency of the transactions based on blockchain; the coded data is
immutable. However, transparency of transaction does not necessarily cover the
identity behind the transaction, which has become a serious challenge for the
regulators, and this tug of war between the pursuit of openness and the need or
desire for regulation remains unresolved (Goodell and Aste, 2019).
A similar concern relates to security and compliance. While the transactions
are generally secure, they are also vulnerable to fraud and hacking, as in some
well-known cases cryptocurrency worth billions of dollars has been stolen. One
of the largest hackings, worth one billion dollar, from banks across the globe was
recorded in 2015 (Blue Water Credit, 2015). Notably, in 2016, Bitfnex crypto-
currency exchange was hacked and bitcoins worth $4.5 billion were stolen, even
though a good part of it was later recovered. Indeed, security remains one of
the most critical concerns, where the Fintech users expect a substantively better
performance.
So far, the leading aspects of Fintech’s value proposition have been faster and
more efcient payments, better and friendlier customer experience, the newly
discovered capacity to generate business insight using big data and data analytics
and expanded fnancial inclusion. This value proposition is relevant for Islamic
fnance industry as well. The Global Islamic Fintech Report 2021 identifes several
important areas where Islamic fnance industry is benefting from and is poised
for expansion and growth. However, the report does not indicate any special
competitive advantage of Islamic fnance industry (Dinar and Elipses, 2021).
A good proportion of Muslim population avoids conventional interest-based
banking. Hence, Islamic fnance industry has been a valuable option for this pop-
ulation segment. This means that a greater degree of fnancial inclusion through
Fintech will be possible in the future.
Notably, just like there is potential vulnerability to technomania, Muslim
world also has a parallel undercurrent of technophobia. It is not surprising that
even before the actual benefts and harms of cryptocurrencies, as part of Fintech
revolution, are adequately assessed, there are technophobic and obscurantist
religious scholars, who are pronouncing “haram” (prohibited) fatwas (Mellor,
2021).
While fnancial sector and Islamic fnance both are expected to beneft from
Fintech and deliver beneft for the society and economy, the larger picture
involving technology and progress is often glossed over. Technological progress
 Socio-civilizational challenges 67

has been instrumental behind the transformation of the society. However, it

is important that human society remains the master of technology than being
its slave, especially in the civilizational context. Of course, “technological
determinism,” viewing technology as an autonomous force of change over
which we have little control, paints a rather pessimistic picture of civilization
(Bergandi, 2013).

3 Technological progress and technomania

One of the undeniable impacts of technology is that it has made the world
much smaller, connecting people across the globe. Holdstock (2019) refers Matt
Mullenberg, a social media entrepreneur, who aptly said, “technology is best
when it brings people together.” In general, technology now not just shapes,
but also dominates, our life. Instead of being a useful servant, it seems to be
emerging as, Nobel Laureate Christian Lange (Lange, 1921) puts it, a “dangerous
master.” Indeed, technology is being presented in civilization term. Ryan (2020)
quoted Jacques Ellul “modern technology has become a total phenomenon for
civilization, the defning force of a new social order in which efciency is no
longer an option but a necessity imposed on all human activity.” Unfortunately,
technology, instead of improving our life, seems to have become our life. While
it is people who make technology possible, we seem to be losing faith in people
and putting more faith in technology. Steve Jobs (2019) had sagaciously argued,
“technology is nothing. What’s important is that you have faith in people, that
they’re basically good and smart, and if you give them tools, they’ll do wonderful
things with them.”
The ubiquitous and domineering impact of technology is aptly captured by
Steven Levy (1995):

The revolution has only just begun, but already it’s starting to overwhelm
us. It’s outstripping our capacity to cope, antiquating our laws, trans-
forming our mores, reshufing our economy, reordering our priorities,
redefning our workplaces, putting our Constitution to the fre, shifting
our concept of reality.

Levy’s observation was in 1995, based on what he observed, while the last two
decades have seemed to appear as an unprecedented technological transforma-
tion, even by Levy’s benchmark.
Yet, the fact remains that even though technology is a contribution from
human beings, and it will continue to exert its indomitable infuence on the
human society as an autonomous force of change, and it makes us more ef-
cient and bring transformational impact on the lives of people in so many ways,
Ord (2020) asks: does everything have technological solutions, especially for
socio-civilizational challenges that either have been persistent or gradually
becoming existential ones?
68 Mohammad Omar Farooq and Muhammad Dulal Miah

There is exuberance with technology, in general, and Fintech, in particular,

and there are compelling reasons to believe that more exciting solutions are
forthcoming that will make things faster, cheaper, inclusive, more decentralized,
more reliable (maybe), and secure (maybe). However, there are some persistent
socio-civilizational problems or challenges (Truevtsev, 2016) that beg question
whether those are amenable to technological solution or, in other words, if solu-
tions to those challenges lie in technology. Also, a question remains whether
fnancial sector, in general, or Islamic fnance, in particular, can really address
these existential civilizational challenges. Such concerns are relevant because
ultimately if these socio-civilizational challenges are not addressed, especially
the existential ones, there might not be any problem to solve.

4 Socio-civilizational, especially existential, challenges

not treated as priorities
In 2017, the famous and infuential scientist, Stephen Hawking, made a dire
prediction that human species has about 100 years to save itself by fnding another
habitable planet (Zorthian, 2017). Doomsday predictions are not that uncom-
mon, and many observers have pointed out the tendency of Hawking and other
doomsday forecasters to exaggerate. Therefore, any such doomsday prediction
must be taken with enormous caution. However, if we can put aside the exis-
tential challenges in doomsday terms, there are still challenges that the modern
civilization fnds persistent and growing. Not only their mere existence, but
these challenges are worsening, pushing the concerns to an existential level.
Based on a number of works related to the study of civilization and its modern
crisis (Avery, 2017), here we explore fve challenges, two of which are persistent,
while the other three are not just persistent but growing worse to the level of
existential concerns.

4.1 Poverty
Poverty has been a persistent challenge for human civilization, where a
signifcant segment of the population is bypassed by the economic development
and progress around them. Whatever criteria are used for measuring poverty
and extreme poverty, the last century’s economic progress across the globe has
had notable improvement in alleviating poverty. The economic development,
with specifc target to alleviate poverty, has been possible through the efects of
education, infrastructure, and technology, which facilitated rising productivity
and income.
According to various international sources, just in the last three decades, “the
number of people in extreme poverty has fallen from nearly 1.9 billion in 1990 to
about 650 million in 2018” (Roser and Ortiz-Ospina, 2019). Notably, these are
pre-pandemic data, and, ignoring the adverse efects of the pandemic and barring
any other major global mishap, if the trend of the past three decades continues
 Socio-civilizational challenges 69

until 2030, “the number of people in extreme poverty will stagnate at almost
500 million” (UNDESA, 2021). As the efects of the pandemic on global poverty
are becoming clear, the progress in poverty alleviation has taken a big hit, and
some of the progresses have been reversed (UNDESA, 2021). Also, noteworthy
is that much of the discussion about poverty is focused on extreme poverty,
with a very low threshold of US$1.90 per day. With a higher and more relevant
threshold, those in poverty (not just in extreme poverty) would be a much higher
in number. The defnition and measurement of poverty and extreme poverty
are rather highly contested areas of research. Some of the rosy pictures about the
progress in poverty alleviation have been challenged by many studies (Hickel,
2019).
The father of microcredit movement, Nobel Laureate Muhammad Yunus,
dreams of putting poverty in museum and many other voices also would like
to see not just alleviation of poverty, but rather its elimination. Most of them
see technology as a relevant but not necessarily the driving force for achiev-
ing that goal of poverty eradication. Modern technology has been one of the
powerful catalysts on many fronts to enhance economic progress and alleviate
poverty, but the issues related to poverty and deprivation are more complex.
Despite all the progress, including the impact of technology, if the number of
people in poverty and extreme poverty persist from 500 million to 1.5 billion, it
should not be difcult to understand that the problem and complexity involved
go beyond technology. Therefore, technology in general and Fintech in particu-
lar might bring further improvement in certain ways. Since the reason behind
persistent poverty is not necessarily amenable to merely technological cure, we
must be circumspect regarding any over expectation from technology-led, tech-
nology-driven, or technology-dependent model of progress and development,
without concurrently focusing on other and more complex factors.
Realistically, the most promise of Fintech for poverty alleviation is through
fnancial inclusion, especially microfnance and crowdfunding. As technology is
breaking down the barrier for more and more people by making modern fnan-
cial services scalable and accessible, evidence shows that consequential changes
can happen in a facilitating environment. Several studies from around the world
show the promise of Fintech for poverty alleviation. For instance, Appiah-
Otoo and Song (2021) in the context of China, Emara and Mohieldin (2021)
for data selected from Middle East and North Africa (MENA) region, and Aba
and Linardy (2021) drawing evidence from Indonesia show a positive impact of
Fintech on poverty alleviation. The study by Omar and Inaba (2020) concludes
based on data from 116 countries that fnancial inclusion “… signifcantly reduces
poverty rates and income inequality in developing countries.”
As Islamic fnance is already making a positive contribution to fnancial
inclusion, better equipped with scalable Fintech services, Islamic fnance can
also make further contribution. A World Bank study (2020) fnds solid poten-
tial for Islamic fnance to utilize Fintech toward fnancial inclusion, which is
an important aspect of poverty alleviation. However, the study also notes that
70 Mohammad Omar Farooq and Muhammad Dulal Miah

there are potential risks of Fintech difusion among people with low literacy and
education, which would require “careful mitigation” and an active role of the
industry stakeholders, including the regulators. As some of the Islamic fnance
experts, who are also working with Fintech, articulate “if Islamic fntech can
demonstrate how they uphold the core values of Islamic fnance, using tools like
blockchain, they could be formidable force for good across fnancial services”
(London Institute of Banking and Finance, 2020).

4.2 Inequality
Inequality and concentration of wealth have always been present in human
civilization. Throughout modern periods and in diferent contexts, the inequal-
ity and concentration of wealth have seen better and worse periods. However, the
concentration of wealth has been alarmingly worsening during the 21st century,
and quite interestingly contributed by modern technologies and dominated by
those who have pioneered and led the tech revolution (Summers, 2016).
Modern technologies have contributed to productivity growth, accelerated
economic development, expanded access to practical information sharing, and
enhanced access to basic services and amenities. Indeed, a signifcant decline
in extreme poverty would not have been possible without the role of, among
other things, modern technology. However, neither technology evenly or
fairly impacts the world, nor does it improve inequality and concentration of
wealth. The adverse impact of technology on inequality has been attributed to
“generation of economic rents and rent-seeking behavior” (UNESCAP, 2018).
From economic viewpoint, this economic rent is extracting excess income or
unearned gains without contributing anything to the real economy, and often
through preferential regulation. UNESCAP (2018:20) reports “… fnancial
globalization, digitalization and the rise of frontier technologies are the enabling
environments for rent-seeking that cause extreme, long-lasting, and deepening
inequality.” Digital economy has leveled the playing feld to a great extent for the
broader population by giving access to modern communication technology, but
at the same time, technology has also concentrated the capacity of wealth crea-
tion in the hands of tech companies and those companies that have been directly
and signifcantly aided by technological change.
However, it is not just accumulation of wealth by a few rich, but also their
extraordinary power of regulatory capture – the ability to control the rele-
vant regulators (Allen, 2017). Many prominent economists, including Thomas
Picketty (2014), place the concentration of wealth and the resulting inequality
as one of the biggest challenges facing the globe (Lohr, 2022). Contemporary
world is dominated by capitalist societies, and under this system, capital
owners are the masters and the story of this system revolves around capital.
Unfortunately, there is no technological solution to his worsening, destabilizing
problem, unless technological progress consciously pursues paths toward shared
prosperity.
 Socio-civilizational challenges 71

Reducing income inequality is a formidable challenge because while

technology, especially Fintech, is helping to enhance fnancial inclusion, which
may help alleviate poverty, inequality and concentration of wealth have a more
complex systemic and structural bias. Ironically, such biases are also facilitated
by modern technology, creating disproportionate wealth for those who are
already rich. So far, studies (e.g., Foohey and Martin, 2021; Jones and Maynard,
2023; Petrou, 2018) connecting Fintech and wealth inequality do not indicate
any signifcant positive impact on reducing the inequality. Notably, Global
Islamic Fintech Report 2021 has no reference at all to poverty, inequality, or
wealth gap.

4.3 Epidemics/pandemics
The latest epidemic is a devastating reminder that the human civilization is
acutely vulnerable to non-technological factors. Our mastery of science and
technology has been helpful to mitigate the impact of the pandemic and to over-
come through discovery of relevant vaccines. However, scientists and experts
predict that, far from this being the last time, bigger, wider, and more devastating
pandemic is not only possible, but also likely and not all such possibilities have
technological solutions.
As discussed about poverty and inequality, two interrelated problems, even
with the biotechnological solutions to address pandemic, it is clear that the global
divide between the poor and not-poor persists. The Western countries, where
vaccines were developed, got the priority in the vaccine distribution, and many
countries with lower resources have not been able to make the vaccines availa-
ble to their own population, because vaccine is costly and many poorer coun-
tries, reeling from the devastating economic efects of pandemic, has yet been
able to aford wider distribution for their people. Once again, the complexity
of an interrelated world precludes purely or even primarily technology-driven
solutions.
Even before we get rid of this global pandemic, experts are warning that
more, and even more lethal, pandemics are very likely (Gregory and Elgot,
2021). To be fair, modern technology allows now better and wider dissemina-
tion of news and information, but that includes both useful and accurate as well
as misleading and fake information. Moreover, just like technology has made this
planet an interconnected village and bringing the global communities closer, the
risk of spreading epidemic faster and wider has increased massively.
In several areas, Fintech has had very useful and benefcial impact during
Covid 19 pandemic. One such key area has been contactless payment. While
the technology has been developing for some time, the pandemic provided the
impetus for aggressively developing solutions in this area. Indeed, researchers
and industry observers point to the fact that this pandemic induced as well as
forced many innovations. Islamic fnance has not lagged in this area of adopting
relevant innovations. Forbes (2021) identifed 14 tech innovations that would
72 Mohammad Omar Farooq and Muhammad Dulal Miah

have enduring impact on our life, especially in connection with our work.
Some tech solutions related to our health, such as telehealth and mental ftness,
can help people with their health aspects or innovations that may smoothen
the life of many people, but they would not necessarily be directly relevant
for preventing epidemic. However, that is not necessarily related to Fintech,
but technology in general will have to play the desired role for better health
and safety.

4.4 Wars and conficts

One persistent scourge of human civilization has been wars and conficts. There
was hardly any era in human history when some wars or conficts did not take
place. However, modern civilization has not seen less of them. Rather, 20th
century has been noted as the century of genocide, and the same century also has
seen two of the worst wars of global scales, the two world wars.
If technology has brightened, enriched, and enhanced many aspects of our
lives, and positively touched so many people around the world, it is also the sci-
ence and technology driven by war or military pursuits that now have brought
the planet to an existential threat. The human species now has built the military
capacity to be able to self-destruct. As Russia invaded Ukraine, both countries
part of Europe as the hotbed of two world wars, and if the global military powers
and NATO did not feel restrained and behave pragmatically, such a war initiated
by a nuclear superpower can easily spin out of control and turn into another
existential threat.
The quest of major powers to have dominating edge over the adversaries
involves no-stone-unturned approach, where they are in morbid race in bio-
logical, nuclear, chemical, and other disastrous weapons of mass destruction.
Many of these wars are for vain glories of individual megalomaniacs or domi-
nance-seeking global and regional powers. Many of these wars occur under false
pretexts, and often to serve the interest of the global military weapons manufac-
turing industry, whose quest is not just for innovating defensive solutions, but
also ofensive solutions that are bought and sold like kitchen knives.
In 2015, Federation of American Scientists warned:

while it is impossible to precisely predict all the human impacts that would
result from a nuclear winter, it is relatively simple to predict those which
would be most profound. That is, a nuclear winter would cause most
humans and large animals to die from nuclear famine in a mass extinction
event like the one that wiped out the dinosaurs.
(Starr, 2015)

Some of these risks might be exaggerated, but if there is a nuclear war where
nuclear powers get involved and deploy their weapons, beyond the deterrence,
there is a potential existential threat to human civilization. At least in the
 Socio-civilizational challenges 73

context of wars and conficts, without humanity-oriented values and empathy,

technology so far has been more of bane than boon.
The most recent development of Russian invasion of Ukraine, which can
escalate to a major war of the 21st century in the heartland of Europe, has
placed Fintech industry into a new bind. Fintech envisions a world with “money
without borders” (Webb, 2022). Under the new, globally coordinated sanction
against Russia, Fintech companies are feared to face enormous restrictions on
their transactions. Ukrainian allies, in particular, the European Union, UK, and
USA have imposed various sanctions on Russian government and oligarchs in
response to Russia’s invasion in Ukraine. The sanctions include, along with other
broad measures, expelling major Russian banks from the SWIFT, a communi-
cation system for international banking transactions. The key to implementing
sanctions is the international banking system through which funds are trans-
ferred cross-borders. Banks put every measure to know their customers as well as
the sources and purpose of funds being transferred. In such a process, banks are
strictly reluctant to process fnancial transactions related to sanctioned individu-
als or entities. However, Flitter and Yafe-Bellany (2022) put it in this way “… if
banks are the eyes and ears of governments in this space, the explosion of digital
currencies is blinding them.”
The primary motto of cryptocurrency is to maintain its neutrality which
means that no regulatory entity including the government can prevent its use.
Unlike banks which require formal approval from the respective central bank for
processing major transactions, the exchange of cryptocurrency aims to bypass
such procedures. In efect, no regularity entity can efectively prevent parties to
exchange cryptocurrency because the exchange takes place between peers with-
out involving any intermediary. Some countries including North Korea, Iran,
and Venezuela have used the loopholes of cryptocurrency to ease the pressure
of Western sanctions. North Korea is a notorious example which has occasion-
ally used hacking techniques, using ransomware, to steal cryptocurrency from
diferent parts of the world worth billions of dollars (Kim, 2022). In 2020, about
74% of global ransomware revenues valued US$400 million worth of cryptocur-
rency were captured by entities that are most likely linked to Russia (Flitter and
Yafe-Bellany, 2022). Hence, it is highly likely that Russia would leave no stone
unturned to use cryptocurrency to ease the ongoing sanctions.
Abundance supply of energy has provided Russian miners with a competitive
edge to mine crypto in the country. Russia ranks third in the world in min-
ing bitcoin, the capstone among all the cryptocurrencies (Makhlouf and Selmi,
2022). Although Kazakhstan ranks second following only the USA, it is believed
that Russia has an upper hand in bitcoin mining in Kazakhstan. According
to Bloomberg estimation, Russia is a home to at least $214 billion worth of
cryptocurrency (Fortune, 2022). Such a mounting possession of crypto would
enable Russia to use crypto for buying goods and services which are currently
under sanctioned. It is believed that Russia may develop a network of complicit
exchange services to evade sanctions. For instance, Russia is on the verge to
74 Mohammad Omar Farooq and Muhammad Dulal Miah

develop some new tools that can help mask the origin of such transactions that
would allow businesses to trade with Russian entities without the risk of being
detected. In addition, there are some cryptocurrencies such as Moreno, which
apply private distributed ledger with a feature of privacy-enhancing technology
that aims to conceal transactions. Russia can also resort to dark web marketplace
such as Hydra, powered by cryptocurrency, to accomplish obscured transactions.
Strict regulations and their compliance requirement enable such platforms to
remain outside of researchers and regulator’s focus. Besides Hydra, other money-
laundering techniques, such as “nesting,” are also used for anonymous transac-
tions. Nesting and other such techniques can hide themselves within a larger,
legitimate structure to avoid regulatory purview.
Moreover, the Russian government plans to develop its own digital currency,
digital ruble, so that the country can use it with partner countries without frst
converting to dollars. China, which has already initiated digital currency, is
highly likely to partner with Russia. Moreover, it is still possible that some illicit
trades are happening under the radar because exchanges and cryptocurrency
compliance frms do not necessarily know about all the wallets controlled by
proxies of an individual on a sanction list. In such a case, sanctions against Russia
wouldn’t achieve the intended purpose. This proves that while Fintech aims to
facilitate transactions with ease and lower transaction cost, its use can also create
a loophole for violating international orders and legitimacy.

4.5 Climate crisis

Of all the potential challenges to human civilization, none is more existential in
nature than the climate crisis. From the time of industrial revolution, the unprec-
edented economic and material progress of human society, technology has been
a primary mover, but due to human factor where the people with economic
and political power have put material progress before human welfare, economic
development has occurred in ways that paid little attention to the welfare of the
planet that sustains us. Even today, technology is helping to reverse or slow down
the climate crisis, but scientists and experts also are forewarning that it might be
too late, too slow, or too little actions to save the planet. According to a climate
change report, human civilization has a potential reckoning by 2050 (Pascus,
2019).
While addressing climate crisis requires a more holistic approach and strat-
egy, technology in general will play a pivotal role and within that role Fintech
can also make relevant contribution. Working with the Bank for International
Settlements and major global fnancial institutions, Global Government Fintech
highlights “the potential for technology to tackle challenges in green and sus-
tainable fnance” (Hall, 2022). Banks and fnancial services as a leading sector
have a pivotal role to play, and many of them are gearing up for leveraging
Fintech through niche area of Fintech: “Climate fntech – where the tech inno-
vation is used to address both sustainability and fnancial needs” (Mercado, 2021).
 Socio-civilizational challenges 75

Global fnancial powerhouse like Citibank is taking aggressive interest in engag-

ing Fintech to fght climate change, especially through efective utilization of big
data and AI (Zec and Brunet, 2021).
Parallel to these positive developments and potentials in climate-related tech-
nology and Fintech, there is also negative impact and further potential risk, if
Fintech, as a subset of tech sector, does not change drastically its dependence
on fossil fuel and its mammoth generation of e-waste. Experts identify fve rel-
evant areas where Fintech needs to adapt substantively: (a) dependence on and
complacency with fossil fuel; (b) extravagant consumption of energy; (c) fnance
industry’s lack of transparency regarding carbon footprints; (d) electronic waste,
commonly known as e-waste, which has become one of the fastest growing
sources of waste in the world; and (e) the potential of expanded fnancial inclu-
sion, accompanied by promotion of debt culture, to lead to another major tranche
of consumerism (Cag, 2022).

5 Conclusion
Technology has been an indispensable driver of human civilization and, in
modern times, the phenomenal rise in standard of living and quality of life are
testimony to it. Technology as a whole will remain such indispensable in future
too. However, technology in general or Fintech in particular must not succumb
to technomania, where we are deluded in thinking that everything has a tech-
nological solution because human beings must remain at the core of civiliza-
tion’s problem, and it is they who will drive and reign in technological progress.
As long as we remain excited about the positive and human-welfare-enhancing
potentials of technology, and seek its beneft in a responsible, ethical, and wise
manner, technology will continue to play the role it should. These observations
apply equally from Islamic perspective in general and in the context of Islamic
fnance in particular.
In this chapter, we have mentioned the limitations of technology showing
some existential problems human beings face today. The challenges mentioned
above are not exhaustive and each of these separately might appear less ominous
than they actually seem to be. However, they are not isolated; rather, interlinked
and thus, pose a level of complexity that often obscures the nature and extent of
the challenges.
Considering the value proposition of Fintech, which is slated to reshape
our life in the fnancial services arena, there is much to be excited. However,
the use of technology should be without being entrapped by technomania and
seeking solutions to all problems through technology. Because of the inter-
connections of the challenges, several aspects deserve our collective attention.
(a) The humankind should explore new ways to fulfll our needs and wants
within the framework of the fnite capacity of this planet; (b) establishing and
practicing authentic democracies, where the commitment to human welfare can
ensure accountable and empathic leadership; (c) reverse or substantively reduce
76 Mohammad Omar Farooq and Muhammad Dulal Miah

economic inequality and extreme concentration of wealth and promote shared

prosperity; (d) transition from non-renewable fossil fuels to renewable energies,
especially in the framework of cutting-edge thoughts like circular economy;
(e) bringing global population to a level that can be supported by sustainable
agriculture, which is important because agriculture is an existential need for
the humanity; (f ) wars and conficts need to be managed in ways where they
are treated as uncivilized before modern weapons of mass destruction wreak
irreversible havoc on the planet; and (g) develop a mature and sensitive ethical
system to match our evolving technological capabilities (Avery, 2017).
Achieving the above-mentioned suggestions still require new and adapted
technology to address these challenges. However, that requires a system and
environment where technology is at the service of the humanity and human
civilization, not the master of it.
It is heartening to see that in a more decentralized environment, inventors
and problem-solvers are coming forward to harness the power of technology to
make positive diference in many of the several civilizational challenges identi-
fed earlier. Ultimately, it will take all the stakeholders, especially those who hold
the political and economic power to lead and facilitate the quest for solutions to
those challenges. Much of the problems that human civilization faces require
the human beings becoming better human beings, building institutions are gen-
uinely pro-people, and pursuing an economy and society that embraces shared
prosperity, where every human being can live and let live with fundamental
human dignity. It is possible, because just like technologies are domains of pos-
sibilities, the real source of all possibilities in this world are anchored in human
beings as trustees of our Creators.

References
Aba, Fransiskus and Linardy, Denise (2021). “Financial Technology in Financial
Inclusions and its Implications on Poverty from Indonesia,” https://www.preprints.
org/manuscript/202111.0061/v1/download
Alam, Nafs and Ali, Syed Nazim (2020). Fintech, Digital Currency and the Future of Islamic
Finance: Strategic, Regulatory and Adoption Issues in the Gulf Cooperation Council (Cham,
Switzerland: Palgrave Macmillan).
Allen, Jonathan (2017). Technology and Inequality: Concentrated Wealth in a Digital World
(Cham, Switzerland: Palgrave-Macmillan).
Appiah-Otoo, Isaac and Song, Na (2021). “The Impact of Fintech on Poverty Reduction:
Evidence from China,” Sustainability, Vol. 13, No. 9, 1–13.
Arslanian, Henri and Fischer, Fabrice (2019). The Future of Finance: The Impact of FinTech,
AI, and Crypto on Financial Services (Cham, Switzerland: Palgrave Macmillan).
Avery, John Scales (2017). Civilization’s Crisis: A Set of Linked Challenges (Singapore:
World Scientifc).
Bell, Daniel (1980). The Winding Passage: Essays and Sociological Journeys, 1960–1980 (New
Brunswick, NJ: Transaction Publishers), p. 20.
Bergandi, Donato (2013). “Ecology, Evolution, Ethics: In search of a Meta-paradigm
– An Introduction,” in Bergandy, Donato (Ed.), The Structural Links between Ecology,
Evolution and Ethics: The Virtuous Epistemic Circle (New York, NY: Springer), pp. 1–28.
 Socio-civilizational challenges 77

Blue Water Credit (2015). “The Top 10 Bank Heists of All Time,” Blue Water Credit,
https://bluewatercredit.com/top-10-bank-heists-time/.
Cag, Derin (2022), “Top 5 Causes of Climate Change Related to the Fintech
Sector,” Fintech Magazine, January 13, https://fntechmagazine.com/sustainability/
top-5-causes-climate-change-related-fntech-sector.
Dinar Standard and Elipses (2021). Global Islamic Fintech Report 2021, https://www.
capitalmarketsmalaysia.com/wp-content/uploads/2021/06/Global-Islamic-Fintech-
Report-2021.pdf.
Emara, Noha and Mohieldin, Mahmoud (2021). “Beyond the Digital Dividends:
Fintech and Extreme Poverty in the Middle East and Africa,” Topics in Middle Eastern
and African Economies Proceedings of Middle East Economic Association, Vol. 3, No. 2,
41–73.
Farooq, Mohammad Omar (2012). “Exploitation, Proft and the Riba-Interest
Reductionism,” International Journal of Islamic and Middle Eastern Finance and Management,
Vol. 5, No. 4, 292–320.
Flitter, E. and Yafe-Bellany, D. (2022). “Russia Could Use Cryptocurrency to Blunt the
Force of U.S. Sanctions,” New York Times, February 24, 2022.
Foohey, Pamela and Martin, Nathalie (2021). “Fintech’s Role in Exacerbating or
Reducing the Wealth Gap,” University of Illinois Law Review, 460–504, https://papers.
ssrn.com/sol3/Papers.cfm?abstract_id=3551469#.
Forbes (2021). “14 Pandemic-Driven Tech Innovations That Will Continue to Impact the
World,” June 4, https://www.forbes.com/sites/forbestechcouncil/2021/06/04/14-
pandemic-driven-tech-innovations-that-will-continue-to-impact-the-world/?sh=
7f0666bc6a23.
Fortune (2022). “Russia Nears Plans to Regulate Its Local Crypto Valued at $214
Billion,” March 30, 2022, https://fortune.com/2022/02/01/russia-local-crypto-
214-billion-regulation/.
Goodell, G. and Aste, T. (2019). “Can Cryptocurrencies Preserve Privacy and Comply
With Regulations?” Frontiers in Blockchain, Vol. 2, No. 4, 1–14.
Gregory, Andrew and Elgot, Jessica (2021). “Covid Not Over and Next Pandemic
Could Be More Lethal, Says Oxford Jab Creator,” The Guardian, December 6,
https://www.theguardian.com/world/2021/dec/06/covid-not-over-next-pandemic-
could-be-more-lethal-oxford-jab-creator.
Hall, Ian (2022). “Going Green: Government Look to Fintech to Help Combat Climate
Crisis,” Global Government Forum, February 17, https://www.globalgovernmentforum.
com/going-green-governments-look-to-fntech-to-help-combat-climate-crisis/.
Haq, Rashed (2020). Enterprise Artifcial Intelligence Transformation (Hoboken, NJ: John
Wiley), p. 67.
Hickel, Jason (2019). “A Letter to Steven Pinker about Global Poverty,” Resilience.org,
February 4, https://www.resilience.org/stories/2019-02-04/a-letter-to-steven-
pinker-about-global-poverty/.
Holdstock, David (2019). Smart Geospatial Practices and Applications in Local Government: An
Altogether Diferent Language (Boca Raton, FL: CRC Press), p. 77.
International Monetary Fund (IMF) (2019). Fintech: The Experience So Far (Washington,
DC: World Bank).
Jobs, Steve (2019). “Technology Is Nothing,” October 5, https://www.cnbc.
com/2019/10/05/apple-ceo-steve-jobs-technology-is-nothing-heres-what-it-takes-
to-achieve-great-success.html.
Jones, Lindsay and Maynard, Goldburn (2023). “Unfulflled Promises of the FinTech
Revolution,” California Law Review, Vol. 111, https://papers.ssrn.com/sol3/papers.
cfm?abstract_id=4031044.
78 Mohammad Omar Farooq and Muhammad Dulal Miah

Kim, M. H. (2022). “North Korea’s Cyber Capabilities and Their Implications for
International Security,” Sustainability, Vol. 14, No. 3, 1744.
KPMG (2017). “Value of Fintech,” https://assets.kpmg/content/dam/kpmg/uk/
pdf/2017/10/value-of-fntech.pdf.
Lange, Christian (1921). “Nobel Lecture,” https://www.nobelprize.org/prizes/
peace/1921/lange/lecture/.
Levy, Steven (1995). “Technomania,” Newsweek, February 26, https://www.newsweek.
com/technomania-185328.
Lohr, Steve (2022). “Economists Pin More Blame on Tech for Rising Inequality,”
New York Times, January 11, https://www.nytimes.com/2022/01/11/technology/
income-inequality-technology.html
Picketty, Thomas (2014). Capital in the Twenty-First Century (Cambridge, MA: Harvard
University Press).
London Institute of Banking and Finance (2020). “Islamic Fintech as a Force for Good,”
LIBF, https://mena.libf.ac.uk/2020/11/02/islamic-fntech-as-a-force-for-good/.
Makhlouf, F., and Selmi, R. (2022). “Do Sanctions Work in a Crypto World? The Impact
of the Removal of Russian Banks from SWIFT on Remittances,” hal-03599089,
last access on April 02, 2022 from https://hal.archives-ouvertes.fr/hal-03599089/
document.
Mellor, Sohpie (2021). “Muslim Can’t Trade Crypto, Says the Head of the Shariah
Compliance in the World’s Largest Islamic Country,” Yahoo Finance, November 11,
https://fnance.yahoo.com/news/muslims-t-trade-crypto-says-114358155.html.
Mercado, Angely (2021). “How Banks Are Using Technology to Fight Climate
Change,” Popular Science, December 13, https://www.popsci.com/environment/
climate-fntech/.
Mihalcova, B., Szaryszova, P., Stofova, L., Pruzinsky, M. and Gontkovicova, B. (Eds.)
(2019). Production Management and Business Development: Proceedings of the 6th Annual
International Scientifc Conference on Marketing Management, Trade, Financial and Social
Aspects of Business, May 17–19, 2018, Slovakia and Ukraine (London, UK: Taylor &
Francis).
Miller, Katharina and Wendt, Karen (Eds.) (2021). The Fourth Industrial Revolution and its
Impact on Ethics: Solving the challenges of the Agenda 2030 (Cham, Switzerland: Springer).
Omar, Md Abdullah and Inaba, Kazuo (2020). “Does Financial Inclusion Reduce Poverty
and Income Inequality in Developing Countries? A Panel Data Analysis,” Journal of
Economic Structures, Vol. 9, https://doi.org/10.1186/s40008-020-00214-4.
Ord, Toby (2020). The Precipice: Existential Risk and the Future of Humanity (New York,
NY: Hachette Books).
Pascus, Brian (2019). “Human Civilization Faces ‘Existential Risk’ by 2050 According to
New Australian Climate Change Report,” cbsnews.com, https://www.cbsnews.com/
news/new-climate-change-report-human-civilization-at-risk-extinction-by-2050-
new-australian-climate/.
Petrou, K. (2018). “The Crisis Next Time: The Risk of New-Age Fintech and the
Last-Crisis Financial Regulation,” Federal Financial Analytics Research Report, https://
fedfn.com/wp-content/uploads/2018/09/FedFin-Policy-Paper-on-The-Risk-of-
New-Age-Fintech-and-Last-Crisis-Financial-Regulation.pdf.
Phadke, Sanjay (2020). Fintech Future: Changing the DNA of Finance (London, UK: Sage
Publications).
Roser, Max and Ortiz-Ospina, Esteban (2019). “Global Extreme Poverty,” Our World in
Data, https://ourworldindata.org/extreme-poverty.
 Socio-civilizational challenges 79

Ryan, Donna (2020). Equipped to Tell the Next Generation (Eugene, Oregon: WipF and
Stock Publishers).
Simon, Andree (2020). “Four Fintech & Financial Inclusion Trends for 2020,”
Responsible fnance Forum, https://responsiblefnanceforum.org/four-fntech-fnancial-
inclusion-trends-2020/.
Starr, Steven (2015). “Nuclear War, Nuclear Winter, and Human Extinction,”
Federation of American Scientists, https://fas.org/pir-pubs/nuclear-war-nuclear-winter-
and-human-extinction/.
Summers, Chris (2016). “Rise of the Self-Made Billionaires: How Technology Created
a New Generation of Super-Rich in America,” dailymail, May 17, https://www.
dailymail.co.uk/news/article-3594283/Rise-self-billionaires-technology-created-
super-rich-generation.html.
Truevtsev, Konstantin (2016). “Globalization as a Political Process,” Journal of Globalization
Studies, Vol. 7, No. 1, 66–86.
UNDESA (2021). “Sustainable Development Report Shows Devastating Impact of
COVID, Ahead of ‘Critical’ New Phase,” July 6, https://www.un.org/africarenewal/
news/sustainable-development-report-shows-devastating-impact-covid-ahead-
%E2%80%98critical%E2%80%99-new-phase.
UNESCAP (2018). Inequality in Asia and Pacifc in the Era of the 2030 Agenda for Sustainable
Development, 70, https://www.unescap.org/publications/inequality-asia-and-pacifc-
era-2030-agenda-sustainable-development.
Webb, Alexander (2022). “Ukraine Invasion Upends the Fintech World,” Observer, March
4, https://observer.com/2022/03/ukraine-invasion-upends-the-fntech-world/.
World Bank Group (2020). Leveraging Islamic Fintech to Improve Financial Inclusion (Washington,
DC: World Bank), https://openknowledge.worldbank.org/handle/10986/34520?
locale-attribute=es.
Zec, Jelena and Brunet, Alix (2021). “Climate Fintech: Using Data and AI to Fight
Climate Change and Create Business Opportunities,” https://www.citi.com/
ventures/perspectives/opinion/climate-fntech.html.
Zorthian, Julia (2017). “Stephen Hawking Says Humans Have 100 Years to Move to Another
Planet,” https://time.com/4767595/stephen-hawking-100-years-new-planet/.
PART II

Empirical studies
4
BUSINESS RISK MITIGATION
THROUGH “VALUE-CHAIN
INTEGRATED” FINANCING IN ISLAMIC
PEER-TO-PEER LENDING IN INDONESIA
PT Qazwa Mitra Hasanah’s experience

Sigit Pramono, Dikry Paren, M. Iqbal Ramadhan and

Muhammad Razikun

1 Introduction
This chapter provides an overview of the recent progress of Islamic peer-to-peer
(P2P) lending platform for supporting micro, small, and medium enterprises
(MSMEs) in Indonesia. P2P has emerged as a potential alternative to mainstream
fnancing which eliminates the need for intermediation. The popularity of P2P
can be attributed to quick processing, low cost, and ease of management. It is
worth noting that the fnancial and banking industry will face massive digital
disruption with the emergence of fnancial technology (fntech). Consequently,
this will also afect the Islamic fnance and banking sector. Fintech will encour-
age the acceleration of collaboration between banking business and P2P.
Some studies show that the P2P business model has the potential to efciently
carry out fnancial intermediation process and change fnancing modes of fnan-
cial institutions to the business segments (Huang et al., 2020; Linawati et al.,
2019; Yoshino and Taghizadeh-Hesary, 2017). Moreover, it is projected that P2P
will contribute to the development of the MSMEs sector.
This fntech start-up shares a vision to achieve equity and justice in the society
through economic development facilitated by Islamic fnancial technology. Since
fntech empowers small start-ups, this case is believed to unfold important infor-
mation about P2P fnancing and the accompanied opportunities and challenges.
Regulators can take this information into account for accelerating the pace of
fntech revolution.
This chapter brings practical experience from PT Qazwa Mitra Hasanah
(Qazwa), an Indonesian Islamic P2P company. In specifc, this chapter pre-
sents an interesting fnding from the risk management practice implemented by

DOI: 10.4324/9781003262169-7
84 Sigit Pramono et al.

Qazwa in terms of business risk mitigation through the “value-chain integrated”

fnancing model to help MSMEs.
Recognizably, MSMEs sector relatively has higher business risk and
complicated risk management practices. As an Islamic P2P, Qazwa is consid-
ered as a pioneer in implementing “value-chain integrated” fnancing strategy
in which fnancing to MSMEs business is carried out by promoting an inte-
grated business ecosystem approach. The basic concept of “value-chain inte-
grated” fnancing relies on the understanding that all “players” in the MSMEs
business ecosystem have mutual relationship and contribute to each other in
providing “economic value-added” for their business counterparts. Thus, by
“connecting and maintaining” relationship and “economic value-added” con-
tribution of each economic player in the MSMEs business ecosystem, it is
expected that this fnancing strategy will facilitate risk mitigation of MSMEs
business fnancing.
In principle, “value-chain integrated” fnancing applied by Qazwa is “work-
ing capital” fnancing in relation to the “supply-chain” cooperation in MSMEs
business operation. With this fnancing-mode, it is designed that the level of
business failure of MSMEs can be reduced since business dealings under this
circumstance usually are based on good recognition and close relation between
“suppliers-buyers” in MSMEs business ecosystem. Moreover, Qazwa’s “val-
ue-chain integrated” fnancing will disburse its fnancing directly to MSMEs
in the form of working capital (inventory, raw material, factoring facilities, etc.)
or “capital goods” (i.e., fxed assets, equipment, etc.). This particular mode of
fnancing will avoid spending in “cash fnancing”. It is supposed that this mode
of fnancing will prevent moral hazard attitudes as fnancing received by MSMEs
in cash has potential to be misused for non-business purposes as proposed in the
fnancing proposal.
This chapter is organized as follows: Section 2 discusses an overview of fn-
tech development in Indonesia. Section 3 highlights issues on digital disruption
in Indonesian Islamic fnance and banking industry. Section 4 presents current
development of P2P in Indonesia. Section 5 presents an analysis of business risk
mitigation through “value-chain integrated” fnancing model to MSMEs. This
is followed by a concluding comment in Section 6.

2 Fintech development in Indonesia

Based on the projection analysis report published by PricewaterhouseCoopers
entitled “The World in 2050, The long view: how will the global economic order change”
by 2050? (PwC, 2017), Indonesia has the potential to become one of the world’s
economic magnets by having an economy that will be the world’s ffth largest (at
US$5.424 trillion) in 2030 and in the top four in the world (worth US$10.502
trillion) in 2050.
In terms of the demographic profle, based on the 2020 Population Census,
Indonesia is the fourth most populous country in the world with 270.2 million
 Islamic Peer-to-Peer Lending 85

population (BPS, 2020). The proportion of the working-age population (aged

15–64 years) out of the population reaches 70.7%. The 2020 Population Census
also shows that Generation Z (born 1997–2012) at 27.9% and the Millennial
Generation at 25.8% (born 1981–1996) dominate the demographic structure of
Indonesia. Therefore, it is believed that Indonesia will receive benefts from the
peak of demographic bonuses by 2030.
Meanwhile, according to the report “Digital 2021: the latest insights into the
‘state of digital’” (Kemp, 2021), as of January 2021, the internet penetration rate in
Indonesia stands at 74%. In which, there are 202.6 million people (73.7% of the
total population) internet users and 170 million (61.8% of the total population)
are active social media users, and there are 345.3 million (125.6% of the total
population) who are connected and become users of mobile phones. This data
shows that currently there has been a rapid growth in internet access penetration
which is very promising in Indonesia.
Nevertheless, it is worth noting that there are two fundamental problems in
Indonesia’s fnancial sector that need to be taken into account. Firstly, low level
of fnancial inclusion in the economy. Secondly, large fnancing gap for MSMEs.
According to the World Bank Group Global Findex Database in 2018, only
48.9% of Indonesian adults (15+ years) had bank accounts (World Bank, 2018).
This 48.9% of the banked Indonesian population is still substantially behind the
world average of 69%. Primary barriers to fnancial inclusion include and are
not limited to the lack of personal documents and credit history, poor fnan-
cial infrastructure, logistics and delivery challenges, restrictive regulations, and
fnancial products ofered by banks that are more suitable for urban population
(UOB, 2017).
The emergence of fnancial technology (fntech) has created massive digital
disruption for the fnancial and banking industry. Fintech is trusted to bring
increased convenience for consumers in using digital fnancial services. Fintech
will make it easier for customers in making payment transactions, accessing var-
ious fnancial services, and doing fnancial investments online.
Indonesia’s fntech companies are growing and evolving continuously as
shown by the increasing number of licensed frms in the industry. As of May
2019, there were 250 fntech companies across the business model, from deposit,
lending, payment gateway, and capital funding (Batunanggar, 2019). P2P and
e-payments are the top of two fastest-growing business model among other fn-
tech business models. Consecutively, P2P and e-payments took 43% and 26% of
Indonesia’s fntech landscape compositions, respectively (Figure 1).
Association for Digital Financial Innovations players in Indonesia (AFTECH),
which was appointed by the Financial Services Authority (FSA, Otoritas Jasa
Keuangan/OJK) based on POJK No. 13/2018, reported that AFTECH members
(which represent 80% of licensed fntech start-up in Indonesia) have increased
by 54% (YoY) in 2019. By the end of Q2 2020, the growth is 56.7% (YoY) with
the total number of 362 fntech start-up members registered (Asosiasi Fintech
Indonesia, 2021) (Figure 2).
86 Sigit Pramono et al.

Others; 14; 6%
Enabler; 15; 6%
Insuretech; 8; 3% P2P Lending; 108; 43%

Wealth Management; 15; 6%

Equity Crowdfunding; 5; 2%

Market Provisioning; 20; 8%

Payment; 65; 26%

FIGURE 1 Indonesia’s Fintech compositions by business model.

Source: Batunanggar (2019), created by the authors.

400
362
350

300
275
AFTECH Members

250

200
178
150

100
79
50
24
0
2016 2017 2018 2019 2020
Year

FIGURE 2 AFTECH members from 2016 to Q2 2020.

Source: Asosiasi Fintech Indonesia (2021), created by the authors.

In accordance with the growth of the P2P and e-Payment, FSA recorded an
accumulation of 259.6% increase in loan disbursement from January to December
2019 (Asosiasi Fintech Indonesia, 2021). Total loan amount of IDR 81.5 tril-
lion was disbursed from 605,935 lenders to 18.5 million of borrower’s accounts.
In addition, FSA also recorded IDR 113.46 trillion of total loan disbursement
from 659,186 lenders to 25.7 million of borrower accounts in January–June 2020
cumulatively; whereas, Bank Indonesia (BI) noted 53% increase in e-money
transaction value from January to December 2019 (Asosiasi Fintech Indonesia,
2021). The cumulative transaction value is IDR 47 trillion in 2018 and reached
IDR 145 trillion in December 2019. The transaction value is expected to further
increase in 2020 and reached a total of IDR 93 trillion in June 2020.
Government regulations play a crucial role in the development of fntech
industry. Fintech industry in Indonesia is regulated by BI and the Financial
 Islamic Peer-to-Peer Lending 87

Service Authority (Otoritas Jasa Keuangan/OJK). Each regulator plays a diferent

role in regulating the Indonesia’s fntech industry, in which BI conducts mon-
etary policy and supervises payment ecosystem, whereas FSA performs super-
vision on fnancial services provided by P2P, crowdfunding, digital banking,
etc. In addition, FSA also regulates fnancial data security, technology security,
and fnancial services consumer protection (DailySocial.id, 2021; OJK, 2020;
OJK, 2021; OJK 2022). In terms of supporting fntech development in Indonesia,
both BI and OJK have developed specifc division in their organization with the
responsibility to periodically manage coordination and evaluation performance
of the fntech market players in order to optimize the development of fntech
industry.
In summary, Indonesia’s government has rolled out 11 regulations for fnan-
cial technology sector, comprise of six regulations issued by OJK, four regula-
tions issued by BI, and one regulation issued by the Members of the Board of
Governors of BI (Table 1).
In Indonesia, the digitalization in fnancial sector shows rapid progress with
variety of innovation in fnancial technology in the range of payment system
to digital banking. Information technology and internet development play an
important role to support this progress of fnancial technology. Financial ser-
vice users are enthusiastic for such fnancial innovation, and this situation boost
fntech company to creatively ofer innovations that comfort customers’ life and
make business transactions easy. Obviously, the development of fntech not only

TABLE 1 List of Indonesia’s Fintech regulations

Sector Regulation Government entity

Lending FSA Regulation (POJK) No. 77/ OJK

POJK.01/2016
Equity Crowdfunding FSA Regulation (POJK) No. 37/ OJK
POJK.04/2018
Digital Financial FSA Regulation (POJK) No. 13/ OJK
Innovation POJK.02/2018
Investment Platform FSA Regulation (POJK) No. 31/ OJK
POJK.04/2018, FSA Regulation
(POJK) No. 30/POJK.04/2017,
FSA Regulation (POJK) No. 13/
POJK.02/2018
Digital Wallet BI Regulation (PBI) No. 20/6/PBI/2018 BI
Payment System BI Regulation (PBI) No. 19/12/PBI/2017 BI
Remittance BI Regulation (PBI) No. 14/23/PBI/2012 BI
Electronic Money BI Regulation (PBI) No. 20/6/PBI/2018 BI
Regulation Sandbox Board of Governor (PADG) No. 19/14/ BI
(Bank Indonesia) PADG/2017

Source: Daily Social Innovate Fintech Report 2021.

88 Sigit Pramono et al.

creates technological disruption in the fnancial sector, but also about fnancial
inclusion in the economy (Chapra, 2017; PwC Indonesia, 2019).

3 Digital disruption and Indonesian Islamic fnance

and banking industry
Some studies underline that although Islamic banking and fnance in Indonesia
have enormous potential, the economic reality shows that the Islamic fnance
sector has not played its role optimally in the national economy (Ismal, 2014,
2011; Pramono and Suzuki, 2021; Sukmana and Kuswanto, 2015).
Based on the Indonesian Islamic Finance Development Report 2021 (OJK,
2022), at the end of December 2021, Indonesia’s total Islamic fnancial assets
reached Rp. 2,050.44 trillion (around US$143.70 billions). Indonesia’s total
Islamic fnancial assets have grown by 13.82% (YoY) from the previous year of
Rp. 1,801.40 trillion. In detail, we note that the Islamic Capital Market has the
largest portion of Islamic fnancial assets (60.27%). The Islamic capital market has
experienced the highest growth among other sectors at a rate of 14.83% (YoY).
Meanwhile, Islamic banking with a share of 33.83% of total Islamic fnan-
cial assets has grown by 13.94% (YoY). On the other hand, non-bank Islamic
Financial Institutions (IFI) which have a share of 5.90% of total Islamic fnancial
assets experienced a growth of 3.90% (YoY).
It is worth noting that Indonesia’s total Islamic fnancial assets have only
reached 10.16% of the total assets of the national fnancial industry. In par-
ticular, we note that the market share of Islamic banking in Indonesia has
only reached 6.74% of the national banking industry. Therefore, technology
disruption through fntech in the Islamic fnance and banking industry is
believed to become a new trigger for the development of Islamic banking
and fnance in Indonesia as well to increase fnancial services inclusion in the
economy.
In 2020, the FSA/OJK has prepared the Indonesia Islamic Banking
Development Roadmap 2020–2025. The Indonesia Islamic Banking
Development Roadmap 2020–2025 is a strategic policy of the FSA in align-
ing the direction of Islamic fnance development in Indonesia, especially in the
Islamic fnancial services industry sector as a guidance of catalyst and accelerat-
ing Islamic fnance and banking development in Indonesia. Comprehensively,
this roadmap includes three pillars of development direction, which consist of
Strengthening Islamic Banking Identity, Encouraging Synergy within Islamic Economy
Ecosystem, and Strengthening Licensing, Regulation, and Supervision.
In these three pillars, there are several strategic initiatives which are in line
with eforts to encourage the growth of fntech in the Islamic fnance and banking
industry in Indonesia. First, in the pillar of Strengthening Islamic Banking Identity,
FSA has stated that one of the strategic initiatives is “Accelerating Islamic banking
digitalization”. FSA underlined that digitalization of the banking sector will ena-
ble banking infrastructure to ensure faster, better, and more convenient services
 Islamic Peer-to-Peer Lending 89

to the customers. Also, digitalization will become a signifcant value-added for

fnancial products ofered by Islamic banking and fnance.
Obviously, banking and fnance industry is required to have features which
deliver service excellence for the customers and create efcient business processes
in fnancial services. Financial sector disruption and fntech progress will have
a signifcant impact and accelerate digital transformation process in the banking
and fnancial industry. Hence, in this situation of immense business environ-
ment changes, if the Islamic banking and fnance industry fails to carry out its
digital transformation, they will have less competitive advantage in the indus-
try. Meanwhile, we witnessed that the Covid-19 pandemic has also encouraged
innovation to reduce negative impact of the pandemic and accelerate the digital
transformation of Islamic fnancial products and services.
Second, in the pillar of Encouraging Synergy within the Islamic Economy Ecosystem,
the strategic initiative in the form of “Synergy amongst Islamic Financial
Institutions” is based on the awareness that synergy and integration within the
ecosystem is key factor to take advantage of opportunities for rapid information
technology development in expanding access to Islamic fnancial and banking
services. For example, the Islamic bank can synergize with non-bank fnancial
institutions in which Islamic fntech ofers collaborative opportunities for Islamic
banks through P2P lending by providing lender account services and fnanc-
ing coverage for its potential customers. Obviously, the policy direction of the
Islamic banking and fnancial authorities will focus attention on the development
of fntech for the Islamic fnance and banking industry to respond to disruption
in this fnancial sector.

4 Islamic P2P Lending and MSMEs in Indonesia

One of the fnancial technology innovations which is believed will play an
important role in developing Islamic fnance industry is P2P lending platform.
FSA (Otoritas Jasa Keuangan/OJK) in Indonesia has issued regulation (Peraturan
Otoritas Jasa Keuangan/POJK) No. 77/POJK.01/2016 related to P2P lending, to
respond to the establishment of start-up companies ofering P2P lending fnancial
services. P2P lending platform, according to FSA Regulation (POJK) No. 77
of 2016, is defned as “Information Technology-Based Lending and Borrowing
Services”. Thus, P2P can be interpreted as providing fnancial services to bring
together lenders and loan recipients in entering lending and borrowing agree-
ments directly through the system electronically using the internet platform.
FSA regulation No. 77/ POJK.01/2016 regulates the company to have a reg-
istration as a P2P company from FSA before ofering its service to the public
legally. This P2P business scheme can be described in Figure 3 below.
The development of P2P fnancial services has gained its momentum and
grew fast after the enactment of FSA regulation No. 77/ POJK.01/2016. The
growth of P2P companies peaked in 2020 with the 164 fntech companies which
were successfully recorded as registered P2P companies by FSA. However, until
90 Sigit Pramono et al.

Administrative
Fee

Loan Funding Lending/Financing

Lenders/Investors
P2P Platform Borrowers

Principle + Interest/Margin/Profit Sharing Principle + Interest/Margin/Profit Sharing

FIGURE 3 P2P lending business scheme.

TABLE 2 Fintech lending company overview

Number Total Total Total Outstanding Financing

of assets liabilities equities fnancing accumulation
Description
companies (IDR (IDR (IDR (IDR (IDR
(units) billion) billion) billion) billion) billion)

1. Conventional 96 3,986.22 1,554.35 2,431.88 28.61 10.3

company
2. Syariah-based 7 74.13 45.92 28.22 1.27 3.28
companies
Total 103 4,060.35 1,600.27 2,460.10 29.88 13.58

Source: FSA (2021).

the end of 2021 only, 103 P2P companies succeeded to meet the requirements to
obtain a license from FSA.
Currently, P2P companies have contributed to disburse loans of IDR 272.4
trillion (equivalent to US$19.4 billion) since 2016, and 71.8 million accounts
have been registered as lenders and borrowers up to the end of 2021. These facts
show signifcant role of P2P lending in fnancing demand and increasing fnan-
cial access for the public.
With the rapid growth of P2P in Indonesia, Islamic fnance industry in
Indonesia should also be able to utilize this digital innovation to increase market
share and accelerate Islamic fnance services to the public. However, as shown in
Table 2 below, there is a lack of Islamic P2P potentials.
At the end of 2021, as shown in Table 2, there were only 7 companies of
Islamic P2P lending compared to 96 companies of conventional P2P lending. It
should be a concern to the main stakeholders of the Islamic fnancial and banking
industry, considering that P2P has the potential to fll the vast fnancing gap in
fnancing the Indonesian business sector, especially fnancing for the MSMEs
sector. In fact, according to ILO (2019), the SME Finance Forum reported that
fnancing gap in Indonesia’s MSMEs is about $165.8 billion and credit to MSMEs
 Islamic Peer-to-Peer Lending 91

sector from banking industry reach only about 16% of total banking credit. It is
a very unfortunate circumstance, considering the fnancing potential that can be
served by P2P to business sectors who have not yet accessed the services of formal
fnancial institutions.
Recognizably, MSMEs have played an important role in the Indonesian
economy. The MSMEs sector accounts for approximately 99% of the total num-
ber of business units in the economy. This sector has also contributed no less than
90% in absorbing the country’s workforce (Linawati et al., 2019; Tambunan,
2011; Yoshino and Taghizadeh-Hesary, 2017).
The most fundamental problem relates to MSMEs in fnancial inclusion
policies is the low access and acceptability of the MSMEs sector to formal fnan-
cial institutions and the risk of confned MSMEs in shark-loan trap. In 2014, BI
released data that of the 56.4 million MSMEs in Indonesia, only about 30% were
able to gain access to fnancing from formal fnancial institutions (LPPI and BI,
2015; OECD, 2015).
In particular, we note that in practice, MSMEs in Indonesia face difculties in
accessing banking fnancing, due to inappropriate business operations, reporting
and collateral requirements, and also higher cost of service compared to corpo-
rate loans (Linawati et al., 2019).
In this context, we realize that fnancial technology in the form of P2P has
advantages because it can operate with the support of information technology
that allows fnancial institutions to operate immensely efcient, charge cost of
fund with lower margins, and cut non-substantive intermediary and adminis-
trative activities in the fnancing process. In short, P2P can be expected to be
a crucial alternative to provide a faster, cheaper, and easier way in fnancing
MSMEs (Capri, 2019; Linawati et al., 2019; OJK and Boston Consulting Group,
2020).
In carrying out the fnancial intermediary function, fnancial institution will
concern on obtaining and analyzing information of the customers (borrower)
as crucial factor in making decision of credit (fnancing) to its customer (Boyd
and Prescott, 1986; Diamond, 1984; Huang et al., 2020). The favorable analysis
results from the information related to the borrowers will determine decision on
allocation and arrangement credit between fnancial institution and the customer
(Boyd and Prescott, 1986).
In providing fnancial services to the MSMEs sector, fnancial institutions
often have difculties in analyzing information related to MSMEs business
due to lack of reliable fnancial information and its nature of informal business.
Accordingly, it is MSMEs’ preference to access business fnancing from fnan-
cial institution which can accommodate its informal business institution, i.e.,
non-bank fnancial institutions or micro fnance institutions (Behr, Entzian, and
Guttler, 2011).
P2P is being expected to become a new vehicle to fnance MSMEs business.
P2P is projected to simplify the intermediary function of the fnancial industry
as it bases its operation on fntech innovation. At the end, it is believed that
92 Sigit Pramono et al.

fnancial technology carried out through P2P can reduce MSMEs business risks
because it can monitor costs more efciently and prevent credit rationing from
the conventional banking operation (PwC Indonesia, 2019).

5 Business risk mitigation through “Value-Chain Integrated”

fnancing model to MSMEs: PT Qazwa Mitra Hasanah’s
experience
PT Qazwa Mitra Hasanah (Qazwa) is a licensed Shari’ah-based fntech P2P
lending company in Indonesia. As a shariah-compliant P2P lending company
in Indonesia, Qazwa has been registered by OJK in 2019 and has obtained a
full license according to OJK’s Member of Board of Commissioners Decree
No. KEP-80/D.05/2021 dated 24 August 2021. Qazwa implements a prudent
business process, particularly in fnancing activities for MSMEs. The company
conducts fnancing risk mitigation that fts to its market segment. Although
Qazwa’s business size and contribution are relatively small in this industry seg-
ment, it is interesting to discuss risk management practices carried out by Qazwa
in mitigating MSMEs’ business risks. Qazwa tries to harmonize standard prin-
ciples of risk management in the fnancial sector with adequate consideration to
the specifc characteristics of risk profle faced by MSMEs.
Qazwa has concerns on credit rating (scoring) as an important procedure in
P2P business operations, which serves to measure risk mitigation in every pos-
sible occurrence of “undesirable conditions” (known as probability of default).
Essentially, implementation of credit ratings in the fnancial and banking indus-
try is an important element in risk management practice. In Indonesia, credit
rating in the process of credit (fnancing) disbursement ofcially uses Financial
Information Service System (Sistem Layanan Informasi Keuangan/SLIK)
issued by FSA or information and document from credit rating agency, such as
PEFINDO Credit Bureau.
It is worth noting that credit rating applied in process of MSMEs business
fnancing should take into account the informal business character of MSMEs.
In particular, non-bank fnancial institutions, including P2P, must modify their
credit scoring variables and mechanisms when providing fnancing to MSMEs.
In this case, credit scoring is designed to be more adaptive in preventing business
failure and default payments that occur in the MSMEs business, but at the same
time credit rating should be in line with business strategy of fnancial institutions
to achieve the company’s goal (Wendel and Harvey, 2006).
In preparing a reliable fnancing scoring, Qazwa management will enrich
updated data related to economics and business conditions for MSMEs. Besides,
the scoring process includes an assessment of future prospects of the MSMEs
business to determine eligibility in fnancing their businesses. In addition, the
purpose of the analysis carried out is to minimize potential losses that will be
borne by lenders if Qazwa makes inappropriate fnancing assessments of the
applicants.
 Islamic Peer-to-Peer Lending 93

In developing its credit scoring, Qazwa manages that entrepreneur profle

(borrower) conforms to Qazwa’s fnancing segment of micro and small-scale
business with criteria based on Indonesia’s business regulations (i.e., maximum
turnover in a year is Rp. 2,500,000,000 about US$174,000). In this sense, as
suggested by Hyytinen and Pajarinen (2008), Qazwa could not merely look at
the fnancial statements of MSMEs with the consideration that these potential
borrowers have “information opacity” conditions. With information opacity
underpinning, fnancial information of MSMEs could present unreliable data,
thus make a credit scoring model based solely on fnancial statement will make
scoring instrument generates misleading results.
McEvoy (2014) proposes various alternative data that can be used in perform-
ing fnancing analysis, such as prepaid mobile phone data, social media data, and
e-commerce data. However, based on Qazwa’s experience, using this personal
fnancial data is not feasible to be implemented in MSMEs fnancing as insuf-
cient reliable fnancial and operating data could not be gathered easily (Abbasi,
Wang, and Alsakarneh, 2018; Liu et al., 2021; Wendel and Harvey, 2006). One
main reason for this condition is that the application of a single identity number
in Indonesia has not yet been fully implemented for citizens.
Even though the management of Qazwa has implemented a comprehensive
analysis and risk measurement system (i.e., legal document fulfllment, credit
rating, and site visit), there is still a possibility of business failure of MSMEs. In
general, potential business risk is caused by two main problems. First, because of
the unfavorable economic conditions and business environment. Second, caused
by the potential for fraudulence, where MSMEs commit fraudulent actions in
doing business, for instance providing incorrect information or not conducting
business with sound manner.
Recognizing the potential of business failure conditions that may be faced in
fnancing this sector of MSMEs, Qazwa performs a breakthrough by providing
supply-chain–fnancing scheme. Qazwa is considered as an Islamic P2P pioneer
in implementing “value-chain integrated” fnancing strategy in which fnancing
to MSMEs business is carried out by promoting an integrated business ecosystem
approach. The basic concept of “value-chain integrated” fnancing relies on all
“players” in the MSMEs business ecosystem that have mutual relationship and
contribute to each other in providing “economic value-added” for their business
counterparts (Pfohl and Gomm, 2009; Söderberg and Bengtsson, 2010; Yang
et al., 2021). Thus, by “connecting and maintaining” relationship and contribu-
tion of each economic player in the MSMEs business ecosystem, it will facilitate
risk mitigation of MSMEs business fnancing.
In principle, “value-chain integrated” fnancing applied by Qazwa is “work-
ing capital” fnancing in relation to the “supply-chain” cooperation in MSMEs
business operation. With this fnancing-mode, it is designed that the level of
business failure of MSMEs can be reduced since business dealings under this
circumstance usually are based on good recognition and close relation between
“suppliers-buyers” in MSMEs business ecosystem. Moreover, “value-chain
94 Sigit Pramono et al.

integrated” fnancing will disburse the fnancing directly to MSMEs in form

of working capital (inventory, raw material, factoring facilities, etc.) or “cap-
ital goods” (i.e., fxed assets, equipment, etc.) and not in “cash fnancing”. It
is supposed that this mode of fnancing will prevent moral hazard attitudes as
fnancing received by MSMEs has the potential to be misused for non-business
purposes as proposed in the fnancing proposal.
This “value-chain integrated” fnancing aims to provide signifcant risk miti-
gation in MSMEs’ project fnancing. Therefore, this fnancing strategy needs sup-
porting data from “supply-chain transactions”, which can be the basis for Qazwa to
develop a fnancing mitigation model. One of which is information related to the
relationship between buyers and suppliers in MSMEs business (Abbasi, Wang, and
Alsakarneh, 2018; Edwards, Delbridge, and Munday 2005). Hence, the data used by
Qazwa’s credit scoring practice also be equipped with these complementary data.
For instance, if Qazwa provides fnancing to MSMEs in the form of purchasing
inventory or invoice fnancing, then Qazwa management must obtain information
about patterns and track records between suppliers and potential borrowers. This
information is important to analyze the ability to pay of the borrower and the possibil-
ity of business failure. Information about how the “buyer-supplier” relationship and
the creation of economic value-added in the business ecosystem become important
concern of Qazwa in fnancing decision and measuring the level of fnancing risk.
Thus, this “value-chain integrated” fnancing strategy is expected to contrib-
ute to mitigating MSMEs business risks since it aims at maintaining economic
value-added in the MSMEs business ecosystem, preventing decoupling between
fnancial sector and risk sector in the economy, and build cohesiveness among
MSMEs business stakeholders. Figure 3 below presents Qazwa’s “Value-Chain
Integrated” fnancing approach to MSMEs.
Following is an explanation of the supply-chain–fnancing data that will be
processed when there is a fnancing application (Figure 4).

UMKM

Supplier
4 3
Supplier delivers the goods, raw material After required fund is fulfilled, Qazwa

MSMEs qazwa
or working capital, etc. to MSMEs. will disburse the financing directly to the
supplier for procurement request of goods,
raw material or working capital, etc.

1 2
MSMEs submit its financing application to Qazwa in Qazwa assesses the suitability of MSMEs’ financing proposal.
accordance with Islamic principles and its historical If the proposal is eligible, “campaign program” for the
transactions to the supplier MSMEs project will be advertised at the website to invite
the potential lenders/investors.

FIGURE 4 Qazwa’s “value-chain integrated” fnancing approach.

 Islamic Peer-to-Peer Lending 95

5.1 Supply-chain variable

Supply-chain variable is data taken from MSMEs’ business process to understand
and analyze business character of MSMEs in the supply chain. This is important
because Qazwa will only facilitate fnancing which is allocated for procurement
of working capital and capital goods; therefore, performance and prospect of
MSMEs in the supply chain should be understood precisely.

5.2 Demand risk data

Demand risk data is data obtained through interviews with MSMEs related to
potential risk that may rise from sales activities to the customers. This is to fnd
out whether MSMEs have a contingency plan if they face the risk and how
they manage it to maintain their business activities. This data highlights some
issues:

Variable Data Credit risk relationship

resource

Failed to pay Interview If there are customers experienced default, it will

increase the risk of repaying the loan
Change of season Interview If the sale of products is afected by the season, it
demand will increase the risk of non-repayment
Late payment Interview If there are customers who have possibility of late
payment, it will increase the risk of repaying the
loan
Specifc types of Interview If the type of goods sold is too specifc for a
goods for certain particular market, it has the potential that the
market goods are not well absorbed into the market, thus
increasing the risk of non-repayment
Unable to Interview If MSMEs cannot complete its customer order, it
complete will increase the risk of repaying the loan
customer’s order

5.3 Supply risk data

This data contributes to determine the risks faced by MSMEs in terms of the
availability of such products to be sold. A smooth supply fow of products with
good quality indicates stable and sustainable MSMEs business. Supply risk data
96 Sigit Pramono et al.

is obtained through interviews with MSMEs and suppliers of the products. This
data includes these issues (Figure 5):

Variable Data resource Credit risk relationship

Short supply of Interview If MSMEs has lack of supply for the products from
products suppliers, it will hamper production process and
increase the risk of default
Delay in items Interview If suppliers are not able to provide goods on time, it
availability will hamper the production process and increase
the risk of default
Items do not Interview If the ordered goods from the supplier are not
match suitable to the provisions, it will hamper the
production process and increase the risk of default
Number of Interview If MSMEs only have one supplier, it will increase
suppliers risk of not being able to fulfll the demand
subscribed
Product return Interview If the supplier does not provide product return for
from supplier rejected or damage goods, it will hamper the
production process and increase the risk of default

The following is the supply chain–fnancing workfow carried out by Qazwa:

Supplier Borrowers

2 1
4

qazwa

FIGURE 5 Supply chain–fnancing model workfow.

1 Prospective borrower submits a fnancing proposal to Qazwa, and credit scor-

ing will be carried out by Qazwa regarding the proposed fnancing proposal.
2 If the fnancing proposal is approved, Qazwa will coordinate, arrange
business dealing and perform transaction with the supplier to be able to
supply the requested products of the borrower
3 Delivery goods from the suppliers to the borrower, this goods delivery
mechanism is to avoid misuse of fund by the borrower.
4 The borrower will repay its fnancing bill through Qazwa.
 Islamic Peer-to-Peer Lending 97

In the context of risk management practice, it is worth noting to highlight

experiences and challenges faced by Qazwa in implementing this pertaining
“value-chain integrated” fnancing, as follows:
Qazwa has put forward a breakthrough to implement “a business incubator”
in supporting MSMEs business through formatting business dealings under this
circumstance usually based on good recognition and close relation between
“suppliers-buyers” in MSMEs business ecosystem. In turn, this strategy is expected
also to optimize mutual relationship and contribution from all players in MSMEs
business ecosystem under “value-chain integrated” framework to “support each
other” in generating “economic value-added” from their business counterparts.
Meanwhile, this Qazwa’s strategic fnancing approach, basically aims to
utilize “interlock mutual good relation and cooperation” among all players of
“suppliers-buyers” in MSMEs business ecosystem to reduce level of business fail-
ure of MSMEs since Qazwa’s fnancing will be disbursed only to the MSMEs
which have good credential and reputation in this ecosystem business dealing.
In fact, from the perspective of Shari’ah compliance issues apply to good
corporate governance practice in Islamic mode of fnancing, Qazwa is con-
centrating and conducting only to fnancing MSMEs directly in the form
of working capital (inventory, raw material, factoring facilities, etc.) or
“capital goods” (i.e., fxed assets, equipment, etc.) and not in “cash fnanc-
ing”. This mode of fnancing intends to prevent moral hazard attitudes as
fnancing received by MSMEs has potential to be misused for non-business
purposes as proposed in their fnancing proposal. In this sense, as practicing
in Indonesian IFI refers to Fatwa (Syariah Opinion) DSN-MUI Nomor 4/
DSN-MUI/IV/2000 about Murabahah and Fatwa (Syariah Opinion) DSN-
MUI Nomor 113/DSN-MUI/IX/2017 about Akad Wakalah bi Al-Ujrah (the
granting of authority/mandate with rewards); in Murabahah fnancing, the
IFI/Islamic bank can grant authority to the customer/borrower to buy spe-
cifc goods as their propose for fnancing on behalf of IFI/Islamic banks as
fnancier. Thus, IFI/Islamic bank just simply give “cash fnancing” to the
customer/borrower. In many cases, unfortunately, this typical of fnancing
has the possibility to bring negative/contra productive impacts as the cus-
tomer/borrower has opportunity to use the money with fraud (i.e. misused
the money for non-business purposes or not in accordance with the agree-
ment). Consequently, this condition will impact in increasing business failure
and payment default occurrences.

6 Concluding comments
Islamic P2P Lending is a promising alternative for fnancing Indonesian MSMEs
business. Yet, this potential fntech needs a robust policy direction from govern-
ment and FSA. Moreover, this strategic breakthrough to solve fnancing gap to
the MSMEs should be supported by all the stakeholders of Islamic fnance and
banking industries.
98 Sigit Pramono et al.

There are crucial challenges to bring successful Islamic P2P in doing their
business, including but not limited to: a strong regulation from the FSA to drive
IFI to collaborate with others fnancial institution (especially banking sector)
in fnancing MSMEs business; conducive innovation and collaboration of IFI
widely, and improvement of business innovation and good government practice
of the practices Islamic P2P Lending.
Meanwhile, we recognize that P2P is a fntech mode of fnancing to MSMEs
sector that should be prioritized by the fnancial sector as a business trust and
avoiding incidences of frauds. Thus, Qazwa’s “value-chain integrated” fnancing
scheme is considered as a smart practice to provide signifcant risk mitigation in
MSMEs’ project fnancing. This “value-chain integrated” fnancing strategy is
expected to realize conducive condition in maintaining economic value-added
in the MSMEs business ecosystem, prevent decoupling between fnancial sector
and risk sector in the economy, and build cohesiveness among MSMEs business
stakeholders.

References
Abbasi, W. A., Wang, Z., and Alsakarneh, A. (2018). Overcoming SMEs Financing and
Supply Chain Obstacles by Introducing Supply Chain Finance. International Journal of
Business and Management, 13(6), 1–9. https://doi.org/10.5539/ijbm.v13n6p165
Asosiasi Fintech Indonesia. (2021). Annual Members Survey 2019/2020. Indonesia:
AFTECH. Retrieved from: https://fntech.id/storage/fles/shares/
Badan Pusat Statistik (BPS). (2020). Hasil Sensus Penduduk 2020 (The 2020 Population
Census). Retrieved from: https://www.bps.go.id/pressrelease/2021/01/21/1854/
hasil-sensus-penduduk-2020.html
Batunanggar, S. (2019). Fintech Development and Regulatory Frameworks in Indonesia.
ADBI Working Paper 1014. Tokyo: Asian Development Bank Institute. Retrieved from:
https://www.adb.org/publications/fntech-development-regulatory-frameworks-
indonesia
Behr, P., Entzian, A., and Guttler, A. (2011). How Do Lending Relationship Afect
Access to Credit and Loan Conditions in Microlending? Journal of Banking and Finance,
35, 2169–2178.
Boyd, J. and Prescott, E. (1986). Financial Intermediary-Coalitions. Journal of Economic
Theory, 38, 211–232.
Capri, Alex. (2019). Micro and Small Businesses in Indonesia’s Digital Economy: Keys to
Developing New Skills and Human Capital. Canada: Asia Pacifc Foundation of Canada.
Chapra, A. (2017). How FinTech Startups Are Transforming the Way Banks Function in Indonesia.
Retrieved from: https://inc42.com/features/fntech-indonesia-banks-startups/
DailySocial.id. (2021). Fintech Report 2021: The Convergence of (Digital) Financial Services.
Retrieved from: https://dailysocial.id/research/fntech-report-2021
Diamond, D.W. (1984). Financial Intermediation and Delegated Monitoring. The Review
of Economic Studies, 51(3), 393–414.
Edwards, T., Delbridge, R., and Munday, M. (2005). Understanding innovation in small
and medium-sized enterprises: a process manifest. Technovation, 25, 1119–1127.
Huang, Y., Zhang, L., Li, Z., Qiu, H., Sun, T., and Wang, X. (2020). Fintech Credit
Risk Assessment for SMEs: Evidence from China. IMF Working Paper No. 2020/193.
 Islamic Peer-to-Peer Lending 99

Retrieved from: https://www.imf.org/en/Publications/WP/Issues/2020/09/25/

Fintech-Credit-Risk-Assessment-for-SMEs-Evidence-from-China-49742
Hyytinen, A. and Pajarinen, M. (2008). Opacity of young businesses: Evidence from
rating disagreements. Journal of Banking and Finance, 32(7), 1234–1241.
International Labour Organization (ILO). (2019). Financing Small Businesses in Indonesia:
Challenges and Opportunities. Jakarta: ILO. Retrieved from: https://www.ilo.org/
publns
Ismal, R. (2011). Islamic Banking in Indonesia: Lessons Learnt. Paper presented at Multi-
year Expert Meeting on Services, Development, and Trade: The Regulatory and Institutional
Dimension, Geneva, 6–8 April 2011.
Ismal, R. (2014). Indonesia, The Resilience and Prospects of Islamic Banking, in S.
Thiagaraja et al. (Eds.), The Islamic Finance Handbook: A Practitioner’s Guide to the Global
Market, Singapore: John Wiley and Sons, pp. 155–173.
Kemp, S. (2021). Digital 2021: The Latest Insights Into the State of Digital. Retrieved from:
https://wearesocial.com/uk/blog/2021/01/digital-2021-the-latest-insights-into-
the-state-of-digital/
Lembaga Pengembangan Perbankan Indonesia (LPPI) and Bank Indonesia (BI). (2015).
Profl Bisnis Usaha, Mikro, Kecil dan Menengah (UMKM). Jakarta: LPPI and BI.
Linawati, N., Moeljadi, M., Djumahir, D., and Aisjah, S. (2019). The Role of Peer to
Peer Lending in Increaing Funding Micro, Small, and Medium Enterprises. The 1st
International Conference on Social Sciences and Humanities (ICSH 2019).
Liu, F., Fang, M., Park, K, and Chen, X. (2021). Supply Chain Finance, Performance and
Risk: How Do SMEs Adjust Their Buyer-Supplier Relationship for Competitiveness?
Journal of Competitiveness, 13(4), 78–95. https://doi.org/10.7441/joc.2021.04.05
McEvoy, M. J. (2014). Enabling Financing Inclusion through “Alternative Data”. Bentonville,
AR: Mastercard Advisors.
OECD. (2015). New Approaches to SME and Entrepreneurship Financing: Broadening the
Range of Instruments. Istanbul: OECD.
Otoritas Jasa Keuangan. (2020). Indonesia Islamic Banking Development Roadmap 2020–
2025. Jakarta: Otoritas Jasa Keuangan.
Otoritas Jasa Keuangan. (2021). Laporan Perkembangan Keuangan Syariah Indonesia 2020:
Ketahanan dan Daya Saing Keuangan Syariah di Masa Pandemi. Jakarta: Otoritas Jasa
Keuangan.
Otoritas Jasa Keuangan. (2022). Laporan Perkembangan Keuangan Syariah Indonesia 2021:
Menjaga Ketahanan Keuangan Syariah dalam Momentum Pemulihan Ekonomi. Jakarta:
Otoritas Jasa Keuangan.
Otoritas Jasa Keuangan and Boston Consulting Group. (2020). Bagaimana UMKM
dan Perbankan dapat Sukses di Era Ekonomi dan Digital. Jakarta: OJK – BCG Joint
Research.
Pfohl, H.C., and Gomm, M. (2009). Supply Chain Finance: Optimizing Financial
Flows in Supply Chains. Logistics Research, 1, 149–161. https://doi.org/10.1007/
s12159-009-0020-y
Pramono, S., and Suzuki, Y. (2021). The Growth of Islamic Banking in Indonesia: Theory and
Practice. London: Routledge.
PricewaterhouseCooper (PwC). (2017). The World in 2050: How Will the Global
Economic Order Change? Retrieved from: https://www.pwc.com/gx/en/world-
2050/assets/pwc-world-in-2050-summary-report-feb-2017.pdf
PricewaterhouseCooper (PwC) Indonesia. (2019). Indonesia’s Fintech Lending: Driving
Economic Growth through Financial Inclusion. PwC Indonesia - Fintech Series.
Retrieved from: https://www.pwc.com/id/fntech-lending
100 Sigit Pramono et al.

Sukmana, R., and Kuswanto, H. (2015). Assessment on the Islamic banking market
share projection by Bank Indonesia and proposed methods. Journal of Islamic Monetary
Economics and Finance, 1(1), 107–133.
Söderberg, L., and Bengtsson, L. (2010). Supply chain management maturity and perfor-
mance in SMEs. Operations Management Research, 3, 90–97.
Tambunan, Tulus T. H. (2011). Development of Micro, Small and Medium Enterprises
and Their Constraints: A Story from Indonesia. Gadjah Mada International Journal of
Business, 13, 21–43.
United Overseas Bank (UOB). (2017). State of FinTech in ASEAN. Retrieved from:
https://www.uobgroup.com/techecosystem/news-insights-fntech-in-asean-2017.
html
Wendel, B., and Harvey, M. (2006). SME Credit Scoring: Key Initiatives, Opportunities,
and Issues. Access Finance, March 2006, Issue No. 10. The WorldBank Group. Retrieved
from: https://documents1.worldbank.org/curated/en/221231468339556964/pdf/
389550AF101Wendel1article
World Bank. (2018) The Little Data Book on Financial Inclusion. Washington: World Bank
Group. Retrieved from: https://openknowledge.worldbank.org/handle/10986/29654
Yang, Y., Chu, X., Pang, R., Liu, F., and Yang, P. (2021). Identifying and Predicting
the Credit Risk of Small and Medium-Sized Enterprises in Sustainable Supply
Chain Finance: Evidence from China. Sustainability, 13(5714), 1–19. https://doi.org/
10.3390/su13105714
Yoshino, N, and Taghizadeh-Hesary, F. (2017). Solutions for Mitigating SMEs’ Difculties
in Accessing Finance: Asian Experiences. ADBI Working Paper 768. Tokyo: Asian
Development Bank Institute. Retrieved from: https://www.adb.org/publications/
solutions-smesdifculties-accessing-fnance-asian-experiences
5
PROSPECTS AND OPPORTUNITIES
OF ISLAMIC CROWDFUNDING IN
BANGLADESH
S. M. Sohrab Uddin, Rima Akter and
Md Imran Hossain Anik

1 Introduction
Bangladesh is a developing country with huge potentials to grow in the near
future. The development depends on certain factors and one of the key factors
here is the roles and activities of the fnancial intermediary, which assists in
capital formation, investment and savings. It plays a vital role in a well-devel-
oping economy (Salehi, 2008). But the current fnancial institutions have cer-
tain limitations and problems that don’t allow the start-ups to grow smoothly,
an activity that is highly essential in a developing economy. Not only do the
developed countries have the opportunity to implement the frameworks related
to crowdfunding, but for the simplicities in its structure and the ease of pro-
cess which enables people from every sector to connect with it via mobile and
online platforms, the developing countries are also considering crowdfunding
as an important tool in capital formation and investment. In fact, by 2025, the
market potential of crowdfunding for developing countries is estimated to be
$96 billion per year.
At present, Bangladesh has also initiated to emphasize this sector. Having
crowdfunding as their core operational activity, some small and medium start-
ups have initiated some projects that are not yet running at full pace. The
government is looking to bring this sector under a regulatory framework so that
the people can fnd it reliable to invest in the crowdfunding platform (CFP).
Bangladesh has the vision to be a developed country by adapting the latest
technologies and transforming traditional activities into digital. Hence, the
implementation of fntech has become an important concern. Crowdfunding
is a wing of fntech that works with the collection of funds through blockchain
technology. This can bring a revolution in the fnancial sector of Bangladesh
where small businesses can collect their funds efciently; poverty can be reduced

DOI: 10.4324/9781003262169-8
102 S. M. Sohrab Uddin et al.

through donation-based funding and alternative sources of fnance will boost

the economy.
There has been some research on the future potential of crowdfunding in
Bangladesh on a general basis that mainly included interest-based fnancing. But
a country like Bangladesh with the majority of its population being Muslim has
more opportunity to fourish the economy by replacing interest-based fnanc-
ing with proft-based fnancing platforms that are compliant with the Shari’ah.
Considering the growth of Islamic Banking, at the end of March 2021, Bangladesh’s
10 full-fedged Islamic banks have been operating with 1,558 branches out of a
total of 10,767 branches of the whole banking sector. In addition, 19 Islamic
banking branches of 8 conventional commercial banks and 178 Islamic banking
windows of 11 conventional commercial banks are also providing Islamic fnan-
cial services in Bangladesh (Hasin & Alamin, 2021). This implies the need for a
framework in all fnancial institutions and types including the sector of crowd-
funding. But here a research gap has been seen which implies questions like What
will be the Islamic crowdfunding scenario in Bangladesh? What will be its type?
What will be the framework compared with other Islamic developing countries?
Considering these issues, this research paper aims to fnd answers.
The paper has high signifcance because crowdfunding itself is an emerging
sector with huge potential in Bangladesh and blending it with Islamic mecha-
nisms, it will portray some valuable insights about its diferent characteristics,
possibilities and mechanisms that comply with the Shari’ah law.

2 Literature review
Crowdfunding is said to be the modern and digitalized form of the traditional
fund collection (Wahjono et al., 2015). Bottiglia and Pichler (2016) have defned
three attributes that are a must for crowdfunding, and they are – (i) the existence
of a business project that requires funding; (ii) the presence of several investors
who are likely to associate with the project and (iii) the investors and entrepre-
neur have to be connected via internet. According to several pieces of research,
four forms of crowdfunding have been in practice till now – donation-based
crowdfunding, reward-based crowdfunding, equity-based crowdfunding (ECF),
and peer-to-peer lending (Hagedorn & Pinkwart, 2016; Harrison & Mason,
1992; Mohd Thas Thaker, 2018).
The global volume of crowdfunding in 2012 was $2.7 billion in which dona-
tions and reward-based crowdfunding represented an amount of 51.4%, followed
by lending-based crowdfunding which was about 44.2% and ECF was only 4.2%
of the total volume (Massolutions, 2013). This diference is caused due to the
variation in the complexity and uncertainty range of the diferent models.
Donation-based crowdfunding comes with the least risk and uncertainty as
the donor doesn’t provide fund in exchange of any investment or return, whereas
ECF has the highest amount of risk and uncertainty as the return on their invest-
ment depends on the company’s actions and they have to bear loss if the company
 Prospects and opportunities of Islamic crowdfunding in Bangladesh 103

cannot make proft. So, the regulatory framework of equity-based models would
be more complex (Athlers & Cumming, 2012). Since equity holders don’t rip the
fruits of proft only but also bear the losses with the companies so this model is
more coherent with the idea of Islamic crowdfunding.
The concept of crowdfunding can bring a revolution in the feld of Islamic
fnance as it opts for the socio-economic development of the community by
bringing investors, entrepreneurs, and donors under the same platform. So, it is
important to ensure that the crowdfunding components are Shari’ah-compliant.
Since Islamic fnance aims to support projects which are labelled halal accord-
ing to Islamic laws so Islamic crowdfunding should support the same and thus
gambling and speculations (Maysir), uncertainty (Gharar) and interest rate (Riba)
are prohibited in the platform (Aizah Ibrahim et al., 2018). Crowdfunding based
on reward is closely related to Bai Salam as it rewards the investors through spe-
cifc products or services in exchange for the money they invested. The model
is appropriate according to the Islamic Shari’ah as the entity unable to produce
a product due to shortage of fnance can produce it by getting the money from
the investors as a pre-payment for the product. And once the product gets cre-
ated, the manufacturer can deliver the product to the investor as a reward for
their investment (Chowdhury & Shil, 2017). One of the largest CFPs based
on reward exists in Malaysia known as Mystartr (Mahadi et al., 2018). Many
donation-based CFPs around the world support education and health expenses
and new entrepreneurs by seeking a small number of donations from the gen-
eral public through platforms like GoFundMe, YouCaring.com, GiveForward,
FirstGiving, Skolafund and BitGiving. Thus, both reward and donation-based
crowdfunding align with the Shari’ah. ECF can also be aligned according to
Islamic laws by implementing certain changes. The closest Islamic fnance model
to this type is Mudarabah where one party bears the capital, and the other parties
give their skill, efort and time. ECF comes up with the highest amount of risk
as only the Mudarib (the capital provider) is entitled to bear the monetary loss.
The Shari’ah-based sale and investment instruments like Murabaha (mark-up
sale), Salam (advanced sale), Istisna (manufacturer’s advanced sale), Musharakah
(partnership) and Mudarabah can be brought under the CFP to digitalize the
Islamic fnancial practices (Muneeza et al., 2018). In the present scenario, where
there exists an absolute lack of trust between investors and entrepreneurs and a
lack of experience of the small business entrepreneurs, ECF is becoming more
complicated. But bringing this idea under Shari’ah rules would reduce the risks
to some extent as the operations will be limited to halal projects and products
that are compliant with Shari’ah.
The main distinction between traditional crowdfunding and Islamic crowd-
funding is the latter’s adoption of Islamic precepts. The Maqasid-Shari’ah,
or Shari’ah purposes, has traditionally been the criterion for determining
whether Islamic products or enterprises are compatible with Shari’ah stand-
ards. Necessities, needs and luxuries are the three levels of the Maqasid-Shari’ah
order. In supplement to the three parties engaged in traditional crowdfunding,
104 S. M. Sohrab Uddin et al.

the Shari’ah committee is an essential aspect in Islamic crowdfunding. That is,

four parties take part in Islamic crowdfunding. The fund pursuer, the investor,
the portal operator, and the Shari’ah committee are the four parties involved
(Nordin & Zainuddin, 2021).
If considered peer-to-peer or P2P crowdfunding, then we will see that Islamic
P2P crowdfunding follows the identical framework and operating procedures as
traditional P2P. It must, nevertheless, be devoid of any interest-based contracts
in order to be Shari’ah-compliant. Alternatively, it uses a proft-sharing deal,
which allows investors to enjoy a pre-determined amount of the earnings from
the ventures they fund.
Mudharabah and Murabahah are two famous Islamic peer-to-peer struc-
tures. The advent of Islamic crowdfunding provides halal investment alternatives
for investors wanting a Shari’ah-compliant commodity while participating in
crowdsourcing. Due to the strict principles of Islam, which prevent purposely
dangerous and detrimental acts, Islamic crowdfunding guarantees higher protec-
tion to investors compared to ordinary crowdfunding. It gives investors a larger
selection of Islamic commodities to decide from while also helping individuals
in need of money by redirecting funds to productive projects.
Islamic crowdfunding, unlike certain other Shari’ah-compliant commodities,
is not restricted to Muslims. It is open to all investors, and they can contribute
depending on the product’s proftability and risk sensitivity.
There is a high potential in Musharakah to be adopted as a practice of
ECF where the investors would be able to gain a return as Shari’ah-compliant
arrangement of proft sharing. The need for a third-party guarantor would be
substituted by the crowdfunding site in exchange for a certain amount of fee. To
unleash the full potential of Mudarabah and Musharakah with the use of fntech,
a Mudarabah crowdfunding model based on blockchain technology has been
proposed by Muneeza et al. (2018). The use of blockchain would mitigate the
probable privacy risks, eliminate the need for third parties and promote transpar-
ency in the projects that need investment.
But in developing countries like Bangladesh where there is an acute lack
of digital literacy, implementation of such a high-tech platform is challenging
(Ishak & Rahman, 2021). Slowly but gradually the country is shifting towards
the adaptation of technology in many of its fnancial services. In recent times,
the country has seen a revolutionary rise in the usage of fntech. More and more
customers are now inclining towards fntech media like bKash, Rocket, mCash,
Ucash, UPay, and Nagad (Tanjib Rubaiyat, 2020). These media provides both
banking and non-banking services like sending money, depositing money, pay-
ing bill, recharge, online payment and many more.

3 Research methodology
The research has been conducted with both qualitative and quantitative analysis
to portray the prospects and opportunities of Islamic crowdfunding in Bangladesh
 Prospects and opportunities of Islamic crowdfunding in Bangladesh 105

that is in both numerical and descriptive manner. For secondary research, dif-
ferent articles, research papers and journals that have focused on crowdfunding
have been evaluated. The sources will be used to justify the concepts and analysis
that will bring insights about the particulars. This mixed approach uses previous
sources but there will be a gap regarding primary data which can be taken as a
consideration for future research.

4 History and current situation of crowdfunding in Bangladesh

Bangladesh has had some attempts in creating CFPs but hasn’t been able to
make a big impact until now. The microfnancing concept in Bangladesh came
from the Noble Laureate Dr. Mohammad Younus, where he had the idea of
facilitating people who are in poverty by lending a small amount of money and
providing it to a large number of people. ‘Somiti’ in Bangladesh is another type
of crowdfunding where the members save a portion of their salary and later
the sum is invested in the business where the members divide the proft among
themselves. But none of these matches with the centralized tech-based crowd-
funding system.
The frst web-based CFP in Bangladesh that has been created including a
centralized online system was Projekt.co which is a reward-based platform with
industries related to music, arts, and technology. This platform had intended to
help the people related to the creative industries, entrepreneurs, and makers to
make their ideas come to life. The website was founded by Waiz Rahim who
mainly got the idea to do such kind of thing from Kickstarter. But this CFP’s
journey came to an end in 2017 because people in Bangladesh weren’t used to
crowdfunding and the popularity was very low. Ultimately the project became
a failure. In 2015, another CFP was launched with the name GoRiseMe. They
have accommodated 33 campaigns until now but they are to achieve a successful
campaign. Their vision was to reshape the global e-trade and build a commu-
nity based on trust, privacy, and secure real-time business with integrity (Suresh
et al., 2020).
Oporajoy.org was launched in 2018 which is a donation-based crowdfunding
site. Oporajoy has completed a campaign where they raised $150 through the
platform that was to assist a student with the admission fee of the University of
Dhaka. The founder of Oporajoy is Monjurul Islam who got the idea of Oporajay
while doing his post-graduation program in the US. He saw that in the US, peo-
ple even collect funds for their pet’s birthdays, so he had the question of why
he can’t use the same type of platform in Bangladesh where people are hungry
and living in poverty. Thus, he created the donation-based CFP Oporajoy for
this reason. Another platform was launched in 2018 called GoFundsMe which is
an equity-based platform. This platform is partially funded by the Department
of the International Labor Department of the UK. This platform has bought
some projects to fund for equity but hasn’t still been able to complete a project
(Table 1).
106 S. M. Sohrab Uddin et al.

TABLE 1 CFPs in Bangladesh

Platform Type Established year Percentage of commission

Projekt Reward-based 2015 –

GoRiseMe Donation-based 2015 3%, for PayPal 3.4% + €0.35 per
donation
Fundsme Equity-based 2018 Upfront fee on the funding
purpose
Oporajoy Donation-based 2018 5%

Source: Suresh et al. (2020).

Ekdesh is a recent CFP that was launched by Access to Information (a2i). a2i is
the signature program of the Digital Bangladesh movement of the government of
Bangladesh. Ekdesh is the frst CFP that is based on raising funds from the public
which will be later distributed among the poor people as Zakat or Financial Aid.
This platform allows the people to donate to the Prime Minister’s relief fund,
Islamic foundation or other NGOs. Along with helping the poor people, the
platform gives an opportunity to help the small businesses that were hit in the
time of the Corona pandemic. The platform has both website and mobile app
and organizations like BRAC, Bidyanondo, and Centre for Zakat Management
have joined the program.
As of now, there is no centralized platform in Bangladesh working on Shari’ah-
based crowdfunding. The few that are operating are focused on donation only.
But Islamic crowdfunding is a more diverse feld that can bring substantial proft
for the country if implemented and monitored with the right regulations.
Hence, it is seen that there are some attempts made in crowdfunding, but the
success hasn’t been observed vastly. It is still in a growing phase and if the poten-
tials are implemented in the right manner, crowdfunding can be a major source
of funding in Bangladesh.
So, by analysing the essentials, the problems that are seen from the previous
experiences are listed below:

• The people are not still used to the term ‘Crowdfunding’. They do not have
an idea of its mechanism and how it will serve a beneft to them. The gap
of knowledge has become a core issue of the failure of crowdfunding in
Bangladesh until now. Trust has become a vital issue in the crowdfunding
sector as many MLM companies have cheated people with new terminologies
and investment opportunities. So, people are afraid of trying out a new thing
as the previous experiences have made them more risk-averse in this case.
• There are still no formal regulations regarding crowdfunding in Bangladesh,
so it is not getting the desired structure for all the stakeholders included. The
development of structure, rules and regulations is highly needed so that the
activities in this sector get a legal body and authority.
 Prospects and opportunities of Islamic crowdfunding in Bangladesh 107

• If there is any investor wanting to invest in an Islamic CFP, there is no

opportunity for them, as the current CFPs are not built complying with that
mechanism (in terms of equity and debt-based CFPs).
• There is a strong resistance to change in the mentality of Bangladeshi
people. They are more likely to embrace certainty and what is known. This
is indeed a reason for the hindrance of growth, especially in the technolog-
ical sector in Bangladesh.

5 Comparison of economic infrastructures of Bangladesh with

other developing countries
Crowdfunding has been established successfully in many of the developed
countries with guided rules and regulations. The countries dominating the
crowdfunding industry mainly include the USA, UK and China. China has
more than 80% of the market share in the crowdfunding industry. But our
concern is how efective it is for the developing nations and if it is feasible
to implement crowdfunding models (particularly Islamic crowdfunding) in
Bangladesh.
Bangladesh has been one of the fastest developing nations in the world over
the last decade and made remarkable progress in sustainable economic growth.
The country reached a lower-middle-income status in 2015 and currently, the
government aims to target to be a developed nation through the implementa-
tion of technological infrastructure and building a Digital Bangladesh. Hence,
crowdfunding can be a source of development for three reasons. First, crowd-
funding itself is a wing of fntech that supports the Digital Bangladesh vision of
the government. Second, crowdfunding can be a source of alternative fnance
that will radically decrease the problems regarding investment and boost infra-
structural development. Third, donation-based crowdfunding can be a source of
bringing income equality and social development in Bangladesh.
Considering Bangladesh’s neighbours, India is a developing country that has
implemented all four forms of crowdfunding to a greater extent (Suresh et al.,
2020). ECF and lending-based crowdfunding have got a good market now in
India. In fact, P2P is said to be one of the fastest-growing markets in India where
the current market size is around 2 billion INR and 40–50 platforms under the
P2P umbrella (Saleem, 2018). Hence, Bangladesh has not yet shown any promise
regarding the P2P platform. In case, if Bangladesh wants to implement such a
kind of crowdfunding, following the general model will not satisfy the rules of
Shari’ah. That is why if Bangladesh wants to bring a P2P lending platform like
India, it should be modifed under the rules and regulations of Islam to comply
with the Islamic fnancial system, which is the main concern of this research.
Hence, banks like IBBL can make a major contribution here.
One point to be noted here is that India doesn’t have bespoke regulations
regarding reward and donation-based crowdfunding but has strong regulations
under authority regarding lending and ECF. This is because lending and ECF
108 S. M. Sohrab Uddin et al.

need an essence of trust, clarity and if gone out of control, there is a huge possi-
bility of misuse and fraud. Thus, in terms of Bangladesh, we can see that the lack
of regulations is a vital reason why equity and lending-based crowdfunding still
hasn’t got the confdence of the stakeholders related to it.
If considered the list of countries that successfully executed the idea of
Islamic crowdfunding, then Malaysia would be one of the top choices. It is
the fourth largest economic power in Southeast Asia. For the technological
transformation and adoption, the labour productivity is signifcantly higher in
Malaysia. The Global Competitiveness Report of 2019 had declared Malaysia
as the 27th most competitive country in the world. The country has adopted an
infrastructure according to the guidance of Islamic Shari’ah, which has made
Malaysia a central hub for Islamic fntech. ‘Ethis’ is a CFP based in Malaysia
that is playing a leading role in Malaysia’s growth. This platform has collected
more than $15 million and completed 16,000+ transactions. It is regulated
under the crowdfunding licenses of Malaysia and Indonesia that approve it as
Shari’ah. This P2P platform can be a benchmark for Bangladesh in case of
establishing an Islamic CFP. Thus, compared with Malaysia, certain measures
can be taken in case of developing economic infrastructure and harnessing the
power of Islamic fntech efectively. First, the regulatory framework regarding
CFPs should be developed quickly. Second, the literacy rate should be increased
and efectiveness in learning should be included so that people can understand
the concepts of fntech and have confdence about utilizing the power of dig-
ital economy platforms. Third, the platforms should be made easy to use with
availability to all.
Finally, it can be said that by understanding the trends of other develop-
ing countries and comparing them with Bangladesh’s condition, there is a huge
potential of crowdfunding in Bangladesh that needs some regulatory and aware-
ness concerns.

6 Opportunities of Islamic crowdfunding in Bangladesh

The World Bank has valued the South Asian market of crowdfunding to be
worth US$5 billion. The societal, cultural, and religious norms of the countries
of this region (Bangladesh, India, Sri Lanka, and Pakistan) encourages helping
each other through donations and loans during their extreme necessities like
medical emergency, education fnances or starting a business. So, these societal
and religious traits are very similar to the crowdfunding principles. But despite
having such potential the alternative fnance activity in the South Asian region
amounted to only US$269 million where more than 95% of the value was con-
tributed by India alone.
The volume of alternative fnance in Bangladesh is only US$10,272 as exhib-
ited in Table 2, whereas even countries like Nepal and Pakistan that are similar
to the infrastructure and size of Bangladesh have a volume of US$1,014,850 and
 Prospects and opportunities of Islamic crowdfunding in Bangladesh 109

TABLE 2 Volume of alternative fnance in South Asian countries

Country Population (million) The volume of fnance (US$)

Bangladesh 161 10,272

Bhutan 0.8 10,000
Nepal 28 1,014,850
India 1352 268,579,820
Pakistan 212 8,571,762
Srilanka 21 38,926

Source: The World Bank Database (2013).

US$8,571,762 respectively. Thus, there exists a greater portion of the unutilized

potential of crowdfunding fnance in Bangladesh.
As of 2020, Bangladesh recorded the highest unemployment rate of 5.30% in
its history. The youth of the country are more interested in government jobs. But
the government itself can’t arrange job opportunities for such a vast population.
So, the government has been encouraging the youth towards entrepreneurship.
One of the main barriers for young entrepreneurs is securing capital for their
businesses. The fnancial needs of the entrepreneurs are basically met by three
sets of fnancial intermediaries in Bangladesh. The frst one is the commercial
bank including all the fnancial institutions that are operated under the direct
control of Bangladesh Bank (the central bank of Bangladesh). The second fnan-
cial intermediary is the stock market and the third one includes some of the
NGOs that operate in the rural economy. But the small frms and start-ups are
the last things that come to their mind while investing.
Over the last 10 years, the small frms and enterprises did not even receive 1%
of the total loans disbursed by the scheduled banks of the country. One of the
prime reasons behind this is the credit management policy of these banks that
depend excessively on a codifed system of assessing the risk that is responsible
to generate a ‘credit crunch’ for the small frms specifcally (Adhikary et al.,
2018). Another reason for small frms not getting enough credit extension would
be low profts and high NPLs of the scheduled commercial banks (SCB) and
Development Financial Institutions (DFI) that collectively hold 31.5% of the
total industry assets and 30.3% of the total industry deposits. This imposes a sig-
nifcant impact on the ROA of the banks which is shown in Table 3.
Second, the two stock markets of Bangladesh – the Dhaka Stock Exchange
and Chittagong Stock Exchange – have fnanced a very limited number of
companies in the last 10 years. Moreover, they exhibited poor performance in
fnancing the productive sectors and even to the established companies (Kumar
Adhikary & Kutsuna, 2015). Many countries in the world have a separate market
for fnancing start-ups and young entrepreneurs like Japan has ‘Mothers’, China
has ‘ChiNext’ and Korea has ‘Kosdaq’ unlike Bangladesh.
110 S. M. Sohrab Uddin et al.

TABLE 3 NPL and ROA of diferent banks

Year NPL (% of total loan) ROA (%)

SCB PCB FCB DFI All SCB PCB FCB DFI All
banks banks

2003 29 12.4 2.7 47.4 22.1 0.1 1.1 2.8 0.7 0.7
2004 25.3 8.5 1.3 42.8 17.6 –0.1 0.8 2.4 0.3 0.5
2005 21.35 5.62 1.26 34.87 13.56 –0.1 0.7 2.6 0 0.5
2006 22.94 5.45 0.81 33.68 13.15 0 1.2 3.2 –0.2 0.7
2007 29.87 5.01 1.43 28.58 13.23 0 1.1 3.1 –0.1 0.6
2008 25.4 4.4 1.9 25.5 10.8 0.7 1.1 2.2 –0.2 0.8
2009 21.4 3.9 2.3 25.9 9.2 1 1.3 3.1 –0.3 0.9
2010 15.7 3.2 3 24.2 7.3 1.1 1.4 2.9 –0.6 1.2
2011 11.3 2.9 3 24.6 6.1 1.3 1.6 3.2 0.4 1.4
2012 23.9 4.6 3.5 26.8 10 –0.6 2.1 2.9 0.2 1.8

Source: Annual Report of Bangladesh Bank (Bangladesh Bank, 2012).

And the last fnancial intermediary consists of the NGOs that mainly work
with the underprivileged and marginalized communities like women, farmers,
and rural artisans. So, all of the three fnancial intermediaries have their separate
target market where the small frms and start-ups are not a part of it.
Thus, the country is losing the potential of the entrepreneurs and their
innovative ideas which contributes to the country’s economy the most. In this
scenario, crowdfunding can play a pivotal role in mitigating this gap between
entrepreneurs and fnancial intermediaries. Integrating the Shari’ah rules will
make crowdfunding a trustable and efcient platform for both investors and
entrepreneurs. Since Islamic crowdfunding promotes risk-sharing by both
parties, so no parties can be held responsible to bear the losses.

7 A convenient framework of crowdfunding for Bangladesh

As said earlier, there are quite a few platforms in the country that exhibit the
practice of informal crowdfunding specially donation-based crowdfunding for
example GoRiseMe, Oporajoy where the platform posts the stories of the people
who are in need, to motivate the audience to donate. Both the platforms take
a small percentage of the amount collected as their commission. Apart from
these, there is Project.co which is a reward-based CFP, and Fundsme which
is an equity-based CFP. Yet, there has not been much success gained in any of
these platforms. Also, no CFP has been introduced in Bangladesh that permits
Shari’ah-based investments. In this situation, it is ECF and reward-based crowd-
funding can be utilized to get hold of the potential of Islamic crowdfunding in
Bangladesh as these two models are closely related to the Islamic Shari’ah-based
business models such as Bai Salam and Musharakah.
 Prospects and opportunities of Islamic crowdfunding in Bangladesh 111

7.1 Reward-based crowdfunding platform

Here, the buyers and sellers would be able to connect through the crowdfund-
ing website. The seller would portray his products and services, the detailed
description of it including the dimensions, materials, uses and proper costing
of the products. The website will host this information along with the seller’s
profle. Then, the interested buyers will choose their desired products from that
and have to pay the cost of the product in advance which portrays the essence of
the practice of Bai Salam. Then, the seller will deliver the product at an agreed-
upon date in the future. Being the intermediary between the buyers and seller,
the website will charge a specifc percentage of the cost which will have to be
not more than 5% (Figure 1).

7.2 ECF platform

Equity-based CFP goes with the Shari’ah-mentioned rules and regulations the
most. Many Islamic countries like Malaysia, Indonesia, United Arab Emirates
have already established crowdfunding websites that follow the equity model
according to the Shari’ah-based rules of proft and risk-sharing. Since Bangladesh
is a country with a majority of its population being Muslim, this platform can
easily grab both the investors’ and borrowers’ attention. And if the platform is
introduced by an already existing trustworthy enterprise for example a reputed
bank like Islamic Bank Bangladesh Limited or any other fnancial institution,
then it will add more value to the branding of the platform. bKash which is the
leading mobile fnancial service provider of Bangladesh was also launched by the
BRAC bank as a subsidiary which helped the platform gain the trust of the mar-
ket as an initiator of a new service. The small frms or entrepreneurs will present
their idea, the equity that they are ready to ofer, the investments required for
the implementation and how far the idea reached in the Islamic crowdfunding
website (ICFW). The ICFW will then play the role of the investment generator
by marketing the campaign in their social and personal networks. The interested
individuals can invest in the campaigns directly using the ICFW and they will

Crowdfunding
• Products and Website • Browsing
Services • Information products for
hosting purchasing

Sellers Buyers

FIGURE 1 Reward-based crowdfunding model.

112 S. M. Sohrab Uddin et al.

become equity stakeholders for which they will receive dividends in exchange
for their investment. The website will also be the medium of communication
between the investors and entrepreneurs where the investors can have direct
queries from the entrepreneur. This would increase the transparency between
them which will help both parties to make rational decisions. The ICFW are
entitled to receive a fixed fee from the firms that collect their capital through the
website (Figure 2).
This model is extremely suitable for start-up companies as they do not receive
necessary firms from other financial intermediaries. Through the proper exhibi-
tion of the potential of their idea and a realistic business model, start-up compa-
nies will be able to collect their required capital in a short span of time without
getting involved in a time-consuming and uncertain traditional loan process-
ing system. Since the function of ICFW is similar to the stock exchange so the
implementation of this platform has to be regulated by the security laws of the
country so that the investors are protected from fraud contracts (Suresh et al.,
2020). The role of the Central Shari’ah Board for Islamic Banks of Bangladesh
(CSBIB) is also significant in this aspect to monitor if the website is following the
Shari’ah rules in real or just applying this as a marketing strategy.

7.3 Regulations for crowdfunding platforms in Bangladesh

While crowdfunding is still a new concept to the Muslim countries or the South
Asian countries, it has been practised in western countries much before that. So,
they have already created proper policies and regulatory frameworks for running
the CFPs.
As it can be seen in Table 4, the CFPs of the USA and Australia are regu-
lated by the Securities and Exchange Commission (SEC), and in the UK and

Crowdfunding
Website
s s
or a
st ide

In
ve f

te
In g o

re & I
re
of ,
th tin

ty ty

st nv
Pr
fe
ui bili
wi e

ed e
o
g rk

ba
Eq si
tin ma

fie tor
d, fea

bl

ld p
ec d

s
nn an

of rof
re s

in
ui it

ve

in ile
eq a &
Co on

Equity based
ve
s
& oti

tm
t R de

st
om

Crowdfunding
en

m
en I
m up

en
Pr

to

Platform
st rt-

t
pt
ve ta

io
In S

ns

Equity and share of the company, Dividends

Entrepreneurs Investors

Investments and Finances

FIGURE 2 ECF model.

TABLE 4 Crowdfunding regulatory policies of different countries

Country UK USA Canada New Zealand Australia

Raise limit/1 year €8 million US$1 million CA$1.5 million NZ$2 million AU$5 million
Open to ordinary Yes Yes Yes Yes Yes
investors
Investment limit per Under 10% of net total US$2,000 per offer or, CA$2,500 per offer None AU$10,000 per offer
ordinary investor assets 5% income per offer (some provinces
if income is less have additional
than US$100,000 limits for total
crowdfunding)
Investment limit per None US$100,000 or 10% CA$25,000 per offer None None
accredited investor lesser income/net (some provinces
worth greater than have additional
US$100,000 limits for total
crowdfunding)
Regulator Financial conduct SEC Province-by-province Financial markets Australian securities
authority regulation authority and investment
commission
Others Very lucrative tax Explicit ‘no Various levels of Not specifically Restricted to public
exemption (SEIS/ exemption’ of crowdfunding restricted to small and proprietary
EIS) platform and exemptions businesses limited companies
intermediary
liability

Source: Planetcompliance.com (2022)

Prospects and opportunities of Islamic crowdfunding in Bangladesh 113
114 S. M. Sohrab Uddin et al.

New Zealand, they are regulated by the fnancial market’s authority. The SEC
of the United States has set regulatory standards on crowdfunding that include
four basic points: the amount of money that can be raised, the fnancial history
of investors, the role of intermediaries, and investor eligibility. Meanwhile, in
emerging nations such as Indonesia, the policy on crowdfunding or fntech looks
to be harsher, with the Financial Service Authority Regulation 2016 No. 77 pro-
posing ten points. The Securities Commission of Malaysia has overseen Islamic
crowdfunding under the Guidelines on Recognised Markets, which specifes
that all Islamic fnancial services must conform with IFSA 2013 (Uluyol et al.,
2018). At present, the registered platforms include Leet Capital, Ata Plus, Pitchin,
Ethis Ventures, Fundnel and so on.
In Bangladesh, crowdfunding is still quite far from the proper exhibition for
which there are no regulations introduced till now by the Bangladesh Bank. The
deputy governor of the bank said in an interview that there is no regulation about
crowdfunding in Bangladesh. He also added that the event is a timely initiative
to create awareness among the citizens of the country. Even if it is implemented
in the near future, the main regulator should be Bangladesh SEC or the central
bank. For Islamic crowdfunding one of the main regulators would include the
CSBIB too.

8 Problems related to the implementation of Islamic

crowdfunding in Bangladesh
Bangladesh has enormous opportunities in terms of economic development
by using crowdfunding, but certain limitations need to be addressed. The frst
and foremost problem is the bureaucracy in creating rules and regulations. It
takes years in Bangladesh to enact and implement a valid policy, but the current
competitive and dynamic situation demands Bangladesh to create a regulatory
framework regarding crowdfunding within the least time possible. Dr. Habib,
a professor and director of the Bangladesh Institute of Bank Management, has
portrayed the fact that due to the lack of policy and regulatory framework, it
has been difcult for Bangladesh to explore the potentials of crowdfunding.
Hence, there should be a framework regarding Islamic crowdfunding so that it
becomes possible for the institutions to approve their platforms under the Islamic
Shari’ah.
Again, there is a need for awareness and training for the people as most of
the people aren’t still familiar with the concept of crowdfunding in Bangladesh
(Suresh et al., 2020). In a survey, it was seen that, among the respondents who
were small business owners, only 5% had heard about the term crowdfunding
(Kumar Adhikary & Kutsuna, 2015). Here, the government can play the big-
gest role by creating awareness programs about crowdfunding, assisting the new
platforms in their growth and providing monetary help. This is aligned with the
accordance of government’s vision of revolutionizing the country with fntech
for boosting economic growth and removing poverty.
 Prospects and opportunities of Islamic crowdfunding in Bangladesh 115

Furthermore, one of the core challenges is to build trust among the people.
As mentioned by Islam and Khan (2021), the success of crowdfunding depends
on the engagement of the end-users. People in Bangladesh has been facing
fraud through online medium and transactions. The past issues regarding Evaly,
Dhamaka and E-orange where the customers have lost their trust and money
have made it tougher for the new online platforms to acquire new customers.
This will ultimately hurt the crowdfunding sector too and this implies the need
for close monitoring, building regulatory framework and creating an environ-
ment of trust and clarity. Islamic crowdfunding needs clarification of Shari’ah
compliance as the religious-minded people who will be interested to invest in
the platforms would want to be sure about the ethical and Shari’ah aspects of
both the systems and the platforms.
Finally, there is a challenge to implement a successful business model that will
be profitable for all the stakeholders (Gooch et al., 2020). There is an amount that
the platform charges for providing the benefits and to bear the costs associated
with the platform. Again, no matter what type of CFP it is, the stakeholders will
look to gain their interest and because of that reason, the whole model should be
built to meet those interests that will assist in making the platforms successful,
trusted and sustainable. Hence, by tackling the challenges, Bangladesh has huge
potential in this industry and gain economic benefits in the long term.

9 Conclusion
For the Bangladeshi financial market, crowdfunding is still in its infant stage.
It is a blessing for small enterprises and entrepreneurs who are mostly ignored
by microcredit organizations and commercial banks. The country has already
experienced a technological boom in its financial sector through the increas-
ing use of mobile financial services. This has resulted in an extreme rise in the
mobile banking sector as well. So, it is no doubt that the people are ready to some
extent for the upcoming revolution in the fintech industry. The integration of
Islamic Shari’ah in the fintech sector would give the platforms like crowdfund-
ing an extra edge to reach the customers as the majority of the country’s pop-
ulation are Muslims. The greatest challenge right now for the implementation
of Islamic crowdfunding is the lack of digital infrastructure, lack of digitally
skilled employees and no regulation has still been set up for such platforms. So,
the policymakers must set up strict rules so that the investors’ money can be
protected from incurring losses due to the lack of efficient risk management tech-
niques. Also, there is a huge risk for CFPs to be under cyber-attacks and other
digital crimes for which people tend to restrict themselves from online financial
services. So, the CFPs and the cyber security regulator of the country must
work together to make this highly anticipated platform safe and secure from such
mishaps. When dealing online or on the internet, another major challenge for
CFPs would be gaining the trust of the people. In this case, being the subsidiary
of already existing reputed financial institutions will make the platforms have
116 S. M. Sohrab Uddin et al.

their back. The Islamic Banks of the country can be the initiator of this service
in Bangladesh. As a whole, successful implementation of Islamic crowdfunding
would require the coordination of factors like digital literacy, Shari’ah literacy,
an encouraging environment for technological innovation, proper regulatory
framework and efective online markets. The image of the Bangladeshi online
market has been damaged severely due to increasing scams and frauds on such
platforms. This image has to be immediately restored to enjoy the fruits of the
potential of Islamic crowdfunding in the future.

References
Adhikary, B. K., Kutsuna, K., & Hoda, T. (2018). Crowdfunding Potential in Developing
Countries—A Case of Bangladesh. In Adhikary, B., Kutsuna, K., & Hoda, T. (eds.)
‘Crowdfunding: Lessons from Japan’s Approach (pp. 77–94), Springer, Singapore. https://
doi.org/10.1007/978-981-13-1522-0_6
Aizah Ibrahim, S., Nurhidayah Mohd Roslen, S., Aizah binti Ibrahim, S., bt Mohamad
Salleh, N., Soon Theam, T., Yeen Lai, K., & Tunku Abdul Rahman Malaysia, U.
(2018). Islamic Microfnancing: Crowd-funding as a Drive to Improve Financial
Inclusion in Malaysia. International Journal of Engineering & Technology, 7, 18–20. https://
www.researchgate.net/publication/332140862
Athlers, G., & Cumming, D. (2012). Signaling in crowdfunding. SSRN Working Paper.
Bangladesh Bank. (2012). Annual Report 2012.
Bottiglia, R., & Pichler, F. (2016). Introduction. In Crowdfunding for SMEs. https://doi.
org/10.1057/978-1-137-56021-6_1
Chowdhury, A., & Shil, N. C. (2017). Public Sector Reforms and New Public
Management: Exploratory Evidence from Australian Public Sector. Asian Development
Policy Review, 5(1). https://doi.org/10.18488/journal.107/2017.5.1/107.1.1.16
Crowdfunding’s Potential for the Developing World CONFERENCE VERSION. (2013).
Gooch, D., Kelly, R. M., Stiver, A., van der Linden, J., Petre, M., Richards, M., Klis-
Davies, A., Mackinnon, J., Macpherson, R., & Walton, C. (2020). The Benefts and
Challenges of Using Crowdfunding to Facilitate Community-led Projects in the
Context of Digital Civics. International Journal of Human-Computer Studies, 134, 33–43.
https://doi.org/10.1016/j.ijhcs.2019.10.005
Hagedorn, A., & Pinkwart, A. (2016). The Financing Process of Equity-Based
Crowdfunding: An Empirical Analysis. In FGF Studies in Small Business and
Entrepreneurship. https://doi.org/10.1007/978-3-319-18017-5_5
Harrison, R. T., & Mason, C. M. (1992). International Perspectives on the Supply
of Informal Venture Capital. Journal of Business Venturing, 7(6). https://doi.
org/10.1016/0883-9026(92)90020-R
Hasin, Z., & Alamin, M. (2021). Developments of Islamic Banking in Bangladesh
January–March 2021. Islamic Banking Cell, Research Department, Bangladesh Bank.
Ishak, M. S. I., & Rahman, M. H. (2021). Equity-based Islamic Crowdfunding in
Malaysia: A Potential Application for Mudharabah. Qualitative Research in Financial
Markets, 13(2), 183–198. https://doi.org/10.1108/QRFM-03-2020-0024
Islam, M. T., & Khan, M. T. A. (2021). Factors Infuencing the Adoption of Crowdfunding
in Bangladesh: A Study of Start-Up Entrepreneurs. Information Development, 37(1),
72–89. https://doi.org/10.1177/0266666919895554
 Prospects and opportunities of Islamic crowdfunding in Bangladesh 117

Kumar Adhikary, B., & Kutsuna, K. (2015). Small Business Finance in Bangladesh:
Can “Crowdfunding” Be an Alternative? Review of Integrative Business and Economics
Research, 4(4), 1–21. www.sibresearch.org
Mahadi, R., Sariman, N. K., Noordin, R., Mail, R., & Fatah, N. S. A. (2018). Corporate
Governance Structure of State Islamic Religious Councils in Malaysia. International
Journal of Asian Social Science, 8(7). https://doi.org/10.18488/journal.1.2018.87.388.395
Massolutions. (2013). Crowdfunding Industry Report.
Mohd Thas Thaker, M. A. bin. (2018). Factors infuencing the adoption of the crowd-
funding-waqf model (CWM) in the waqf land development. Journal of Islamic Marketing,
9(3). https://doi.org/10.1108/JIMA-05-2016-0043
Muneeza, A., Arshad, N. A., & Arifn, A. T. (2018). The Application of Blockchain
Technology in Crowdfunding: Towards Financial Inclusion via Technology.
International Journal of Management and Applied Research, 5(2). https://doi.
org/10.18646/2056.52.18-007
Nordin, N., & Zainuddin, Z. (2021, August). Islamic Crowdfunding: A Shariah-
Compliant Investment Alternative. The Halal Journal. https://ethis.co/blog/
islam ic-crowd f und ing-shar iah-compl iant-investment-a lter nat ive/#:~:tex-
t=The%20key%20difference%20between%20conventional,or%20businesses%20
with%20Shariah%20principles.
Planetcompliance.com. (2022). The Impact of Equity Crowdfunding Regulations –
Planet Compliance. https://www.planetcompliance.com/the-impact-of-equity-
crowdfunding-regulations/ [Accessed 8 October 2022].
Salehi, M. (2008). The Role of Financial Intermediaries in Capital Market. Zagreb
International Review of Economics & Business, 11(1), 97–109.
Saleem, Shaikh Zoaib. (2018). Lessons for P2P Lending in India. https://www.livemint.
com/Money/tuI4wvfqdbVH9nQVYC1M5I/Lessons-for-P2P-lending-in-India.html
Suresh, K., Øyna, S., & Munim, Z. H. (2020). Crowdfunding Prospects in New
Emerging Markets: The Cases of India and Bangladesh. In Advances in Crowdfunding.
https://doi.org/10.1007/978-3-030-46309-0_13
Tanjib Rubaiyat. (2020). Future of Fintech in Bangladesh. Daily Sun, 2(April).
Uluyol, B., Musito, M. H., & Yücel, E. (2018). Islamic Crowdfunding: Fundamentals,
Developments and Challenges. The Islamic Quarterly, 62, 469–484. https://www.
researchgate.net/publication/324593863
Wahjono, S. I., Marina, A., & Widayat. (2015). Islamic Crowdfunding : Alternative
Funding Solution. 1st World Islamic Social Science Congress, December.
6
EMPIRICAL ASSESSMENT ON DIGITAL
TRANSFORMATION IN ISLAMIC
BANKING1
Abideen Adeyemi Adewale and Rifki Ismal

1 Background
Digital transformation in the Islamic banking industry is building momentum
and increasingly transforming the fnancial products ofered and services ren-
dered. This development is crucial in order to sustain the growth momentum of
the industry by reinvigorating its current outreach and radically exploring new
horizons, identifying untapped potentials and unlocking opportunities. What
is required to achieving this is a radical departure from the traditional sales and
product inclination banking model to collaborative or competition-induced
innovative ways of service delivery. Such innovative banking model should align
with the high expectations of today’s tech-savvy and convenience-driven cus-
tomers (PWC, 2019).
Digitalising Islamic banking will bring about a myriad of opportunities for
growth. For instance, it will help the Islamic banks (IBs) to respond to changing
customer structure and expectations, as well as the consequential disintermedia-
tion due to competition from new-entrant non-bank fnancial services providers.
Digitalising Islamic banking will also impact positively on fnancial inclusion,
assist small and medium enterprises, and enhance value-based intermediation
among many other benefts.
Notwithstanding, digitalisation may also create exposure to potential risks
that have implications for fnancial stability and integrity of the Islamic banking
industry. For instance, digitalisation may also expose IBs to cyber-security risk,
money laundering and fnancing terrorism (ML/FT) risk cloud-concentration
risk, and Sharia non-compliance risks. Consumers and investors may also be
exposed to protection issues.
Across jurisdictions, IBs and the Regulatory and Supervisory Authorities
(RSAs) are in diferent stages of the development and implementation of digital

DOI: 10.4324/9781003262169-9
 Empirical assessment on Digital transformation in Islamic banking 119

Islamic banking. Some IBs are already deploying technology in their operation
via the use of software applications, especially for payments and transaction
services.
Other IBs are adopting robotics process automation, machine learning and
Artifcial Intelligence (AI) technology for repeatable transactional tasks. Predictive
analytics based on big data, cloud computing and the Internet of Things (IoT) are
also being deployed to better anticipate customer needs. Similarly, unbundling
of services and data sharing in open banking applications are also being imple-
mented via Application Programming Interfaces (APIs) (Thomson Reuters and
DinarStandard, 2019).
Arising from both the benefts and risks of digitalisation, there are also both
operational and regulatory implications of its implementation for the fnancial sta-
bility of Islamic banking. The frst derives from how the incumbent IBs respond
to the challenges arising from both market structure dynamics and transforma-
tion to digital Islamic banking. IBs face stif competition from FinTechs and
BigTechs and increased possibility for new disruptors to enter the market, thus
heightening competition and contestability (Financial Stability Board, 2019).
Moreover, on the management front, there would be the need to attract new
staf with, or train existing staf on requisite skills, innovative and agile mind-set.
The second derives from RSAs’ response to fnding a balance between encour-
aging technology-based fnancial innovation while protecting consumers, sup-
porting business operations, and promoting fnancial inclusion. This should be
done without infringing on the fundamental premise of Sharia upon which
Islamic banking is built. In this regard, RSAs have also been issuing guiding
framework and regulations, promoting regulatory sandboxes and establishment of
digital banking institutions including for IBs (Elipses and Salaam Gateway, 2019).
The specifc objectives of this study include to investigate (i) what is the cur-
rent status of the digital transformation of Islamic banking, (ii) what are the pecu-
liar impediments or challenges to its implementation in various Islamic Financial
Services Board (IFSB) jurisdictions, (iii) what prudential risks may crystallise
from digitalisation of Islamic banking, (iv) what needs to be done to support the
digital transformation process in Islamic banking. The data used are collected via
questionnaire survey distributed online to some countries having Islamic fnance
industry between the period September and October 2020. Mainly, it gathered
data and information from 90 IBs and analysed with descriptive analysis based
on simple percentage, frequency and, in a few instances, weighted mean scores
to show relative importance.

2 Research method
The research adopts a quantitative method which is a survey questionnaire;
particularly, the data analysed in this study were collected via questionnaire
survey distributed online. The survey was addressed to IBs via the RSAs in
120 Abideen Adeyemi Adewale and Rifki Ismal

various IFSB member jurisdictions between September and October 2020. The
survey comprised mainly closed-ended questions with codes to indicate options
a respondent IB might wish to select. In some other instances, open-ended
questions were also included for the respondents’ IBs to freely express their
opinion on related matters beyond the closed-ended options provided. The
cooperation of the responding IBs was sought especially in terms of ensuring
that the responding ofcer was the person with the relevant responsibility to
do so and that the permission of relevant superiors or authorities was obtained
where necessary. The responses provided by an institution are assumed to
refect its perspectives on the issues raised. Owing to the exploratory nature
of the research, data elicited from 80 IBs cutting across 21 IFSB member juris-
dictions 18 were subjected to descriptive data analysis only, mainly based on
simple percentage, frequency and, in one instance, weighted mean scores to
show relative importance.

3 Digitalisation in Islamic banking industry

3.1 Islamic banking perception about digitalisation

IBs view digitalisation of their operations from the perspective of (i) what Islamic
banking products and services they ofer and (ii) the various channels or plat-
forms through which such services are ofered to their customers. Some IBs also
view digitalisation of their Islamic banking activities as enhancements to their
operational efciency, data security, regulatory compliance and customer expe-
rience in its entire ramifcation via technology.
Regardless of the perspective, a notable common statement among the
respondent IBs is that Sharia-compliance must nonetheless be ensured. Though
digitalisation universally refects the application of new technology to improve
the process, products and business models in rendering of fnancial services,
Islamic banking digitalisation would require something more for it to be con-
ceptually, practically and justifably diferent.

3.2 Rationale for Islamic banking digitalisation

The next question in the survey sought the responding IBs’ rationale for embark-
ing or proposing to embark on digital transformation. Based on the literature
reviewed, 12 possible reasons why IBs should engage in digital transformation
were listed in the survey questionnaire. Responses obtained from the IBs that
participated in the survey indicate that all reasons stated are considered pertinent.
In order to fnd out the relative importance of each of these stated reasons, a
weighted mean analysis was conducted, and the outcome is depicted in Figure 1.
The mean-weighted distribution of responses indicated results in an average of
1.51 for all 12 reasons stated therein.
 Empirical assessment on Digital transformation in Islamic banking 121

Comply with regulatory requirement 1.42

Reduce operating cost 1.71

Counter disruption and competition from
incumbents
1.9

Create new business models 1.54

Enhance operational efficiency 1.4

Improve data security 1.6

Increase customer value and satisfaction 1.24

Increase market penetration 1.45

Ensure physical distancing due to COVID-19 1.28

Promote organisational agility and modernisation 1.4

Enhance revenue generation 1.57

Strengthen core competencies 1.57

FIGURE 1 Reasons why IBs engage in digital transformation.

With a weighted mean score of 1.9, the IBs generally consider countering
disruption by new entrants and competition from other incumbent IBs as a very
pertinent justifcation for embarking on digital transformation. Both competi-
tion and competitors are changing, and IBs will need to respond accordingly.
Competitive diferentiation and contestability of the IBs will largely depend on
to what extent they can digitalise their workplaces. This is crucial to enhance
operational efciency through optimal combination of both front-ofce and
back-ofce technology, as well as to attract the right talents with the specifc
requisite human capital.
Competition and contestability are envisaged to further increase as new play-
ers come on board and regulators respond to fnding a balance between encour-
aging innovation, protecting consumers, and ensuring fnancial stability (Vives,
2019). The responses obtained, therefore, may be more of a pre-emptive justi-
fcation than contingent reaction to threat from both FinTechs and BigTechs.
This is because, at the moment, both large and small IBs consider competi-
tion from the novel and technology-enabled business model of the new entrants
as being moderate at most (General Council for Islamic Banks and Financial
Institutions, 2019). This view is similar to the responses obtained in this current
study. As shown in Figure 2, only 32% of the respondent IBs ‘strongly agree’
that competition from new entrants when considered in isolation, is a reason for
their digitalisation process. The responding IBs also indicate the need to reduce
122 Abideen Adeyemi Adewale and Rifki Ismal

Comply with regulatory requirement 70%

Reduce operating cost 44%

Counter disruption and competition from
incumbents 32%

Create new business models 54%

Enhance operational efficiency 67%

Improve data security 55%

Increase customer value and satisfaction 77%

Increase market penetration 59%

Ensure physical distancing due to COVID-19 69%

Promote organisational agility and modernisation 61%

Enhance revenue generation 45%

Strengthen core competencies 51%

FIGURE 2 Proportion of IBs that ‘Strongly Agree’ with Reasons for Digitalisation.

operating costs with a weighted mean score of 1.71. It has become inevitable for
IBs to replace legacy infrastructures to enhance their competitiveness during and
post-COVID-19. As shown in Figure 2, 44% of the IBs ‘strongly agree’ that cost
reduction is a reason to embark on digital transformation.
Customer satisfaction as an important reason for digitalisation recorded a
weighted mean score of 1.24 as shown in Figure 1, with 77% of the respondent
IBs also indicating that they ‘strongly agree’ with this view as shown in Figure
2. Customer satisfaction is a very important rationale for IBs’ engaging in digital
transformation in today’s customer-centric fnancial market. The future outlook
of the fnancial system revolves around the repository, availability, and access
to accurate yet comprehensive digitalised data about a customer. Such data are
expected to be processed in real-time based on algorithms to arrive at credit
worthiness, insurance or investment preferences of customers.
Simplifcation of banking processes and added convenience via technology
have resulted in customer satisfaction with positive implication for economic
bottom line of banks. Changing customer demand particularly from increasing
number of millennials that have grown up in a digitally connected world and
do not have the same loyalty to banks is adduced as one of the factors driving
the prominence of digitalisation. While some consumers, particularly corpo-
rates, remain loyal to banks, changing retail consumer expectations are exerting
pressure on banks to adopt various forms of technology to improve their services.
This has brought about value given that customers now have more access to
 Empirical assessment on Digital transformation in Islamic banking 123

hitherto restricted assets, more control on their choices, and more visibility in
product development.

3.3 COVID-19 and digital transformation in IBs

The need to ensure physical distancing due to COVID-19 recorded a weighted
mean score of 1.24 as shown in Figure 1. Arguably, the outbreak of COVID-19
and the consequential need for physical distancing and efcient disbursement of
funds to the needy have amplifed the indispensability of digitalisation of bank-
ing services. Figure 2 indicates that 69% of the respondent IBs ‘strongly agree’
that the pandemic is one of the important reasons for their digitalisation process.
As a strategy to reduce infection rate, contactless digital payments between
persons as well as for purchases in stores have been greatly encouraged since the
outbreak of the pandemic. Incentives to use digital payments have also been
provided in some instances, especially in developing countries (Agur, Peria, &
Rochon, 2020). The increased experience with online banking due to the
restrictions on movement, especially during the frst wave of the pandemic, does
not favour the physical service delivery that bank branches are meant to provide.
Prior to the COVID-19 pandemic, 42% of the responding IBs did not
implement the work from home (WFH). The pandemic has necessitated that
34% of the IBs implement a rotational WFH–work-from-ofce (WFO) policy
in which case staf come to the ofce on alternate days of the week. Almost 20%
apiece among the responding IBs indicate that they have implemented a blend of
25% WFH or 25% WFO policy depending on the stringency and duration of the
lockdown in their respective jurisdictions. The IBs need to get used to this new
normal of staf working from home by enhancing their teleworking and remote
access capabilities without compromising on the integrity of their technology
network.
In response to how efective the WFH policy has been, 42% of the respondent
IBs stated that the nature of banking operations would require that some technical
and administrative matters can only be conducted at the ofce. Although 19%
stated that with the requisite supporting digital infrastructure, WFH can be
applied for most types of activities, 32% noted that adopting WFH makes them
more susceptible to cyber risk.

3.4 Status of Islamic banking digitalisation

Three questions were further asked to know the current state of digital transfor-
mation. These specifcally relate to the proportion of digital operation, as well as
proportion of the most recent budget spent on the digital transformation process
respectively among the responding IBs. As shown in Figure 3, most IBs (77%)
are at various stages of their digital transformation process, while only 3% are
planning to commence, another 4% of the IBs are not having any related digital
transformation plan at the moment. Of the remaining IBs, 13% indicate that
124 Abideen Adeyemi Adewale and Rifki Ismal

Completed pre-COVID-19 13%

Completed during COVID-19 4%

In Progress 77%

Planning to commence 3%

Not in plan 4%

FIGURE 3 Status of IBs Implementation of Digital Transformation.

38%
30% 31%
25% 27%
24%
18%

7%

1%-25% 26%-50% 51%-75% 76%-100%

Proportion of IBs' operation considered digital

Proportion of the most recent budget spent on digital transformation

FIGURE 4 Proportion of IBs digital operation and most recent IT budget spent.

they have already completed necessary related processes prior to the outbreak
of COVID-19. Only 4% completed their digital transformation process during
the pandemic.
The specifc status of IBs that indicate that their digital transformation process
is in progress is unknown. However, the fact that a process is promising. This is
because the swift change in technological advancement implies that the prolifer-
ation of disruptive fnancial technology and the rate of adoption by IBs will not
only be unprecedented but also likely un-abating anytime soon.
As shown in Figure 4, the proportion of the digital operation of the IBs as well
as the proportion of the most recent IT budget spent on digital transformation
activities are classifed into four. As indicated, while 30% of the IBs indicate that
up to 25% of their operations are digitalised, 38% indicate that they spent up to
25% of their most recent IT budgets on digital transformation. For the 25% of
 Empirical assessment on Digital transformation in Islamic banking 125

the IBs whose proportion of digital operations is between 26% and 50%, their
corresponding proportion of IT budget spent is 31%. In both classifcations, the
proportion of digital activities is greater than the proportion of IT budget spent.
Furthermore, while 27% of the IBs indicate that between 51% and 75% of
their operations are digitalised, 24% indicate that they spent a similar propor-
tion of their most recent IT budgets on digital transformation. Perhaps due to
overhaul of legacy infrastructure, 7% of the IBs indicate that at least 76% of
their operations are digitalised while 18% of their IT budget is spent on dig-
ital transformation. At such a relatively higher level of digital operation, it is
likely that huge sums of money would have been spent on an outright overhaul
of legacy infrastructures for information sharing among stakeholders as well as
to strengthen cyber-security units with the requisite human talents, especially
domain specialists.

4 Important issues in Islamic banking digitalisation

4.1 Technological advances adopted in digital transformation of IBs

Responses to the question on various technological advances being adopted by
the IBs indicate that related digital banking activities are already taking place in
the Islamic banking industry. As indicated in Figure 5, the three most adopted
technologies are mobile and digital wallets (93%), API (91%) and biometric
authentication (87%). The three least used technologies are robo-advisory (27%),
distributed ledger technology and smart contract (26%), and IoT (23%).
Numerous IBs have introduced various mobile banking apps and digital
wallets, which are among the most popularly deployed technologies – especially
for deliveries and e-hailing services. Their usefulness especially for fnancial
inclusion through payment services and fnancing is well noted in jurisdictions
with a low penetration of bank accounts ownership but a high rate of access to
mobile smartphones, especially among millennials.
Mobile wallets are also very useful for fattening the curve of the spread of
COVID-19 because they allow users to make contactless payments based on a
near-feld communication (NFC) technology in which case a mobile device is
held within a short distance from a point-of-sale terminal. This ofers a lot of
benefts to users including convenience of not needing to carry physical cards or
remembering PINs. Another IB also introduced Chat Banking via the WhatsApp
platform. This is to further enhance the experience and engagement of the
patrons of its digital banking channels who will be able to perform a myriad of
fnancial transactions in a secure and confdential manner over the platform.
API is also very much adopted by the IBs. This also refects the increased use
of APIs within the global fnancial ecosystem from 1 in 2005 to 17,000 in 2017
(Financial Stability Board, 2019). It connects software programmes and allows
them to communicate based on programming code bringing about efcient and
reliable interactions among computerised systems. APIs allow for secured data
126 Abideen Adeyemi Adewale and Rifki Ismal

Application programming interface 91%

Artificial intelligence 42%

Cloud computing 57%

Distributed ledger technology and smart contract 26%

Distributed ledger technology for digital identity 36%

Internet of Things 23%

Machine learning for big data analytics 46%

Mobile/digital wallets 93%

Robo-advisory 27%

Use of biometric authentication 87%

Open banking capabilities 59%

FIGURE 5 Technological advances adopted by Islamic Banks.

sharing and analytics among disparate systems and separate fnancial institutions
especially in open banking applications (Dubai Islamic Economy Development
Centre, 2019).
Nonetheless, if not properly secured, adopting APIs can lead to market struc-
ture fragility as well as trigger network instability with contagion efects in the
event of a breakdown. APIs may also infuence customer switching behaviour
with a signifcant impact on deposits as a source of funding for fnancial institu-
tions (World Bank, 2019).
The widespread use of biometric authentication by IBs as indicated by
responses provided to the survey could be due to its benefts especially stream-
lining of authentication processes. It also provides additional security benefts
through the use of a stable and unique biometric features, for instance fnger-
prints, voice, face, iris patterns or some other internal features recognition. Some
jurisdictions also use biometric verifcation number which is unique to every
bank customer regardless of the number of accounts operated with same or dif-
ferent banks within a jurisdiction. The use of this technology extends beyond
biometric identifcation which answers the question of ‘who are you?’ because
authentication requires a proof of who the user is prior to gaining access to a
desired fnancial service.
Biometric authentication via smartphones with pre-installed fngerprint
scanners has increased the use of this technology. Typically, it is used for lim-
ited services like checking account balance or transfer of a limited amount
between pre-registered and verifed accounts via mobile banking application.
 Empirical assessment on Digital transformation in Islamic banking 127

This technology is less susceptible to theft, spoofng, and online phishing which
are quite common with password authentication. In a scenario like that of the
current COVID-19 pandemic, this technology could also help with remote cus-
tomer on-boarding without infringing on the customer due diligence process.
This may not only result in increased market penetration as indicated by 59% of
the IBs as per Figure 2 but also reduced operating costs on call centres for pass-
word reset for instance.
Cloud computing has also been very much deployed especially for unbun-
dling of services as well as for data sharing in open banking applications. More
than half (57%) of the respondent IBs indicate that they adopt cloud technology.
This perhaps refects a gradual shift among IBs from an on-premises data service
to a public cloud-based data service. The possibility of technology externali-
sation due to the proliferation of technology vendors and platforms that ofer
cloud services would signifcantly reduce IBs’ infrastructure and human resource
requirement costs. However, IBs may have to contend with providing fnancial
services on platforms they neither own nor have control over. This may have
implication for fnancial stability in the event of a breach or cyber-attack on the
part of the cloud service provider.
The use of software applications, especially for payments and transaction ser-
vices, is becoming fundamental to IBs’ operations due to increasing contesta-
bility and competition. Robotics process automation, machine learning and AI
technology are now pervasive. For instance, an IB, as part of its innovation and
digital transformation process to enhance customer experience and convenience,
unveiled its digital virtual employee called ‘Dana’. Dana will digitally provide
FinTech tips and insights as well as information on the Islamic bank’s products
and services (Wanbaba, 2019). IBs are expected to use these technologies more
for repeatable transactional tasks, as well as predictive analytics based on big data,
cloud computing and the IoT to better anticipate customer needs.
Based on the alignment of its operational principles with Sharia principles
such as trust, transparency, traceability, fairness and equality, IBs have also
applied blockchain technology in their various operations. Specifcally, 36% of
the respondent IBs as shown in Figure 5 indicate they apply this technology.
When combined with AI and complemented with cloud computing, IBs opera-
tional resilience and regulatory compliance can be enhanced through facilitation
of customer due diligence and prevention of fraud and irregularities. Although
still at a very early stage, blockchain technology in Islamic fnance is mainly in
cryptocurrency which has attracted variety of rulings among Sharia scholars but
seems to be gaining traction (Alam, Gupta, & Zameni, 2019). Some FinTech
frms have obtained certifcation for the Sharia compliance of their digital cur-
rencies in their respective jurisdictions.
As indicated by 26% of the respondent IBs, blockchain technology is also
increasingly being used for the operation of smart contracts in Islamic bank-
ing. In this case, programmable applications have been employed to self-ver-
ify and self-execute Sharia-compliant fnancial transactions. For instance, while
128 Abideen Adeyemi Adewale and Rifki Ismal

appearing virtually to all network users, automatic change of ownership or adjust-

ment to fnancial fow in a contractual transaction can be triggered due to the
occurrence of specifed events in the contractual clause (Zaina, Alib, Adewale,
& Hamizah, 2019). Some IBs have also used blockchain in their cheque-based
payment process as well as for ṣukūk issuance to authenticate transactions and
mitigate potential for fraud.
With the support of multilateral organisations like the Islamic Corporation for
the Development of the Private Sector, further options are still being explored by
start-ups to deploy blockchain technology for Sharia-compliant liquidity man-
agement, interbank relations and commodity transactions. Other areas being
explored include the use of smart contracts based on blockchain technology to
automate the entire contractual process of institutions ofering Islamic fnancial
services (i-Fikr, 2019).

4.2 Types of technology on which IBs are currently investing

In addition, the IBs were asked to indicate which among the listed variants of
technology they are presently investing in as part of their digital transformation
process. As shown in Figure 6, the distribution also refects that observed earlier
in Figure 5. Most IBs, specifcally, 82% currently expend on mobile application
technology. This is followed by expenditure on biometric authentication tech-
niques indicated by 68% as per Figure 6.
Regarding other technologies, 59% of the IBs are currently investing on secu-
rity and privacy technologies, while 59% are also investing on NFC, QR codes
and SMS technology (59%). Furthermore, 59% indicate they currently expend on
business intelligence, data and analytics. This refects the fact that even though
customer convenience, preference and experience are being prioritised, it is not at
the expense of data and privacy protection. Smart contract via blockchain technol-
ogy currently receives relatively lower investment among IBs as indicated by 15%.
The cloud computing service model receiving the most investment is
Software-as-a-Service as indicated by 27% of the respondent IBs. This perhaps
may be due to its relatively lower costs, reduced time to beneft, scalability and
integration, ease of use, and upgrades possibility (IBM, 2020). Infrastructure-
as-a-Service (IaaS), which is considered the most relevant level of cloud service
to fnancial institutions for processing core banking systems and storing critical
data in the cloud is being invested on by 21% of the responding IBs (World Bank,
2019). IaaS allows the users to access cloud service on a pay-as-you-go basis.
Apparently, in response to the new normal of staf working from home due to
COVID-19, 34% of the responding IBs indicate they are also expending on req-
uisite workforce enablement software towards enhancing their teleworking and
remote access capabilities.
In response to the question on what aspects the IBs’ digital transformation
is most costly, 44% indicated it is on providing and investing in online plat-
forms and security system. While 35% stated that investing on digital banking
 Empirical assessment on Digital transformation in Islamic banking 129

Biometric authentication technologies 68%

Blockchain technology/smart contract 18%

Business intelligence, data, and analytics 59%

Business-process-as-a-Service (BPaaS) 16%

Customer engagement software 46%

Infrastructure-as-a-Service (laaS) 23%

Mobile applications 82%

Near Field Communication, QR codes, SMS,
59%
POS etc
Platform-as-a-Service (PaaS) 20%

Security and privacy technologies 60%

Software-as-a-Service (SaaS) 27%

Workforce enablement software 36%

FIGURE 6 Technological advancement being currently expended on as part of IBs’

digital transformation process.

infrastructure is the costliest, 11% indicated that it is the cost of maintaining

existing digital system. Staf training is considered the least costly aspect of dig-
ital transformation as indicated by 11% of the IBs. This distribution also refects
the response of the IBs to the questions relating to the challenges to implement-
ing digitalisation in which legacy infrastructure and lack of requisite human
capital are considered among the top issues.

4.3 Prudential risks faced by IBs in their digitalisation process

Technological adoption has not only brought about new possibilities and enhance-
ment to the operational efciency of IBs but also potential risks. Responses
obtained from the IBs that participated in the survey indicate that risks relating
to cyber security, technology, third-party/outsourcing, and data integrity risks
are on the front burner. The distribution of responses provided by the IBs is
shown in Figure 7.
Cyber-security risk seems to be the main prudential risk facing the IBs in
their digital Islamic operation. This risk is indicated by 76% of the IBs. The swift
changes in technological advancement make the legacy infrastructure of many
IBs highly susceptible to cyber risk. In fact, the CIBAFI Islamic Global Bankers’
Survey 2019 ranked cyber risk as the number one risk facing IBs.
High susceptibility to cyber-security risk may also create reputational risk
for an IBs’ digital operation as highlighted by 41% of the respondents. Given
the implications of cyber-risk occurrence for fnancial stability, the focus of IBs
130 Abideen Adeyemi Adewale and Rifki Ismal

41%
Business risk 32%
27%
39%
Cloud service concentration risk 37%
24%
76%
Cyber-security risk 12%
12%
52%
Data integrity risk 20%
28%
45%
Legal or conduct risk 35%
20%
48%
Money laundering and financing of terrorism risk 21%
31%
41%
Reputational risk 23%
36%
29%
Shari’ah non-compliance risk 25%
45%
27%
Technical debt risk 45%
28%
59%
Technology risk 18%
23%
57%
Third party/outsourcing risk 28%
15%

53%
Vendor lock-in risk 32%
15%

Agree Neutral Disagree

FIGURE 7 Digital transformation risks facing IBs.

should, therefore, transcend cyber-risk prevention. Such focus should also cover
response, recovery and adaptation, given that such risks are difcult to pre-empt
yet evolve and transform swiftly with no trace of perpetrators.
The FSB already notes the fnancial stability implications of such, especially
in the event of a cyber-attack on or an operational failure of cloud services. In a
case where quite a number of IBs rely on a few dominant cloud service suppliers,
this may pose a systemic risk triggered by ‘cloud-concentration’ risk due to oper-
ational centrality of computing services (Harmon, 2019). This risk is also indi-
cated by 39% of the respondent IBs. The efects of such failures on perceptions of
data integrity may also have implications for public confdence in the technology
thus creating reputational risk.
In terms of data security risk, the manifestation depends on the type of
technology deployed. There could be issues arising from dependency on, for
instance, mobile device manufacturers or third-party wallet. The proliferation of
viruses and malwares as well as the danger of lost or stolen mobile devices could
also heighten the risk of unauthorised payments (European Banking Authority,
2018). Reliance on third-party smartphone manufacturers and the pre-installed
 Empirical assessment on Digital transformation in Islamic banking 131

biometric authentication technology in the devices also means fnancial insti-

tutions have no direct control on a technology crucial to their operational ef-
ciency. This exposes them to third-party risk which is indicated by 59% of the
responding IBs. In addition to the fact that unlike password, a fngerprint cannot
be changed if accessed without consent, a potential data security risk may result
from residual attacks due to possibility of collecting fngerprints from various
objects touched by a customer or even fngerprint sensors.
Vendor lock-in risk is indicated by 53% of the responding IBs as having pru-
dential implication arising from digitalisation of their banking operations. This
risk would arise where an IB is dependent on a particular service provider, for
instance, for cloud services, and cannot switch to a diferent vendor without
incurring signifcant costs, facing legal actions or sufering technical incompati-
bilities. This raises concerns for movement of data in and out from the cloud, data
ownership and confdentiality and susceptibility to cyber breaches with implica-
tions for business operations. The intensity of the IBs to this risk would depend
on the extent to which they retain fexibility to switch to other providers as and
when required (Opara-Martins, Sahandi, & Tian, 2016).
Although 59% of the respondent IBs strongly agree that technology risks have
prudential implications for the digitalisation of their banking operations, a lower
percentage, 29%, indicate that technical debt is a concern. The former risk occurs
when either unsuitable or outdated technology is deployed for the daily opera-
tions of the bank such as reconciliation of books of accounts. The latter occurs
where avoidable additional costs would have to be incurred later by adopting and
investing in a cheaper technology now as a short-term fx at the expense of more
expensive, efcient, and efective alternative.
As indicated in Figure 7, almost half (48%) of the respondent IBs indicate they
strongly agree that ML and FT risk might have prudential implication arising
from digitalising their operations. This concern is not peculiar to the IBs given
that perpetrating such crime is driven more by opportunity and convenience
rather than by an institution or transaction follow Islamic banking. Nonetheless,
the proliferation of innovative fnancial products and processes due to fnan-
cial technology should not make IBs more susceptible to ML/FT activities in
such a way that money launderers might use the sophisticated methods employed
by fnancial institutions to launder illicit funds (Mamun, Adewale, Mwis, &
Youssef, 2019).
From a prudential risk perspective, Sharia non-compliance risk could crys-
tallise from the use of mobile wallets, for instance. This could also potentially
impact the risk profle of an IB as indicated by 29%. Such risk could result from
concerns that bother on the non-specifcity of the contracts upon which such
mobile wallets are ofered as well as the modus operandi involved. Are funds
in these wallets based on qarḍ or wadīʻah? Are the promised rewards which are
based on luck and guaranteed in some instances, a form of hibah or returns? Can
this be applicable if the funds placed in the wallets are based on qarḍ? Can the
funds be based on equity-based contracts like muḍārabah and mushārakah given
132 Abideen Adeyemi Adewale and Rifki Ismal

that the deposits are guaranteed? Prior to being used by depositors, are the wallet
funds used for Sharia-compliant purposes by the digital wallet providers? These
and related questions raise the needs for Sharia considerations in digital products
and fnancial apps development in response to perceived ‘Sharia neutrality’ of
technology and fnancial apps (Islamic Bankers Resource Centre, 2019).

5 Challenges and regulatory approaches

5.1 Challenges to digital transformation in IBs

IBs were also asked about factors that impede their digital transformation process.
A list of such factors drawn from various publications was provided against
options indicating the level of agreement or otherwise on a scale of ranging from
‘strongly agree’ to ‘strongly disagree’. Responses obtained as shown in Figure 8
indicate that factors relating to legacy infrastructure, lack of open banking initia-
tives, budgeting constraint and lack of requisite human capital are front-burning.
Issues relating to regulatory uncertainty and lack of top management support are
among the least cited impediments to digital transformation process in IBs.
Based on responses obtained, 74% of the IBs indicated that legacy infrastruc-
ture and technologies impede their response to changing market dynamics and
competition driven by technology. Perhaps, there are concerns for IBs relating
to mitigating operational risks that may crystallise from using legacy technology
infrastructure to cope with the rate and speed of technological transformation
today. There will even be more pressure where the IBs still rely on obsolete
legacy infrastructure, outdated applications, siloed data platforms, overextended
branch network, disparate data sources and rigid internal operations and culture.
Not only would these hinder the IBs’ usage of the huge data at their disposal, but
it also makes them highly susceptible to, for instance, cyber risks.
As shown in Figure 8, 57% of the IBs strongly agree that lack of the requi-
site human capital needed for digitalised banking like data analysts may be an
impediment. Human capital development is a fundamentally important pillar for
innovation to be successful. The digital transformation process requires highly
specialised human capital and domain experts. For instance, as automation of
most banking operation becomes the new norm, a new competency model
would also become pertinent in the human capital strategy of the IBs.
Providers of digital Islamic fnancial services will, therefore, need to retrain
and reskill existing talent even as they make eforts to attract new ones that ft
the imminent digital workforce transformation of the banking workforce. This
process may not be as straight-forward as presented for a number of reasons. For
instance, attracting and recruiting the right talent may involve looking beyond
the fnancial service industry or even beyond a particular jurisdiction. This is
added to the fact that most of these potential talents are likely to be millennials
whose expectations and preferences in terms of remuneration, work fexibility in
 Empirical assessment on Digital transformation in Islamic banking 133

Legacy infrastructure/technologies that impede

72%
quick innovative response to changing markets and 16%
competition 12%

Lack of top management buy-in of the digital 34%

13%
transformation process 53%

41%
Lack of regulatory guidance and framework 32%
28%

54%
Budgeting constraints 20%
26%
Lack of requisite human resources availability 57%
needed to shift from a physical to a more virtual 21%
infrastructure 21%

32%
Regulatory uncertainty around liability for losses 43%
25%

Lack of government digital infrastructure e.g. 40%

13%
national digital identity systems 47%

Stringent regulatory requirements e.g. entity based 40%

33%
rather than activity-based regulation 27%

45%
Competition from start-ups 24%
31%

48%
Competition from Big Techs 29%
23%

57%
Lack of open banking initiatives and architecture 24%
19%

Lack of innovation facilitator initiatives e.g. 39%

24%
sandboxes 37%

Agree Neutral Disagree

FIGURE 8 Challenges to IBs’ digital transformation.

terms of location and time, as well as opportunities for development would suit
competitors such as FinTechs and BigTechs better than the IBs.
Budgeting constraints are also indicated as an impediment to digitalising
Islamic banking operations by 57% of the respondents. The need to replace leg-
acy infrastructures to enhance their competitiveness co and post-COVID-19
will further strengthen the efect of budgeting constraint on implementing distal
transformation. As shown in Figure 8, 70% of the responding IBs spend less
than 50% of their most recent budget on IT, and 45% indicated more than 50%
of their operation is digitalised. This may imply that IBs have hitherto not been
spending much on technology but may have to do so now for so many reasons
earlier stated. However, while these may yield favourable outcome in the future
as IBs leverage on technology, it will put immediate pressure on their capital
expenditure.
134 Abideen Adeyemi Adewale and Rifki Ismal

Lack of open banking initiatives and architecture is indicated by 57%, while

lack of innovation facilitator initiatives such as regulatory sandboxes is indicated
by 39% of the responding IBs. Although quite a number of the jurisdictions
where Islamic banking is operated have provided such requisite infrastructure
and initiatives, there are still challenges. For instance, regulatory sandboxes
still need to thoroughly assess the relevance and beneft of their solutions to the
domestic banking market. Similarly, IBs’ resistance due to infrastructure setback
and lack of technical standards have also impeded implementation of open bank-
ing in some jurisdictions. Such regulatory uncertainty and lack of regulatory
guidance have been indicated by 32% and 34% of the respondent IBs respectively.
Competition from both start-ups and BigTechs has been indicated by 45% and
48% of the respondent IBs respectively as some of the digitalisation challenges
confronting them. The efect of the BigTechs may be discerning especially if
they chose to obtain digital Islamic banking license. FinTechs on the other hand
are envisaged to continue to have an increasing infuence on customers’ experi-
ence and expectations. For now, such infuence may not be severe due to various
factors. These include regulatory barriers to entry, inertia to switch among many
old customers, and the possibility of the incumbents using their fnancial capa-
bility to either replicate or absorb the FinTech frm outright.
Nonetheless, the FinTechs have expanded the scope of their services beyond
digital payments and e-wallets. They now ofer Sharia compliant P2P fnanc-
ing and equity crowd funding which are considered top growth sectors for the
Islamic FinTechs in 2020 (Elipses and Salaam Gateway, 2019). This may exert
pressure on the incumbent IBs’ proftability and ability to weather future busi-
ness cycles (Financial Stability Board, 2019).

5.2 Regulation of Islamic digital banking

Technological advancement also presents new regulatory and supervisory chal-
lenges for the fnancial sector regulators. Most jurisdictions where Islamic bank-
ing is operated have one form of regulation, policy document, rule-book etc. or
the other that guides the application of these various technologies. As stated by
most of the respondent IBs in response to a related question in the survey, most
of these regulations are available on the websites of their respective RSAs.
About two-thirds (77%) of the IBs also responded that there are no specifc
or diferent digital banking regulations for IBs separate from the conventional
banks. This is generally expected given that various forms of technology being
applied are meant to aid delivery of Islamic banking products and services with-
out infringing on the tenets of the applicable Sharia injunctions. It is the extra
emphasis placed on this consideration that is adduced as the reason why the
remaining 23% stated otherwise. IBs were asked to describe the regulatory
approach prevalent in their jurisdiction vis-à-vis digital transformation process
and developments. As shown in Figure 9, in most jurisdictions, there are vari-
ous regulatory approaches that are adopted in this regard. Based on responses
 Empirical assessment on Digital transformation in Islamic banking 135

Existing regulation is unchanged but with clarity

8%
on how it applies to digital banks

Specific regulation or guidelines are issued for

32%
digital banking operation

There are ongoing efforts to amend existing 57%

regulation to include digital banking activities

Digital banking regulation is not presently being

3%
considered

FIGURE 9 Regulatory approaches to digital transformation.

obtained, 8% of the IBs indicate that although existing regulation remains

unchanged, further clarity has been provided on how such regulation applies to
digital banking operation.
RSAs have been generally cautious about ensuring that a favourable dispo-
sition towards technological fnancial innovation does not infringe on fnancial
market integrity and stability. In this regard, 32% of the respondent IBs indicate
that specifc digital banking regulations have been issued in their jurisdiction.
Most respondent IBs, specifcally 53% indicated that there are ongoing eforts
to amend existing regulation in their jurisdiction to cater for the peculiarities of
digital banking operations. The remaining 3% of the respondent IBs indicate that
digital banking regulation is not presently being considered in their jurisdiction.

6 Implication of digitalisation in Islamic banking fnancial

stability
Without prejudice to the numerous benefts that digital banking ofers, it has
resulted in increasing activities of the non-bank fnancial institutions, as well as
increasing cyber-security risks among other operational issues (General Council
for Islamic Banks and Financial Institutions, 2019). Technological adoption has
brought about a new regulatory and supervisory challenge for the fnancial sector
regulators as new risks are introduced – for instance, safeguarding data privacy,
cyber-security, consumer protection, consumer fnancial health, compliance
with anti-money laundering/combating the fnancing of terrorism (AML/CFT)
regulations and so on. All these are some of the manifestations of the fnancial
stability implications of digitalising banking operations.
In terms of fnancial stability implications of digitalisation of the operation
of IBs, 78% of the IBs indicated that positive competition would be height-
ened due to the entrants of disruptors. This would reduce concentration in the
136 Abideen Adeyemi Adewale and Rifki Ismal

Islamic banking industry especially if there are regulatory guidance and requisite
infrastructure that allows new entrants to leverage on technology to unbundle
fnancial services as well as increase contestability.
Perhaps new entrants, in a bid to avoid regulation and compliance costs, would
not opt to become licensed Islamic digital banks, so would not be able to venture
into activities such as accepting deposits (Dubai Islamic Economy Development
Centre, 2018). The fact that the new entrants do not perform liquidity trans-
formation means that as per e-money regulations clients’ funds at their disposal
would have to be placed for instance as deposits in the IBs. This presents a com-
petitive advantage to incumbent IBs due to the opportunity it provides for them
to get stable and cost-efcient funding.
If properly executed, digital transformation holds opportunities for IBs to
boost their revenues (The Malaysian Reserve, 2019). Nonetheless, the new
entrants are envisaged to continue to have an increasing infuence on customers’
experience and expectations. This may exert pressure on the incumbent IBs’
proftability especially in proftable lines like payments thus constraining their
ability to weather future business cycles (Financial Stability Board, 2019). This
view is agreed by 61% of the IB respondents that also state that in a bid to sail
through, the incumbents may resort to increased risk taking to make up for the
shortfall in margins.
In order to curb excessive risk taking at the individual bank level and sys-
temic risks at a macro level, prudential requirements have often been imposed
on incumbents. For instance, to complement the Basel III accords, there are
equivalent IFSB standards on capital adequacy and liquidity requirements for IBs
that have been implemented in numerous jurisdictions. However, by imposing
prudential regulations, the impetus for shadow banking activities may increase,
as has been observed in conventional banking. Shadow banks as fnancial service
disruptors have been said to prosper in areas and activities where compliance
with regulatory requirements has been considered a burden by traditional depos-
it-taking banks (Buchak, Matvos, Piskorski, & Seru, 2018).
Sixty-fve per cent of the respondents supported the view that the regulatory
challenge in balancing the objectives of facilitating innovation while ensuring
fnancial stability inhibits the provision of a clear policy guideline. Moreover, a
lack of, or unequal application of regulation on, for instance, prudential require-
ments may encourage regulatory arbitrage and higher risk taking by new-entrant
disruptors. The inertia that inhibits provision of a clear policy guideline in this
regard could also magnify the threat to fnancial stability. This view is supported
by 88% of the respondent IBs.
The fact that these new entrants help to mobilise a substantial amount of funds,
which they do not retain, may heighten their susceptibility to moral hazards and
adverse selection due to information asymmetry. There are also arguments that
the new entrants in a bid to increase fnancing volume to boost revenue may
result in a lower-quality fnancing assessment process (Vives, 2019). This view is
supported by 58% of the respondents’ IBs.
 Empirical assessment on Digital transformation in Islamic banking 137

In the medium to long term, however, these new entrants, and other non-
bank players such as TechFins, are expected to be the pivot around which the
changing landscape of the fnancial ecosystem including IFSI rotates. A widely
held view is that the future of fnancial services will be shaped by how much con-
trol customers have over the data held about them by fnancial institutions and
how much access third parties have to this data. In this case, Islamic FinTechs are
also expected to accelerate their entry into prominence in the Islamic banking
and fnancial ecosystems.
The gradual shift among fnancial institutions from an on-premises data ser-
vice to a public-cloud-based data service makes subscribing to an external third-
party cloud service provider inevitable. The potential is high for a systemic risk
to be triggered by cloud concentration risk due to the operational centrality of
computing services.

7 Conclusions and recommendations

7.1 Conclusion
Emerging technology is expected to further revolutionise the fnancial sector,
enhance fnancial accessibility, convenience, and efciency. The inevitability of
the digital transformation process as a new normal in the banking industry has
been strengthened by the movement restriction order and physical distancing
instructions as measures to curb the spread of COVID-19. IBs that commenced
their digital transformation process prior to the outbreak of COVID-19 may fnd
it relatively easier than those that would have to react due to the inevitability
of such transformation as a crucial co and post-COVID-19 economic recovery
reality.
The adoption of innovative technologies and business models is a prominent
emerging trend that is fast changing the ecosystem of the IFSI, and IBs are not
immune to these developments. In order to enhance their competitiveness and
contestability in the IFSI via operational efciency and modernisation of their
business model, IBs must leverage on technological innovation. However, this
should be done without infringing on the fundamentals of the Sharia.
Both competitors and competition are changing and the IBs need to respond
accordingly through technology. The rationale for IBs’ digital transformation
drive is informed by a plethora of reasons. This is mainly in response to the dis-
ruption of fnancial services rendering by new-entrant FinTech start-ups as well
as competition from incumbent IBs. This would entail that the IBs leverage on
technology to increase customer value and satisfaction, reduce operational cost,
enhance revenue generation, strengthen core competences, and improve data
security among other considerations.
The COVID-19 outbreak and the consequential movement restrictions and
physical distancing as measures to fatten the curve of its spread have added to
the need for digitalising fnancial services including those ofered by the IIFS.
138 Abideen Adeyemi Adewale and Rifki Ismal

For instance, most of the IBs have also adopted the WFH policy which requires
remote access and strengthening of the security of their technology network.
More than two-thirds of the IBs are at various stages of their digital trans-
formation process. While the specifc status of their implementation varies, it
is promising to know that they have commenced. However, most of the IBs
in this category are also those that expended less than 25% of their most recent
budget on IT-related activities. For the few IBs that have commenced earlier and
have completed implementation either pre or during the COVID-19 pandemic,
they would have an edge in coping with the new normal of digital banking
operations.
Mobile technology/digital wallets and the use of biometric authentication are
the most adopted technologies by the IBs. Plausible reasons could be their use-
fulness especially for fnancial inclusion through payment services and fnancing
especially during COVID-19. Moreover, both technologies can be applied via
smartphones which are quite common among IBs’ customers. These two tech-
nologies in addition to security and privacy technologies are those on which a
larger chunk of IBs’ IT budgets is expended.
APIs are also very common among the IBs due to their data sharing and
analytics possibilities. Cloud computing has also been very much deployed
especially for unbundling of services as well as for data sharing in open bank-
ing applications. The adoption of robo-advisory and blockchain technology for
smart contract are, however, still in their very early stages of adoption. Cyber
security is the main prudential risk facing IBs in their digital transformation
activities. Also notable are technology risk, data integrity risk, third-party out-
sourcing risk and vendor lock-in risk. Although the IBs are faced with issues
of legacy infrastructure, technical debt risk is not a front burner. Also, Sharia-
compliant risk from digital Islamic banking operation is not considered a direct
risk. However, susceptibility to such risk through, for instance, system error is
duly noted.
In most jurisdictions where Islamic banking is practised, there are no spe-
cifc or diferent digital Islamic banking regulations. However, most jurisdictions
have issued one form of regulation, policy document, rule-book etc. or the other
that guides the application of these various technologies. There are also ongo-
ing eforts in most jurisdictions to amend their existing regulations in line with
technological developments. The COVID-19 pandemic and the resulting lock-
down revealed a lot of room for operational and supervisory improvements. For
example, real-time monitoring of IBs is essential when a crisis unfolds rapidly.
Digital tools could help in that respect. Similarly, supervision is to some extent
still paper-based. This can be an issue for supervisors that are currently working
remotely. The crisis has shown the need to set up systems so that future supervi-
sion can be carried out paperless.
Legacy infrastructure that impedes quick innovative response to changing
market needs is the main impediment to IBs’ digital transformation. Budgeting
constraints as well as lack of human capital especially domain specialist may slow
 Empirical assessment on Digital transformation in Islamic banking 139

the pace of digital transformation of Islamic banking. It is important to note that

in most jurisdictions, the government continues to provide requisite supports
and infrastructures like technology hubs, national identity, and APIs which are
crucial for open banking initiatives and architecture.
The digitalisation of the operations of IBs has implications for the fnancial
stability of the IFSI. This is arising from how the incumbents respond to the
digital transformation process and its consequential increased possibility for new
disruptors to enter the market, thus heightening competition. Such response
would also refect on related issues such as cyber security, consumer protection,
consumer fnancial health, compliance with AML/CFT regulations and so on.

7.2 Recommendations
Regulators in jurisdictions where Islamic banking is practised have and are con-
tinuing to roll out requisite policy guidance and framework, as well as promoting
regulatory sandboxes etc. Nonetheless, as events unfold further consideration
needs to be explored on how technological innovation can be pursued with-
out adversely impacting fnancial stability and achieving support for fnancial
inclusion and real-economic growth. It is essential to ensure that technology-led
operations duly comply with Sharia governance requirements to ensure best
practices while protecting consumer rights. An efective Sharia governance sys-
tem for maintaining Sharia compliance is the core of the Islamic banking busi-
ness that diferentiates it from conventional banking regardless of the platform
through which products and services are provided.
As new risks are introduced, safeguarding data privacy, cyber security, con-
sumer protection, consumer fnancial health, compliance with AML/CFT and
so on would require that regulations are up to speed. In order to strengthen reg-
ulatory oversight on fnancial technology, RSAs may consider monitoring the
implications of third-party relationships that exist among various IBs and their
FinTech partners, perhaps to mitigate against step-in risk that may arise outside
of, but connected to, the Islamic banking industry (Vives, 2019).
RSAs need to be cognisant of the potential new risks that digital Islamic
banking poses as they coordinate prudential regulation and competition pol-
icy. Developing a ‘ft-for-purpose’ regulatory and supervisory regime is imper-
ative, notwithstanding the formidable challenge it presents in balancing the
objectives of facilitating innovation while ensuring efective risk manage-
ment, fnancial stability. In this regard, regulators are expected to increase
the frequency of simulation exercises on emerging technology risks and to
strengthen the focus on internal cyber-security activities by requesting data on
cyber threats.
Human capital development is a fundamentally important pillar for innova-
tion to be successful. The digital transformation process requires highly special-
ised human capital and domain experts. Therefore, providers of digital Islamic
fnancial services will need to retrain and reskill existing talent even as they make
140 Abideen Adeyemi Adewale and Rifki Ismal

eforts to attract new ones that ft the imminent digital workforce transformation
of the digital banking workforce.

Note
1 Modifcation of the authors’ working paper titled Financial Stability Implications of
Operational and Regulatory Digital Transformation in Islamic Banking, published
by IFSB.

References
Agur, I., Peria, S. M., & Rochon, C. (2020). Digital Financial Services and the Pandemic:
Opportunities and Risks for Emerging and Developing Economies. International Monetary
Fund. Retrieved from https://www.imf.org/~/media/Files/Publications/covid19-
special-notes/en-special-series-on-covid-19-digital-f inancial-services-and-the-
pandemic.ashx
Alam, N., Gupta, L., & Zameni, A. (2019). Fintech and Islamic Finance. Cham: Palgrave
Macmillan. https://doi.org/10.1007/978-3-030-24666-2
Buchak, G., Matvos, G., Piskorski, T., & Seru, A. (2018). Fintech, Regulatory Arbitrage,
and the Rise of Shadow Banks. Journal of Financial Economics, 130(3), 17–39.
Dubai Islamic Economy Development Centre. (2018). Islamic Fintech Report 2018. Dubai:
Dubai Islamic Economy Development Centre.
Dubai Islamic Economy Development Centre. (2019). State of the Global Islamic Economy
Report 2018/2019. Dubai: Dubai Islamic Economy Development Centre. Retrieved from
https://islamicbankers.f iles.wordpress.com/2019/02/thomson-reuters-difc-state-
of-the-islamic-economy-report-2018.pdf
Elipses and Salaam Gateway. (2019). The Global Islamic Fintech Report 2019. London:
Elipses and Salaam Gateway. Retrieved from https://ceif.iba.edu.pk/pdf/
IslamicFinTechReport19.pdf
European Banking Authority. (2018). EBA Report on the Prudential Risks and Opportunities
Arising for Institutions from Fintech. London: European Banking Authority.
Financial Stability Board. (2019). FinTech and Market Structure in Financial Services: Market
Developments and Potential Financial Stability Implications. Basel: Financial Stability
Board. Retrieved from https://www.fsb.org/wp-content/uploads/P140219.pdf
General Council for Islamic Banks and Financial Institutions. (2019). Global Islamic
Bankers’ Survey 2019. Bahrain: General Council for Islamic Banks and Financial
Institutions. Retrieved from https://cibaf.org/images/FI153-CI1809-GIBS%20
2019%20Report_English%20Summary_for%20printing.pdf
Harmon, R. L. (2019). Cloud Concentration Risk: Will This be our Next Systematic Risk
Event? Atlanta, GA: Cloudera
IBM. (2020, September 18). IBM Blog. Retrieved from IBM Blog: https://www.ibm.
com/cloud/blog/top-5-advantages-of-software-as-a-service
i-Fikr. (2019, January 2). i-Fikr. Retrieved from i-Fikr ISRA: https://ifkr.isra.my/news/
post/blockchain-is-making-its-way-into-islamic-fnance
Islamic Bankers Resource Centre. (2019, January 15). Islamic Bankers Resource Centre.
Retrieved from E-Wallets: Did You Forget Us Again?: https://islamicbankers.
me/2019/01/15/e-wallets-did-you-forget-us-again/
 Empirical assessment on Digital transformation in Islamic banking 141

Mamun, M. S., Adewale, A. A., Mwis, G. A., & Youssef, N. (2019). Joint IFSB–AMF
Working Paper on Money Laundering and Financing of Terrorism (ML/FT) Risks in Islamic
Banking. Kuala Lumpur: IFSB–AMF. Retrieved from https://www.ifsb.org/down-
load.php?id=5509&lang=English&pg=/index.php
Opara-Martins, J., Sahandi, R., & Tian, F. (2016). Critical Analysis of Vendor Lock-in
and Its Impact on Cloud Computing Migration: A Business Perspective. Journal of
Cloud Computing: Advances, Systems and Applications, 5(4), 1–18.
PWC. (2019). Virtual Banking: Malaysian Customers Take Charge. Kuala Lumpur: PWC.
Retrieved from https://www.pwc.com/my/en/assets/workshops/2019/virtual-bank-
ing-malaysian-customers-take-charge-report.pdf
The Malaysian Reserve. (2019, 8 July). Business. Retrieved from Digitising to Drive
Growth of Islamic Banks: https://themalaysianreserve.com/2019/07/08/digitising-
to-drive-growth-of-islamic-banks/
Thomson Reuters and DinarStandard. (2019). State of the Global Islamic Economy Report
2018/19. Dubai: Thomson Reuters and DinarStandard. Retrieved from https://
islamicbankers.fles.wordpress.com/2019/02/thomson-reuters-difc-state-of-the-is-
lamic-economy-report-2018.pdf
Vives, X. (2019). Digital Disruption in Banking. Barcelona: Annual Review Connects.
https://doi.org/10.1146/annurev-fnancial-100719-
Wanbaba. (2019, May 28). Wanbaba Blog. Retrieved from Wanbaba Blog: https://wanba-
bablog.com/2019/05/28/bahrain-islamic-bank-unveils-its-frst-virtual-employee/
World Bank. (2019). Prudential Regulatory and Supervisory Practices for Fintech: Payments,
Credit and Deposits. Washington: World Bank. Retrieved from https://documents1.
worldbank.org/curated/en/954851578602363164/pdf/Prudential-Regulatory-and-
Supervisory-Practices-for-Fintech-Payments-Credit-and-Deposits.pdf
Zaina, N. R., Alib, E. R., Adewale, A., & Hamizah, A. (2019). Smart Contract in
Blockchain: An Exploration of Legal Framework in Malaysia. Intellectual Discourse,
27(2), 595–618.
7
FINTECH IN ISLAMIC BANKING IN
BANGLADESH
Opportunities and threats

Md. Joynal Abedin, Syed Mahbubur Rahman and

Riyashad Ahmed

1 Introduction
Fintech is about using a wide array of technologies to ensure the smooth delivery
of fnancial services (Arner et al., 2018). It is considered as one of the most prom-
ising sectors in view of the solutions it extends to the fnancial systems (Chishti
and Barberis, 2016). While Fintech in the traditional interest-based banking
application has attracted substantial number of researchers across the world,
specialized mode of fnancing like Shariah-based Islamic banking has yet to draw
attention of the researchers, particularly from the developing South, targeting
Fintech. A substantiated recent review revealed a negligible concentration of
Fintech’s association with Islamic banking (Tarique and Ahmed, 2021), which
urges for further inquiry about the implementation of Fintech from Islamic
banking perspective.
Fintech has been growing. It has been argued that the use of Fintech is likely
to assist Islamic banks in serving their customers, eventually resulting in higher
market share (Todorof, 2018). For instance, Indonesians are more fascinated to
invest in Fintech peer-to-peer lending (Dewi, 2018); and the contribution of
Fintech was £7 billion with around 60,000 employments in Britain’s economy
in 2017 (Williams-Grut, 2017). The most active Fintech countries globally are
the USA, the UK, and Israel, while Singapore, Australia, and China are from
the other side (Findexable, 2021). The global Fintech contribution in 2020 was
$105 billion, in which the contribution of the USA was $76 billion, Europe,
Middle East, and Africa (EMEA) region’s contribution was $14.4 billion, and the
Asia-Pacifc region’s contribution was $11.6 billion (KPMG, 2020). In contrast,
the market size of Islamic Fintech was $49 billion in 2020, and it is expected to
grow at 21% compound annual growth rate to $128 billion by 2025 (Ahmed
et al., 2021).

DOI: 10.4324/9781003262169-10
 Fintech in Islamic banking in Bangladesh 143

Considering the unavailability of market information related to Fintech,

it may be argued that the presence of Fintech particularly in Islamic banking
is substantially low. The use of technology is growing rapidly, mainly in the
banking industry in Bangladesh. Although Fintech is still in its primary stage,
the Islami Bank Bangladesh Limited, the frst of its kind, has already announced
that it will use Islamic Fintech in all its operations in the near future, which will
serve as a new milestone for the growth of the Islamic fnance in Bangladesh.
Al Arafah Islami Bank recently introduced its mobile application “Islamic
Wallet” but has not yet been able to reach many customers. Some other banks
have recently restructured from conventional banking to full-fedged Islamic
banking, for instance, National Bank Limited. It has been observed that only
a limited number of Islamic banks are more concerned with the application of
Fintech. In this backdrop, this research aims to investigate the opportunities
and threats Islamic banks in Bangladesh may face in embracing Fintech in their
operations.
There is a dearth of literature about Fintech in Islamic banking system in
Bangladesh. Besides, previous and very recent literature about Fintech in
Bangladesh has conducted some quantitative analyses based on survey conducted
among a specifc group of users or consumers, for instance, mobile phone users
(Ayoungman et al., 2021). Few of the studies are based on surveys of executives
from the fnancial sectors (Islam et al., 2021a, 2021b). In contrast, this research
has taken a qualitative stand keeping both regulator and regulatee in the sample
of respondents. This chapter contributed to the existing literature in two ways.
First, it combines the responses of both regulator and regulatees, which has not
been observed in previous studies. Second, instead of focusing on a particular
tool, like mobile applications or mobile app-based limited fnancial transactions,
this research discusses Fintech in a wider context.

2 Literature review
Islamic fnance is based on the concepts of Islamic Shariah and public interest.
Compared with the traditional fnancial system, Islamic fnance must comply
with the principles of sharia law that promote competition and sustainability.
It must also comply with sharia law to avoid prohibited issues such as interest,
gambling, speculation, and ambiguity. In Islamic banks, interest on traditional
loans is altered into fnancial income through risk as well as proft and loss shar-
ing between the bank and its trading partners. Start-up business and business
with innovative ideas require factors of production to climb the ladder, and one
of the key rudimentary factors is capital (Gompers and Lerner, 2004). Najaf et al.
(2021) demonstrated that the appropriate nexus between banking fnancial insti-
tutions and Fintech can be benefcial and sustainable when they work together to
mitigate excessive underlying cybersecurity risks.
Darussalam et al. (2019) investigated consumer perception about the impact of
Fintech on Islamic banking system of Indonesia, which is poor in infrastructure.
144 Md. Joynal Abedin et al.

However, it is anticipated that Fintech would facilitate the fnancial inclu-

sion of the underprivileged Muslims around the world (Tarique and Ahmed,
2021; Todorof, 2018). Besides, in the Fintech era, digitalization ofers vari-
ous accessibilities in conducting fnancial transactions efciently (Tarique and
Ahmed, 2021).
According to Murinde et al. (2022), banking is changing because of the various
fnancial crunches and Fintech is playing a signifcant role in this transformation
of banking fnancial institutions. They also revealed that Fintech lenders are
unlikely to replace banks, perhaps banks are uninterruptedly developing their
own Fintech platforms or collaborating with Fintech startups. Fintechs have
extensively increased competitive pressure through uninterrupted communica-
tion with consumers. The battle for “customer ownership” will be ferce, as in
most industries the links in the value chain closest to the customer generate the
highest margins. (Petralia, 2019). The current regulatory dilemma is to create a
balance between maximizing the benefts of Fintech innovation and protecting
the fnancial system and clients from the possible rudimentary uncertainties that
these revolutions convey (Appaya and Gradstein, 2020).
Fintech innovations are causing economically signifcant changes in the
production of fnancial services with implications for industrial fnance structure.
Improvements in connectivity and data processing can help improve efciency
and competition. In many cases, fnancial services have experienced an unbun-
dling of diferent products and services. At the same time, the fnancial frictions
and forces that drove the need for fnancial intermediaries in the frst place have
increased again (Feyen et al. 2021).
Recent research about Islamic banking in Bangladesh has concentrated on the
evaluation and assessment of fnancial performance (Akter et al., 2021), compar-
ing performance with the conventional banks (Ullah et al., 2021), risk disclo-
sure in comparison to conventional banks (Nahar et al., 2021), corporate social
responsibility (Bhuiyan et al., 2022; Islam et al., 2021a, 2021b), and roles and
responsibilities of the Shariah Board (Alam et al., 2021; Islam et al., 2021a, 2021b).
Many operations and impacts of both conventional and Islamic banking systems
have attracted numerous researchers across the globe, Fintech, particularly in
Islamic banking, focusing on Bangladesh is an underexplored area of research.
However, recent studies about Fintech in Bangladesh have elaborated the role
of Fintech during COVID (Ahmed et al., 2022), factors impacting the adoption
of Fintech in fnance and investment companies (Islam et al., 2021a, 2021b),
users’ perspective in adopting Fintech (Ayoungman et al., 2021; Chowdhury and
Hussain, 2022; Hasan, 2021), and problems and opportunities of Fintech (Taher
and Tsuji, 2022). Among the studies, a wider discussion about situation analysis
and opportunities is prevalent.
Rahman et al. (2021), based on quantitative analysis, have identifed that
Fintech has been growing with a signifcant opportunity for further growth
in Bangladesh local market and has the potential to impact the fnancial sector.
However, the study also identifed some barriers toward the growth of Fintech.
 Fintech in Islamic banking in Bangladesh 145

The authors have also found that website-based growth is more likely in future
compared to that with mobile application. Blockchain has been identifed as
the most popular emerging technology followed by biometric authentication
and artifcial intelligence. Among the sectors, banking is more likely to enjoy
automation, followed by securities and among the banking activities, consumer
banking (Rahman et al., 2021). At the same time, Islam et al. (2021a, 2021b)
have also found the factors of Fintech adoption in Bangladesh market, which
are ease of convenient task accomplishment, knowledge about how to operate,
frequency of use, and adaptability. Accordingly, Chowdhury and Hussain (2022)
have suggested that government and Fintech service providers should initiate
knowledge and awareness-raising programs for low-income and less-education
customer segments for higher adoption of Fintech.
Ayoungman et al. (2021) surveyed among mobile users in Bangladesh and
come to conclusion that perceived trust, usefulness, compatibility, cost efciency,
risk, and attitude impacts the use of Fintech among consumers. Ahmed et al.
(2022) added another dimension on Fintech research with respect to Bangladesh,
the gender issue. The authors investigated the Fintech situation during COVID
in three diferent communities. The study found gap between digitally
disconnected communities, which is rational, and suggested some measures for
inclusive Fintech implications in the Bangladesh market.

3 The Bangladesh context

Bangladesh celebrated the 50th anniversary of its independence in the year 2021.
After the birth in 1971, Henry Kissinger, the then US national security advisor,
derisively afrmed the country as a “basket case.” Despite the awful beliefs and
several natural disasters, Bangladesh has in fact made a huge evolution in decreas-
ing poverty and in stimulating economic growth. The country’s economy raised
by an average of 6.9% from 2011 to 2019 and in the face of COVID-19 pan-
demic grew by an approximate 5.2% in the year 2020. The country secured
lower middle-income grade in 2015 and congregated the United Nations enti-
tlement principles to proceed from the least developed country position in March
2018 with validation to be operative in 2026. Bangladesh has made great strides
in economic growth, with its gross domestic product (GDP) increasing from
$5.7 billion in 1972 to $329.12 billion in 2020 (World Bank national accounts
data). International Monetary Fund, in its World Economic Outlook, April
2021 has ranked Bangladesh the 41st largest economy in the world in terms of
GDP (nominal) and ranked 31st in terms of GDP (PPP) based on the data of
2020. Readymade garment industry plays a vital role in both export volume
and employment. In 2020, remittances sent by Bangladeshi expatriates totaled
$21.75 billion, a rise of 18.40% from the year 2019, which also forms a strong
pillar of the country’s economy (KNOMAD, 2021). At the end of June 2021,
the foreign exchange reserves stood at $46.39 billion. Bangladesh is among the
top 20 foreign direct investment (FDI) recipients (UNCTAD, 2017), a record
146 Md. Joynal Abedin et al.

$2.65 billion of FDI infow was observed in 2019. The real per capita income
stands at $1,968.79 in 2020.
To survive in the era of globalization, a nation needs to focus on information
technology (IT). Without the development of IT, it is almost impossible to
keep up with the pace of today’s world. Digital Bangladesh, although a polit-
ical motivation, is the frst initiative in building a science-based country.
Digitization of public services is the fundamental goal of digital Bangladesh initi-
ative. Prominent digital services employed and currently at hand are e-banking,
e-book, e-commerce, e-education, e-fling, e-health service, e-mutation, e-paper
e-voting, online registration, online income tax return, online public exam
result, and transportation tickets. An e-book platform was launched to spread
the light of education. To strengthen the IT sector, the country’s frst high-tech
park was built on an area of 202 acres in Gazipur. Internet services are becoming
more accessible today with the addition of submarine cables. Currently, more
than 101.20 million people are using internet (Digital Bangladesh, Vision 2021).
Union digital center has been set up in each union, the smallest rural admin-
istrative units in Bangladesh, to ensure online government services. During
COVID-19 pandemic, Bangladesh government has distributed Bangladesh taka
(BDT) 2,500 each to fve million helpless families through mobile banking.
More than one million readymade garments workers have been receiving their
wages through mobile banking. There has been a revolution in banking services,
and now people can conduct their banking services online. Mobile banking like
bKash, Nagad, and Rocket has made people’s life easy. This has prevented people
from exposing themselves to contamination from the deadly coronavirus. The
growth in internet access has contributed to a signifcant increase in the number
of mobile phone subscribers. Currently, 171,854 million people are using mobile
phones in the country (Bangladesh Telecommunication Regulatory Commission
(BTRC) report end of January 2021). The growth of transactions of e-commerce
is much higher than before, especially during COVID-19.
The position of Islamic banks in Bangladesh is stronger than before, because
one third of all banking activities are conducted through Islamic banks, which
accounts for 25.04% of total deposits, circulates 24.93% of total investments, and
holds 27.20% of total remittances (IFN Annual Guide-2021). Despite COVID-
19 pandemic, Islami Bank Bangladesh Limited recorded a milestone of $11.54
billion in deposits during the year 2020, for the frst time in the history of com-
mercial banks in Bangladesh (IFN, 2021). By the end of December 2020, eight
full-fedged Islamic banks operated with 1,311 branches. In addition, 19 Islamic
banking branches of nine conventional banks and 198 Islamic banking windows
of 14 conventional banks are also serving Islamic fnancial services. The number
of Islamic banking branches including Islamic branches/windows of conven-
tional banks reached at 1,528 at the end of December 2020 which was 1,380
in 2019. Total employment in the Islamic banking sector stood at 38,784 as of
December 2020 which was 35,906 in 2019 (Bangladesh Bank, 2020). At the
end of Decembe 2020, total deposits of Islamic banking reached BDT 3,269
 Fintech in Islamic banking in Bangladesh 147

billion, which increased by 16.66% and total investment stood at BDT 2,941
billion, which went up by 8.09% compared to December 2019. Surplus liquidity
of Islamic banking stood at BDT 293 billion in December 2020. Total remit-
tances mobilized through Islamic banking stood at BDT 214 billion during
October–December 2020. Islamic banks have accounted for 40.51% share of
remittances mobilized by the entire banking industry during the last quarter of
2020 (Bangladesh Bank, 2020).

4 Research method

4.1 Research design and respondents

As an underexplored area of research, particularly in the context of Bangladesh,
this research is drawn on a qualitative approach including in-depth interviews
of the key informants from the Islamic banking sector and Bangladesh Bank,
the central bank. Qualitative approach has been implemented for identifying
Fintech’s opportunity for instance by Darussalam et al. (2019). Trotter (2012)
suggested a range of 15–25 informants for survey; hence, this research is drawn
on 22 interviews of professionals working in the banking sector including the
regulator and the regulatee. The respondents were selected using snowball sam-
pling, since specialized knowledge about Fintech was required. Table 1 provides
the profle of the respondents.
Respondents from the Bangladesh Bank are engaged in various capacities in
diferent departments. Few of them have PhD in economics or related felds. One
of them was a PhD candidate during the interview. One former Governor of
Bangladesh Bank was also interviewed. It is to note that, although the Governor
has retired, for this study, we considered the Governor as a respondent from the
regulator side. The employees from various Islamic banks were found to have a
postgraduate degree with more than six years of experience in various depart-
ments and branches.
Due to the COVID situation, interviews were conducted online. Most of the
interviewees declined to let the interviewer record the session, while very few
agreed for a recorded session. Sufcient notes were taken during interviewees.
The duration of the interviews ranges from around 40 minutes to more than 60
minutes. Since the information generation saturated during the 19th interview,
three more interviews were conducted to assess the quality of information.

TABLE 1 Profle of the respondents

Status Mid-level Top management Total

Regulator 3 4 7
Regulatee 12 3 15
Total 15 7 22
148 Md. Joynal Abedin et al.

4.2 Analysis
Thematic content analysis was implemented to evaluate the data. After the
interviewees, the research team carefully coded the information from the notes
taken during the interview. Data were read and systematically analyzed by the
investigators to identify the themes related to the research objectives (Creswell
and Creswell, 2017). The responses have been analyzed in terms of awareness
about Fintech, expertise and ability to promote Fintech, pressure from the cen-
tral bank and market, opportunities, and challenges.

5 Results and discussions

5.1 Awareness about Fintech

Respondents were found aware of the Fintech services Islamic banking sector
provides, while one respondent with research background raised concern about
the vague defnition of Fintech. The respondent explained,

Fintech does not have a universally accepted defnition yet, making it

difcult to explain the level of understanding.
(Translated from Bengali)

The awareness about overall Fintech, however, was confned to mobile banking
services provided by many banking and non-banking (non)fnancial institutions.
Among them, commonly uttered names were Rocket, bKash, M-cash, and Upay
which allow consumers to access various banking services in limited form 24×7.
Internet banking and SMS banking were also mentioned, along with the ATMs
instant cash deposit services. Informed about Fintech, respondents also mentioned
the necessity of adopting the application of artifcial intelligence, cloud comput-
ing, crowdfunding for funding a project or venture, blockchain, and robo-advice
in their services. A handful number of respondents answered to operate technol-
ogies such as Real-Time Gross Settlement, Bangladesh Electronic Funds Transfer
Network, Electronic Funds Transfer, and the Society for Worldwide Interbank
Financial Telecommunication to make the banking experience prompt and
customer-friendly. A few banks provide POS services, Bangladesh Automated
Clearing House services, cash recycling machines, QR code transactions, Core
banking software, and automated batch processing software to make the daily
life of a customer easier. Coming to the technologies yet to be adopted, a more
signifcant number of respondents shared that the specialized Islamic banking
software in service is not adequate to fulfl a variety of customer demand. It
was sensed from discussions that the Shariah-based banks were lagging behind
compared to the conventional banks in terms of availability and application of
Fintech in day-to-day operation.
The fnding of this research is well-aligned with the previous studies
conducted by Islam et al. (2021a, 2021b) and Chowdhury and Hussain (2022),
 Fintech in Islamic banking in Bangladesh 149

in which the authors identifed lack of awareness among mass people and hence
suggested Fintech awareness training programs. Ahmed et al. (2022) also found
a knowledge gap between digitally connected and not-connected communities.
Connectivity may also be a reason for low awareness.

5.2 Capability of Islamic banks in bringing and promoting Fintech

This study was done to fgure out the organization’s ability to bring or promote
Fintech to the customers. It was found that a considerable portion of the existing
staf are unaware of Fintech innovations in the global market. This phenomenon
was more experienced with the senior employees, while comparatively younger
staf are more aware of the latest technologies available elsewhere. Since senior
managers are less informed about the latest technologies, it remains a barrier in
bringing innovative tools in the service or promoting it to the customers. The
lack in technical expertise has also been identifed by the respondents in promot-
ing new Fintech to local market. One respondent explained,

The employees who have been working in remote or rural branches for
substantially longer time, they are less aware of latest technologies, while
employees in branches located in big cities or head ofce are more informed.
(Translated from Bengali)

When such employees are promoted to higher positions and posted at head ofce
or given responsibilities for any specifc units, they remain less capable to plan
or suggest for innovations including launching new Fintech. To overcome this
limitation, continual training and development has been suggested to make
them understand the technology. Although Islamic banks in Bangladesh enjoy
a comparable IT infrastructure as installed in the conventional banks, in terms
of availability of services based on technology and individual skill and expertise,
Islamic banks are little behind.
In line with our study, Darussalam et al. (2019) have also observed poor
infrastructure in Indonesian context; however, it is claimed that Fintech has the
potential to improve Islamic banking services. Besides, digital connectivity as
suggested by Ahmed et al. (2022) has also been a factor for the promotion of
Fintech in Islamic banks in Bangladesh.

5.3 External pressure in innovating and launching Fintech

in Islamic banks
This study was done to recognize the pressures from market and the central
bank in developing tools using Fintech. The majority of the respondents disa-
greed with having pressure from the central bank in developing Fintech tools.
Instead, they agreed to get full support from the central bank in adopting the
technologies. However, Islamic banks experience market pressure from the
150 Md. Joynal Abedin et al.

informed customers. A substantial part of the respondents refers to having inten-

sive pressure from the customers’ side for adapting continuous change in the
services. Though the market leaders have already started artifcial intelligence,
blockchain, and cloud computing to provide efcient fnancial services, the cus-
tomers are asking for faster innovation. They are asking for full-fedged mobile
banking and more web-based services and demanding to outnumber the ATMs.
It provides massive pressure to the banks that the customer may leave if they
fail. In several instances, respondents mentioned about intense competition in
adapting the innovative tools because every player in this sector is stepping into
innovation and becoming more focused on serving the customers. In that case,
if any of the providers adopt one, the others face immense pressure from their
customers to adapt the service right away, and if the institution fails to do so,
it may be dropped from the race instantly. This happens for the big cities only.
Customers of the urban branches are better informed about Fintech, and they
raise the issues with the executives working in urban branches. Besides, cus-
tomers compare other banks, including both conventional and Islamic, with the
host bank about newer technologies available. Hence, the pressure in innovating
Fintech come more from the customer and competitors than the central bank.
The central bank encourages the banks to implement Fintech and supports them
full-fedged to this journey. Some discrete issues like real-time payment settle-
ment have been identifed by few. Therefore, this research has added one more
dimension as identifed by Ayoungman et al. (2021) which includes trust, useful-
ness, compatibility, cost efciency, risk, and attitude, for the adoption of Fintech.

5.4 Fintech opportunities for Islamic banks in Bangladesh

Most of the respondents suggested for acquisition of more young employees and
young customers. As the world evolves toward technology, the young generation
may fnd it very handy and show their interest in this. It could help Islamic banks
to provide services more smoothly than the previously applied one, which can
eventually make their work more efective, saving time, and at the same time
it can lower the costs as well. The study found that the use of Fintech will help
Islamic banks to provide better service and thus increase market share. Adapting
technology can drastically minimize operational costs as it will lower the num-
ber of employees. Thereby, by cutting down the costs and time, banks can max-
imize the proft signifcantly. All respondents agreed that many non-resident
Bangladeshi customers would be acquired if Fintech was adapted to the banking
system. The fnding of this research also supports the arguments made by Taher
and Tsuji (2022) about the opportunities of Fintech.

5.5 Challenges for innovating and implementing Fintech

in Islamic banks
The majority of the respondents mentioned about less workforce with sound
knowledge as the primary challenge. A small number of people refer to security
 Fintech in Islamic banking in Bangladesh 151

issues as there is always a cyber-security risk as it takes place now and then.
Without having competency about this can lead them to a massive loss. In line
with our study, despite the concern about cybercrime, Tarique and Ahmed (2021)
have predicted newer wings of opportunities through the use of Fintech. In our
study, few of the responses raised not having any specifc guidelines toward this
from the Islamic banking to adapt the technology. A handful of people bring up
the issue of whether it will be sustainable or not for the customers or not having
any prior experience, and software efcacy is one of the fundamental reasons
behind it. In a few instances, it is raised that it requires a handsome amount of
budget to achieve this change, and even after implementing it, it requires a vast
amount of cost to train and develop the human resources. Ultimately, the top
management is found to be not interested about this, and the reason behind this
might be the insufciency in knowledge about the change as they are used to the
core banking system or the fear of losing their job in case the adjustment fails.
Respondents also stated to include two or more IT personnel in decision-making
team. It will help and guide the top management to implement appropriate tech-
nology in their organization and hence maximize the proft.

6 Conclusion
Artifcial intelligence, Robo services, Blockchain, and other latest fnancial
technologies have gradually found some space in the Islamic banking industry,
though it is not up to the mark in Bangladesh. With ever-changing technology
and pace of globalization, Islamic banks around the world and particularly in
Bangladesh have to focus on Fintech to ensure sustainable business. This study
investigated the current status of Fintech in Islamic banks in Bangladesh as well
as the opportunities and threats. This research was drawn on in-depth interviews
of employees with adequate experiences in IT working in Bangladesh. The study
also found that Fintech has potential infuences on the brighter future of Islamic
banking in Bangladesh. Through our interactive conversations with bankers,
we also found that Fintech can minimize operation costs, target more young
customers, compete with international banks, and eliminate unnecessary inter-
mediaries from its operations in Islamic banking sector in Bangladesh. Apart from
these fndings our study also found some challenges and threats for implementing
Fintech in Islamic banking industry due to insufcient budgets, skilled work-
force, and appropriate IT people in decision-making. There are massive oppor-
tunities for researchers for further studies in implementing Fintech in Islamic
banking sector, especially in the feld of AI, Blockchain, and Cloud Computing.

References
Ahmed T., Basit, A. H., Shikoh, R. (2021). Global Fintech Report 2021. New York, Dubai,
DinarStandard.
Ahmed, N., Rony, R. J., Khan, S. S., Ahmed, M. D., Sinha, A., Saha, A., … & Sarcar,
S. (2022). Resilience during COVID Pandemic: Role of Fintech in the Perspective of
Bangladesh. http://doi.org/10.2139/ssrn.4009497
152 Md. Joynal Abedin et al.

Akter, S., Rahman, M. M., Subat, A., & Rahman, M. R. (2021). Assessing the Performance
of Selected Islamic Banks: Evidence from Bangladesh. International Business Education
Journal, 14(2), 101–123.
Alam, M. K., Ab Rahman, S., Tabash, M. I., Thakur, O. A., & Hosen, S. (2021). Shariah
Supervisory Boards of Islamic Banks in Bangladesh: Expected Duties and Performed
Roles and Functions. Journal of Islamic Accounting and Business Research, 12(2), 258–275.
Appaya, M. S., & Gradstein, H. L. (2020). How Regulators Respond to Fintech:
Evaluating the Diferent Approaches–Sandboxes and Beyond. In FinTech Note (No. 4).
Washington, DC, The World Bank.
Arner, D. W., Barberis, J., & Buckley, R. P. (2018). RegTech: Building a Better Financial
System. In Handbook of Blockchain, Digital Finance, and Inclusion (Vol. 1, pp. 359–373).
New York, Academic Press.
Ayoungman, F. Z., Chowdhury, N. H., Hussain, N., & Tanchangya, P. (2021). User
Attitude and Intentions Towards FinTech in Bangladesh. International Journal of Asian
Business and Information Management (IJABIM), 12(3), 1–19.
Banglaesh Bank. (2020). Development of Islamic Banking in Bangladesh, Islamic
Banking Cell. Dhaka.
Bhuiyan, M. A. H., Darda, M. A., & Hossain, M. B. (2022). Corporate Social
Responsibility (CSR) Practices in Islamic Banks of Bangladesh. Social Responsibility
Journal, 18(5), 968–983.
Chishti, S., & Barberis, J. (2016). The Fintech Book: The Financial Technology Handbook for
Investors, Entrepreneurs and Visionaries. West Sussex, John Wiley & Sons.
Chowdhury, N. H., & Hussain, N. (2022). Using Technology Acceptance Model for
Acceptance of FinTech in Bangladesh. International Journal of Internet Technology and
Secured Transactions, 12(3), 250–264.
Creswell, J. W., & Creswell, J. D. (2017). Research Design: Qualitative, Quantitative, and
Mixed Methods Approaches. Thousand Oaks, CA, Sage Publications.
Darussalam, A. Z., Tutuko, B., Dahlan, A., Hudaifah, A., & Tajang, A. D. (2019). Islamic
Financial Technology towards the Advancement of Islamic Banking in Indonesia.
Nisbah: Jurnal Perbankan Syariah, 4(2), 171–181.
Dewi, T. R. (2018). The Paradoxical Case Against Interest Rate Caps for Microfnance—
And: How Fintech and RegTech Resolve The Dilemma. University of Luxembourg
Law Research Paper Series 2018-003, Luxembourg.
Feyen, E., Frost, J., Gambacorta, L., Natarajan, H., & Saal, M. (2021). Fintech and the
Digital Transformation of Financial Services: Implications for Market Structure and
Public Policy. In BIS Papers. No 117.
Findexable. (2021). Global Fintech Index 2021. London, Findexable.
Gompers, P. A., & Lerner, J. (2004). The Venture Capital Cycle. Cambridge: MIT Press.
Hasan, R. (2021). Factors Afecting Adoption of Fintech in Bangladesh. International
Journal of Science and Business, 5(9), 156–164.
Islam, K. M., Sadekin, M. S., Rahman, M., Chowdhury, M., & Haque, A. (2021a).
The Impact of Shariah Supervisory Board and Shariah Audit Committee on CSR
Adoption at Islamic Banks. Journal of Asian Finance, Economics and Business ( JAFEB),
8(3), 479–485.
Islam, N., Mubassira, Q. N., Huda, R. B., & Fuad, M. A. (2021b). Adoption of FinTech by
Financial and Investment Companies of Bangladesh. In 16th South Asian Management
Forum 2021, 16–18 December, Dhaka, Bangladesh.
KNOMAD. (2021). Regional trends in Migration and Remittance Flows. Migration
and Development Brief 34, https://www.knomad.org/publication/migration-and-
development-brief-34
 Fintech in Islamic banking in Bangladesh 153

KPMG. (2020). Pulse of Fintech H2’20, KPMG International, https://home.kpmg/xx/en/

home/insights/2021/02/pulse-of-fntech-h2-20-global.html
Murinde, V., Rizopoulos, E., & Zachariadis, M. (2022). The Impact of the FinTech
Revolution on the Future of Banking: Opportunities and Risks. International Review
of Financial Analysis, 81, 102103.
Nahar, S., Azim, M. I., Islam, M. N., & Bepari, M. K. (2021). Corporate Risk Disclosure:
A Conventional and Islamic Bank Perspective. Accountancy Business and the Public
Interest, 184–213.
Najaf, K., Mostafz, M. I., & Najaf, R. (2021). Fintech Firms and Banks Sustainability:
Why Cybersecurity Risk Matters? International Journal of Financial Engineering, 8(02),
2150019. https://doi.org/10.1142/S2424786321500195
Petralia, K., Philippon, T., Rice, T., & Veron, N. (2019). Banking Disrupted? Financial
Intermediation in an Era of Transformational Technology. Geneva Reports on the World
Economy, 22.
Rahman, B., Ahmed, O., & Shakil, S. (2021). Fintech in Bangladesh: Ecosystem,
Opportunities and Challenges. International Journal of Business and Technopreneurship,
11, 73–90.
Taher, S. A., & Tsuji, M. (2022). An Overview of FinTech in Bangladesh: Problems
and Prospects. In: A. S. Al-Mudimigh, et al. (Eds.), FinTech Development for Financial
Inclusiveness, 82–95. Hershey, PA, IGI Global.
Tarique K. M., & Ahmed M. U. (2021). The Direction of Future Research on i-FinTech.
In: M. M. Billah (Eds.), Islamic FinTech. Cham: Palgrave Macmillan. https://doi.
org/10.1007/978-3-030-45827-0_24
Todorof, M. (2018, August). Shariah-Compliant FinTech in the Banking Industry. In
ERA Forum (Vol. 19, No. 1, pp. 1–17). Berlin, Heidelberg: Springer.
Trotter, R. T. II. (2012) Qualitative Research Sample Design and Sample Size: Revolving
and Unresolved Issues and Inferential Imperatives. Preventive Medicine, 55(5), 398–400.
Ullah, M. H., Kamruzzaman, A. S. M., & Rahman, S. M. (2021). Performance
Evaluation of Conventional and Islamic Banks in Bangladesh. Business Studies Journal,
12(3), 16–29.
UNCTAD (2017). World Investment Report 2017: United Nations Conference on Trade
and Development. https://worldinvestmentreport.unctad.org/world-investment-
report-2017/
Williams-Grut, O. (2017). Fintech Is Now Worth £7 Billion to Britain’s Economy and
Employs 60,000 People. Business Insider UK.
8
EXPLORING DIGITAL BANKING
PATRONAGE IN THE NETHERLANDS
Muhammad Ashfaq, Abdul Rauf, Mai Tran
and Rashedul Hasan

1 Introduction
The expansion of internet-based services across service industries has become
one of the most rapidly growing trends in the world. The internet prolifer-
ates in almost every feld and positively contributes to the comprehensive devel-
opment of society in general. The banking industry also takes advantage of
internet-based technologies to launch a new service which is digital banking
(Alsayed & Bilgrami, 2017). Digital banking is a fusion of traditional banking
and web-based technology. It is difcult to diferentiate between online banking,
web-based banking, internet banking, e-banking, mobile banking, and digital
banking. Kaur et al. (2021:2) defne digital banking as one that “goes beyond
other banking models and requires a comprehensive re-engineering of a bank’s
internal systems. Digital banking involves the digitization of every program and
activity carried out by fnancial institutions and their customers”.
Digital banking has benefted not only the banking sector but also their cus-
tomers. In short, by using digital banking, banks are able to reduce their oper-
ational expenses owing to the decline of physical facilities involving human
resources and paperwork. On the other hand, by conducting transactions
through digital banking, customers can access diversifed fnancial activities as
most services are available around the clock. For example, Citibank and Nations
Bank have integrated the use of the internet into their traditional banking sys-
tem and provide their clients with the comfort and convenience of using digital
banking services leading to the contribution to the development of the banks and
the popularity of digital banking (Alsayed & Bilgrami, 2017).
Data are objects with the ability to store, retrieve, and develop through a
software procedure and communicate through a network. Data quality refers
to completeness, accuracy, timeliness, consistency, and accessibility. Data are

DOI: 10.4324/9781003262169-11
 Exploring digital banking patronage in the Netherlands 155

considered to meet the characteristic of completeness when they meet the

expectations of comprehensiveness. Accuracy of data means both the correctness
and reliability of data. Timeliness of data mentions the availability of data when
it is needed. Consistency refers to the presentation of the same format and the
compatibility with previous data. Accessibility refers how simply and rapidly
data are available and retrieved. Reliable data enables the banking sector to opti-
mize efciency, predict constant customers’ expectations and demands through
advanced analytics, and make use of artifcial intelligence to build new business
possibilities.
Data governance is a procedure of controlling the availability, ease of use,
entirety, and security of data in a company’s system. Data governance comprises
policies, procedures, and organizational structure helping companies man-
age data. Data governance focuses on data quality facilitating the sustainable
development of a frm’s data quality. However, the implementation of efective
data governance is not easy because of the factors highlighted above and their
complexity.
Since the features of digital banking are diferent from traditional banking,
customers’ experience of using digital banking is also diversifed. Apart from
the advantages of digital banking, there are some factors infuencing customers’
digital banking usage, especially data breaches (Makarevic, 2016). Customers’
perceptions of data and cybersecurity in digital banking play an important role
in afecting their confdence in digital banking adoption (Alwan & Al-Zu’bi,
2016; Jibril et al., 2019; Szopiński, 2016). For instance, according to Milosavljević
and Njagojević (2019), there are only a limited number of research studying
customers’ perceptions of information security regarding illegal manipulation,
access, and storage of their personal information. According to Uddin et al.
(2020) cybersecurity is concerned mainly with protecting systems, networks,
and programs from unauthorized access by external and internal parties. Data
security becomes vulnerable because of a lack of dedicated control systems to
ensure appropriate technologies, tools, training, and best approaches applied by
the relevant institutions and organizations protect networks, devices, programs,
and data from any attack or unauthorized access. Cybersecurity and data security
risks are changing the dynamics of fnancial and banking industry digital opera-
tions, rapidly thus making such investigations signifcant.
In the Netherlands, according to the Dutch Data Protection Authority
(Autoriteit Persoonsgegevens, 2019), there were around 27,000 data breaches
in 2019, a rise of 29% compared to the previous year. They also reveal that
most of the leaks occur in the fnancial sector, around 30%. A great number of
data breaches are mainly caused by hacking, phishing, or malware (Autoriteit
Persoonsgegevens, 2019). This points to the ever-increasing awareness and
concerns for cybersecurity measures taken by the service frms providing a
good range of online services to their customers. Thus, it is meaningful to
investigate whether the customers in the Netherlands are as aware of cyber
security risks as other customers in diferent parts of the world. This research
156 Muhammad Ashfaq et al.

focuses on exploring the factors impacting digital banking patronage in the

Netherlands.
This research expects to provide useful information to the banks and their
stakeholders in terms of customers’ perceptions of data protection quality level in
digital banking services. Subsequently, the fndings of this paper could allow reg-
ulators formulate proper policies that may improve organizations’ performance
and increase the customers’ confdence in digital banking adoption, especially
during the COVID-19 outbreak. This study expects to assist two key stake-
holders in the banking industry, the bankers and the regulators, with greater
insight into their customers’ perceptions regarding data protection of digital
banking services in the Netherlands. This can be useful to top management in
the banking industry to develop more efective data management and protection
strategies to improve the confdence of existing customers along with potential
customers’ adoption and trust in digital banking services.

2 Overview of the banking system in the Netherlands

The Netherlands is a country located in Western Europe bordering Germany,
Belgium, and the North Sea. The Dutch economy is known as one of the most
developed economies in Western Europe (Frost, Haan & Horen, 2017). From
the middle of the 19th century, the Netherlands, as well as some other European
countries, experienced substantial development in the formal provision of
personal fnance. During this period, a diversity of new fnancial institutions
emerged throughout the country intending to ofer innovative banking services,
such as savings and loan solutions, particularly to low- and middle-class clients
(Colvin, Henderson & Turner, 2018).
De Nederlandsche Bank (DNB) was established by King William I in 1814 to
contribute to the revival of the Dutch economy after the severe crisis during the
French period (Westerhuis & Zanden, 2018). In the 20th century, DNB grew
from a private lender into a part of the European System of central banks and
the Dutch prudential supervisor of the entire fnancial sector. DNB operates as
an independent fnancial institution with three major functions including mon-
etary policy aimed at price stability, smooth functioning of the payment system,
and stability of the fnancial sector (Westerhuis & Zanden, 2018). More than
ten banks are operating in the country and three players, i.e. Rabobank, ING
(Internationale Nederlanden Groep), and ABN (Algemene Bank Nederland)
Amro, are dominating the banking sector. In short, these three banks control
more than 80% of the markets for fnancial transactions in retail banking, mort-
gages, and business loans (Statista, 2020).
The Dutch banking sector contributes to GDP and plays a vital role in the
economy (Frost, Haan & Horen, 2017). In 2019, banking sector assets reached
over 2 trillion euros, which was more than four times the size of the Dutch GDP.
However, with the development of the internet in the late 20th century, digital
banking in the country has gained a certain success to meet diverse customer
 Number of commercial bank branches by year Number of debit cards by year
4,000 2.10
2.05
3,500
2.00
3,000
1.95
2,500 1.90

2,000 1.85
1.80
1,500
1.75
1,000
1.70
500 1.65

0 1.60
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Number of credit cards by year Outstanding loans from commercial banks (%GDP) by year
0.47
2019
0.46
2017
0.45
2015
0.44
2013
0.43
2011
0.42

0.41 2009

0.40 2007

0.39 2005

0.38 2003
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 0 5 10 15 20 25 30 35 40 45
Exploring digital banking patronage in the Netherlands 157

FIGURE 1 Trends in the Dutch banking sector.

158 Muhammad Ashfaq et al.

expectations and demands in the provision of diversifed banking services. In the

Netherlands, digital banking is well developed, providing full-scale digital bank-
ing services to banking customers. In 2019, it is stated that the internet user
penetration rate in the Netherlands accounted for roughly 93% of the Dutch
population. Indeed, the penetration rate of digital banking users in the country
constituted a considerable proportion in the same year. Specifcally, individu-
als aged 18–25 years and 25–35 years made up the largest percentage of Dutch
digital banking users, 97.8% and 96.1% respectively. In contrast, more than 40%
of people aged over 70 years used digital banking services during that period
(Europa, 2020). Figure 1 indicates the development of the Dutch banking sec-
tor in terms of the number of branches, credit and debit cards issued, and out-
standing loans from customers. The national and international regulations play
an important role in data management and security. The next section provides
insights on the importance role of general data protection regulation for the
banking sector.

3 General data protection regulation in the European Union

Since the potential threats to personal data security are the possible disadvan-
tages of using digital banking, promulgating data protection regulation is the
most important action to secure users’ data in this regard. Understanding the
importance of this issue, the European Union (EU) prescribed the General Data
Protection Regulation (GDPR) in 2018 to reduce any violation or data breaches
regarding personal data or personal information of European citizens (Stepenko,
Dreval, Chernov, & Shestak, 2021).
In 1950, the European Convention on Human Rights was established in which
the right to privacy was one of the integral parts of this convention. During the
2000s, in light of the rapid development of digital banking services throughout
the world, the EU updated the 1995 European Data Protection Directive to
comprehensively protect individual data over digital operations. The GDPR was
introduced in 2018 after being approved by the European Parliament (Voigt &
Bussche, 2017).
GDPR is a confdentiality and security regulation drafted and approved by
the EU. This regulation enforces frms globally to comply with data privacy
and protection legislation if they collect personal information or data of citizens
living in the EU. Through GDPR, the EU has afrmed its solid viewpoint on
protecting the confdentiality of personal data in Europe. However, the regula-
tion is relatively large and extensive, making GDPR observance more difcult
(IT Governance Privacy Team, 2017).
According to Voigt and Bussche (2017) and Chinn, Hannigan and London
(2020), the GDPR outlines six data protection principles including:

1 Lawfulness, fairness and transparency—Organizations ensure that their data

collection activities are lawful and transparent to data subjects. In short,
 Exploring digital banking patronage in the Netherlands 159

data subjects should receive information regarding the type of data the
organizations collect and the purposes of processing data.
2 Purpose limitation—Personal data are only collected for specifc, plain, and
legitimate purposes. The processing of data for public interest, scientifc or
historical research, or statistical purposes is allowed as they are compatible
with initial purposes.
3 Data minimization—Organizations should only process personal data which
is completely necessary for specifc processing purposes.
4 Accuracy—Organizations should ensure the accuracy of personal data. They
are also required to delete or rectify personal data that is inaccurate or
incomplete.
5 Storage limitation—Personal data must be deleted when the organizations do
not use it any longer. The timescales for data storage depend on the business
circumstances of organizations and the purpose of data collection.
6 Security—The appropriate security of personal data should be ensured while
processing data. Organizations should protect the data against unauthorized
or unlawful processing, accidental loss, and damage by using data security
measures including encryption and so on.

Apart from complying with those data protection principles, organizations are
held responsible and accountable for personal data handling. Accountability
requires business subjects to demonstrate what they did to prove that they are
GDPR compliant. Besides, they should conduct appropriate technical and organ-
izational measures to protect relevant data. The measures may include maintain-
ing a detailed fle of collected data, appointing data protection ofcers, creating
data processing agreement contracts with third parties for data processing, and
others (Preece, 2018).

4 Digital banking patronage in the Netherlands

Customer confdence refers to the degree of optimism and trust that customers
feel about certain products or services ofered by sellers. High customer conf-
dence in certain services refects the credibility of the service provided by the
frm, resulting in an increase in customers’ purchase of the services (Meylano,
Respati & Firdiansjah, 2020). The recent development in the internet of things
(IoT) has infuenced digital banking services provisions. IoT and data are fun-
damental in providing efective and high-quality banking services, as IoT will
serve as the backbone for service provision in digital banking (Ramalingam &
Venkatesan, 2019). Some researchers have investigated customers’ confdence
and trust in digital banking adoption in diferent parts of the world (Oertzen
& Odekerken-Schröder, 2019; Singhal, 2017). Using some relevant models,
such as the Technology Acceptance Model and Theory of Innovation Difusion,
they explored several factors infuencing customers in digital banking adoption.
Among other factors, customers’ demographic factors are also taken into account
 160 Muhammad Ashfaq et al.

Account, female (% age 15+) and Account, male (% age 15+) by Year
Account, female (% age 15+) Account, male (% age 15+)
Account, female (% age 15+) and Account, male (% age 15+)

0.998

0.996

0.994

0.992

2014 2015 2016 2017

Year

FIGURE 2 Digital banking account holders across gender.

(Gianniotis, 2018; Richard, 2020; Salem, Baidoun & Walsh, 2019). Customers’
demographic factors, such as gender, age, and technical knowledge background,
also play an important role in infuencing customers’ data security perceptions;
consequently, this impacts their decisions in digital banking adoption (Alwan
& Al-Zu’bi, 2016; Jibril et al., 2019; Milosavljević & Njagojević, 2019). Figure
2 indicates digital banking adoption among male and female consumers in the
Netherlands. Evidence suggests an increase in the digital banking patronage
among female consumers, while male consumer adoption of digital banking
remains unchanged.

4.1 Gender
The frst demographic factor which is one of the potential elements afecting
the perception of customers toward data protection in digital banking is gender.
There are some studies investigating how gender afects customers’ perception of
data security. It is stated that gender-based diferences are found for data security
perceptions in digital banking (Schomakers et al., 2019; Villarejo-Ramos et al.,
2015). For example, female users tend to be more concerned about data privacy
and security issues in digital banking than male users. However, they do not feel
more vulnerable despite their data technology skills (McGill & Thompson, 2018).
Conversely, another research indicates that men account for a higher proportion
 Exploring digital banking patronage in the Netherlands 161

Made digital payments in the past year, female (% age 15+) Made digital payments in the past year, male (% age 15+)
0.97 0.98

0.97

0.97

0.96

0.96
2014 2015 2015 2017 0.95
2014 2015 2015 2017

FIGURE 3 Digital payments by gender.

in information security familiarity and digital banking risk familiarity afecting

their decision of digital banking adoption (Milosavljević & Njagojević, 2019).
Nevertheless, the research has also presented some contradictory fndings. For
instance, some studies have not found considerable gender diferences in terms
of data security concerns (Yang et al., 2009). While previous studies indicate that
data security perceptions play an instrumental role in determining digital bank-
ing adoption more for males than for females (Milosavljević & Njagojević, 2019),
other studies do not fnd considerable gender diferences in such relationships
(Alwan & Al-Zu’bi, 2016). Figure 3 shows opposite patterns for digital payment
usage between male and female customers.

4.2 Age
In terms of age, some studies reveal that there is no direct impact of customers’
age on data security perceptions in digital banking. Most young age groups are
in harmony with older people in terms of data privacy and security. There are
no statistically considerable diferences between young people and older people
on issues of data security (Markos et al., 2017). However, most researchers fnd
that age-based diferences are found for data security perceptions. For instance,
younger age groups are less aware of data security although they share their
information more on online platforms. The users aged under 25 years show less
engagement in data security practices when they use digital banking than older
users. This can be explained by the fact that young users rely more on technology
in their daily lives, which might lead to less attention to data security. On the
other hand, older customers feel less secure and would refuse to provide their
personal information more than young customers (Agami & Du, 2017; Kaiser,
2016). In contrast, other researchers indicate that young people have further data
security perception in digital banking compared to older people resulting in
higher satisfaction in using digital banking services. Therefore, younger cus-
tomers are likely to use digital banking more than older people (Oertzen &
Odekerken-Schröder, 2019). Figure 4 indicates a consistent increase in digital
banking among young banking consumers.
162 Muhammad Ashfaq et al.

Used the internet to pay bills or to buy something online in the past year,
young adults (% age 15-24)
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
2014 2015 2015 2017

FIGURE 4 Digital payments by age.

4.3 Technical knowledge

Regarding technical knowledge, some studies state that while digital banking
users’ level of perception about data security is relatively high; their level of tech-
nical knowledge does not necessarily match. Irrespective of customers’ degree
of technological knowledge, their perceptions of security in digital banking still
play an important role in afecting their adoption of digital banking. In addition,
it is reported that although women have a lower level of technical knowledge and
information security training, their perception of data security is still higher than
their male counterparts (McGill & Thompson, 2018; Moscato & Altschuller,
2012).
Nevertheless, other studies found that there is a relationship between cus-
tomers’ technological knowledge and their perceptions of data security in digital
banking. When customers have insufcient technical knowledge about the data
security of digital banking, they do not fully understand the importance of tan-
gible features for data protection while conducting their digital banking transac-
tions ( Jibril et al., 2019; Singhal, 2017). It also suggests that a higher educational
level can improve clients’ technical knowledge of data security issues in digital
banking. The potential of data security policies to create customers’ confdence
in using digital banking might greatly depend on customers’ abilities to com-
pletely understand such policies (George and Mallery, 2019).
Most studies have found that customers’ awareness of data security in digital
banking positively impacts them on using digital banking (Aboobucker & Bao,
2018; Al-Sharaf et al., 2016). The vast majority of banking services are pro-
vided through diverse online platforms accessed through smart devices; thus
users are highly concerned about how well their data are secured by the banks.
 Exploring digital banking patronage in the Netherlands 163

0.99

0.98

0.97

0.96

0.95
1 2 3 4

FIGURE 5 Digital banking patronage among consumers with technological expertise.

It is reported that when customers perceive the importance of data and cyberse-
curity and the high quality of tangible data protection policies from the banks,
this might improve their confdence in continuous intention to use digital bank-
ing (Baabdullah et al., 2019; Normalini & Ramayah, 2017). For example, when
clients recognize that the digital platform and interface have higher quality
regarding transparent security policies, they are likely to have positive percep-
tions of data security of such a platform leading to an increase in digital banking
services usage.
Besides, it is stated that most of the customers are increasingly concerned
regarding the level of data security when they are in the process of digital bank-
ing usage. As a result, customers tend to pay more attention to tools and systems
that can safely protect their data while conducting fnancial transactions using
IoT technologies. Thus, fnancial institutions should emphasize their security
features to enhance their customers’ data security perceptions (Patel & Patel,
2018). Then, a question raised is whether the customers’ awareness of the qual-
ity level of data security in their banks in the Netherlands is also the key factor
signifcantly afecting customers’ confdence in using digital banking. Figure 5
shows a steady increase in digital banking patronage among customers who have
the technological expertise of mobile banking.

5 Challenges of digital banking development in the Netherlands

Cybercrime has signifcantly increased since the COVID-19 crisis resulting
in more concerns for cybersecurity. Online hackers strive to obtain personal
data, fnancial gains, or access to secured systems by deceiving legitimate users
164 Muhammad Ashfaq et al.

(Naidoo, 2020). Organizations have increasingly recognized phishing campaigns

through emails containing malware that represent medical and other charitable
organizations. Email scammers have impacted executives to transfer funds to
make payments to vendors’ operations. Additionally, cybercriminals are attack-
ing websites with weak security measures and protection to deliver malware.
Several malware applications launch ransomware attacks, which lock the systems
of users until the users pay a given amount of money to the hackers (Boehm
et al., 2020).
Based on a report by Interpol, over 900,000 spam messages, 700 malware
attacks, and more than 40,000 malicious domains were found from January to
April of 2020 in the UK alone. The UK fraud prevention organization CIFAS
(Credit Industry Fraud Avoidance System) explores online fraud in the form
of a quiz testing users’ understanding of the coronavirus that tries to collect
users’ information linked to their digital banking transactions. In Europe, the
EU Agency for Cyber Security (Enisa) also warns that the attackers tend to
target new digital banking users and use the outbreak as a means to force users
to install fake applications or access fake websites masquerading as their repu-
table banks (Espinoza, 2020). According to Google, there were more than 200
million COVID-related spam messages delivered in April 2021. The number
of hacking attack cases also rose to six times compared to the fgure in March
2021. In addition, COVID-19 phishing messages also went up by over 600% in
recent times. Apart from that, there is some malware masquerading as COVID-
19 relief payments to ask for fnancial relief from internet users and steal their
data (Mathews, 2020).
Such cybersecurity threats are equally detrimental to the development of
both the conventional and Islamic fntech sectors in the Netherlands. Due to the
identical nature of cyber threats to the fnance industry, we witness the similar
level of cyber protection mechanisms applied to both conventional and Islamic
fnancial institutions around the world. With numerous online frauds regard-
ing personal data, the banking industry (including conventional and Islamic)
has taken efective measures to protect its customers from the diverse types of
cyber frauds during the COVID-19 outbreak. In their best practices to protect
customers’ data efectively, banks encourage their employees to buy approved
and safe hardware and software by providing the necessary funds when they
work from home during the COVID-19 pandemic. Such practices are identi-
cal for both conventional and Islamic fnancial institutions in the Netherlands.
In addition, security teams in the banks also increasingly prepared staf with
up-to-date information and instructions to avoid being deceived. Furthermore,
high-risk employees who frequently work with confdential data are identi-
fed and supervised for their behavior, including downloads of business data to
prevent potential security breaches (Boehm et al., 2020).
The Network and Information Systems Act (WBNI) provides clear guid-
ance for the banking sector to ensure efcient cyber protection. The WBNI
replaced the Data processing and Notifcation Requirement Act (WGCM) and
 Exploring digital banking patronage in the Netherlands 165

strengthens the resilience of the Dutch fnancial sector against various cyber
threats. However, the guidelines and frameworks suggested under WBNI are
generic and do not necessarily provide any unique guidance for the growing
Islamic fntech sector in the Netherlands. While still a draft bill, the WBNI act
recommends the appointment of the Ministry of Economic Afairs and Climate
policy as the National Cybersecurity certifcation authority.
Both Islamic and conventional banks cooperate with third parties such as
contractors and external vendors. Since the banks integrate IT systems and share
their data with third parties, they have made eforts to ensure that these third
parties can proactively conduct adequate security controls and processes to secure
customers’ data in case unpredictable breaches might occur (Boehm et al., 2020;
Kędzior, 2020).
Concerning the technology, the banks in the US have enhanced multi-layer
protection for digital banking, such as Secure Socket Layer (SSL) encryption – an
internet security protocol based on encryption to ensure the security of an inter-
net connection and sensitive data; antivirus and anti-malware programming –
programs or software (such as Kaspersky, McAfee Live) that protect data from
virus or malware; multi-factor authentication – customers are required to pro-
vide their password or biometric verifcation to legally log into their accounts.
In Europe, banks have also improved and developed their security technology
to protect customers’ data from online fnancial crimes. For example, fnger-
print and facial recognition biometric technology is used to ensure only banks’
customers can access their accounts; 3D Secure is an authentication step asking
customers to authorize online payments through digital banking apps; the secure
inbox feature ensures that only customers can read and reply to an important
notifcation from the banks through the in-app mailbox (Lake, 2020).

6 Discussion
Not surprisingly, the penetration rate of digital banking is more than 96%,
which is relatively high compared to the internet user penetration rate in the
Netherlands. This can be explained by the fact that digital banking provides
users with the comfort and convenience of using it. At this point, we do not dif-
ferentiate between the digital services provided by both Islamic and conventional
banks in the Netherlands, considering the size of the Islamic fnancial institu-
tions. However, our results provide a positive note on the overall demand for
fntech among consumers in the Netherlands. Digital banking customers of both
conventional and Islamic banks can conduct most of the banking transactions,
including bill payments, fund transfers, and account summary requirements,
without physically visiting the bank. In other words, customers can immedi-
ately access diversifed fnancial activities in their banks at the click of a mouse.
According to frequency analysis, the majority of respondents believe that ease of
use is the most important factor to them when they choose a bank’s digital bank-
ing services. Most of them are satisfed with the quality level of data protection
166 Muhammad Ashfaq et al.

in their banks. They also reveal that their banks have greatly improved and
developed data protection measures to protect their data. As such, Islamic fnan-
cial institutions could beneft from such fndings and can attract customers by
ensuring fexibility in their digital services.
Regarding the impact of customers’ demographic factors on their perception
of data protection quality level in digital banking, this study fnds that technical
knowledge of customers infuences their perception while gender and age do not.
In particular, there is no positive impact of gender on customers’ perceptions of
data protection quality level in banks. Prior studies, however, found that either
females or males were concerned about data security issues in digital banking
afecting their decision of digital banking adoption (McGill & Thompson, 2018).
This can be explained by the fact that both female and male respondents in
this research have a high educational level, thus they properly understand the
importance of data protection quality in their banks.
In terms of age, this study fnds that there are no age-based diferences in data
security perceptions. In other words, there is no positive impact of age on cus-
tomers’ perceptions of data protection quality level in banks, which is also con-
tradictory to other studies. Other researchers found that young people depended
more on technology in their daily life leading to less attention to data security
than older people (Agami & Du, 2017; Kaiser, 2016). One of the reasons why this
research’s fnding is diferent from others might be that most respondents believe
their banks have improved certain data protection measures as well as timely
updated information regarding data protection. Thus, both young and older age
groups show similar percentages of the perceptions of data protection quality lev-
els in their banks. Regarding technical knowledge, through correlation testing,
technical knowledge signifcantly correlates with data protection quality level.
In short, technical knowledge positively impacts customers’ perceptions of data
protection quality in digital banking in the Netherlands.
This fnding is aligned with previous studies ( Jibril et al., 2019; Singhal, 2017)
and can be explained by the fact that the majority of respondents attain a high
educational level, which improves their technical knowledge of data protection
issues in digital banking. Additionally, with the popularity of data security infor-
mation through social media, banking apps, or emails, customers can also obtain
adequate knowledge about the issue. Therefore, they can completely understand
the importance of data protection features when they conduct digital banking
transactions. Overall, this study explores that customers’ perceptions of data
protection quality level positively infuence their confdence in digital banking
adoption. This fnding is also aligned with other fndings (Alabdan, 2017).
Customers tend to use digital banking rather than traditional banking to avoid
direct human-human interaction as much as possible according to social distanc-
ing measures. For instance, they use digital banking as a contactless payment to
conduct transactions such as digital shopping. This fnding is also aligned with
previous fndings in other countries (Droesch, 2020). With digital banking users,
they indicate that COVID-19 does not greatly impact their regularity of using
 Exploring digital banking patronage in the Netherlands 167

digital banking during the pandemic. This can be explained by the fact that
whether COVID-19 prevails or not, digital banking is still the main banking
service channel to them rather than other channels.
The COVID-19 pandemic positively impacts digital banking frauds in the
Netherlands. This fnding is also aligned with other fndings (Mathews, 2020;
Naidoo, 2020). The reason might be that these respondents may experience the
frequency of fraudulent activities themselves. In simple terms, they might be one
of the victims of crimes, including COVID-related spam messages or COVID-
19 phishing messages since the pandemic occurred; consequently, they can rec-
ognize how these crimes change over time. Such threats are identical for both
Islamic and conventional fntech organizations and could have a detrimental
impact on their growth.
Regarding data protection measures in digital banking, this study fnds that
more than 50% of respondents believe that COVID-19 positively impacts data
protection measures in their banks. This result is also aligned with other studies
(Boehm et al., 2020; Kędzior, 2020; Lake, 2020) and could be because banks
in the Netherlands might actively enhance current measures as well as develop
new measures to protect customers’ data during the pandemic. The respondents
might be frequently notifed by their banks regarding the measures that are being
used to secure their data. Besides, they may also recognize how the measures
have changed during the pandemic through the steps of accessing their digital
banking accounts or other banking services.

7 Conclusion
This study examines the impact of customers’ demographic factors on their
perception regarding the quality of data protection and measures to tackle
cybersecurity in digital banking. Technical knowledge is a positive factor impact-
ing customers’ perception of data protection quality. Once the customers have
certain technical knowledge, they are able to understand how well their banks
protect their data, resulting in the possible increase in customers’ trust in using
digital banking services. However, gender and age do not show any positive rela-
tionship with data protection quality level. This study concludes that there are no
gender diferences in the familiarity of data security perceptions in digital bank-
ing among male and female respondents. In addition, age is not considered as a
factor afecting the perception of data protection. Whether young or older peo-
ple, they occupy a similar proportion in the familiarity of data security in digi-
tal banking operations. In general, the banks in the Netherlands might provide
adequate information regarding data protection at the service touch points to all
customers so that every customer can be aware of it regardless of their age.
The evidence suggests that ease of use, less time-consuming, and high data
protection/security are the most important elements afecting customers’ digital
banking adoption. Thus, it is correct to say that any bank in the Netherlands ensur-
ing these features in their digital banking services can retain existing customers
168 Muhammad Ashfaq et al.

as well as attract more potential customers. This study also fnds that customers
feel more confdent in using digital banking services when they are aware of
the quality of data protection in their banks. With the diverse development and
concerns of data breaches globally, the better the banks protect their customers’
data, the more the customers trust their service providers, which can certainly
lead to more adoption and trust in digital banking services. In addition, the
evidence confrms that the majority of digital banking users feel satisfed with
the quality of data protection in their banks. That probably explains why most
customers are confdent in adopting digital banking in the Netherlands.
In terms of the infuence of the COVID-19 pandemic on digital banking
fraud attempts, this research fnds that COVID-19 has positively afected digital
banking frauds in the Netherlands. Since most people use digital banking more
frequently during the COVID-19 pandemic, cybercriminals take advantage of
this circumstance to steal users’ data. As a result, the respondents believe that
there was an increase in digital banking fraud attempts in 2020 compared to the
years before the COVID-19 outbreak in the Netherlands. It is undeniable that
digital banking users are more vulnerable to attack, as their fnancial information
is greatly attractive to hackers. With a rise in the number of COVID-related
fraudulent activities, the appropriate action taken by the banks can reassure cus-
tomers’ concerns about data breaches and make them more comfortable using
digital banking.
Concerning the infuence of COVID-19 on data protection measures in dig-
ital banking, this study fnds that the data protection measures in the banks are
positively afected during the outbreak in the Netherlands. According to most
of the respondents, there is an increase in the intensifcation of data protection
measures in digital banking during the COVID-19 outbreak. In other words,
banks have enhanced current data protection measures to greatly protect their
data. Since there is a growth of data breaches over the pandemic, the intensifca-
tion and development of existing as well as new measures are indispensable steps
of the banks to ensure the security of their customer’s data. Understanding the
importance of data protection measures, close cooperation between banks and
customers is essential to reduce unexpected losses caused by the COVID-19 crisis.
Among the respondents in this survey, more than 3% of them do not use
digital banking services. The main reason is the concern over security and iden-
tity theft, representing 80%. Furthermore, in terms of the intention of using
digital banking, around 30% of the respondents are strongly willing to adopt
digital banking in the future, while 70% of them retain neutral attitudes and
refuse to use it. Therefore, banks should create appropriate strategies regarding
data security to gain more potential customers. Besides existing data protection
measures, banks should improve and develop multi-layer protection for digital
banking, such as frewalls, multi-factor authentication, and others. Moreover,
the cooperation of the customers against cyber criminals also plays an impor-
tant role in considerably protecting their data. In short, banks should constantly
and timely update the latest information regarding new data breaches to the
 Exploring digital banking patronage in the Netherlands 169

customers. As a consequence, the customers can be aware of the current situation

and cooperate well with the banks to reduce unexpected harm to customers’
data. Thus, the loyalty of customers to digital banking will be higher.

References
Aboobucker, I. and Bao, Y. (2018) What obstruct customer acceptance of internet
banking? Security and privacy, risk, trust and website usability and the role of moder-
ators, The Journal of High Technology Management Research, 29(1), pp. 109–123.
Agami, A. and Du, T. (2017) Examining Young Users’ Security Perceptions of Mobile Banking.
Master Thesis. Umeå School of Business and Economics.
Alabdan, R. (2017) The adoption of online banking with saudi arabian banks: a Saudi
female perspective, Journal of Internet Banking and Commerce, Special issue: 8(37),
pp. 1–18.
Alsayed, A.O. and Bilgrami, A.L. (2017) E-banking security: Internet hacking, phishing
attacks, analysis and prevention of fraudulent activities, International Journal of Emerging
Technology and Advanced Engineering, 7(1), pp. 109–115
Al-Sharaf, M.A., et al. (2016) The efect of security and privacy perceptions on
customers’ trust to accept internet banking services: An extension of TAM, Journal of
Engineering and Applied Sciences, 11(3), pp. 545–552. doi: 10.3923/jeasci.2016.545.552
Alwan, H.A. and Al-Zu’bi, A.I. (2016) Determinants of internet banking adoption
among customers of commercial banks: An empirical study in the Jordanian banking
sector, International Journal of Business and Management, 11(3), pp. 95–104.
Autoriteit Persoonsgegevens (2019) Cijfers Datalekken 2019. Available at: https://
autoriteitpersoonsgegevens.nl/nl/onderwerpen/beveiliging/meldplicht-datalekken/
overzichten-datalekken/cijfers-datalekken-2019 (Accessed: 21 September 2020)
Baabdullah, A.M., et al. (2019) An integrated model for m-banking adoption in Saudi
Arabia, International Journal of Bank Marketing, 37(2), pp. 452–478.
Boehm, J., Kaplan, J.M., Merrath, P., Poppensieker, T. and Stähle, T. (2020) Enhanced
cyberrisk reporting: Opening doors to risk-based cybersecurity, Cybersecurity in a
Digital Era, 9, pp. 25–33.
Colvin, C.L., Henderson, S. and Turner, J.D. (2018) The origins of the (cooperative)
species: Raifeisen banking in the Netherlands, 1898–1909, QUCEH Working Paper
Series, pp. 1–37.
Chinn, D., Hannigan, R. and London, S. (2020) Defense of the cyber realm: How
organizations can thwart cyberattacks, Cybersecurity in a Digital Era, pp. 89–99.
Droesch, B. (2020) Coronavirus Boosts Online Banking, Payments Usage in the US. Available at:
https://www.emarketer.com/content/coronavirus-boosts-online-banking-payments-
usage-in-the-us (Accessed: 11 December 2020)
Europa (2020) Digital Economy and Society Statistics – Households and Individuals. Available
at: https://ec.europa.eu/eurostat/ (Accessed: 25 September 2020).
Frost, J., Haan, J. and Horen, N. (2017) International banking and cross-border efects
of regulation: Lessons from the Netherlands, International Journal of Central Banking,
13(S1), pp. 293–313. doi:10.2139/ssrn.2839791
George, D. and Mallery, P. (2019) IBM SPSS Statistics 26 Step by Step: A Simple Guide and
Reference. 16th edn. New York: Routledge.
Gianniotis, K. (2018) Factors Afecting E-Banking Adoption by Greek Consumers. Master
Thesis. International Hellenic University. Available at: https://repository.ihu.edu.gr/
xmlui/bitstream/handle/11544 (Accessed: 20 September 2020).
170 Muhammad Ashfaq et al.

IT Governance Privacy Team (2017) EU General Data Protection Regulation (GDPR): An

Implementation and Compliance Guide. 2nd edn. United Kingdom: IT Governance
Publishing. Available at: https: www.jstor.org/stable/j.ctt1trkk7x (Accessed: 25 June
2020).
Jibril, A., et al. (2019) Customers’ constraints towards online banking transaction:
A literature review, Journal of Sustainable Development, 9(23), pp. 29–43.
Kaiser, A.F. (2016) Privacy and Security Perceptions between Diferent Age Groups While
Searching Online. Bachelor Thesis. University of Twente.
Kaur, B., Kiran, S., Grima, S., & Rupeika-Apoga, R. (2021) Digital banking in Northern
India: The risks on customer satisfaction, Risks, 9(11), p. 209.
Kędzior, M. (2020) The right to data protection and the COVID-19 pandemic: The
European approach, ERA Forum, 21, pp. 533–543. doi:10.1007/s12027-020-00644-4
Lake, R. (2020) Mobile and Online Banking Security During COVID-19: What You
Need To Know. Available at: https://www.forbes.com/sites/advisor/2020/06/16/
mobile-and-on line-bank ing-secur it y-dur ing-covid-19-what-you-need-to-
know/?sh=4328379b206c (Accessed: 11 December 2020).
Makarevic, N. (2016) Perceptions towards IT security in online banking: Croatian clients
vs. clients of Bosnia and Herzegovina, International Journal of Finance & Banking Studies,
5(1), pp. 1–15. doi:10.20525/ijf bs.v5i1.51
Markos, E., Milne, G.R. and Peltier, J.W. (2017) Information sensitivity and willingness
to provide continua: A comparative privacy study of the United States and Brazil,
Journal of Public Policy & Marketing, 36(1), pp. 79–96.
Mathews, L. (2020) Criminals Resurrect A Banking Trojan to Push COVID-19 Relief
Payment Scam. Available at: https://www.forbes.com/sites/leemathews/2020/03/31/
cr i m i n a l s-resu r rect- a-ba n k i ng -t roja n-to -push- cov id-19 -rel ief-pay ment-
scam/?sh=55dc81e75f38 (Accessed: 11 December 2020).
McGill, T. and Thompson, N. (2018) Gender diferences in information secu-
rity perceptions and behaviour, Australasian Conference on Information Systems 2018,
pp. 1–11. doi:10.5130/acis2018.co
Meylano, N.H., Respati, H. and Firdiansjah, A. (2020) The efect of confdence through
emotional branding Honda motorcycle customer satisfaction: A case study of Maumere,
Indonesia, International Journal of Advances in Scientifc Research and Engineering, 6(2), pp.
113–118. doi:10.31695/IJASRE.2020.33720
Milosavljević, N. and Njagojević, S. (2019) Customers’ perception of information
security in internet banking, Proceedings of the 5th IPMA SENET Project Management
Conference (SENET 2019), 108, pp. 272–277.
Moscato, D.R. and Altschuller, S. (2012) International perceptions of online banking
security concerns, Communications of the IIMA, 12(3), 51–64.
Naidoo, R. (2020) A multi-level infuence model of COVID-19 themed cybercrime,
European Journal of Information Systems, 29(3), pp. 306–321. doi:10.1080/09600
85X.2020.1771222
Normalini, M.K. and Ramayah, T. (2017) Trust in internet banking in Malaysia and the
moderating infuence of perceived efectiveness of biometrics technology on perceived
privacy and security, Journal of Management Sciences, 4(1), pp. 3–26. doi:10.20547/
jms.2014.1704101
Oertzen, A. and Odekerken-Schröder, G. (2019) Achieving continued usage in online
banking: A post-adoption study, International Journal of Bank Marketing, 37(6), pp.
1394–1418. doi:10.1108/ijbm-09-2018-0239
 Exploring digital banking patronage in the Netherlands 171

Patel, K. and Patel, H. (2018) Adoption of internet banking services in Gujarat, International
Journal of Bank Marketing, 36(1), pp. 147–169. doi:10.1108/IJBM-08-2016-0104
Preece, R. (2018) The GDPR accountability principle and the use of scenario workshops
in the digital age, Journal of Data Protection & Privacy, 2(1), pp. 34–40.
Ramalingam, H. and Venkatesan, V.P. (2019) Conceptual analysis of Internet of Things
use cases in Banking domain. In TENCON 2019-2019 IEEE Region 10 Conference
(TENCON) (pp. 2034–2039). IEEE.
Richard, M.O. (2020) User adoption of online banking in Kenya: A qualitative study,
The IUP Journal of Bank Management, 19(2), pp.7–23
Salem, M.Z., Baidoun, S. and Walsh, G. (2019) Factors afecting Palestinian custom-
ers’ use of online banking services, International Journal of Bank Marketing, 37(2),
pp. 426–451. doi:10.1108/IJBM-08-2018-0210
Schomakers, E., et al. (2019) Internet users’ perceptions of information sensitivity –
insights from Germany, International Journal of Information Management, 46, pp. 142–150.
doi:10.1016/j.ijinfomgt.2018.11.018
Singhal, S. (2017) Demonetisation and e-banking in India, International Journal of New
Technology and Research (IJNTR), 3(1), pp. 20–25.
Statista (2020) Share of Individuals Who Use Online Banking in the Netherlands from 2012
to 2019, by Age Group. Available at: https://www.statista.com/statistics/575490/
(Accessed: 21 September 2020).
Stepenko, V., Dreval, L., Chernov, S. and Shestak, V. (2021) EU personal data protec-
tion standards and regulatory framework, Journal of Applied Security Research, 17(2),
pp. 1–14.
Szopiński, T.S. (2016) Factors afecting the adoption of online banking in Poland, Journal
of Business Research, 69(11), pp. 1–6. doi:10.1016/j.jbusres.2016.04.027
Uddin, M., Ali, M., and Hassan, M. K. (2020) Cybersecurity hazards and fnancial
system vulnerability: A synthesis of literature, Risk Management, 22(4), pp. 239–309.
Villarejo-Ramos, A.F., et al. (2015) Gender diferences among elderly in the use of
Internet banking services, Technology Information and Science Management of Journal
International, Special Issue: 2014, pp. 45–52
Voigt, P. and Bussche, A. (2017) The EU General Data Protection Regulation (GDPR), New
York: Springer.
Westerhuis, G. and Zanden, J.L. (2018) Four Hundred Years of Central Banking in the
Netherlands, 1609–2016. United Kingdom: Cambridge University Press.
Yang, S., Ji, S. and Beyah, R. (2018) DPPG: A dynamic password policy generation
system, IEEE Transactions on Information Forensics and Security, 13(3), pp. 545–558.
9
CAN ISLAMIC FINTECH BEST SERVE
THE MIGRANTS’ INTEREST IN
REMITTANCE SERVICES? THE SOUTH
AND SOUTHEAST ASIAN PERSPECTIVE
S. M. Sohrab Uddin and Tasfka Khanam

1 Introduction
People used to wait for a longer period of time to perform any fnancial
transaction; but with the passage of time, there is a radical improvement in
this trend. With a single click, a myriad of fnancial transactions, from order-
ing food to sending money abroad, can be performed within the blink of eyes.
Modern technology has a greater contribution toward this magical transforma-
tion. Financial Technology (FinTech), an evolution of the 21st century, has made
fnancial transactions facile with its easier approach. It is an innovation where
fnance and technology are blended or providing fnancial services to the clients
in a convenient way.
Further, one of the belongings of FinTech is blockchain, a breakthrough
technology based on a distributed database or public ledger of all transactions.
Here, every transaction is verifed by the majority of participants in the system
and information entered once cannot be removed. In order to ensure the infor-
mation security, cryptography is used where each block contains its own cryp-
tographic hash and refects the hash of the previous block. By this way, a link is
established between the blocks. Hence, a blockchain is formed (Antonopoulos,
2014). However, blockchain technology has started working in a wide range
of applications in both fnancial and non-fnancial sectors. Among all, the
cross-border transfer payment is a mind-blowing opportunity for migrants. By
using blockchain technology with the support of cryptocurrency, migrants’ can
remit their hard-earned money with a low-cost and transparent medium.
The periodic crisis faced by the conventional fnancial system since the world
had bitter experiences of economic depressions under the conventional fnan-
cial system, Islamic fnance got the opportunity to keep its door open for all
and expand service opportunities. In recent times, Islamic fnance has adopted

DOI: 10.4324/9781003262169-12
 Migrants’ interest in remittance services 173

FinTech in its services. Islamic FinTech, basically, represents the use of modern
and innovative technologies by fnancial institutions based on Islamic Shari’ah.
The success of Islamic FinTech depends on the number of fnancial service areas
where FinTech can be linked to those areas such as cryptocurrencies, blockchain,
and cross-border payments (Gomber et al., 2018; Michalopoulos & Tsermenidis,
2018).
South and Southeast Asia, a rising hub of Islamic fnance, are taken into
consideration in this regard since most of the remittance receiving countries
are under this region. As the countries under this region have desire to fourish
in Islamic fnance, Islamic FinTech is a trump card for them. Some countries
already have started to use Islamic FinTech in their fnancial services. Above all,
the potential for blockchain-based remittance under Islamic FinTech is promis-
ing in this region. Thus, this chapter aims to identify whether the adoption of
blockchain technology in cross-border transfer payments under Islamic FinTech
can protect migrants’ income.
The later part of this chapter is divided into four segments. The following
section takes into account the overview of FinTech, Islamic FinTech, and block-
chain-based remittance transfer. Section 3 deals with the comprehensive litera-
ture review. Section 4 represents key fndings based on the scenario of remittance
collection and the use of Islamic fnance as well as FinTech in Asian & Southeast
Asian countries. Section 5 includes drawbacks of traditional system of remittance
transfer, emergency of blockchain-based remittance transfer, and essentiality of
remittance under Islamic FinTech. Finally, Section 6 concludes the chapter with
some policy recommendations.

2 FinTech, Islamic FinTech and blockchain-based remittance:

an overview

2.1 FinTech and Islamic FinTech

Financial Technology, popularly known as FinTech worldwide, simply refers to
the use of modern technologies in various fnancial activities. As a new concept
of the 21st century, FinTech has received a great recognition from users. The
essential reason behind this acceptance includes ensuring higher security to the
investors with lower transaction costs. Thus, FinTech can be considered as the
fusion of information technology and fnance in order to provide the fnancial
services at an afordable cost with a seamless user experience (Rabbani, Khan, &
Thalassinos, 2020).
On the other hand, Islamic FinTech implies the situation when modern
and innovative technologies are used by fnancial institutions based on Islamic
Shari’ah. After the fnancial crisis of 2008, people lost their confdence in conven-
tional fnance and tend to move toward Islamic fnance. Because of its inherent
nature of avoiding riba (interest), maysir (uncertainty), and gharar (ambiguity), it
is less prone to any fnancial crisis. Therefore, as a part of Islamic fnance, Islamic
174 S. M. Sohrab Uddin and Tasfka Khanam

FinTech has huge opportunities to fourish. Islamic FinTech has made Islamic
fnance attract more customers and thus become more competitive against con-
ventional fnance with enhanced efciency, reduced costs, and a wide range of
products (Qatar Financial Centre, 2018). Besides, transparency, accessibility,
and easiness to use are the major advantages of Islamic FinTech (Laldin, 2018;
Wintermeyer, 2017). The success of Islamic FinTech depends on the number
of fnancial service areas where FinTech can be linked to those areas such as
cryptocurrencies, blockchain, and cross-border payments (Gomber et al., 2018;
Michalopoulos & Tsermenidis, 2018). According to IFN FinTech, Shari’ah-
compliant products are being ofered by 116 FinTech companies including 21
in Malaysia, 18 in Britain, 15 in Indonesia, and 14 in the United States. Among
them, around two-thirds are providing fnancial services like payments, remit-
tance, and crowdfunding (Qatar Financial Centre, 2018).

2.2 Blockchain
Blockchain, a breakthrough innovation of modern technology under FinTech
arena, is essentially a distributed database, or public ledger of all transactions or
digital events that already have been executed and shared among participating
members. Every transaction is verifed by the majority of participants in the sys-
tem and once information is entered, cannot be removed. In order to ensure the
information security, cryptography is used in blockchain. Each block contains its
own cryptographic hash, and each block refects the hash of the previous block.
By this way, a link is established between the blocks, and a blockchain is formed
(Antonopoulos, 2014). However, blockchain technology has started work in a
wide range of applications in both fnancial and non-fnancial world. It can be
designed for public or private use. Public blockchains allow anyone to access
the network, view transaction fow, submit their own records, and participate
in the consensus process (Buterin, 2015). On the contrary, private blockchains,
also known as permissioned blockchains, are used only by certain institutions
like banks and other institutions to provide services and it’s getting popular day
by day. Bitcoin, Ripple, and so on are examples of digital currencies or cryp-
tocurrencies used in blockchain technology. Two Islamic viewpoints do exist
in using cryptocurrencies. According to the frst viewpoint, cryptocurrency is
haram since it can be used in illegal and fraudulent activities. Contrarily, the
second viewpoint claims cryptocurrency is permissible in principle because such
currency fulflls the conditions of being money- treated as a valuable thing, as a
medium of exchange by all or substantial group, as a measure of value, and as unit
of accounts, and possess no clear contradiction to Shari’ah (Bakar, 2017).

2.3 Blockchain-based Remittance

Remittance, simply, refers to the portion of migrants’ earnings sent back from
abroad to home countries. This is also known as transfer payments or cross-border
 Migrants’ interest in remittance services 175

payments which is one of the driving forces of the world economy. Moreover,
a signifcant amount of remittances is being channelized through informal way,
such as physical transportation of cash or hawala, from developed countries to
developing countries and thus ultimately creating a barrier toward fnancial
inclusion. In order to widen the arena of fnancial inclusion, formalized chan-
nels, such as banks, post-ofces, non-bank fnancial intermediaries, and money
transfer organizations (MTO), are encouraged through the utilization of mod-
ern technologies. Interestingly, blockchain technology can be used in a variety
of fnancial arena such as fnancial services provided by diferent institutions
and banks and among all uses, the cross-border payments are regarded as the
most promising by the scholars because of its timeliness, transparency, and cost-
efective features (Crosby et al., 2016; Qiu, Zhang, and Gao, 2019).
The study of Qiu, Zhang, and Gao (2019) suggests that in the long run the use
of cryptocurrencies such as Ripple, blockchain can ease the medium of money
transfer for migrants. These technologies deem to be better than the traditional
system including Society for Worldwide Interbank Financial Telecommunications
(SWIFT) because SWIFT is time-consuming and costly compared to FinTech-
based technology. Ripple system for remittance includes blockchain technology
to construct a Peer-to-Peer (P2P) network where Ripple acts as both the mes-
saging network and settlement network. Besides, when remittance sender enters
remittance request P2P network takes immediate action. It keeps the fow of
transaction information and settles the payments simultaneously. This is why
remittance time is near real-time and transaction cost is low in blockchain tech-
nology. The messenger, the inter-ledger protocol (ILP), the FX ticker, and the
validator; these four key components exist in the process fow of Ripple. The
task of messenger is to connect both the sender bank and receiver bank through
a bidirectional message which contains relevant information such as risk details,
foreign exchange rate, payment details, process cost, and estimated completion
time. The ILP acts as a sub-ledger in order to keep track of credit, debit, and
liquidity status across the transacting parties. Whether the process will fail or
settle instantly, is decided by ILP. The exchange rate quote is examined by the
FX ticker. Finally, the validator ensures the transaction’s success or failure at the
receiver bank through cryptography which removes settlement risk and reduces
delay as well.

3 Literature review
Although it is relatively a new concept, there are a good number of studies on
FinTech; but only a few studies in Islamic FinTech were conducted till date.
A comprehensive review on Islamic FinTech was done by Rabbani, Khan, and
Thalassinos (2020) in which Islamic FinTech was classifed into three broad
categories – Islamic FinTech opportunities and challenges, Cryptocurrency/
Blockchain Shari’ah compliance, and law/regulation. The study fnds block-
chain technology in Islamic FinTech as a more secure and innovative way of
176 S. M. Sohrab Uddin and Tasfka Khanam

doing business where the transactions under blockchain are more transparent and
visible to all. They suggest Islamic Financial Institutions to be the partners of the
FinTech companies in order to increase efciency, transparency, and customer
satisfaction. By doing frm-based analysis, Firmansyah and Anwar (2018) show
study profles, prospects, and challenges of the Shari’ah-compliant six fnancial
technology frms headquartered in Indonesia and Singapore. The study reveals
there is a bright prospect of Islamic FinTech and suggests fair government regu-
lations in this regard. Crosby et al. (2016) explain blockchain fundamentals and
its specifc uses in both fnancial and non-fnancial areas. They claim that the
advantages of blockchain technology outweigh the regulatory issues and techni-
cal challenges.
Some studies concentrate on how digital currencies can be incorporated in
Islamic FinTech. The study by Bakar (2017) shows two diferent viewpoints on
Bitcoin, cryptocurrency, and blockchain in which the frst view considers cryp-
tocurrency as haram whereas the second view claims that cryptocurrency is per-
missible in principle. Interestingly, the author agrees with the second view as
cryptocurrency is acting as money and can be used in transfer payment through
blockchain technology. Alzubaidi and Abdullah (2017) focus on introducing
an Islamic digital currency in their study on blockchain and digital currencies.
According to them, the proposed digital currency can fulfll the Islamic law,
functions of money, and provides a more stable currency than fat money.
Side by side, some studies shed light on the use of blockchain technology in
migrants’ remittances. In order to signify the payment infrastructures, Rella (2019)
connects remittances, blockchain technologies, and correspondent banking. The
study fnds blockchain technologies are being used in remittance formalization
as well as being incorporated into existing infrastructures, business models, and
regulatory structures. The author argues that the main focus of blockchain-based
remittances is on profts, risks, costs, interoperability, trapped liquidity, and idle
capital in correspondent banking accounts, rather than on fnancial inclusion.
Qiu, Zhang, and Gao (2019) focus on the Strengths, Weaknesses, Opportunities
and Threats (SWOT) analysis of blockchain-based Ripple and traditional SWIFT
system in remittance. The study expresses SWIFT can lead remittance market for
the short term due to the economy of scale while Ripple has a greater prospect in
the long run because of its extra benefts in transfer payments.
It is evident that Islamic FinTech can ensure fnancial inclusion. Muneeza
and Mustapha (2021) focus on how fnancial inclusion can be ensured by Islamic
FinTech. The study identifes some Islamic FinTech key drivers such as digitally
native Muslim demographic, government initiatives toward Islamic FinTech,
and FinTech startups for fnancial inclusion. They suggest government and reg-
ulatory bodies to play a decisive role in governance and regulation in FinTech to
avail limitless opportunities inherent in Islamic fnance. El Amri, Mohammed
and Bakr (2021) investigate how FinTech-based payment system, such as M-Pesa
in Kenya and Orange Money in 13 African countries, is contributing to fnancial
inclusion. It is found that such payment system reduces transaction cost which
 Migrants’ interest in remittance services 177

is efective in increasing fnancial inclusion. The study includes some challenges

like insufcient number of rural branches, lack of understanding culture and
needs, legal risk, and trust defcit to this payment system.
Above all, Ahmad and Mamun (2020) fgure out the possibilities of Islamic
FinTech in Bangladesh and Turkey. By using qualitative method, the study fnds
many opportunities such as opening startups, promoting digital efciency, ofer-
ing business diversity, generating fnancial security, and addressing fnancial
inclusion for both countries.
Therefore, the existing literature focuses on comprehensive review, fnancial
inclusion, prospects and challenges of Islamic FinTech, incorporation of digi-
tal currency and blockchain in FinTech, and comparison between SWIFT and
Ripple in remittance; and thus shows no concrete study on blockchain-based
remittance incorporating Islamic FinTech. That’s why the aim of this chapter is
to identify whether the adoption of blockchain technology in remittance under
Islamic FinTech is able to protect migrants’ income.

4 Remittance collection scenario and current practice of Islamic

fnance as well as FinTech in South and Southeast Asian
countries

4.1 South Asia

As a part of the world economy, South Asia is known as a remittance-based
economy. Many migrant workers of this region are working abroad and thriv-
ing for the economic development of both self and nation. There is tremendous
growth in inward remittance corresponding to the growth of the number of
migrant workers. Therefore, the total inward remittance to South Asia rose by
5.2% to $147 billion in 2020 (World Bank, 2021). The amount will be higher if
all of them could be channeled through formal channel; unfortunately, a large
portion of transfer payments is made through informal channel. Consequently,
mass people are out of the reach of fnancial intermediaries and antisocial activi-
ties can be done by these unauthorized money. Therefore, government and other
concerned authorities try to make formal channels more attractive and friendlier
to the migrants both in conventional and Islamic ways along with the inclusion
of new technology. In Table 1, it is evident that the inward remittances in South
Asian countries such as Bangladesh and Pakistan have increased by 42% and 35%,
respectively from year 2015 to year 2020. Moreover, Table 2 shows the Gross
Domestic Product (GDP) percentage of remittance of each country where a sig-
nifcant portion of South Asian countries’ GDP comes from remittances.

4.1.1 Bangladesh
Bangladesh, proudly considered as a ‘Rising Tiger’ in South Asia with $21.74
billion inward remittance, has become the third and eighth highest remittance
178 S. M. Sohrab Uddin and Tasfka Khanam

TABLE 1 Year-wise remittance collection through formal sector from year 2015 to year
2020.

Country/ 2015 2016 2017 2018 2019 2020

Year

Bangladesh 15.30 13.57 13.50 15.57 18.36 21.75

Pakistan 19.31 19.82 19.86 21.19 22.25 26.11
Indonesia 9.66 8.91 8.99 11.22 11.67 9.65
Malaysia 1.64 1.60 1.65 1.69 1.64 1.45

Source: Constructed by the authors based on World Bank (Various Years) Data. Amounts are in US$
billion.

TABLE 2 Country-wise inward remittance and remittance percentage of GDP at the

end of 2020

Particulars/Year Bangladesh Pakistan Indonesia Malaysia

Amount of remittance 21.75 26.11 9.65 1.45

(in USD billion)
% of GDP 6.7 9.9 0.91 0.4

Source: Constructed by the authors based on the World Bank Data 2020.

recipient country in South Asia and the world, respectively, in 2020. Inward
remittance is the second largest source of foreign currency earning followed by
readymade garments (RMG) in Bangladesh. Moreover, through the creation
of scope for unemployed people, alleviation of extreme poverty, improvement
of living standard, growth of foreign exchange reserves, and counter balance of
the current account defcit with the growing trend of migrants’ remittance, the
economy is moving forward. About 6.7% of the GDP of Bangladesh came from
migrants’ income at the end of 2020.
In Bangladesh, a huge amount of remittance is transferred through a legal
channel such as banks. The highest amount of remittances, among all commer-
cial banks, have been collected by Private Commercial Banks (PCBs) followed
by the State-owned Commercial Banks (SCBs), Specialized Banks (SBs) and
Foreign Commercial Banks (FCBs). From October to December 2020, about
$4,577.23 million remittances (73.45 percentage of total) have been collected
by PCBs. However, the highest amount of remittance with $1,922.96 million
(30.86 percentage of total), among all PCBs, have been received by Islami Bank
Bangladesh Limited (IBBL) (Bangladesh Bank, 2020a). In addition, Islamic
banks in Bangladesh are responsible for 40.51% of remittances received by
the whole banking sector at the same period (Bangladesh Bank, 2020b). This
scenario shows that the appeal for the transfer payments through Islamic banks is
rising in Bangladesh during the pandemic. The reasons behind include executing
fnancial stimulus package as per the direction by the Bangladesh Bank (BB); the
central bank of Bangladesh, extending the time for loan repayment; delivering
 Migrants’ interest in remittance services 179

remittances on time; undertaking safety measures for stafs as well as emphasizing

online banking; virtual meeting and training.
Apart from this, the government of Bangladesh recently has taken several
fruitful initiatives in order to promote the remittance infow through the legal
channel such as banks. In the frst place, the maximum time limit for remit-
tance disbursement becomes 48 hours instead of 72 hours. The facilities for
Commercially Important Person (CIP) and special citizen among Bangladeshi
expatriates have been extended. In order to facilitate medical check-up services
to migrant workers, Authorized Dealers (ADs) with the request from approved
medical centers can remit the fee to the benefciaries’ bank account where
check-up details and applicable tax deductions are specifed in invoice. With a
view to facilitating house fnancing to the Non-Resident Bangladeshis (NRBs),
the maximum debt-equity ratio has been set at 75:25 rather than previous 50:50.
Besides, 2.5% cash incentives have been provided for inward foreign remittance
remitting via banking channel. Again, to make the procedure of receiving cash
incentive simple BB has also given specifc directions.
According to the concerned authority, to perform fnancial transactions in a
more efcient way, increase of Shari’ah-compliant FinTech application is essen-
tial for Islamic banking sector of Bangladesh. Consequently, this will ensure
the efcient transfer of migrants’ income. Being a Muslim-majority country,
Bangladesh has tremendous potential for Islamic FinTech. Around 28% of
market shares are held by Islamic banks among the entire banking industry in
Bangladesh (Bangladesh Bank, 2021). It represents that many customers will be
involved if Islamic banks can provide FinTech-based services. Acknowledging
the great scope of Islamic FinTech, the country’s largest PCB, IBBL has planned
to convert into FinTech-based global standard bank soon (Islam, 2020).

4.1.2 Pakistan
Pakistan has become the second largest in foreign remittance earnings with
$26.11 billion which is a contribution of 9.9% to the nation’s GDP in 2020. This
shows the level of importance of remittance in the economic development of
Pakistan. In Table 1, it’s seen that there is a rising trend in the remittance collec-
tion. The major reasons behind this ceaseless growth include the upward trend
of digitalization, restrictions upon money transfer through Hundi and Hawala
along with the limited transfer of cash in person because of traveling restrictions.
In addition, the use of digital means by banks has lessened the cost of money
transfer by the migrants. The report of remittance price worldwide database by
World Bank has expressed the average cost of remitting $200 dropped to 4.1%
in 2020 in Pakistan.
The government of Pakistan along with the central bank, the State Bank of
Pakistan, has taken some major initiatives recently to boost the remittance fow
through formal channels. These include starting performance-based incentive
scheme for Home Remittances scheme marketing which will encourage large
180 S. M. Sohrab Uddin and Tasfka Khanam

players to increase their eforts to transfer inward remittances, initiating massive

public marketing campaign on remittance collection through banks, following
a fat rate of SAR 20/- for all transactions of USD 100/- and above to support
small remitters, and collaborating with the Ministry of Overseas Pakistanis and
Human Resource Development (MOP & HRD) in order to initiate rule for
intended emigrant worker as well as at least one of his/her family member to
maintain an active bank account (State Bank of Pakistan, 2020a).
With 22 Islamic banks including 5 full-fedged Islamic banks along with 17
conventional banks with the branches and windows of Islamic banking; a total
of 3,456 branches and 1,638 windows exist in Pakistan as of December 2020.
Islamic banking sector’s assets valued Rs. 4,269 billion whereas the deposit base
is Rs. 3,389 billion at the same time. Both assets and deposits show the highest
growth, 30% and 27.8% respectively, which indicates a promising transition for
the banking sector of Pakistan (State Bank of Pakistan, 2020b). Moreover, on
January 13, 2021, State Bank of Pakistan has been announced as the best central
bank in promoting Islamic fnance which is based on a poll conducted by Islamic
Finance News, REDmoney Group, Malaysia. Furthermore, the Securities
and Exchange Commission of Pakistan has urged to develop Shari’ah FinTech
market.
Apart from this, Telenor Microfnance Bank in Pakistan made a partnership
with Alipay in order to provide blockchain-powered remittance service between
Pakistan and Malaysia in March 2018. The blockchain technology can transfer
cross-border payments between Malaysia and Pakistan faster and with higher
efciency along with highly secured and transparent manner (Business Wire,
2019).

4.2 Southeast Asia

Two countries – Indonesia and Malaysia, in Southeast Asia have been consid-
ered as a sample in this section. Table 1 depicts the yearly inward remittances
in Southeast Asian countries where remittances in Indonesia increased by 20%
from year 2015 to year 2019. Moreover, Malaysia holds a stable position in remit-
tance collection as its main focus is to disburse remittance rather than collect.

4.2.1 Indonesia
Being the largest economy in Southeast Asia, Indonesia is blessed with a large
amount of inward remittance, amounting to $9.65 billion at the end of year
2020. This amount is responsible for almost 1% of the country’s GDP. Most of the
migrants of Indonesia reside in Malaysia and send their remittances to the home
country by using more informal channels. A study by International Organization
for Migration (IOM) reveals that there is a lack of knowledge among some
segments of the migrant population on how to choose a Remittance Service
Provider (RSP) wisely for earning beneft.
 Migrants’ interest in remittance services 181

To encourage the formalization of the remittance fows, the Bank Indonesia

(BI) has therefore taken a number of initiatives. These include making it
mandatory for all migrants to open a bank account as well as for BI to train
migrants on fnancial literacy sessions on banking and remittance procedures
before their departure, establishing banking networks and initiating dialogue
with destination countries. Besides, BI has been encouraging non-bank agents to
conduct remittance transfers (International Organization for Migration, 2010).
Apart from this, Project Greenback 2.0 has been initiated by the World Bank
so that there will be an enriched remittance market and a better remittance
impact in Indonesia. All sorts of digital payments as well as the activities related
to government’s social assistance programs associated with cash transfers will
be facilitated by the project. Moreover, the project will work for assuring the
advancement of payment service network under private sector. Therefore, long-
run goal of the project is to stimulate economic growth through the conversion
of remittances into productive investments and creation of job opportunities
against unemployment so that remittance senders can choose safer options.
Indonesia, being the world’s largest Muslim country, is regarded as an organ-
ized nation to be the focal point of Islamic Fintech worldwide. According to
the Financial Service Authority of the Republic of Indonesia (Otoritas Jasa
Keuangan – OJK), there are 64 registered FinTech frms in which three of them
including PT Ammana Fintek Syariah (Ammana), PT Dana Syariah Indonesia
(Dana Syariah), and PT Investree Radhika Jaya (Investree) are the Islamic
FinTech P2P lending frms (Aldila, 2018).
Based on 2019 data from OJK, it is observed that around 189 Islamic banks
exist in Indonesia; among them, 14 Shari’ah Commercial Banks (Bank Umum
Syariah – BUS), 20 Shari’ah Business Units (Unit Usaha Syariah – UUS), and
164 Shari’ah Rural Banks (Bank Pembiayaan Rakyat Syariah – BPRS) are work-
ing (Otoritas Jasa Keuangan, 2019). In 2018, a report on Islamic FinTech by
Dinar Standard, a research frm, reckoned that among 93 Islamic FinTech start-
ups in the world, 31 are Indonesian frms (The Jakarta Post, 2020).
Above all, sufcient fnancial literacy is crucial in Islamic banking since there
remains a knowledge gap among Indonesian individuals about Islamic banks’
services which, ultimately, results in impeding the prospect of developing Islamic
banking in Indonesia (Sudarsono, Tumewang, & Kholid, 2021).

4.2.2 Malaysia
Malaysia, a Southeast Asian hub for remittance provider, receives a little amount
of remittance of $1.45 billion which is only 0.4% of GDP. Basically, migrants
come to Malaysia from neighboring countries such as Bangladesh, Indonesia,
India, Nepal, Myanmar, Vietnam, and China.
Bank Negara Malaysia, the central bank of Malaysia, is concerned about
the use of technology in fnancial services. Consequently, there is a signifcant
growth in e-remittance services as the total value of transactions becomes more
182 S. M. Sohrab Uddin and Tasfika Khanam

than double to RM6.6 billion (25 percentage of total outward remittances) at the
end of 2020 (Bank Negara Malaysia, 2020).
Since most of the migrants are connected with their family via smart phones,
it seems very comfortable to use technology. By considering this issue, financial
institutions have opted to provide technology-driven innovative remittance ser-
vices. For example, ‘MyCash Online,’ an online financial service provider with
six languages, is serving migrant workers in Malaysia. In order to transfer inter-
national remittances with more convenient way and low cost, MyCash Online
makes partnership with a licensed RSP named Metro Exchange. It’s undoubt-
edly a great initiative to make easier and low-cost transfer services for migrants
(Pathak, Garg and Gupta, 2018).
In order to strengthen the financial inclusion, Malaysia, with a dual banking
system, has leveraged both Islamic and conventional financial instruments. In order
to increase the number of digital payment users, the MoF in Malaysia has launched
the ‘e-Tunairakyat’ (e-Cash people) initiative in which RM30 will be given to
the participants using any of three e-Wallets (Touch ‘n Go, Boost, and GrabPay).
Apart from this, conditional cash transfers can also be possible and can be used as
an international money transfer tool to improve social welfare and reduce poverty.

5 Problems in traditional remittance transfer

For so many years remittance is being transferred traditionally by both for-
mal channel including banks and MTOs; and informal channel such as hawala
(Ozaki, 2012), whereas the later one attracts migrants more due to the lack of
financial literacy and higher costs involved with the former one. Evidence shows
that South Asian migrants remit a larger portion of their hard-earned money
through informal channel which has no effective linkage to capital generation
in financial system of the economy as households, most of the time, spend on
consumption with little productive investment (Ozaki, 2018).
SWIFT, a traditional medium of remittance transfer is nothing but simply a
messaging platform providing details of the cross-border transactions. By using a
standardized code, known as SWIFT code consisting of institution code, country
code, location code, and bank branch code, as well as transactions details message
is prepared. Moreover, this system only transfers messages whereas payment set-
tlement is accomplished by ongoing banking system. Almost five parties – orig-
inating bank, originating bank’s correspondent, the central bank, beneficiary
bank’s correspondent, and beneficiary banks – are involved within the process
in order to reach money from originator (sender) to beneficiary (receiver). Thus,
the overall SWIFT transaction process can be divided into two parts – delivering
messages and settling payments as well.
Although SWIFT system is being used traditionally in remittance transfer under
the banking platform, it has some inherent drawbacks such as time-­consuming,
costly, and settlement risk. The reason behind this is, basically, the transaction
structure of the system. In most of SWIFT transactions, corresponding bank, an
 Migrants’ interest in remittance services 183

Separate messaging and

payment system - Lengthy processing time

- High transaction costs

Involvement of
corresponding banks

Liquidity problem of middle or - Settlement risk

local receiver bank

FIGURE 1 Drawbacks of SWIFT system.

intermediary between domestic and foreign bank, plays a subsidiary role in payment
settlement. In brief, after receiving money from originating bank, corresponding
bank of originator transfer it to the central bank of migrants’ home country in
order to conduct the exchange of currency and further deliver it to the correspond-
ing bank of beneficiary; after that finally reach to the beneficiary (Chen, 2018).
Thus, the whole process becomes lengthy and time-consuming for the 21st cen-
tury. Sometimes, 3–5 days can be required to remit money to some region under
SWIFT transaction system (Qiu, Zhang, & Gao, 2019). Apart from this, the sys-
tem employs two types of service charge or fee for remitting money derived from
corresponding banks and respective banks (Horton, 2021). Moreover, payment
delivery is charged by both corresponding banks making remittance transfer costly
for migrants. In addition, fee includes initial SWIFT messaging cost, correspond-
ing bank fee and exchange rate fee as well. In this way, traditional SWIFT system
generates higher cost in cross-border remittance. Furthermore, settlement risk can
arise if any middle bank or local receiving bank faces sudden shortfall in liquidity.
In such a situation, transaction will be stopped eventually and make further delay
in payment settlement (Qiu, Zhang, & Gao, 2019) (Figure 1).

5.1 How does blockchain-based remittance transfer reduce the

drawbacks of traditional SWIFT system?
Blockchain-powered remittance technology has the ability to overcome the
shortcomings inherent in traditional SWIFT system. For instance, Ripple system
by constructing P2P network acts as both the messaging network and settlement
network. In this system, when migrant enters remittance request through bank
P2P network takes immediate action as well as keeps the flow of transaction
information and settles the payments simultaneously (Qiu, Zhang, & Gao, 2019).
Moreover, blockchain-enabled remittance eliminates multiple intermedi-
aries such as the corresponding bank of originator and corresponding bank of
beneficiary. Consequently, money is directly transferred through blockchain
from originating bank to destination bank and thus reduces the transaction cost
184 S. M. Sohrab Uddin and Tasfka Khanam

Simultaneous messaging and

Near Real
payment mechanism
time

Lower
transaction cost

Elimination of multiple Settlement risk

intermediaries reduction
(corresponding banks)

FIGURE 2 Blockchain based remittance transfer reducing the drawbacks of

traditional SWIFT system.

of remittance transfer (Rahman & Yadlapalli, 2021) and making the process
shortened (Shumsky, 2020). Therefore, remittance time is near real time and
transaction cost is low under blockchain technology.
Apart from this, the whole process of blockchain includes some compo-
nents which ensures on time message deliberation and payment settlement. For
instance, the messenger, the ILP, the FX ticker, and the validator; these four
key components exist in the process fow of Ripple. The task of messenger is to
connect both the sender bank and receiver bank through a bidirectional mes-
sage which contains relevant information such as risk details, foreign exchange
rate, payment details, process cost, and estimated completion time. The ILP
acts as a sub-ledger in order to keep track of credit, debit, and liquidity status
across the transacting parties. Side by side, whether the process will fail or
settle instantly, is decided by ILP. The exchange rate quote is examined by
the FX ticker. Finally, the validator ensures the transaction’s success or fail-
ure at the receiver bank through cryptography which removes settlement risk
(Qiu, Zhang, & Gao, 2019). However, the system under blockchain can easily
inform relevant parties about any missing document or information before the
starting of transaction (Overdahl, 2019) which generally reduces settlement
risk (Figure 2).

5.2 Loopholes in conventional blockchain-based remittance transfer

In order to attract migrants to use the formal channel in transferring remit-
tance, the government, central banks, commercial banks, and other related
organizations have taken diferent laudable steps where the inclusion of modern
technology such as the use of blockchain under FinTech is praiseworthy. Since
blockchain-based remittance is in its initial stage with the specifc advantages
of lower transaction costs, near real-time transaction, and reduction of settle-
ment risk; some unavoidable challenges also remain. In the frst place, lack of
 Migrants’ interest in remittance services 185

centralization and no strict regulation have created a challenge in acceptance of

blockchain-based remittance transfer by all. This can create fraudulent activities
(Crosby et al., 2016) even after using digital payment system and thus may create
trust defcit among participants. Moreover, many people are unwilling to go
with this new technology as it does not maintain any direct link with the Islamic
Shari’ah (Islamic law). Thus, the above issues are creating room for an alternative
to conventional blockchain-based remittance.

5.3 Contribution of Islamic FinTech in transferring remittance

under blockchain
Since Islamic FinTech is thriving, it has potential to include blockchain technol-
ogy in transfer payments. By using Shari’ah-compliant cryptocurrency, the task
can be performed easily. Moreover, blockchain technology in Islamic FinTech
gives a more secured and innovative way of doing business where the trans-
actions under blockchain ensure more transparency to all the users (Rabbani,
Khan, & Thalassinos, 2020). Since Shari’ah law is followed in Islamic fnance, it’s
enclosed with strict regulation which can ensure the fairness of each transaction
in remittance.
Furthermore, fraudulent activities can be prevented through mutual monitor-
ing by relevant participants such as SSB, government, regulatory authorities, and
so on. However, Islamic banks already have structured SSBs, who are responsible
for monitoring and ensuring Shari’ah compliance of Islamic product, in their
banking model; and they are opted to add technical expertise to adopt Islamic
FinTech appropriately. When Islamic banks along with other stakeholders work
together in monitoring and supervising, it will be easier to prevent fraudulency
in remittance transfer using blockchain technology.
Apart from this, the blockchain-enabled remittance transfer under Islamic
FinTech has great potential to create a new avenue for both Muslim and non-Mus-
lim migrants. Besides, due to the expansion of access of a large number of people,
Islamic FinTech enables reducing the cost of transactions remarkably (Muneeza
& Mustapha, 2021). In addition, it is expected that the growth of the Muslim
population will reach 3 billion by 2060 (Cooper, 2018). Hence, Islamic FinTech
has opened a new horizon for fnancial inclusion of the Muslim community
most of whom were reluctant to be a part of conventional FinTech (Muneeza
& Mustapha, 2021). With the passage of time, engagement of more clients will
reduce the cost of transaction although initially monetary assistance and techni-
cal cooperation from government and regulatory bodies such as Islamic Financial
Services Board (IFSB) and other stakeholders are required for dealing with the
costs borne by Islamic banks in order to compete with its conventional counter-
part in blockchain-powered remittance. Thus, through the reduction of informal
transfer payments and the enhancement of fnancial inclusion, Islamic FinTech-
based blockchain remittance can increase the money supply in the economy and
create more investment opportunities (Figure 3).
186 S. M. Sohrab Uddin and Tasfika Khanam

Shari’ah law under

Assurance of
Islamic FinTech
transparency

Strict regulation by Shari’ahlaw can ensure the fairness of the

transaction in remittance.
Mutual monitoring by
participants in Islamic Prevention of
FinTech fraudulent activities

Fraudulency prevented by relevant participants such as SSB, government, and

regulatory authorities’ mutual monitoring.

New avenue to include more Muslim.

Lower transaction
Collaboration of Islami banks and regulatory cost
bodies such as IFSB along with other
stakeholders.
a) Inclusion of more Muslim in transactions results
in low cost.

b) At the initial stage, monetary assistance from IFSB

and government can assist in dealing with cost
under Islamic FinTech.

FIGURE 3  ontribution of Islamic FinTech in Transferring Remittance under

C
Blockchain.

5.4 Challenges in blockchain-based remittance transfer under

Islamic FinTech
South and Southeast Asia, being a focal zone of remittance collection along with
a rising hub for Islamic finance, have a great potential for blockchain-powered
remittance under Islamic FinTech. Some countries have already started finan-
cial activities by using FinTech in order to ensure smooth transactions and avail
advantages as well.
With tremendous advantages, a few challenges are also waiting for blockchain-­
based remittance under Islamic FinTech. In the first place, lack of trained human
capital (Rusydiana, 2018) and appropriate regulation can be the major impedi-
ments for developing countries. Further, people normally think financial services
under Islamic finance are more complex than conventional finance.

5.5 Ways to overcome challenges in blockchain-based remittance

transfer under Islamic FinTech
Proper training facilities including FinTech and blockchain need to be ensured
in order to create skilled human capital in this field. Further, country-wise reg-
ulation must not be too much flexible or rigid; a proper balance is required
along with timely review and monitoring. However, more studies are needed
 Migrants’ interest in remittance services 187

about how easily Islamic FinTech can express the process of blockchain-enabled
remittance to migrants.

6 Conclusion
Since people of the 21st century are more indulged in using modern technology
and most of the fnancial services are provided using diferent technologies, it
creates a great opportunity for Islamic banks and other institutions to incor-
porate FinTech into their services. With strong potential, blockchain-powered
cross-border money transfer can be included in order to ease the payment system
of migrants. Mainly, some South and Southeast Asian countries – Bangladesh,
Pakistan, Indonesia, and Malaysia – are taken as sample in this regard. The goal
of this chapter was to identify whether the adoption of blockchain technol-
ogy in remittance transfer under Islamic FinTech is able to protect migrants’
income. From the fndings, it is evident that some of the countries such as
Pakistan and Malaysia have already started blockchain-based transfer payment
under Islamic FinTech in order to avail the advantages including cost, time, and
work efciency; trust enhancement; productive investments and job creation;
and fnancial inclusion.
Moreover, since there is a knowledge gap on blockchain-based remittance
among migrants and other stakeholders, sufcient concentration and practical
training are required in order to make the whole process easier and popular.
Besides, central government and regulatory bodies along with SSBs need to play
a vital role in this case.
Indeed, further research opportunities lie in examining the viability of the
use of blockchain-based transfer payment under Islamic FinTech in non-Muslim
countries and how easily Islamic FinTech can express blockchain-enabled remit-
tance to migrants.

References
Ahmad, S. M., & Mamun, A. A. (2020). Opportunities of Islamic FinTech: The Case of
Bangladesh and Turkey. CenRaPS Journal of Social Sciences, 2 (3), 412–426.
Aldila, N. (2018). “Indonesia Negara Paling SiapKembangkan ‘Fintech’ Syariah.”
FinansialBisnis. Retrieved from http://fnansial.bisnis.com/read/20180707/89/813959/
indonesia-negara-paling-siap-kembangkan-fntech-syariah
Alzubaidi, I. B., & Abdullah, A. (2017). Developing a Digital Currency from an Islamic
Perspective: Case of Blockchain Technology. International Business Research, 10 (11), 79.
Antonopoulos A. M. (2014). Mastering Bitcoin: Unlocking Digital Cryptocurrencies, 1st ed.
Sebastopol, CA: O’Reilly Media, Inc.
Bakar, M. A. (2017). Shari’ahh Analysis of Bitcoin, Cryptocurrency, and
Blockchain. Blossom Finance. Retrieved from https://blossomfnance.com/posts/
shariah-analysis-of-bitcoin-cryptocurrency-and-blockchain
Bangladesh Bank. (2020a). Developments of Islamic Banking in Bangladesh, October–
December 2020. Islamic Banking Cell Research Department Bangladesh Bank.
188 S. M. Sohrab Uddin and Tasfka Khanam

Bangladesh Bank. (2020b). Quarterly Report on Remittance Infows in Bangladesh,

October–December 2020. Bangladesh Bank Research Department External Economics
Division.
Bangladesh Bank. (2021). Developments of Islamic Banking in Bangladesh, April-June
2021. Islamic Banking Cell Research Department Bangladesh Bank.
Bank Negara Malaysia. (2020). Annual Report 2020. Annual Publication. Retrieved from
https://www.bnm.gov.my/documents/20124/3026128/ar2020_en_ch1e_payments.
pdf
Business Wire. (2019). Blockchain Technology Backed Home Remittances from Malaysia
to Pakistan Made Possible to Promote Financial Inclusion. Retrieved from https://
www.businesswire.com/news/home/20190108005651/en/Blockchain-Technology-
Backed-Home-Rem ittances-from-Malaysia-to-Pakistan-Made-Possible-to-
Promote-Financial-Inclusion.
Buterin, V. (2015). On Public and Private Blockchains. Retrieved from https://blog.
ethereum.org/2015/08/07/on-public-and-private-blockchains
Chen, P. (2018). Ripple, the Disruptor to the Forty Years Old Cross-Border Payment System.
Digital Initiative. Retrieved from https://digital.hbs.edu/platform-digit/submission/
ripple-the-disruptor-to-the-forty-years-old-cross-border-payment-system/
Cooper, T. (2018). The Race to Become the World’s Leading Leading Islamic
Fintech Hub. Raconteur. Retrieved from https://www.raconteur.net/fnance/
race-become-worldsleading- leading-islamic-fntech-hub.
Crosby, M., Nachiappan, P. P., Verma, S., & Kalyanaraman, V. (2016). BlockChain
Technology: Beyond Bitcoin. Applied Innovation Review, 2, 7–17. Retrieved from https://
www.appliedinnovationinstitute.org/blockchain-technology-beyond-bitcoin/
El Amri, M. C., Mohammed, M. O., & Bakr, A. M. (2021). Enhancing Financial
Inclusion Using FinTech-Based Payment System. In: Billah, M.M. (eds.), Islamic
FinTech. Palgrave Macmillan, Cham, 191-207. doi: 10.1007/978-3-030-45827-0_11
Firmansyah, E. A., & Anwar, M. (2018). Islamic Financial Technology (Fintech): Its
Challenges and Prospect. Advances in Social Science, Education and Humanities Research
(ASSEHR), 216.
Gomber, P., Kaufman, R. J., Parker, C., & Weber, B. W. (2018). On the Fintech
Revolution: Interpreting the Forces of Innovation, Disruption, and Transformation
in Financial Services. Journal of Management Information Systems, 35(1), 220–265.
Horton, C. (2021). What is Correspondent Bank? The Balance. Retrieved from https://
www.thebalance.com/correspondent-bank-5198871
International Organization for Migration. (2010). International Migration and Migrant
Workers’ Remittances in Indonesia. Publication. Retrieved from https://publications.
iom.int/books/international-migration-and-migrant-workers-remittances-indonesia
Islam, S. (2020). IBBL to Launch Global Standard FinTech Banking. Retrieved from
https://thef inancialexpress.com.bd/stock/bangladesh/ibbl-to-launch-global-
standard-fntech-banking-1596084333
Laldin, M. A. (2018). FinTech and Islamic Finance. IFN Islamic Finance News, 15, 67.
Michalopoulos, G., & Tsermenidis, K. (2018). Country Risk on the Bank Borrowing Cost
Dispersion within the Euro Area during the Financial and Debt Crises. International
Journal of Economics and Business Administration, 6(4), 76–92.
Muneeza, A., & Mustapha, Z. (2021). Islamic FinTech and Financial Inclusion. In:
Billah, M.M. (eds.), Islamic FinTech. Palgrave Macmillan, Cham, 173–190. doi:
10.1007/978-3-030-45827-0_10
Otoritas Jasa Keuangan. (2019). Indonesia’s National Financial Literacy Strategy.
Retrieved from https://www.ojk.go.id/id/berita-dan-kegiatan/publikasi/Pages/
Strategi-Nasional-Literasi-Keuangan-Indonesia-.aspx
 Migrants’ interest in remittance services 189

Overdahl, S. (2019). How Blockchain Could Lower the Cost of Remittances. The
National News. Retrieved from https://www.thenationalnews.com/business/money/
how-blockchain-could-lower-the-cost-of-remittances-1.945431
Ozaki, M. (2012). Worker Migration and Remittances in South Asia. ADB South Asia
Working Paper Series, 12.
Ozaki, M. (2018).Channeling Remittances and Diaspora Savings for Investments.
Migration and Remittances for Development in Asia, Chapter 6.
Pathak, A., Garg, P., & Gupta, S. (2018). The Potential for Technology-backed
Remittance Solutions in Malaysia. MicroSave Consulting. Retrieved from https://
www.microsave.net/2018/05/25/the-potential-for-technology-backed-remittance-
solutions-in-malaysia/
Qatar Financial Centre. (2018). Fintech, a Global Boost for Islamic Finance? Retrieved
from https://www.reuters.com/article/idUSWAOAPHREBLWW18A3
Qiu, T., Zhang, R., & Gao, Y. (2019). Ripple vs. SWIFT: Transforming Cross Border
Remittance Using Blockchain Technology. Procedia Computer Science, 147, 428–434.
Rabbani, M. R., Khan, S., & Thalassinos, E. I. (2020). FinTech, Blockchain and Islamic
Finance: An Extensive Literature Review. International Journal of Economics and Business
Administration, VII (2), 65–86.
Rahman, S., & Yadlapalli, A. (2021). Can Blockchain Boost Remittance Infow? The
Financial Express. Retrieved from https://www.thefnancialexpress.com.bd/views/
views/can-blockchain-boost-remittance-infow-1611588849
Rella, L. (2019). Blockchain Technologies and Remittances: From Financial Inclusion
to Correspondent Banking. Frontiers in Blockchain, 2 (14), 1–2. doi: 10.3389/f bloc.
2019.00014
Rusydiana, S. A. (2018). Developing Islamic Financial Technology in Indonesia.
Hasanuddin Economics and Business Review, 2 (2), 143–152. doi:10.26487/hebr.v2i2.1550
Shumsky, P. (2020). How Blockchain Is Going to Change the Remittance in 2020.
Retrieved from https://www.fnextra.com/blogposting/18367/how-blockchain-is-
going-to-change-the-remittance-in-2020
State Bank of Pakistan. (2020a). Annual Report. Annual Publication. Retrieved from
https://www.sbp.org.pk/reports/annual/arFY20/Vol-1/annual-index-eng.htm
State Bank of Pakistan. (2020b). Islamic Banking Bulletin. Quarterly Publication. Retrieved
from https://www.sbp.org.pk/ibd/Bulletin/Bulletin-1.asp
Sudarsono, H., Tumewan, Y. K., & Kholid, M. N. (2021). Customer Adoption of Islamic
Banking Services: Empirical Evidence from Indonesia. Journal of Asian Finance,
Economics and Business, 8 (3), 1193–1204.
The Jakarta Post. (2020).Traceable: Stakeholders Work to Promote Digital Shari’ahh Economy.
https://w w w.thejakar tapost.com/news/2020/11/30/traceable-stakeholders-
work-to-promote-digital-Shari’ah-economy.html
Wintermeyer, L. (2017). The Future of Islamic FinTech is Bright. Retrieved from
https://www.forbes.com/sites/lawrencewintermeyer/2017/12/08/the-future-
ofslamic-fntech-is-bright/#684952e465fa.
World Bank. (2020). Personal Remittances received (% of GDP). Data. Retrieved from
https://data.worldbank.org/indicator/BX.TRF.PWKR.DT.GD.ZS
World Bank (2021). Defying Predictions, Remittance Flows Remain Strong
During COVID-19 Crisis. News. Retrieved from https://www.worldbank.
org/en/news/press-release/2021/05/12/defying-predictions-remittance-f lows-
remain-strong-during-covid-19-crisis
World Bank. (Various Years). Personal Remittances received (Current US$). Data. Retrieved
from https://data.worldbank.org/indicator/BX.TRF.PWKR.CD.DT. Accessed:
June 12, 2022.
10
THE IMPACT OF CENTRAL BANK
DIGITAL CURRENCY (CBDC) ON THE
OPERATIONS OF ISLAMIC BANKS
A.K.M. Kamrul Hasan

1 Introduction
Globally accepted current forms of money are bank notes, bank deposits and
central bank reserves (i.e., commercial banks’ deposits at central bank). Besides,
due to rapid innovation in Fintech and payment settlement system, private dig-
ital currency (Token-based money-like IC Card) is also popular around the
world. On the other hand, with the growing popularity of cryptocurrencies (or
crypto assets) and Distributed Ledger Technology (DLT), central banks around
the world have been searching for the concept and design of digital curren-
cies. Indeed, Central Bank Digital Currency (CBDC) has created a contem-
porary debate on academic circle as well as in the practitioners in last decade.
The debate mainly gets momentum due to two reasons. First, several private
owned digital currencies are used to settle the consumer payment, second, sev-
eral central banks around the world step ahead to take pilot project to introduce
a CBDC. The academic research on CBDC is still on going and central banks
in the advanced economies have already stepped up to explore the opportunities
of issuing CBDC and engaged in experimental work (BIS, 2020, 2021). For
instance, the bank of Japan has initially aimed to start a Proof of Concept (PoC)
phase 1 on CBDC as an alternative payment instrument in 2021 in responses to
global demands and smooth the payment and settlement systems in the Japanese
society (BOJ, 2020). In the United States, an initiative namely ‘Digital Dollar
project’ for introducing pilot programmes for CBDC has been taken (US Senate
Committee, 2021). Besides, Central Bank of the Republic of Turkey (CBRT)
announced that the bank is going to examine the digital Turkish Lira currency
as a potential payment settlement instrument (CBRT, 2021). Overall, the central
banks around the world including China and Europe have initiated the CBDC
projects to improve the payment settlement system and fend of threat from crypto

DOI: 10.4324/9781003262169-13
 The impact of central bank digital currency 191

assets. However, there is little discussion in contemporary study on the potential

impact of CBDC on Islamic banking context. To explore this, in this chapter we
broadly focus on the defnition and features of CBDC and its impact on Islamic
baking operations specially liquidity management. The structure of the chapter
is as follows. Section 2 describes the defnition, trends and features of CBDC.
Section 3 illustrates the architecture of CBDC. Section 4 briefy discusses about
the gharar, CBDC and liquidity in Islamic banks whereas, Section 5 focuses on
a shariah-compliant CBDC and its road map. Section 6 concludes the chapter.

2 CBDC: defnition, features and trends

CBDC is considered as a new form of electronic money. ‘A CBDC is a digital
payment instrument, dominated in the national unit of account, that is a direct
liability of the central bank’ (BIS, 2020). One of the main rationales for intro-
ducing CBDC is to provide a safe central bank instrument where we observe a
signifcant declining trend to use of cash (BIS, 2018). Scholars are very enthusias-
tic about the future of CBDC. For instance, ‘CBDC is a global innovation which
will revolutionize the international payments in the way that the frst Atlantic
Cable did for capital fows and international payment in 1866’ (Bordo, 2021). In
short, we can term CBDC as ‘digital money’ (Brunnermier et al., 2019, Bank
of England, 2020). The major diference between cryptocurrencies (or crypto
assets) and CBDC is, the former one is privately issued and not backed by any
central party whereas the latter one is backed by central bank.
CBDC could be an interest bearing and a non-interest bearing. Interest-
bearing CBDC would likely to increase fnancial inclusion and CBDC does not
need to have a negative impact on bank lending operations if the central bank
follows an interest rate policy rule (Andolfatto, 2018). Although till now, there
is no exact physical existence of a CBDC, the Bank for International Settlement
(BIS) attempts to harmonize few core features of CBDC. BIS (2020) refers that
a CBDC should have three foundational principles, such as (i) ‘do no harm’ to
central bank mandate on monetary and fnancial stability, (ii) it should be coex-
isted with the existing central bank money (cash, reserve or settlement accounts)
and (iii) innovation and efciency – it should be supportive to safe, efcient and
accessible payment system. In addition, the Bank for International Settlements
has described 14 core features of CBDC from three categories to fulfl the three
foundational principles. The core features of CBDC that advocates in BIS (2020)
are shown in Table 1.
Indeed, we have to recognize that CBDC remains a young feld with limited
pilot studies and testing. However, there are some potential opportunities and
risks involved with CBDC. The potential opportunities include (i) it could be
a useful tool for central banks to pursue their policy objectives, (ii) it continues
providing safe and widely accessible central bank money, (iii) supporting a more
resilient and diverse domestic payment system and (iv) it may ofer opportunities
192 A.K.M. Kamrul Hasan

TABLE 1 Core features of CBDC

Sl no Categories of features Features

1 Instrumental features Convertible, Convenient, Accepted and

available, Low cost
2 System features Secure, Instant, Resilient, Available,
Throughout, Scalable, Interoperable,
Flexible and adaptable
3 Institutional features Robust legal framework, Standards

See details in BIS (2020).

that are not possible with cash (BIS, 2020). The potential risks that may arise
from CBDC are as follows: (i) it could have fnancial stability implications that
would need to assess and managed carefully, (ii) increase the potential for digital
bank runs in times of stress and (iii) it could have longer-term consequences for
bank funding by eroding banks; retail deposits, resulting in a less stable funding
mix (BIS, 2020). However, research fnds that the risk can be avoided by intro-
ducing two-tier CBDC system (Bindseil, 2020).
In a broad sense, there are three factors that are important to use CBDC as
a means of payment instrument. These are widespread merchant acceptance,
sufcient distribution of CBDC and demand from the consumers to pay with
CBDC (Bindseil et al., 2021). Moreover, some scholars argue that allowing
unrestricted access to a CBDC in to the cross-border use of CBDCs to cross-
currency payments between CBDCs, there have three potential risks. For
instance, (a) increase the risk of digital currency substitutions – impairing the
efectiveness of domestic monetary policy and raising fnancial stability risk
specially for emerging markets and less developed economies that have unsta-
ble currencies and weak fundamentals, (b) global spillovers – issuing a CBDC
could magnify the cross-border transmission of shocks and increase exchange
rate volatility and alter capital fow dynamics and (c) broader international
demand for a CBDC may cause the exchange rate appreciate since cost of
cross-border payment might falls by using a CBDCs as international currencies
(Panetta, 2021). International cooperation among central banks could mini-
mize the risk.
In Islamic fnance and banking literature the concept of ‘crypto currency’
is almost similar to the traditional concept of CBDC (as we summarized in the
above discussion) in terms of utilizing DLT and utility perspective. However,
scholars’ concern on the price volatility of crypto assets which make them reluc-
tant to accept a CBDC as a fully shariah-compliant instrument. Once this issue
has been successfully addressed, no point of diferences will be existed to issue
an Islamic CBDC, we believe. Next section, we summarize the architectural
foundation of CBDC before moving to our core discussion.
 The impact of central bank digital currency 193

3 Architecture of CBDC
BIS has opined that ‘issuance of CBDC is not a mandatory rather a national choice
and if the societies want it central banks come forward to fulfl the demand’
(Carstens, 2021). A careful architectural design for CBDC is required so that the
monetary policy implementation and fnancial stability will not be jeopardized
(Carstens, 2021). Auer and Böhme (2021, 2020) mentioned three types of CBDC
while architecture a retail CBDC for operation. These are ‘direct’ CBDC, ‘hybrid
and intermediated’ CBDC and ‘indirect’ CBDC. ‘Direct’ CBDC refers direct claim
on the central bank, which also handles all payments in real time and thus keeps a
record of all retail holdings. Hybrid CBDC incorporates a two-tier structure with
direct claims on the central bank while real-time payments are handled by inter-
mediaries. In the case of indirect CBDC, a CBDC is issued and redeemed only by
the central bank, but this is done indirectly to intermediaries. Intermediaries, in
turn, issue a claim to consumers. The intermediary is required to fully back each
claim with a CBDC holding at the central bank and the central bank operates the
wholesale payment system only (Auer and Böhme, 2021, p. 10). Most recently,
the Central Bank of Nigeria (CBN) has launched eNaira, a CBDC, in October
2021 which is based on a two-tier system and direct one (CBN, 2021a,b). In our
view, Islamic CBDC (see in Section 6.5) should be two-tier CBDC and direct one
instead of indirect CBDC. The rationale is explained in the following section.

4 Gharar, CBDC and Islamic banks liquidity

The term gharar (uncertainty) originates from the Arabic verb gharra, which
means to deceive. Forms of gharar (uncertainty) include pure speculation where
the outcome depends on chance or gambling, uncertain outcome where the
counter-value is uncertain or not realized, inexactitude of object and unknown
future of object (Paldi, 2014). Most scholars agree that the issue of speculation is
related to gharar. Speculation according to Kamali (2000, p. 147) is the purchase
and sale of an asset in the expectation of a gain from changes in the price of that
asset. Some scholars consider the prohibition of gharar in terms of speculation
have multiple dimensions. For instance, Suzuki (2013, p. 208) mentioned that

the prohibition of Gharar in speculation is considered as the wisdom for

minimizing the potential periodic fnancial disaster. In parallel, under the
prohibition of Gharar (also the proft-loss sharing) framework, it may have
created a dilemma of the so-called ‘Murabaha syndrome’ leading to the
fnancial disintermediation (particularly the dry-up of long-term funds) in
the potentials in the agricultural and industrial sector. Long-term growth
may sufer as a result.

Al-Saati (2003) summarizes the concept of gharar from Islamic jurisprudence into
three headings. These are (a) a state where it is unknown whether something will
194 A.K.M. Kamrul Hasan

take place or not (i.e. uncertainty of existence of the subject matter of sale), (b)
ignorance of the purchaser of what he has bought and the seller does not know
what he has sold and (c) a state of transaction where consequences are concealed.
Al-Saati (2003) also classifes the gharar into four types in terms of degree of its
permissibility in Islamic transaction. These include (i) prohibited gharar – a kind
of uncertainty which is taken voluntarily and transfer of money/goods with no
value creation or created from the transaction, (ii) permissible gharar – if there is
no general agreement among the school of jurisprudence to prohibit and inva-
lid the contract that involves such kind of gharar. For instance, two sales in one
contract, option sale, conditional sale, etc., (iii) acceptable gharar – if the gha-
rar sources are either endogenous or exogenous uncertainty, it is permissible in
shariah. For example, exogenous uncertainty are changes in consumer’s taste,
frms’ technologies and weather conditions and of endogenous uncertainty, the
buyer’s uncertainty about the suitability of the seller he meets, or the quality of
commodity he buys, or the term of the trade that will take place and (iv) man-
datory gharar – the uncertainty that goes with the transaction and which can’t
be avoided. The musharakah, ijarah and mudarabah contracts are well examples
of mandatory contract. In short, we can say that in commercial contract we
cannot totally eliminate the uncertainty and there are always some elements of
gharar (Aldohni, 2015; Hassan and Lewis, 2017) and a commercial transaction is
permissible in shariah context when all the contracting parties in the transaction
share the same level of acceptable risk (Balala, 2014). It is worth to refer Alvia
(2020) who summarizes the defnition and scope of gharar in Islamic fnance in
the following way:

Gharar in Islamic fnance is not without issues, primarily because there is

no universal agreement among Muslim jurists as to what degree of legal
uncertainty is acceptable in commercial transactions. Gharar is therefore
a matter of interpretation, which in itself can cause issues (Nehad and
Khanfar, 2016). In an attempt to counter such issues, learned scholars are
generally relied upon to distinguish between contracts containing minor
gharar (allowed) and contracts containing substantial gharar (forbidden and
therefore void) (Balala, 2014).

As we discussed in Section 2 that CBDC is kind of virtual currency that is issued

by central bank. We should note that the fundamental features of CBDC are
identical to that of bank notes because both currencies are issued and backed by
central authority. However, there exists a couple of diferences between CBDC
and bank notes from a utility perspective. For instance, fnancial transactions
with the CBDC are more secure as it uses the blockchain and DLT to record
transactions. Besides, CBDC has a fexibility to issue either in tier one (i.e.,
issuing CBDC directly from central bank to merchant and person) or tier two
(i.e., through regulated and supervised fnancial institutions) whereas bank notes
are always issued by central banks under tier two system. We should note that
 The impact of central bank digital currency 195

introducing tier one type CBDC requires a more technological and stronger reg-
ulatory framework. Ward and Rochemont (2019) refer to a few unique features
of CBDC compared to bank notes. As the central bank directly guarantees the
at-par convertibility of CBDC into cash and/or reserves, it would not provide
lending facilities for holders of the digital currency (Ward and Rochemont,
2019). The World Economic Forum (WEF, 2019) has also described a few pros
of CBDC over bank notes. These are (i) reducing frictions and costs associ-
ated with physical cash storage, transport and management within the banking
system, (ii) providing alternative to private sector digital payments technologies,
to counter operational risk or monopolistic control by those providers if they
become dominant and to serve as a government-issued alternative for cash if it
becomes scarce in the future, (iii) improves payment system resilience to cyber-
attacks, operational failures and hardware faults relative to centralized data stor-
age and processing, which has less data redundancy and, therefore, may be less
robust (WEF, 2019). As we have referred earlier that if we consider fat money
and CBDC in terms of central authority, there is no basic diference however
in terms of circulation or impact on bank money supply there are diferences.
Besides, the fuctuations of nominal value (since there are no fxed assets/gold
behind issuance of CBDC) in the case of CBDC might be higher which might
increase the infation in turn enhance fnancial instability (Abubakar et al. 2019).
Abubakar et al. (2019) also refer that the empirical study of Abdullah (2015)
shows that high-value currency (the cause) means low prices (the efect) over the
long term, or a low-value currency would involve high prices; thus, in order to
obtain price stability, monetary authorities should pay attention to a stable value
of money rather than focusing on the quantity of money, or interest rate, or even
target prices. Considering this, we can say that the price fuctuations in CBDC
could create chaos in the fnancial system. Now let’s examine how CBDC has
an impact on Islamic fnancial institutions (IFIs) operation, especially liquidity
management.
First, let us discuss, how traditional IFIs are managing the liquidity at opera-
tional level. Conventional commercial banks are investing their surplus liquidity
in call money market instruments and in governmental treasury bills and bonds.
As both are interest-bearing instruments, IFIs could not participate in such short-
term money market. Rizkiah (2018) documented that several Islamic liquidity
management instruments are used across the countries in which Malaysia has
much more diversifed instruments and sukuk might be most familiar instru-
ment treated as liquidity management tools (see details in Rizkiah, 2018p. 139).
Global and domestic sukuk are issued with short-term and long-term maturity.
Short-term sukuk with maturity of 1 year or less are indispensable in particular
meeting liquidity management requirements of IFIs (IIFM, 2021). Total global
short-term sukuk issuance since the inception of the sukuk market stands at
USD 502.05 billion, whereas during 2020, short-term sukuk issuance was USD
56.741 billion against 2019 issuance of USD 40.00 billion which translates into
an increase of around 41.84% p.a. of short-term sukuk issuances (IIFM, 2021).
196 A.K.M. Kamrul Hasan

1. Low profit rate in Islamic

money market products
Islamic Money might reduce
market instruments competitiveness of IFIs.
2. Some products are not
validated as pure Islamic
products by the scholars
Liquid Fund globally. Such as
commodity murabahah or
tawarruq.

Non-existence of real asset

CBDC
and Price fluctuation creates
gharar issue.

FIGURE 1 Liquidity management dilemma for IFIs.

Malaysia’s share of the short-term sukuk market including International Islamic

Liquidity Management remains dominant with the total market share of around
52.60% during 2020 (IIFM, 2021). However, the main obstacles for managing
IFIs liquidity through short-term sukuk has the debate among the Islamic schol-
ars regarding its shairah legitimacy as there are diferent opinions exists in Islamic
schools of jurisprudence especially on tawarruq-type issue (Sarker, 2019).
Besides, in countries where the Islamic banking market share is not dominant,
the proft rate of liquidity instruments is low because of their low demand and
roll out. For example, Bangladesh Bank (BB), the central bank of the country
has introduced Bangladesh Government Islamic Investment Bond (BGIIB) in
2004 with the objective to develop a sound foundation for the Islamic bond
market and to convert excess liquidity into investment through Islamic bonds,
however fund return is very low compared to other deposit products (BB, 2021;
Sarker , 2019). In turn, BGIIB became an unattractive instrument to the Islamic
banks in Bangladesh. In addition to BGIIB, BB has formed an Islamic inter-bank
fund market (IIFM) in 2011, a new platform for Islamic Sharia’h-based scheduled
banking companies and fnancial institutions and Islamic banking branches of
scheduled conventional banking companies to conduct transactions into IIFM
(Sarker , 2019). IIFM has been established in resemblance with the call money
market for conventional banks to eliminate temporary and short-term liquidity
crisis of Islamic banks; however, Islamic banks are not participating in this mar-
ket due to lower yield rates (Sarker ., 2019). To sum up, existing Islamic money
market instruments face dilemmas with its legitimacy and proft rates and IFIs are
struggling to manage surplus/defcit liquidity management.
On the other hand, CBDC could be a better option for IFIs for managing
surplus/defcit liquidity pressure. As discussed, CBDC is a central bank instru-
ment and can be issued with interest or interest-free. One feasible option of
IFIs is to hold CBDC if it is interest-free, but proft can be loaded in CBDC
 The impact of central bank digital currency 197

like sukuk pay the yields to its holders. However, the crux question at this
point is the price stability of CBDC and its underlying assets. In fact, the
massive price fuctuations in the crypto assets link to gharar and if CBDC
contains such price fuctuations as typical cryptocurrencies have, IFIs will face
new dilemmas with the CBDC. The summary of the above discussion can be
shown in Figure 1.

5 Roads towards a Shariah-compliant CBDC

We could recall that Bitcoin, the largest cryptocurrency by market value, was
more volatile and proved just choppy as any other during 2021. While observing
the price fuctuation of cryptocurrencies in the past decade, one of a leading
bankers termed Bitcoin as ‘it’s a speculative asset’ (Hajric, 2021). Probably this
would be a real reason to issue a shariah-compliant CBDC. We should note that
scholars are concerned about the features of an Islamic currency from several
point of views. For instance, Hanif (2020) states that an Islamic currency should
consist of eight features such as acceptability, measure and store of value, dura-
bility, desirability, stability, transferability, fexibility and security. As discussed,
a CBDC’s features meet all criteria (see Table 1) for being it an Islamic currency
except concern on gharar that raised mainly from the fear of price fuctuations.
Once a shariah-compliant CBDC is introduced, IFIs could easily be tapped on
it and optimize the CBDC to tackle their liquidity management dilemma as
we showed in Figure 1. In the next two sub-sections, we proposed two theo-
retical approaches to issue a shariah-complaint CBDC by which gharar could be
resolved since there will be a very little possibility for price fuctuations in these
two options.

5.1 Precious-metal–backed cryptocurrency (PMBC)

Ajouz et al. (2020) advocate for shariah-compliant PMBC in lieu of tradi-
tional one. However, the main limitation of this concept is the scarcity of
precious metals and political compromise with the rich Muslim majority
countries statesmen and rest of world powers. Another option is the issuance
of only gold-based CBDC. Aliyu et al. (2020) documented that there are
fve shariah-compliant private digital currencies/cryptocurrencies in opera-
tion of which two (namely, OneGram and Bayan Token) are based on assets.
OneGram is completely based on gold whereas Bayan Token is based on cloud
server service. Following the development of private shariah-based crypto-
currencies, central banks could take initiative to introduce gold back CBDC
instead of following traditional blockchain technology. However, again there
is an issue of how to reconcile the supply of gold to issue a huge amount of
CBDC. Few rich Muslim states might be controlling the supply of CBDC
in such a gold-backed CBDC and the price fuctuation might be higher if
demand goes up.
198 A.K.M. Kamrul Hasan

5.2 Asset-backed CBDC (ABCBDC)

A recent study conducted by the BIS reveals that most of the central banks in
the emerging market and developing economies (EMDEs) prefer retail CBDC
instead of wholesale CBDC (see details in Alfonso et al. (2022). EMDEs main
motivation to issue retail CBDC is to national use only and place the great-
est weight on financial inclusion, efficiency of the domestic payments system
and safety of the payments system (Alfonso et al., 2022). Most of the Muslim
majority countries are in EMDEs category and having such a reality, we could
consider issuing ABCBDC instead of PMBC or Gold-backed CBDC. To issue
ABCBDC long-term sukuk structure could be applied. There is a thin difference
between asset-based sukuk and asset-backed sukuk, i.e., asset-based sukuk return
considers as traditional income from bond whereas the asset-backed sukuk return
as income from equity. Scholars argue that the latter one much more shariah
­compliant than the former one (see details in Herzi, 2016). Therefore, central
bank could create a Special Purpose Vehicle for the issuance of ABCBDC. It can
be backed by any strategic state-owned assets like minerals and natural oil field,
gold mine, etc. However, it would be difficult for developing Muslim countries
to issue either ABCBDC or asset-based CBDC due to resource constraint.
Overall, we argue that if there is specific asset underlying the CBDC the
­gharar issue could be resolved. Table 2 shows the implication of shariah-based
CBDC (based on our proposed two options) on various aspects.
In our theoretical discussion on proposed Islamic CBDC, we argue to issue a
CBDC on asset-backed type which might create a differentiation with its coun-
terpart bank notes and conventional CBDC. Currently, IFIs are to some extent
tap on the conventional call money market to borrow funds however they could
not participate in the call money market as a lender (due to association with
interest). On the other hand, the profit rate in Islamic call money markets is too
low to attract the IFIs to invest their funds. Having such a reality, we suggest that

TABLE 2 Implication of Shariah-based CBDC

Details PMBC ABCBDC

Is it possible to make Somewhat difficult due Not difficult, however,

production in large to scarcity of precious developing Muslim
volume? metals majority countries might
face resource constraint
Is there any gharar issue No No
involved?
Will it be supportive to Yes Yes
manage IFIs’ liquidity
issue?
Any chance to price May be May not
fluctuations?
 The impact of central bank digital currency 199

if CBDC is issued under asset-backed, the conventional fnancial institutions as

well as IFIs would invest their funds in it. Either the case of high/low demand
for CBDCs or the competition among CBDCs issued by multiple central banks
may not fuctuate the price of ABCBDC. This will diferentiate between typical
CBDC, bank notes and ABCBDC. We assume that since the market participants
are now larger, the return will be attractive. In turn, IFIs have an incentive to
invest and manage the liquidity through the CBDC marketplace. We presume
that, in such a way, circulation of CBDC could ease the liquidity management
dilemma in case of IFIs. Finally, we should note that, most of the virtual curren-
cies including CBDC will facilitate the ‘peer-to-peer’ settlements and decentral-
ized manner (no intermediary). A retail CBDC acts as a substitute or complement
for cash and an alternative to traditional bank deposits. Obviously, it depends on
the rule of necessity (darurah) and the state of a country’s current payment system.
For instance, The Central Bank of Denmark expressed a doubt of the potential
role of retail CBDC, in a report published in 2017 in the Denmark fnancial
system, ‘in a country like Denmark, with a secure and efective payment system,
it is difcult to see what CBDC would contribute that is not already covered
by the existing payment solutions’ (DNB, 2017, p. 21). Hence, we can presume
that the emerging economies where the payment system is not developed as par
with the developed economies, may have most to gain to introduce CBDC and
it would play a key role in ‘peer-to-peer’ settlements. If so, circulation of CBDC
could create uncertainty/gharar to some extent in emerging economies. It is true
for both conventional and Islamic fnancial systems.

6 Conclusion
In this chapter, we attempt to discuss the core concept of CBDC and its
architecture of Islamic CBDC. We discuss how IFIs are facing dilemma in
managing surplus or defcit in liquidity management. We advocate that although
there are several fnancial instruments currently used in managing such dilemma,
due to low-proft rate, the liquidity management products are not so attractive to
the IFIs. We believe that to solve this issue if Islamic CBDC is introduced by the
national regulator, IFIs will be interested to invest on it to manage their surplus
or defcit liquidity problem. At this point, the price fuctuation in CBDC may
be a shariah concern for IFIs due to gharar. To resolve the gharar issue in CBDC,
we presume that ABCBDC could be a feasible solution. However, as there are a
few live CBDC exists till date and most of the advanced economies and emerg-
ing economies adopt ‘wait and see’ approach to launch fully operational CBDC,
we have little operational experience and few empirical academic research on a
functional CBDC. The theoretical discussion in this chapter on the initiation of
Islamic CBDC and operational concept of managing the liquidity problem in
IFIs through Islamic CBDC obviously demand further research along with their
conventional pair.
200 A.K.M. Kamrul Hasan

References
Abdullah, A. (2015). Economic security requires monetary and price stability: Analysis
of Malaysian macroeconomic and credit data. Al-Shajarah: Journal of the International
Institute of Islamic Thought and Civilization (ISTAC), 205–247.
Abubakar, M., Hassan, M. K. and Haruna, M. A. (2019). Cryptocurrency Tide and
Islamic Finance Development: Any Issue? In Choi, J.J. and Ozkan, B. (Eds.), Disruptive
Innovation in Business and Finance in the Digital World (International Finance Review, Vol.
20, pp. 189–200). Bingley: Emerald Publishing Limited. https://doi.org/10.1108/
S1569-376720190000020019
Ajouz, M., Abdullah, A. and Kassim, S. (2020). Developing a Shari’ah-compliant precious
metal backed cryptocurrency. JKAU: Islamic Economics, 33 (1), 3–20.
Aldohni, A. K. (2015). The quest for a better legal and regulatory framework for Islamic
banking. Ecclesiastic Law Journal, 17, 15–35.
Alfonso, V., Kamin, S. and Zampolli, F. (2022). Central bank digital currencies (CBDCs)
in Latin America and the Caribbean. BIS Working Papers No 989. BIS Representative
Ofce for the Americas, Monetary and Economic Department.
Aliyu, A., Abu Bakar, K., Matsuda, G., Darwish, T. S. J., Abdullah, A. H., Ismail, A. S.,
Radzi, R. Z. R. M., Yusof, A. F., Mohamad, M. M., Idris, M. Y., Ismail, Z.,
Yaacob, A. C. and Herman. (2020). Review of Some Existing Shariah-Compliant
Cryptocurrency. Journal of Contemporary Islamic Studies, 6 (1), 22–43.
Al-Saati, A. R. (2003). The Permissible Gharar (Risk) in Classical Islamic Jurisprudence.
Journal of King Abdulaziz University: Islamic Economics, 16 (2), 3–19.
Alvia, D. D. (2020). Risk, uncertainty and the market: a rethinking of Islamic and
Western fnance. International Journal of Law in Context, 16, 339–352. doi:10.1017/
S1744552320000154
Andolfatto, D. (2018). Assessing the Impact of Central Bank Digital Currency on Private
Banks. Working Papers 2018-026. Federal Reserve Bank of St. Louis, revised 22 April
2020.
Auer, R. and Böhme, R. (2020). The technology of retail central bank digital currency.
BIS Quarterly Review, March 2020, 85–100.
Auer, R. and Böhme, R. (2021). Central bank digital currency: the quest for mini-
mally invasive technology. BIS Working papers: No 948. Monetary and Economic
Department, BIS.
Balala, M. H. (2014). Islamic Finance and Law: Theory and Practice in a Globalized World.
New York: I.B. Tauris & Co Ltd.
Bangladesh Bank (2021). Developments of Islamic Banking in Bangladesh ( July-September
2021). Dhaka: Research Department, Head Ofce, Bangladesh Bank.
Bank for International Settlements (2018). Central Bank Digital Currencies. Technical Report.
Basel Committee on Payments and Market Infrastructures. Basel: Switzerland.
Bank for International Settlements (2020). Central Bank Digital Currencies: Foundational
Principles and Core Features: Report 1 in a Series of Collaborations from a Group of Central
Banks. Basel: Switzerland.
Bank for International Settlements (2021). BIS Papers no. 114: Ready, Steady, Go? – Results
of the Third BIS Survey on Central Bank Digital Currency. Basel: Switzerland.
Bank of England (2020). Discussion Paper: Central Bank Digital Currency Opportunities,
Challenges and Design. London: United Kingdom.
Bank of Japan (2020). The Bank of Japan’s Approach of Central Bank Digital Currency. Tokyo:
Japan.
 The impact of central bank digital currency 201

Bindseil, U. (2020). Tiered CBDC and the Financial System. Occasional Paper Series, 2351,
ECB, Frankfurt am Main, January.
Bindseil, U., Panetta, F. and Terol, I. (2021). Central Bank Digital Currency: Functional
Scope, Pricing and Controls. Occasional Paper Series, No. 286. ECB, Frankfurt am
Main, December.
Bordo, M. D. (2021). Central Bank Digital Currency in Historical Perspective: Another
Crossroad in Monetary History. NBER Working Paper No. 29171, August 2021.
Brunnermier, M., James, H. and Landau, J. P. (2019). The Digitalization of Money.
NBER Working Paper 26300, September 2019.
Carstens, A. (2021). Digital Currencies and the Future of the Monetary System. BIS,
January 2021 (https://www.bis.org/speeches/sp210127).
Central Bank of Nigeria (CBN) (2021a). Design Paper for the eNaira. Retrieved from
https://www.enaira.gov.ng/about/design
Central Bank of Nigeria (CBN) (2021b). Central Bank of Nigeria Press Release: President
Buhari to Unveil eNaira on Monday, 25 October 2021. Retrieved from https://www.cbn.
gov.ng/Out/2021/CCD/eNaira%20Launch%20Press%20release%20%20231021.pdf
Central Bank of the Republic of Turkey (CBRT) (2021). Press Release on Central Bank
Digital Turkish Lira R&D Project. Central Bank of the Republic of Turkey, Head Ofce,
Ankara.
Danmarks National Bank (2017). Central bank digital currency in Denmark? Analysis,
(28), 1–23.
Hajric, V. (2021, December 31). Bitcoin closes lucrative year with a whimper. Al Jazeera.
Retrieved from https://www.aljazeera.com/economy/2021/12/31/bitcoin-closes-
lucrative-year-with-a-whimper
Hanif, M. (2020). Developing a fair currency system. ISRA International Journal of Islamic
Finance, 12 (3), 325–345.
Hassan, K. and Lewis, M. K. (2007). Handbook of Islamic Finance. London: Edward Elgar.
Herzi, A. A. (2016). A Comparative study of asset based and asset backed sukuk from the
shariah compliance perspective. JMFIR, 13 (1), 25–34.
International Islamic Financial Market (IIFM) (2021). Sukuk Report: A Comprehensive study
of the global sukuk market (10th Edition). Manama, Kingdom of Bahrain: International
Islamic Financial Market.
Kamali, M. H. (2000). Actualization (Taf’il) of the Higher Purposes (Maqasid) of Shariah.
Herndon, VA: International Institute of Islamic Thought.
Nehad, A. and Khanfar, A. (2016). A critical analysis of the concept of Gharar in
Islamic fnancial contracts: diferent perspective. Journal of Economic Cooperation and
Development, 37, 1–24.
Paldi, C. (2014). Understanding Riba and Gharar in Islamic Finance. Journal of Islamic
Banking and Finance, 2(1), 249–259.
Panetta, F. (2021). “Hic sunt leones” – open research questions on the international dimension of
central bank digital currencies. Speech by Mr Fabio Panetta, Member of the Executive
Board of the European Central Bank, at the ECB- Central Bank Research Association
(CEBRA) conference on international aspects of digital currencies and fntech,
Frankfurt am Main, 19 October 2021. Retrieved from https://www.bis.org/review/
r211118c.htm
Rizkiah, S. K. (2018). Liquidity management in Islamic banking: Issues and challenges.
Tazkia Islamic Finance and Business Review, 12(2), 132–152.
Sarker, M. A. A. (2019). Liquidity Management Instruments for the Islamic Banks in Bangladesh
(Special Research Work (SRW-1904)). Dhaka: Bangladesh Bank.
202 A.K.M. Kamrul Hasan

Suzuki, Y. (2013). A Posttps://www.emerald.com/insight/search?q=Yasushi%20Suzuki”

International Journal of Islamic and Middle Eastern Finance and Management, 6 (3), 200–
210. https://doi.org/10.1108/IMEFM-Sep-2012-0086
US Senate Committee (2021). Building a Stronger Financial System: Opportunities of a Central
Bank Digital Currency: Testimony of Hon. J. Christopher Giancarlo. Washington DC: US
Senate Committee on Banking Housing and Urban Afairs. Retrieved from https://
www.banking.senate.gov/imo/media/doc/Giancarlo%20Testimony%206-9-21.pdf
Ward, O. and Rochemont, S. (2019). An addendum to “A Cashless Society- Benefts, Risks and
Issues (Interim paper)”: Understanding Central Bank Digital Currencies (CBDC). Institute
and Faculty of Actuaries. Retrieved from The Cashless Society Working Party:
h t t p s://w w w. a c t u a r ie s .o r g .u k /p r a c t ic e - a r e a s/f i n a nc e - a n d i nve s t m e n t /
fnance-and-investment-research-working-parties/cashless-society-working-party.
World Economic Forum (WEF). (2019). White paper: Central Banks and Distributed Ledger
Technology: How Are Central Banks Exploring Blockchain Today? Cologny/Geneva,
Switzerland: World Economic Forum.
11
TAKAFULTECH REFLECTS THE
MAQASID AL-SHARIAH ETHOS IN
TAKAFUL
Amirul Aff Muhamat and Norfaridah Ali Azizan

1 Introduction

“It’s not a faith in technology. It’s faith in people.”

Steve Jobs

The words of wisdom from Steve Jobs about technology implies that the raison
d’être of technology is to lift up the mankind quality of life which is also the
ultimate purpose of Shariah. In this chapter, the discussion will be centred on the
connection between the takaful operators and the implication of technology to
assist the takaful operators to better serve the takaful participants (policyholders)
and ultimately to achieve the maqasid al-Shariah.
The chapter is structured into several sections, which is immediately after
this section is an overview on the takaful industry, followed by discussion on the
maqasid al-Shariah. Subsequently after that are arguments on the dilemma faced
by the takaful participants and then deliberation on the examples of takafultech
technologies such as drone and blockchain as well as their potentials. Gradually,
discussion will be focusing on the challenges of takafultech and linking towards
the maqasid of Shariah. Last but not least is the conclusion to bring into focus the
essential points of discussion in this chapter.

2 Overview of takaful
Takaful is one of the main components in the modern operations of Islamic
fnance. The importance of takaful can be seen when it was developed after the
Islamic banking, particularly in the Muslim countries that have dual banking
systems. Takaful provides the necessary protection scheme that is Shariah compli-
ant for individual, group and corporate.
DOI: 10.4324/9781003262169-14
204 Amirul Aff Muhamat and Norfaridah Ali Azizan

Islamic Financial Services Industry Stability Report 2020 by Islamic

Financial Services Board mentions that the global takaful industry has
recorded approximately at 8.5% in terms of the compound growth rate from
2011 to 2018, and fve countries, Iran, Saudi Arabia, Malaysia, the UAE and
Indonesia, contributed 91% of the global total contributions. The same report
also highlighted that in 2018, the general takaful represents higher contribu-
tion, 82.6% compared to family takaful at 17.4%. This is mainly due to the
diferent market features in which the Gulf Cooperation Council countries
focused more on the general takaful compared to the Muslim countries in
South-East Asia such as Malaysia and Indonesia, which gained more from the
family takaful business.
The total global takaful assets in 2019 as reported by ICD-Refnitiv in the
Islamic Finance Development Report 2020 is estimated to be at USD51 billion
with 336 takaful operators (including windows) actively servicing the takaful par-
ticipants all over the world, and 80% or the Top Three markets’ share in 2019 for
the global takaful assets are Saudi Arabia, Iran and Malaysia.
The industry is now equipped itself with the necessary knowledge, skills and
capacity to respond to the takafultech requirements. Takafultech which derives
its name from the words takaful plus technology (takaful+technology) represents
the contemporary era of the industry brought by the disruption to the incum-
bents facilitated by the sophisticated technological tools such as data analytics,
internet of things (IoT), clouds and others – most important, it must be Shariah
compliant.
The general insurance and takaful business are expected to face stif compe-
tition from the standalone insurtech/takafultech (PWC, 2016). In 2016–2017,
insurers and takaful operators mostly uncertain in terms of consumers readiness
for digitalisation. EY (2020) suggests several major areas that will be infuenced
by the “tech”, which are:

i Underwriting and risk

ii Claims and data management
iii Products and customer experience

This chapter discusses two takafultech technologies which are drone and the
blockchain, and their potentials to assist the takaful operators to enhance their
fulflment of the maqasid al-Shariah.

3 Maqasid al-Shariah in the context of takaful

Takaful products and services are fnancial instruments that are closely related to
the fulflment of the maqasid Shariah. This is not peculiar since the early inception
of takaful which can be traced back to the old Arab tribal practices, the aqilah sys-
tem, to contribute funds that will be used to pay as compensation to the victim
 Takafultech refects the Maqasid al-Shariah ethos in takaful 205

from another tribe. In most cases, this has helped to avoid tribal dispute (which
normally leads to fghting) from happening. Eventually, when Islam came and
spread all over Arabia, the practices which are compatible with the Islamic tenets
are remained to be practiced.
Therefore, such form of protection which has managed to avoid the tribal
confict from happening, and in today’s modern takaful operation, the services
and products ofered by the takaful operators have fulflled the fve components
of maqasid of Shariah which are to protect and preserve the religion, life, progeny,
intellect and wealth (Auda, 2008).

3.1 To protect and preserve religion

It is important to note that in takaful, the concept of tawakkal is pertinent because
it emphasises the efort put by the Muslims to ensure the next of kin will be
living in a respectable condition if the breadwinner or spouse dead as a result
of unfortunate event. In addition, such planning is also accompanied by the
intention to gain blessings from Allah while at the same time hoping that such
calamity will not happen.
Likewise, if the calamity occurs, the next of kin will be compensated accord-
ingly. This is important so that their current condition can be maintained and
not deteriorated. It will be bad if the breadwinner dies, and the family sufers
fnancially due to lack of fnancial protection in the form of takaful. This terrible
condition has possibility to cause the victim’s family in disarray which perhaps
leads the kids to be involved in immoral and criminal activities because they
want to “run” from the delicate situation or to fnd easy yet wrongful way to
get money to survive post-death of the breadwinner. In other words, there are
possibilities that the next of kin becomes the victim of situation which causing
them to do something against the Islamic teachings.
Therefore, takaful is essential to ensure the one of the maqasid of Shariah which
is to protect and preserve religion is upheld. This is consistent with the Prophet
Muhammad S.A.W. hadith1:

Narrated from Amir bin Sad bin Abi Waqqas that his father said, “In the
year of the last Hajj of the Prophet I became seriously ill and the Prophet
used to visit me inquiring about my health. I told him, I am reduced to
this state because of illness and I am wealthy and have no inheritors except
a daughter (in this narration the name of Amir bin Sad was mentioned
and in fact it is a mistake; the narrator is Aisha bint Sad bin Abi Waqqas).
Should I give two-thirds of my property in charity? He said, no. I asked,
half? He said, no. Then he added, one-third, and even one-third is much.
You’d better leave your inheritors wealthy rather than leaving them poor,
begging others. You will get a reward for whatever you spend for Allah’s
sake, even for what you put in your wife’s mouth…”
206 Amirul Aff Muhamat and Norfaridah Ali Azizan

3.2 To protect and preserve life

This is another facet of maqasid of Shariah that is closely related to takaful, being
a business that manages risk on behalf of the takaful participants. This element of
maqasid is empowered in takaful on the basis that in the event of difculty, takaful
operators will compensate the unfortunate participant from the pooled funds
contributed by other fellow participants. The compensation will be used to assist
and to ensure that even though the unfortunate participant experienced deterio-
ration of health or being a victim to any disaster such as fre or food; it will not
cause the unfortunate participant and the next of kin to give up on their lives or
stop from getting the necessary treatment for the disease.
Figure 1 shows the global fgures of victims who died from suicide. There are
various reasons that contributed to this such as depression, notably as a result of
the rising costs of living including medical costs, domestic relationships, jobless
and others.

3.3 To protect and preserve progeny

In the context of takaful, to protect and preserve progeny can be best described
by ensuring the next of kin to have proper life even after the demise of the
breadwinner. This concern is especially relevant in maintaining the family life-
style so that other social illnesses do not infltrate the family, particularly the

Death rate from suicides, 2017

The annual number of deaths from suicide per 100,000 people.

No data 0 5 10 15 20 40 50 100

Source: IHME, Global Burden of Disease (GBD) OurWorldInData.org/suicide • CC BY

Note: To allow comparisons between countries and over time this metric is age-standardized.

FIGURE 1 Death rate from suicides 2017.

Source: https://ourworldindata.org/suicide
 Takafultech refects the Maqasid al-Shariah ethos in takaful 207

children.There are various reports depicted that those children who lost their
family members are prone to psychological issues such as inferiority complex,
anger management and others. While takaful might not be directly related to the
situation; but maintaining or providing assistance in the form of compensation
(monetary) will assist the surviving family members to continue with their cur-
rent lives without having to adjust too much.

3.4 To protect and preserve intellect

This objective emphasises on the needs for Muslims to be able to exercise their
freedom to think independently and at the same time to protect their physical
and mental from element that can harm them. In the context of takaful, when
a takaful participant faces an accident that can harm his mental capacity and
even body, then through the assistance rendered by the takaful operators, such an
unfortunate situation can be improved and perhaps to be reinstated to the initial
condition.

3.5 To protect and preserve wealth

The last element of maqasid of Shariah which is to protect and preserve wealth
can be realised when the compensation received from the takaful operators is
used to maintain the standard of living prior to the unfortunate event or disaster
happened. Moreover, some products such as investment-linked funds are aimed
to generate wealth for the takaful participants while at the same time ofers pro-
tection package. Likewise, the hospitalisation benefts shall assist the takaful par-
ticipant to regain the health condition to continue life as before which eventually
permits the person to work again – to build individual’s wealth.

4 Dilemma of the takaful participants

If we regard takaful participants to be in the dilemma, it can be controversial
subject to some takaful practitioners because it focuses on the grievances of the
takaful participants towards takaful operators. Surely, it is not a favourable topic
when you are having a cup of tea in the early morning or even a glass of milk
before you sleep. Nevertheless, the discussion on this issue should not be dropped
rather should be brought to the mainstream discussion.
Therefore, as highlighted earlier, this chapter presents its perspectives from
the lens of takaful participants. Therefore, the following discussions describe the
issues faced by the takaful participants.

4.1 ‘Love–hate’ relationship

This relationship becomes critical for takaful operators that are setup as stock
form takaful due to the existence of two principals apart from the takaful
208 Amirul Aff Muhamat and Norfaridah Ali Azizan

participants – the shareholders. These two principals play diferent roles but
the onus of bearing most of the risks are on the takaful participants (without
neglecting the role of shareholders). Yet, the direction and decision of takaful
operators are being decided by the management of takaful operators who being
more incline towards the shareholders.
While no one should argue on the role of shareholders who provide the seed
capital to setup the business (infrastructure, manpower and paid-up capital) and
required by the central bank to fork out funds in the event of fnancial difculty
faced by the takaful operator in form of benevolent fnancing or qard hassan. Yet,
one also must realise the heavy burden borne by the takaful participants (Mohd
Kassim, 2013; Muhamat et al., 2019).
The takaful participants who are the intended benefciaries from the takaful
operation bear two types of risks; underwriter and investment risks while the
shareholders, who are the founders of the takaful operator, bear three types of
risks which are expense risk, operational and investment risks.
At a glance, the shareholders seemed responsible for more risks compared to
the takaful participants but if we trace back the source of funding to address these
risks, then we will notice that most of the risks are actually being mitigated by
the takaful participants through the “contribution or premium” that they paid.
Perhaps, only investment risk is the only one that being uniquely related to the
shareholders – much as the exposure of the invested funds.
Thus, we can delineate the risks that are borne by the takaful participants in
two circumstances:

i Directly from the takaful participants (from the Participants Account)

ii Indirectly from the takaful participants through the contribution they pay
(Participant Special Account)

The pricing mechanism for takaful product will take into consideration various
costing elements, among the major costs are marketing, reserve requirement,
re-takaful, service fee (manpower cost) of takaful operator and others.
Likewise, if we postulate an event of fnancial difculty due to the skyrock-
eting of takaful claims by the takaful participants that require retakaful opera-
tor to intervene, we have to recognise that such service is actually funded (to
some extent) by the takaful participants. Only if the situation worsening, then
the shareholders will be required to provide qard hassan fnancing which is also
must be repaid from the takaful participants’ fund in the future. It can be recom-
mended to be written-of if the fnancial position of the Participants Account
cannot be recovered after a signifcant period.
Undeniably, the shareholders have important roles in takaful operation, but
at the same time, takaful participants are also at the heart of takaful opera-
tion being the focus of the business – thus more should be done to get the
involvement of takaful participants in the takaful operator’s strategic decision-
making process especially matters that concerning them such as investment
 Takafultech refects the Maqasid al-Shariah ethos in takaful 209

of the funds, price or charge of the takaful policies as well as the benefts or
compensation package.
First and foremost, the cost of tabarru’ or contribution that keep on increasing
for both businesses, family and general takaful, although the former might be
more serious than the latter. While medical card policies are exposed to such
issue, but takaful operators must work in tandem with the medical providers to
reduce the medical costs. For instance, in the long run, may be takaful opera-
tors can have their own hospital which will be diferent from the panel hospital
because the in-house hospital (funded by the takaful operators) will be more
transparent when treating the takaful participants and able to charge reasonable
price for such treatment.
Next is on the takaful compensation, which is battling year in and year out,
to ensure it is able to meet the current economic condition. This is important
although the takaful products have been structured diligently by the actuarial and
product development staf, but it might not be sufcient to sustain the takaful par-
ticipants’ requirements and lifestyle; either as investment return or underwriting
surplus.
Customer service must be put as priority because it is the frst contact that the
takaful operators have with others. Furthermore, one of the purposes of informa-
tion communication and technologies (ICT) that has been adopted and embraced
by the takaful operators is to increase customers’ satisfaction. The fourth concern
is to pave way for the takaful participants to be involved with the operation of
takaful business.
Refecting the core business of takaful operators is to service the takaful partic-
ipants, but it seems that the takaful participants lack choice apart from expressing
their dissatisfaction by leaving the takaful operator and becoming client to a new
one. Importantly, this should not be the case since the wave of the Industrial
Revolution (IR 4.0) has afected all types of businesses involving takaful sec-
tor, hence the takafultech becomes a theme that should be heeded by all takaful
operators. The takafultech should empower takaful operators to encourage more
involvement of takaful participants in takaful operation particularly to address the
issues as highlighted in Diagram 3 above.

5 Takafultech empowers takaful participants

This section discusses the possible impacts that takafultech is able to bring to the
takaful participants if the takaful operator decides to implement proper takafultech
strategies in the company. The takafultech is subcomponent of fnancial tech-
nology or colloquially termed as fntech, which is a new business landscape that
has shaped fnancial markets all over the world. This new phenomenon requires
responsive and agile management of the companies to continuously cope with
the changes.
The evolutions of mankind in terms of creativity and innovation marked
the transition of activities that are highly dependent on manpower to machine
210 Amirul Aff Muhamat and Norfaridah Ali Azizan

power, to electrical and electronics machines, followed by digital revolution

through computers and now through the automation of processes with the IoT,
cloud computing, big data, etc. – from IR 1.0 to IR 4.0. Takaful industry which
is part of the essential component of Islamic fnancial system needs to adopt and
adapt to this new environment as well. Moreover, they must ensure such changes
are compliance with Shariah.
Two major areas under the takafultech that will be discussed in this chapter
are:

• Drone
• Smart contract (utilises the blockchain technology)

These two initiatives bring holistic impacts to the takaful participants as well as
to the takaful operator, hence beneft the shareholders as well.

5.1 Drone
Drone is also called unmanned aerial vehicle (UAV) that has been used for
various purposes such as recreational, scientifc and commercial issues. An auton-
omous insurance drone can include additional drone body, with a sensor device
allocated on the drone and it saves sensor input that can be disseminated wireless
to the insurance processer that will display the data for inspection or analysis
(Luciani et al., 2016). It has been widely used in the insurance sector, especially
in developed countries, but such adoption can be considered as still negligible for
developing countries.
Preliminary research by Muhamat et al. (2021) informs that for instance in
Malaysia and Indonesia, drone is yet to be adopted as part of the takaful opera-
tor’s mechanism for either underwriting or damage (loss) assessing procedure. In
general, drone has many benefts that can be obtained by the takaful operators.
However, the discussion in Table 1 solely focuses on the underwriting process,
damage inspection and disaster victim identifcation (DVI).

5.2 Smart contract upon the blockchain technology

The smart contract works well with the blockchain technology by virtually
allowing another party of the agreement to access, read and eventually sign the
details. Thus, it works well with the blockchain technology by enhancing and
protecting the sensitive information of the contracts. The blockchain can be
briefy defned as a database that shares nodes of computer network and distrib-
utes and stores the information in a digital format. The information is stored
confdentially in a group; or known as block. Once the capacity is maximised,
it will be closed and another block is created and tagged to the previous block.
The process continues until a long chain of blocks, or simply “the blockchain” is
created (VanderLinden et al., 2018).
 Takafultech refects the Maqasid al-Shariah ethos in takaful 211

TABLE 1 Benefts of drone in takaful operation

Underwriting Damage inspection DVI

Purpose Drone can be used Drone can be In the event of mass

to assess the risk navigated to disaster, the golden
of the property inspect the 48 hour is critical to
before determining damages that be adhered because
the appropriate are remote and beyond that the dead
pricing scheme difcult to access victim’s body will be
to be charged such as damages decayed and hard to
to the potential either natural be identifed. Drone
participant. disaster or man- (special customised
made disaster that version) can be fown
happened on the to the disaster area to
rooftop or high identify the victims.
rise building or
covers huge land
area.
Benefts Fair charge Transparent Fast disbursement of
to takaful By fying drone to damage fnancial claims
participants assess the risks and inspection Victims who can be
condition of the Claim fraud is a identifed in a short
property it will common problem period of time by
be able to provide in insurance and using drone during
details which takaful sectors. mass disaster will
possibly cannot be Drone can assess assist the takaful
obtained through the damages operator to process
manual inspection and provide the claim soonest
by staf especially transparent details which eventually
if it involves huge of damages for leads to fast
area or difcult to analysis. Likewise, disbursement of
access site. it reduces human compensation.
involvement in
the investigation
of damages.
Time Time Time
Drone is able to cover Drone expedites Takaful operator
huge area and the investigation needs sufcient
remotely access site of the damaged time to investigate
in a short period of properties hence fnancial claims that
time compared to shorten the being submitted.
manual process by time period of Therefore, if the
staf. investigation. victim identifcation
This can increase can be managed
customer quickly, it will
satisfaction which facilitate the
is important for investigation process;
takaful business. hence signifcant
reduction of time.
(Continued)
212 Amirul Aff Muhamat and Norfaridah Ali Azizan

Underwriting Damage inspection DVI

Price Efcient use of Reduce the

diferentiation Participant psychological
Pricing structure can Account funds burden
be attractive to If the damages due When disasters
potential clients to accident or happened,
because drone as disaster can be victims will face
mentioned earlier determined as psychological
is able to provide precise as possible, stress due to
details that can it can contribute high uncertainty
contribute to better to better concerning their
decision-making compensation lives. They require
before charging received by the the compensation
contribution/ takaful participant money to re-build
premium to the and at the same their lives or
potential client. time, proper used businesses. In the
of funds because case of death of any
by using drone, family member, the
the compensation compensation is
can be lesser. critical to ensure the
family can maintain
the current life style
like pre-disaster
situation.

The security feature of smart contract through the blockchain makes it attrac-
tive to companies like takaful operators which is required by the central bank
to maintain the privacy of the takaful participants’ data. Likewise, the smart
contract ofers such confdentiality through the cryptography process, and such
process also exists in the Bitcoin (which uses blockchain technology as well) that
makes it to be independent and unable to be duplicated (this chapter does not
intend to discuss the issues of Bitcoin from the Shariah perspective).
While the smart contract has its own appealing features, yet we need to
understand how this technology can beneft the takaful participants. Financial
claim (due to the medical requirement or damage to a property) is one of the
critical functions that exist in the takaful. The claim process varies in terms of
time taken to review, investigate and approve the claim, although some takaful
operators delineate the minimum time allocate to process the claims.
Smart contract is suggested to be able to reduce such process; and at the
same time, it permits such information to be shared with the intended takaful
participant so that the person is aware about the claim process; but as per
today’s standard operating procedure of the fnancial claim, such information is
confdential.
 Takafultech refects the Maqasid al-Shariah ethos in takaful 213

Having said that, if such critical information of the fnancial claim is being
made accessible to the takaful participants, it reduces the anxiety to wait for the
approval because the person is able to track and to check the milestones of fnan-
cial claim. For a person who is really in need of compensation due to unfortunate
event, emotionally, the person is in a depressed condition and should be calmed –
smart contract through blockchain technology ofers this.
Furthermore, it can assist to reduce, at least, if not being able to entirely
eliminate fraud from the claim process. While we are not subsiding the pure
intention of fnancial claim by the takaful participant, the industry is prone to
claim fraud and the industry losses millions of dollars. The blockchain, due to its
inherent features, provides better security and confdentiality of data by making
it transparent and unique (hard to be duplicated) (Nienhaus, 2019). If the takaful
operators embrace the blockchain in its system (and operation) and make it man-
datory for the associates to use it, for instance the loss adjusters, panel workshops
and solicitors, this will create a safe and sound ecosystem that will resist the claim
fraud.
All these potential benefts should be directed to the takaful participants by
lowering the price or tabarru’ of the takaful policy, expediting the fnancial
claim, better engagement with the takaful participant and increase of fnancial
returns in the forms of underwriting surplus and investment proft.
Hence, the smart contract promotes fairness that will realise the social jus-
tice especially in term of relationship between the takaful operators and the
takaful participants which has been highlighted before, tend to bend towards
the shareholders of the takaful operators. Therefore, by being able to deliver the
benefts of smart contract to the takaful participants, it will reduce the anxiety
of the takaful participants and enhance the maqasid of Shariah in the takaful
operations.

6 Challenges
Takafultech as being highlighted above ofers various benefts to the takaful
operators, and such positive efects have shaped the way takaful operators engage
with their stakeholders, especially the takaful participants. Nevertheless, from
an independent perspective, not all changes that brought by the takafultech are
embraced and adopted; even though they are positive changes. The crux of this
issue is the inherent cost that is tagged along with the new method, system or
device – who will bear the cost?
This is an interesting dilemma that needs to be investigated further whether
changes that produce benefts will be adopted at the expense of cost. Previous
sections have highlighted the positive impacts brought by drone and in this
section, discussion is directed towards the main challenges that afect potential
adoption of drone.
214 Amirul Aff Muhamat and Norfaridah Ali Azizan

6.1 Financial commitment

Takaful operator as one of the Islamic fnancial institutions is subjected to the
perimeter of proft and loss which infuence every decision that the frms choose.
Therefore, consideration to adopt drone and the blockchain in takaful operation
will be based on the potential proft or loss that the frms make. Likewise, if the
proposed methods (or devices) are better than the current process, but the costs
are high, yet the benefts are more, will the takaful operators opt towards that, or
the takaful operators contend to continue with the current process?
Truly, the question cannot be answered directly because they are intertwined
between the issues and considerations that must be thought deeply, again, takaful
operators is a commercial entity that has shareholders who must be prioritised
(since they are the co-principal in takaful business). Nevertheless, it must be
emphasised here as well that the takaful participants are also the other co-principal
in takaful operation and the ultimate benefciaries of the takaful business.

6.2 “Experiencing” the benefts brought by takafultech

There are several benefts that have been highlighted before on the drone and
blockchain. The benefts can be broadly segregated into:

• Monetary benefts (such as an increment of sharing for underwriting sur-

plus, cash rebate, higher investment proft and less contribution or tabarru’
charge)
• Non-monetary benefts (such as faster claim process, better customer
relationship management, more engagement from the takaful participants
and better transparency process)

Both benefts can be experienced concurrently, or any one of them depending

on the improvement that is made. It is important to ensure that such benefts can
be felt and enjoyed by the takaful participants because if they cannot experience
such positive outcome as promised or expected when changes happened, then
such changes can be regarded as futile.
For instance, takaful participants have witnessed the transformation the takaful
operators have underwent such as implementation of the modern ICT tools and
strategies, with the ultimate objectives to facilitate better customer service and
reducing costs, as well as time to phase out manual processes that can be auto-
mated. Nevertheless, in the case of family takaful, specifcally on the product of
medical card cum investment, benefts from the ICT transformation have not
really been “felt” by the takaful participant. Yet, over the years, the products have
shown several increments of the tabarru’ or contribution charges. For instance, in
2019, the medical costs in Malaysia have surged to 13.1%, only to be surpassed
by Vietnam, 16.3% while the Philippines and Indonesia were 11.5% and 10.8%
respectively (Kwang Zhe, 2020).
 Takafultech refects the Maqasid al-Shariah ethos in takaful 215

It is commonly understood that the medical costs have risen tremendously

parallel with time (New Straits Times, 2019; Merhar, 2020), but with the adop-
tion of latest ICT, such costs are touted and can be pressed down – as being
propagated by the takaful operators in their press conferences every time when
the companies unveiled their strategic initiatives to the public. Unfortunately, it
does not happen.
While it is not fair to direct all the criticisms of medical costs to the takaful
operators because they are not the medical service providers; yet a critical assess-
ment should be applauded! Every year, takaful operators register annual proft, at
least in the case of Malaysia (global trend depicts the same pattern though). On
the other extreme, such positivity is hardly felt by the takaful participants (in the
context of family takaful).
The tabarru’ or contribution charge is never reduced, nonetheless, the takaful
participants noticed spikes of it. Again, while we acknowledge that the risks asso-
ciated with the product of medical card cum investment are increasing in tandem
with age, but, with the positive changes that happened in and around the takaful
operators, can’t the tabarru’ being reduced even once?

6.3 Takaful participants’ rights

Takaful participants must be made to realise their rights as one of the principals in
the takaful business, in the case of stock form takaful operator. While in the con-
text of the governance model of the Anglo-Saxon, their rights are represented
by the Independent Board of Directors, but a collective voice of the participants
is rarely being made known to the management. Thus, the regulators and the
management of takaful operators need to think of the best alternative to rally the
participation of the takaful participants in the operation of takaful operators.
For instance, the takaful participants can be represented by the institutional
takaful participants such as companies that are clients with the respective takaful
operators, hence they can be nominated to be in the board of directors to rep-
resent the rest.

7 Takafultech links to the Maqasid Shariah

While this chapter does not evaluate the impacts of takafultech extensively since
the components of takafultech are wider, based on the examples given previously
on the drone and smart contract, we can understand the potential and magnitude
of the impacts that can be brought by the takafultech which can enhance and
facilitate the takaful operators to perform better to achieve the maqasid Shariah.
It has been highlighted earlier that at this current state, takaful operators have
achieved their raison d’être as prescribed by the maqasid Shariah; but through
takafultech, their ability is enhanced, and they can be better. Figure 2 shows
the major maqasid of Shariah which is linked to the takafultech of drone and
blockchain.
216 Amirul Aff Muhamat and Norfaridah Ali Azizan

Drone is able to idenfy vicms faster. The deceased

Religion bodies can be sent for funeral immediately.

The compensaon to the next of kins can be distributed

Posterity at once (once process of idenficaon completed) so
that they can build-up their lives.
Drone
The vicms who are sll alive and injured can be treated
since drone is able to detect them faster than
Life conveonal search and rescue process. Also, the
livelihood of the next of kins can be maintained through
the assistance from the compensaon.

Drone is able to assess the pre-underwring risks and post-

accident damages precisely which should be able to
Wealth
provide beer pricing and compensaon that sasfies
both, takaful operators and takaful parcipants.
Takafultech

Takaful parcipants able to be involved in the operaon

of the takaful business without having to compromise the
Wealth integrity and confidenality of the informaon. It also
can reduce the operaonal cost which can be transpired
Smart contract into cheaper products.
(blockchain
technology)
The enhanced security features of smart contract offer
more benefits to the takaful parcipants, that
Life
strengthened their welfare and rights, hence promotes
the realisaon of the maqasid Shariah.

FIGURE 2 Major maqasid al-Shariah and their link to the takafultech.

8 Conclusion
This chapter presents discussions from the lens of takaful participants and con-
necting them to the takafultech particularly drone and blockchain. The positive
impacts brought by the two takafultech tools indicate insights on the bigger
potentials of the takafultech to the takaful participants and the takaful operators.
Hence, it facilitates the takaful operators as the Islamic fnancial institutions to
realise their maqasid al-Shariah obligations as expected by the stakeholders.
In addition, the challenges are important to be considered because they afect
the intended objectives that the takaful operators try to achieve. Financial will
always be the main hindrance but takaful operators must also balance such posi-
tion with their roles as value-based intermediaries and as the Islamic fnancial
institutions that derived the strength from Islam – they have to behave like one.

Acknowledgement
The authors would like to acknowledge the Ministry of Higher Education
(MOHE) Malaysia for the research grant awarded that has contributed to some
 Takafultech refects the Maqasid al-Shariah ethos in takaful 217

extent to this chapter. The research grant fle number: 600-IRMI/TRGS 5/3
(001/2019)-3.

Note
1 Sahih Bukhari, Book 23: Funerals (Al-Janaa’iz) Translation of Sahih Bukhari,
Book 23.

References
Auda, J. 2008. Maqasid al-Shariah As Philosophy of Islamic Law. Herndon: The International
Institute of Islamic Thought (IIIT).
EY. 2020. Asia-Pacifc insurance outlook: Driving innovation and transformation to seize oppor-
tunities and sustain growth. https://www.ey.com/en_gl/global-insurance-outlooks/
how-innovation-can-help-insurers-in-asia-pacifc-seize-opportunities (retrieved 14
December 2021).
Kwang Zhe, K.S. 2020. Insurance: Medical insurance premiums rising at an unsustainable rate,
says LIAM. The Edge Markets. https://www.theedgemarkets.com/article/insurance-
medical-insurance-premiums-rising-unsustainable-rate-says-liam (retrieved 14
December 2021).
Luciani, T., Distasio, B., Bungert, J., Summer, M., & Bozzo, T. 2016. Use of Drones
to Assist with Insurance, Financial and Underwriting Related Activities. Available online:
http://www.freepatentsonline.com/y2016/0063642.html (retrieved 30 May 2021).
Merhar, C. 2020. 8 reasons health insurance costs continue to rise. https://www.people-
keep.com/blog/8-reasons-health-insurance-costs-continue-to-rise (retrieved 14
December 2021).
Mohd Kassim, Z.A. 2013. The primary insurance models. In Gonulal, S. O. (Ed.).
Takaful and mutual insurance: alternative approaches to managing risks. Washington DC:
World Bank Publications, pp. 1–204.
Muhamat, A.A., Zulkifi, A.F., Sulaiman, S., Subramaniam, G., & Mohamad, S. 2021.
Development of social cost and beneft analysis (SCBA) in the maqāsid Shariah frame-
work: Narratives on the use of drones for takaful operators. Journal of Risk and Financial
Management 14(8): 387.
Muhamat, A.A., Jaafar, M.N., & Md Saad, M.S. 2019. Essential components of takaful
operation. Melaka: UTeM Press.
New Straits Times. 2019. Why do my medical, health plan premiums/contributions keep increasing?
https://www.nst.com.my/lifestyle/heal/2019/10/532287/why-do-my-medical-
health-plan-premiumscontributions-keep-increasing (retrieved 14 December 2021).
Nienhaus, V. 2019. Blockchain technologies and the prospects of smart contracts in the
Islamic fnance. In Oseni, U.A., & Ali, S.N. (2019). Fintech in Islamic fnance: theory and
practice (1st ed.). Oxon: Routledge
PWC. 2016. InsurTech: the road ahead. AICB-PWC Fintech survey: Insurance cut. https://
www.pwc.com/my/en/assets/publications/2016-aicb-pwc-insurtech-the-road-
ahead.pdf (retrieved 14 December 2021).
VanderLinden, S.L., Millie, S.M., Anderson, N., & Chishti, S. 2018. The insurtech book: the
insurance technology handbook for investors, entrepreneurs and fntech visionaries. Chicester:
John Wiley & Sons.
12
DIGITAL TRANSFORMATION AND IFRS
17 ACCOUNTING ISSUES IN TAKAFUL
INDUSTRY
The case of Indonesia

Ersa Tri Wahyuni

1 Introduction
Islamic fnance has been a growing industry over the last decade and has been
attracting fnancial practitioners in both of the Muslim and non-Muslim coun-
tries. The Islamic Finance Development Report 2021 revealed that the global
Islamic fnance asset has been growing 70% over the last six years (2014–2020)
and is expected to reach almost USD 5 billion in 2025. Nevertheless, most of the
Islamic fnance assets are distributed to Islamic banks (70%) while takaful industry
contributes only 2% to the Islamic fnance asset growth (Refnitiv, 2021).
Although takaful industry is relatively small compared to other Islamic
fnancial institutions (IFIs), the industry is also growing globally and its future
prospect is optimistic (Abdul Rahman, 2009; CIBAFI, 2018). CIBAFI (General
Council for Islamic Banks and Financial Institutions) global takaful survey in
2018 to the 55 takaful operators in 24 countries revealed that most of industry
players are optimistic about the takaful industry’s prospect. 62% of respondents
are fairly optimistic while 36% are very optimistic (see Figure 1). Interestingly,
takaful operators from Southeast Asia (seven companies in Malaysia, Indonesia
and Brunei) were the least optimistic of all region groups (CIBAFI, 2018).
There has never been a more challenging period for the global insurance
industry, takaful included, than the period of 2020s. Firstly, the business land-
scape of insurance is changing tremendously due to the Covid-19 pandemic
and the digital disruption (Capegemini & EFMA, 2021). Secondly, the global
insurance industry is facing enormous pressure from the implementation of the
new international accounting standard, IFRS 17 Insurance Contract. The stand-
ard was issued by the London-based International Accounting Standards Board
(IASB) and to be efective globally in 2023. The two major challenges, digital
transformation and the accounting issues, faced by the takaful industry are the

DOI: 10.4324/9781003262169-15
 Digital transformation and IFRS 17 accounting issues 219

Op˛mism Level on Overall Insurance Industry

World 3.34

GCC 3.17

Middle East ex-GCC 3.63

South East Asia 3.00

West, Central and South Asia 3.20

North Africa 3.50

Sub-Saharan Africa 3.60

Europe, Turkey and others 3.29

1. Extremely pessimis˜c; 2. Very pessimis˜c; 3. Fairly op˜mis˜c; 4. Very op˜mis˜c; 5. Extremely op˜mis˜c

FIGURE 1 Optimism level on overall insurance industry.

Source: CIBAFI (2018).

main discussions for this chapter with a deeper look into Indonesia as the fourth
largest democracy with the most populated Muslims.
The motivation of this chapter arises from various new issues and challenges
in the takaful industry. The Covid-19 pandemic has been a key driver for var-
ious digital transformations in many industries, but the takaful industry seems
to be slow in response to these opportunities as technology transformation
remains a major challenge (Husin, 2019). Other challenges of the takaful indus-
try are weak regulation (Maf ’ula & Mi’raj, 2022), governance issues and the
lack of efectiveness of the shariah supervisory board (Nomran et al., 2018; Zain
et al., 2021). Lastly, the lack of details of AAOIFI (Accounting and Auditing
Organization for Islamic Financial Institutions) standards on takaful contracts
also raises concerns of the quality of takaful companies’ fnancial reports (Nahar,
2015; Zain et al., 2021).
The lack of debate and discussions about a proper accounting policy for takaful
contract, both nationally in Indonesia and internationally, is quite concerning.
The acquiescence of takaful practitioners to the IFRS 17 should raise a fundamen-
tal question if takaful contract actually has economic diferences with the insur-
ance contract at all. A survey by Nahar (2015), for example, provides empirical
evidence that fnancial report users in Malaysia (proxied by fnal year accounting
students) could not see the diference between takaful companies and insurance
companies’ fnancial reports. 96% of respondents could not see the operational
diference between takaful and insurance from their fnancial reports. 100% of
respondents perceived the 2012 fnancial reports of both companies are so similar
and the only diference is the terminologies for the same substance. This fnding
raises a concern whether the fnancial reports of takaful companies have failed to
exhibit the diference of the economic substance of takaful contract.
220 Ersa Tri Wahyuni

2 The concept of takaful and takaful models

Takaful comes from the Arabic word Kafala which means “guarantee” (Pasha
& Hussain, 2013). Takaful is the Islamic alternative to conventional insurance
which is based on the idea of social solidarity, cooperation and joint indemnifca-
tion of losses of the members. Takaful contract is not only involving two parties,
but an agreement among a group of people who agree to jointly indemnify the
loss that may infict upon any of them out of the collective fund they donate
(Hussain & Pasha, 2011). The main purpose of takaful is not merely making
proft, but to provide equity to all participants involved, and the objective of the
contract is to support the member of the group when they sufer from disadvan-
tage or calamity.
The takaful model is derived from the concept of ta’awun which means to help
each other or mutual assistance; the risk being borne among the participants. A
takaful contract in accordance with the shariah principle should not contain gha-
rar (fraud), maysir (gambling), usury, zhulm (persecution), risywah (bribery), haram
(illicit) goods and immorality (Maf ’ula & Mi’raj, 2022). Participants of takaful
donate money to a tabarru fund which will be used to pay the claim should an
insurance risk occurs to one of the participants. The company manages the fund
and also develops the fund by investing it in the various shariah investment.
There are several contract models of takaful for example mudharabah (part-
nership), wakalah (agency) model, waq f model, mutual model and hybrid models
such as wakalah-waq f and wakalah-mudharabah (CIBAFI, 2018; Pasha & Hussain,
2013). According to Global Takaful Survey, more than 50% takaful companies
use the wakalah-mudarabah (Hybrid) model, one-sixth follow a pure wakalah
(Agency) model, while about 10% each adopt the wakalah-waq f (Hybrid) model
y

8.33% Mudarabah…
Other 8.33%

16.67
Wakalah (Agency)
Model
8.33%

58.33
Wakalah- %
Mudarabah Saudi Coopera ve…
(Hybrid) Model

FIGURE 2 Takaful models used globally.

Source: CIBAFI (2018).
 Digital transformation and IFRS 17 accounting issues 221

or the mudarabah (Partnership) model (CIBAFI, 2018). The survey by CIBAFI is

conducted on 55 takaful companies in 24 countries (see Figure 2).
Takaful contract under mudarabah principle sees the relationship between
participants and the companies similar to partnership, where the participants
supply the fund and the companies supply the expertise. Both parties shared prof-
its in a pre-determined ratio, similar to any classic partnership contract (Pasha &
Hussain, 2013). Wakalah model is slightly diferent from mudarabah principle as
the company acts as a wakeel of the participants and receives a management fee.
Risk sharing only occurs among participants where a takaful operator does not
participate or share in any underwriting results as these belong to participants as
surplus or defcit.

3 The takaful industry and the digital transformation of the

insurance industry in Indonesia
Insurance industry in Indonesia in general is an interesting case due to the
major insurance scandals over the last decade, which refects the vulnerability
of the industry and the weak supervisory from the regulator (Adinugroho
et al., 2022). The bankruptcy of PT Asuransi Jiwasraya (Persero) in 2019
shocked the nation as it was the oldest insurance company in the country (160
years old), the largest customer-based (5.5 million policy holders) and a state-
owned enterprise company (Gusti, 2019; Setiawan, 2020). There was also the
bankruptcy of PT Bumi Asih Jaya Life Insurance in 2013 (Adinugroho et al.,
2022) and the default of PT Asuransi Jiwa Kresna in 2020, PT Asuransi Bumi
Putera in 2018 and PT Asuransi Jiwa Bakrie Life in 2008 (Hastuti, 2020).
All these scandals have a detrimental impact on the insurance industry as
the people’s trust to the insurance industry and the efectiveness of regulator
supervisory decline.
The Indonesian Islamic fnance industry is currently lagging Malaysia and
other countries in Asia. For example, in total Islamic fnance assets, Indonesia
is only number seventh rank out of top ten countries with USD 99 billion of
total Islamic fnance assets (ICD, 2021). Malaysia is in the third rank with total
assets of USD 570 billion. Iran and Saudi Arabia both ranked frst and second in
the Islamic Corporation for the Development of Private Sector (ICD) ranking
(Figure 3).
The takaful industry in Indonesia has been developing since 1994, started
with the establishment of PT Syarikat takaful Indonesia. However, a specifc
regulation on shariah insurance business was only issued 16 years later through
Ministry of Finance decree PMK Number 18/PMK.010/2010 concerning the
Implementation of Basic Principles for the Implementation of Insurance Business.
In 2014, the law about insurance industry was ratifed and the law also regulates
the takaful industry. The Law Number 40 Year 2014 on Insurance provides a
defnition of takaful, as follows:
222 Ersa Tri Wahyuni

Top Countries in Islamic Finance Assets 2019 (US$ Billion)

Total Assets (US$ Billion)

Iran 698

Saudi Arabia 629

Malaysia 570

UAE 234

Qatar 144

Kuwait 132

Indonesia 99

Bahrain 96

Turkey 63

Bangladesh 45

FIGURE 3 Top countries in Islamic Finance Assets 2019.

Source: ICD (2021).

Takaful is a group of agreements, comprising agreements between takaful

companies and policyholders and agreements between policyholders, in
the framework of managing contributions based on shariah principles to
help and protect each other by:
i Provide replacement to consumers or policyholders for loss, damage,
costs incurred, loss of profts, or liability to third parties that may be
incurred by consumers or policyholders due to an uncertain event; Or
ii Provide payment based on the death of the user or payment based on
the user’s life with the beneft of which has been established and/or
based on the results of the fund management.
The contribution of takaful industry in the Indonesian economy remains
insignifcant, less than 2% (Bappenas, 2019). A country with the largest Muslim
population in the world does not necessarily warrant a burgeoning Islamic fnance
industry. The total assets of Islamic banking in Indonesia have been growing by
only 13.11% in 2020 but no additional players in the industry. The Islamic stock
index was also declining in 2020, mostly due to the Covid-19 pandemic. The
takaful industry or the shariah/Islamic insurance industry in Indonesia has been
stagnant for the last fve years. Since 2017, there is no additional company in the
Islamic life insurance industry and even the number is declining for the Islamic
general insurance industry (see Table 1).
The decline of the shariah industry creates concern if the Islamic fnance
industry in Indonesia would be able to tap the opportunities of the new digital
era. Digital transformation has been on-going since the last decade with improve-
ment in the telecommunication infrastructures around the world. The Covid-
19 pandemic and lockdown encourage digital transformation in many sectors
even more, for example, in education sector, entertainment, and even tourism.
TABLE 1 Total Islamic insurance industry players in fve years

Industry type 2016 2017 2018 2019 2020

Full Number of Full Number of Full Number of Full Number of Full Number of
shariah investment shariah investment shariah investment shariah investment shariah investment
package companies package companies package companies package companies package companies

Islamic insurance industry

Islamic Life 6 21 7 23 7 23 7 23 7 23
Insurance
Industry
Islamic 4 24 5 25 5 24 5 24 5 21
General
Insurance
Industry
Islamic 1 2 1 2 1 2 1 2 1 3
Reinsurance
Industry

Source: Annual report OJK (2020).

Digital transformation and IFRS 17 accounting issues
223
224 Ersa Tri Wahyuni

Everyday transactions were conducted electronically through e-commerce

or other digital multi channels as people could not go out from their homes.
Business transactions become smoother, faster, more efective and more efcient.
In the new digital era, customers expect 24 hours convenience in doing
transaction and demand quick response from the sellers. That would include the
policy holders of insurance industry. According to the Insurtech World Report
2021, most of the respondents (80%) who participated in their survey put high
value on the convenience factors, namely value for money and insurer’s respon-
siveness as catalyst to switch insurance products. Complicated registrations,
high premiums, inefective claim processing, complicated paper works of the
contracts, etc. are greatest problems for Indonesian considering an insurance
product. These problems are now being addressed by tech-driven insurance
start-ups which provide a faster and smoother customer interaction with the
insurance provider.
In Indonesia, the insurtech is also growing but most of the players are not sha-
riah institutions. For example, PasarPolis, one of the largest on-demand insurtech
in Indonesia enjoyed a signifcant increase of new customers since establishment
in 2015. In 2020, PasarPolis booked four million new customers and every
month they issued about 70 million insurance policies. 90% of the PasarPolis
customers are frst-time buyers who never bought insurance product before and
40% of its customers work in informal sectors like courier drivers and online
SME buyers/sellers (Catriana, 2021). However, PasarPolis insurance partners are
mostly conventional insurance companies. Syariah insurtech seems to lag behind
the conventional. One of the on-demand syariah insurtech is YukTakaful which
was established in 2019. YukTakaful ofers full service from new registration
to claim through its mobile application. All contracts in YukTakaful are using
shariah contract (akad).
The growing number of digital market aggregators allows customers to
compare premiums and benefts easily before deciding to buy insurance prod-
uct. Price comparison is something which is very challenging for the customers
before the new era. In the past, the way customers can get a premium quote is by
contacting an insurance agent and it may take few days to get quotes from various
insurance companies. Insurtech allows this process to be completed within min-
utes. For example, in Indonesia, customers can go to the comparison sites such as
cekaja.com, cekpremi.com or asuransiku.com to compare premium prices from
several insurance providers.
Although the digital transformation in the insurance industry seems promising,
the syariah institution presence is very weak in the Indonesian insurtech. Most
of the players in the insurtech industry are non-syariah companies. The slow
development of the takaful industry in Indonesia may limit the industry to grab
the prospective opportunity from insurtech and the digital transformation which
is happening globally. As transforming into a digital company needs investment,
not only on the hardware and software but also the brainware, this could be a
challenge as well. Lack of regulation can also be a challenge for the insurance
 Digital transformation and IFRS 17 accounting issues 225

company to grow as the regulator is still considering many aspects of insurtech,

especially for shariah insurance (Puspaningtyas, 2021).
Nevertheless, the growing development of insurtech should be perceived
as an opportunity for shariah insurance as well because the market aggregator
also ofers takaful products to their prospective customers. As insurance prod-
uct is becoming more accessible for potential buyers, especially the frst timers,
the whole market is expanding and so does the market of the takaful products.
Potential buyers can easily compare insurance contract and takaful contract in
the market aggregator website. This may encourage more potential customers to
be exposed with the takaful products and consider buying it.

3 Takaful versus conventional insurance contracts: the

accounting challenges
The basic principle of the insurance contract is that the insurance company
absorbs the insured risk of the policy holders. The insured risk can be health
problems (illness), deaths, accidents or loss of properties because of the fre. As the
insurance company absorbs the inherent risk from the policyholders, it creates a
challenge to manage the risk efectively for the insurance company to make
profts out of their business. As the insurance contract can have a long period of
contract, for example, a life insurance contract can have a contract period up to
25 years. Then, the insurance companies are required to assess their risk based on
the probability of occurrence of the incident risks from a pool of policyholders.
As the insurance companies absorb the risks and they promise to pay the com-
pensation when the incident risks occur, this creates a liability in their balance
sheets. In accordance with the duration of the insurance contract, this liability
for remaining claim can be a long-term liability (for example a life insurance
contract) or a short one. Measuring these liabilities, especially for the long-term
contracts, can be signifcantly challenging because it involves many actuarial
assumptions and calculations in terms of the probability of risk.
The accounting standard for insurance contract has been a challenge because
every country has diferent type of accounting standards which make fnan-
cial report of insurance companies across jurisdictions incomparable. It is only
recently that IASB issued a comprehensive insurance contract standard, the IFRS
17 Insurance Contract in 2017. These IFRS 17 would be efectively adopted by
many countries in 2023, with some countries decided to adopt it with one year
or two-year gap.
The debate if IFRS should also be adopted by IFIs for the beneft of com-
parability has been heated over the last few years (Ibrahim & Hameed, 2007;
Zain et al., 2021). There also has been a warm discussion among preparers and
standard setters if IFRS 17 is also suitable for takaful contract. Takaful or shariah
insurance contracts and conventional insurance contracts have slightly difer-
ent basic concepts. While the globally accepted concept of insurance contract is
where one party (the issuer) accepts signifcant insurance risk from another party
226 Ersa Tri Wahyuni

(policyholder), takaful concept is more of a mutual guarantee where the insur-

ance risk is shared among all members.
In the takaful contract, the insurance companies act on behalf of the policy
holders and they only receive management fee (in the wakalah model). Thus, the
risk in the shariah insurance contract is not absorbed by the insurance company
but is shared among all the policy holders in the group. The insurance company
does not necessarily have liabilities to the future claim, but the group of policy
holders does. This fundamental diference encourages some scholars to propose
that takaful contract should have its own accounting standard and should not
adopt IFRS 17.
The fund collected from the policy holders (tabarrru fund) should aim to be
sufcient in covering the risk calculated future claim. This tabarru fund does not
belong to the company but belongs to the participants in the group. If one day in
the future the fund is not enough to pay the claim, the insurance company then
need to step in and give a loan based on a Qard agreement (akad) to the group.
Qard Hasan is an interest-free loan intended to allow the borrower to use the
loaned fund with or without a specifc period (AAOIFI, 2021). Once the tabarru
fund has sufcient money, then the loan should be repaid back to the company.
The same challenges apply for the shariah insurance groups. In order for the
tabarru fund to have sufcient money, the company should sell enough number
of policies as more participants joining would mean more funds will be availa-
ble. The shariah insurance company as the manager of the fund on behalf of the
novice policy holders, manage the risk of the tabarru fund as well to ensure that
the fund is sufcient.
In general, the accounting standard for shariah insurance is less mature than
the accounting standard for conventional insurance. Among many Muslim coun-
tries, only Indonesia has developed their own accounting standard for takaful
contract by an independent syariah accounting standard board. AAOIFI, an
international body headquartered in Bahrain also has developed takaful account-
ing standard which became a major reference in other countries. However, many
countries which have a lot of takaful activities, such as Malaysia, or Saudi Arabia
or Pakistan, do not develop their own accounting standard for takaful. Some
countries stipulate certain additional disclosure or guideline for takaful opera-
tors such as issued by Bank Negara Malaysia (BNM) in 2013 or by Malaysian
Accounting Standards Board (Nahar, 2015).
In term of developing school of thought of the application of IFRS 17 for
takaful contracts, Malaysia seems to be the most progressive country. Where
some countries are considering if IFRS 17 should be adopted for takaful con-
tracts, Malaysia has taken a step ahead. In 2021, Malaysia decided to adopt IFRS
17 for the shariah contracts as there is no scope exclusion for takaful contract.
During 2021, the MASB (Malaysian Accounting Standards Board) has issued
three technical bulletins1 to accompany the application of IFRS 17 to Takaful
Contracts: (1) Applicability of IFRS 17 to takaful, (2) Presentation using Column
vis-à-vis IFRS 17 and (3) Qard (loan) accounting under IFRS 17. Other Muslim
 Digital transformation and IFRS 17 accounting issues 227

TABLE 2 The adoption of IFRS 17 on takaful contract across some jurisdictions

Country IFRS 17 adoption year IFRS 17 application to

takaful contract

Malaysia 2023 Yes, no exclusion for

takaful in the IFRS 17
scope and three guidance
have been issued for
takaful
Indonesia 2025 No. Takaful contract apply
local standard PSAK
108. Takaful contract is
excluded in the scope of
IFRS 17/PSAK 74
Pakistan Under consideration to Yes, no exclusion for
adopt in 2023 takaful in the IFRS
17 scope is under
consideration
Saudi Arabia 2023 Yes, no exclusion for
takaful in the IFRS
17 scope. No special
guidance for takaful
contract
Syria 2023 Yes, no exclusion for
takaful in the IFRS
17 scope. No special
guidance for takaful
contract

Source: Asian-Oceanian Standard-Setters Group/AOSSG 13th annual meeting, November 2021.

countries do not issue any guidance or technical bulletins on how to apply IFRS
17 for the takaful contract (see Table 2).
AAOIFI recently, in 2021, issued exposure draft to amend its existing two
accounting standards for takaful. One standard is for recognition and measure-
ment of takaful contract, and another standard is for presentation disclosure for
takaful institution. Both standards are proposed to be efective 1st January 2024,
one year after IFRS 17. AAOIFI observed the development of global standard for
insurance contract and would like to align their standards to IFRS 17 which will
efective globally on 1 January 2023.
IFRS 17 implementation can be a challenge for any insurance company for
at least three reasons. Firstly, the general model of measurement in IFRS 17
requires the company to make group aggregation of the contracts, based on
their three variables: shared risk, annual cohorts and level of proftability profle.
Since the beginning of the group recognition, the company should calculate
the unearned proft for each group or in IFRS 17 which is called Contractual
Service Margin (CSM). CSM is then released slowly during the duration of the
228 Ersa Tri Wahyuni

contract. However, if there is any group which sufers a loss in the long run, the
company should acknowledge the loss right away. This smaller granularity level
can be challenging for the company as it was never required before by the pre-
vious standard (IFRS 4). Most of the companies already grouped their contract
based on the class of business (COB). For example, the group of health insur-
ance would be managed separately from the group of insurance for vehicle acci-
dent. However, companies may not break down the COB into annual cohorts
and proftability (onerous or proftable group). The smaller level of granularity
under IFRS 17 requires more sophisticated IT systems in order to automate the
accounting process.
Second challenge of IFRS 17 is the model for revenue recognition for the
insurance contract. In the current practice, insurance company book revenue
in accordance with the premium they receive or when the insurance coverage
started and then they create premium reserve as a reduction of the revenue.
The way revenue is recognised would be signifcantly diferent under IFRS 17.
Revenue is only recognised over time when the liability decreased as the com-
pany provide the service. The accrual concept of insurance revenue under IFRS
17 is similar with revenue recognition in other industries. However, the funda-
mental change may make regulator more anxious as the industry size has been
mainly calculated using total premium revenue.
The third challenge is the level of disclosures required by IFRS 17. The stand-
ard required more detailed disclosure than the previous standard. More detailed
disclosures may require a more detailed database and more sophisticated account-
ing IT systems to ensure the data is tallied to the smallest unit of information.
A better database and IT systems may be expensive and the investors of takaful
insurance companies may have less appetite to invest a signifcant investment due
to the small size of the industry.

4 The accounting standard for insurance and shariah insurance

contract in Indonesia
Before adopting IFRS in 2012, Indonesia has already had two accounting stand-
ards for insurance industry. One standard is for life insurance and one stand-
ard is for general insurance. The two accounting standards were developed by
Indonesian Financial Accounting Standard Board (DSAK) by considering the
domestic industrial practice. These two standards were amended when IFRS 4
was adopted in 2011 into the Indonesian standard PSAK 62.
IFRS 4 as an interim IFRS standard for insurance contract stipulates the com-
pany to make liability adequacy test and provides guidance on how to calcu-
late Best Estimate Liability (BEL). However, IFRS 4 does not provide guidance
on how a revenue from the insurance contract should be recognised and how
the insurance contract should be grouped. The standard also did not provide
enough guidance on which discount rate to be used to present value the liability.
Thus, all these faws were remedied by IASB in IFRS 17 with more rigorous
 Digital transformation and IFRS 17 accounting issues 229

principle on how to calculate liability for remaining coverage and also the rev-
enue recognition.
However, for the takaful contract, Indonesia has its own accounting, shariah
accounting standard. PSAK 108 Accounting Transaction for Shariah Insurance
was issued in 2016. The Shariah Accounting Standard Board (DSAS) decided at
that time that the shariah insurance contract cannot satisfy the defnition of insur-
ance contract under IFRS 4, thus a diferent standard is needed. Takaful insur-
ance companies should apply PSAK 108 and deviated from IFRS 4. The basis
for conclusion of PSAK 108 provides argument of why DSAS believes that the
defnition of insurance contract under IFRS 4 cannot be applied to the takaful
contracts. Firstly, there is no risk transfer from the participants to the insurance
company, only risk sharing among participants. Secondly, the akad or agreement
under shariah insurance is using takaful akad, which implies helping each other
and not tijari akad which is for commercial purposes like in the insurance contract.
Under PSAK 108, insurance company which issues shariah contract acts as a
representative of the participants to manage the participant’s funds. Some percent-
age of participant funds are allocated to investments using shariah principles. The
company’s role can be perceived as a representative with a contractual agreement.
In addition, the company can play a role as a mudharib (manager) to generate proft
sharing from the management of participant funds (Hendra, 2021). When there
is a claim from the participant, the company manage the transfer of the claim
amount to the policy holders. If the number of claims is less than expected, the
funds are allocated back to tabarru funds, which over time can keep improving.
Joining the global IFRS wagon, Indonesian Financial Accounting Standard
Board (DSAK) has adopted IFRS 17 to be mandatory applied in Indonesia by
2025; but early adoption is permitted. There will be two-year gap of Indonesia

The Timeline of Accounting Standards for Insurance Contracts in Indonesi

1994 2012 2025

IFRS 17/PSAK 74
PSAK 28 IFRS 4/PSAK 62
Supersede all
General Major Amendment standards except
Insurance PSAK 28 and PSAK 36 for PSAK 10B

1996 2016
PSAK 36 PSAK 108
Life Shariah
Insurance Insurance

PSAK 28 : Accounting Standard for General Insurance

PSAK 36 Accounting Standard for Life Insurance
PSAK 108 Accounting Transaction for Shariah Insurance
IFRS 4/PSAK 64 Insurance Contract
IFRS 17/PSAK 74 Insurance Contract

FIGURE 4 Timeline of accounting standards for insurance contracts in Indonesia.

230 Ersa Tri Wahyuni

and international feld as IASB-stipulated IFRS 17 should be adopted in 2023.

Some joint venture insurance companies in Indonesia may decide to adopt IFRS
17 as early as 2023, following their global parent companies which adopt IFRS
17 in that year. The timeline of accounting standards for insurance contracts in
Indonesia is detailed in Figure 4.
The adoption of IFRS 17 in Indonesia is identical word by word except in the
scope of standard and the efective date. The Board added one exclusion in the
scope of the standard and the efective date is 2025. During the transition year
until 2025, insurance companies can continue using PSAK 62 (IFRS 4) and also
PSAK 28 and PSAK 36 for some elements which are not required in PSAK 62.
For shariah insurance contract, PSAK 108 should be applied until the shariah
board revises it or makes any further decision.

5 Moving forward: the adoption issues of IFRS 17 for takaful

contract
A survey conducted by a global accounting frm KPMG in 2018 to the 160 insur-
ers in 30 countries revealed that the companies believe the implementation of
IFRS 17 will give high impact to their IT Finance systems, actuarial systems and
their core business systems (KPMG, 2018). This survey was conducted one year
after IFRS 17 was issued by IASB in 2017. By that time, IASB’s initial planning
was to implement IFRS 17 in 2021 globally, but then upon feedback from its
constituents, the implementation year was pushed back to 2023. Nevertheless,
one year after the standard was issued, many insurance companies have already
calculated the impact of the standards to their business operations. The industry
expectation at that time was that the implementation is not going to be cheap,
nor simple (KPMG, 2018). The similar global survey in 2021 by KPMG revealed
only half of the respondents have fully adopted IT systems (KPMG, 2021).
Conventional insurance industry in Indonesia is also marching on the prepa-
ration stage of implementing IFRS. As the implementation year of 2025 getting
closer, companies are analysing the gap and preparing the budget for IT invest-
ment in 2022. Many insurance companies aim to do parallel running between
old and new accounting system in the year of 2023, one year before the transition
year of 2024. IFRS 17 requires retrospective approach for transition fgures; thus,
insurance company tries to be ready to implement the standard one year before
the mandatory year.
Most insurance companies in Indonesia also have shariah insurance product
(or shariah business unit) and they are wondering if the takaful contract will also
apply IFRS 17 or remain using the current standard of PSAK 108. The decision
is important in the planning and implementation period as the companies are
preparing for IT infrastructure for IFRS 17 implementation. Should the takaful
contract applies IFRS 17, the IT system of the company would need to main-
tain two parallel systems of accounting at the same time. This could mean more
resources required to run and maintain two systems simultaneously.
 Digital transformation and IFRS 17 accounting issues 231

On the other hand, there are shariah insurance companies which only sell
shariah insurance products. These companies do not sell conventional insur-
ance products. According to the 2020 annual report of Indonesian Financial
Service Agency (OJK or Otoritas Jasa Keuangan), there are seven syariah general
insurance companies, fve life insurance companies and one shariah reinsurance
company. For these full-fedged shariah institutions, they may have interest to
maintain PSAK 108 model as long as possible to avoid IT investment in adopting
IFRS 17. PSAK 108 that mainly in parallel with IFRS 4 has less rigorous meas-
urement model for insurance liability and revenue.
It is interesting to note that DSAS had made decision that when IFRS 4 is
adopted, the takaful contract is not the same with insurance contract. IFRS 17
adopts identical defnition of insurance contract with IFRS 4. Thus, ceteris pari-
bus, DSAS may end up with similar conclusion in which takaful contract should
be scoped out from the IFRS 17. It will be a good idea if DSAS and other Muslim
countries standard setters discuss about these important issues.
As some countries have already decided to adopt IFRS 17 also for takaful con-
tract, DSAS may also move toward similar directions in the future. At least the
board will consider the implementation of IFRS 17 when they revise the current
standard of PSAK 108 as they also included IFRS 4 into consideration when they
issued PSAK 108. At the time, this chapter is written DSAS has not made any
clear decision if the IFRS 17 will also be applied to the takaful contract.
Nevertheless, the lack of debate among preparers of takaful fnancial report
may also indicate the insignifcance of the industry. MASB’s uncontested deci-
sion to adopt IFRS 17 maybe due to the small size of the shariah insurance
compared to the conventional. For example, the market share of Malaysian sha-
riah insurance industry is only 16.99%, which is 5.82% in Indonesia as of 2019
(Mutmainah et al., 2022). Most of the shariah contract issuers are also part of
a bigger conventional insurance company which are already allocating their
resources in the preparation of IFRS 17. Thus, it could be in the interest of the
preparers to adopt IFRS 17 also for takaful contract to avoid the unnecessary
extra burden of two system parallel running.
However, in a spirit of innovation and independence of the accounting stand-
ard setting, the decision to adopt IFRS 17 for shariah contract (or to create a
separate standard) should not be based heavily on the conveniency of the prepar-
ers. Accounting standard setters need to consider if takaful contract is indeed fall
under category of insurance contract in IFRS 17. Malaysian MASB made it clear
that takaful contract falls under the defnition of insurance contract in IFRS,
while Indonesian DSAS stood in the opposite position. On the other hand, a sep-
arate standard should not be exercised just for the sake of distancing the syariah
with the conventional contract just because the contract name is diferent. If the
economics of the contract is similar then the same accounting policy should be
applied to communicate the economics of the transaction, despite the diference
in the contract name. Substance over form, one of the virtues of accounting, should
be upheld in the decision-making of IFRS 17 application for takaful contract. For
232 Ersa Tri Wahyuni

example, the argument that takaful contract is diferent from insurance contract
should also examine the mutual insurance company which almost has similar
economic substance with the takaful contract.
IFRS is a principle-based set of standards and has been used widely and
accepted globally as international accounting standard. Indonesia also has
adopted IFRS since 2012, including IFRS 17 which will be applied in 2025.
Nevertheless, Indonesia retains its right to develop shariah accounting standard
for shariah transaction. The fact that IFRS 17 has been adopted by many coun-
tries for takaful contract, this could be a sign that IFRS 17 is fexible enough
to be adopted also for takaful operators. AAOIFI’s recent amendment of their
accounting standard for takaful contract also apply IFRS 17 logics with diferent
terminologies. For example, AAOIFI standard uses similar way to aggregate the
contracts and the initial recognition takaful residual margin which is a similar
concept of CSM in IFRS 17. If Indonesia also adopts IFRS 17 for takaful compa-
nies, this will improve comparability across jurisdictions and also encourages the
companies to invest in their IT systems.

6 Conclusion
Takaful industry is a growing industry globally and has a prospective future.
However, in Indonesia, takaful industry has been stagnant over the last fve years.
This chapter has addressed two major issues in the takaful industry in Indonesia
which are the digital transformation and accounting issues. The digital transfor-
mation in the takaful industry is much slower than the conventional insurance.
Takaful operators are not present in the insurtech ecosystem in Indonesia. The
small size of the industry may contribute to the lack of appetite to invest in the
IT system to embrace the insurtech opportunity.
The second issue is the adoption of IFRS 17 for takaful contract. Takaful
industry in Indonesia is facing a signifcant uncertainty from the nondecision to
adopt IFRS 17 by the DSAS. The takaful operators in Indonesia mostly operate
as a takaful wing of conventional insurance companies, thus they are marching
on preparation of IFRS 17 for the insurance contract. As IFRS 17 will be adopted
in 2025, Indonesian insurance companies are preparing their IT systems for the
implementation. A diferent set of systems for the takaful wing will complicate
the implementation of IFRS 17 in Indonesia. This chapter recommends for the
accounting standard in Indonesia to consider the adoption of IFRS 17 also for
takaful contract. If a separate standard still deems necessary, harmonisation to
IFRS 17-like AAOIFI approach will be benefcial to the preparers to improve the
comparability of the fnancial reports.

Acknowledgement
The author would like to thank the contribution of Prof Dian Masyita for the
initial discussion of the chapter and the research assistant for this chapter, Rijal
 Digital transformation and IFRS 17 accounting issues 233

Firmansyah. The author is also grateful and acknowledges for the input from
Prof. Yasushi Suzuki and Dr. Mohammad Dulal Miah for the chapter revision.

Note
1 The bulletins can be downloaded in this link: https://www.masb.org.my/pages.
php?id=206

References
AAOIFI. (2021). Exposure Draft of the Financial Accounting Standard Accounting
for Takaful: Recognition and Measurement. In 2021. Accounting and Auditing
Organization for Islamic Financial Institutions.
Abdul Rahman, Z. (2009). Takaful: Potential demand and growth. Journal of King
Abdulaziz University: Islamic Economics, 22(1), 171–188.
Adinugroho, I., Rauf, R., & Sucipto, N. (2022). The role of the financial services author-
ity in supervision of fraud prevention in life insurance companies in Indonesia. Jurnal
Economic Resource, 4(2), 320–324.
Bappenas. (2019). Indonesia Islamic Economic Master Plan 2019–2024. https://knks.go.id/
storage/upload/1560308022-Indonesia%20Islamic%20Economic%20Masterplan%20
2019-2024.pdf
Capegemini, & EFMA. (2021). World Insurance Report 2021. https://worldinsurancere-
port.com/
Catriana, E. (2021). Insurtech Ini Catat 4 juta Pelanggan Baru pada 2020 (This Insurtech
Record 4 millions new customers in 2020). Kompas.com. https://money.kompas.com/
read/2021/01/14/174252026/insurtech-ini-catat-4-juta-pelanggan-baru-pada-2020
CIBAFI. (2018). CIBAFI Global Takaful Survey.
Gusti, G. P. (2019). Analysis of the cause of loss of PT. Asuransi Jiwasraya (Persero). Jurnal
Manajemen Dan Bisnis Sriwijaya, 17(4), 199–206.
Hastuti, R. K. (2020). Kacau! Gagal Bayar 5 Asuransi Ini Bikin Nasabah Teriak (Disaster,
The Default of Five Insurance Companies makes the policy-holders Sreams). www.
Cnbcindonesia.com. 7-180132/kacau-gagal-bayar-5-asuransi-ini-bikin-nasabah-teriak
Hendra, G. I. (2021). Determinants of financial stability of Islamic insurance companies
listed on Indonesia Financial Services Authority. Share: Jurnal Ekonomi Dan Keuangan
Islam, 10(2), 253–278.
Husin, M. M. (2019). The dynamics of Malaysian takaful market: Challenges and future
prospects. Journal of Islamic Finance, 8, 131–137.
Hussain, M. M., & Pasha, A. T. (2011). Conceptual and operational differences between
general takaful and conventional insurance. Australian Journal of Business and Management
Research, 1(8), 23–28.
Ibrahim, S. H. M., & Hameed, S. (2007). IFRS vs AAOIFI: The clash of standards? Munich
Personal PepPEc Archive (MPRA) Paper, 12539.
ICD Refinitiv, I. R. (2020). Islamic Finance Development Indicator.
KPMG. (2018). In It To Win It : Feedback from Insurers on The Journey to IFRS 17 and IFRS
9 Implementation One Year in.
KPMG. (2021). Testing Times: Feedback from Leading Insurers on The Front Line of IFRS 17
Implementation.
Maf ’ula, F., & Mi’raj, D. A. (2022). Islamic insurance in Indonesia: Opportunities and
challenges on developing the industry. Journal of Islamic Economic Laws, 5(1), 116–138.
234 Ersa Tri Wahyuni

Mutmainah, M., Sukmadilaga, C., & Nugroho, L. (2022). Development of Islamic insur-
ance in Southeast Asia (Malaysia, Brunei Darussalam, and Indonesia): The progress
perspective. Sosyoekonomi, 30(52), 243–255.
Nahar, H. S. (2015). Insurance vs takaful: Identical sides of a coin? Journal of Financial
Reporting and Accounting, 13(2), 247–266.
Nomran, N. M., Haron, R., & Hassan, R. (2018). Shari’ah supervisory board charac-
teristics efects on Islamic banks’ performance: Evidence from Malaysia. International
Journal of Bank Marketing.
Pasha, A. T., & Hussain, M. M. (2013). Takaful business models: A review, a comparison.
Business Management Dynamics, 3(4), 24.
Puspaningtyas, L. (2021). Insurtech Jadi Peluang Asuransi Syariah (Insurtech become the
opportunities of syariah insurance). Republika. https://www.republika.co.id/berita/
q4kbug423/insurtech-jadi-peluang-asuransi-syariah
Refnitiv. (2021). Islamic Financial Develoment Report 2021. https://www.refnitiv.com/
content/dam/marketing/en_us/documents/gated/reports/report-2021-all-color2.pdf
Setiawan, I. (2020). Bedah Kasus Gagal Bayar dan Kerugian PT. Asuransi Jiwasraya
(Persero). Jurnal Akuntansi Dan Bisnis Indonesia ( JABISI), 1(1), 34–41.
Zain, F. A. M., Abdullah, W. A. W., & Percy, M. (2021). Voluntary adoption of AAOIFI
disclosure standards for takaful operators: the role of governance. Journal of Islamic
Accounting and Business Research.
13
DILEMMA AND CHALLENGES FOR
FINTECH APPLICATION IN WAQF
ADMINISTRATION/REGULATION IN
CONTEMPORARY MUSLIM MAJORITY
COUNTRIES
A case of Bangladesh

A. K. M. Kamrul Hasan

1 Introduction
Waq f is not a new terminology in Islamic traditions, but rather embedded with
the Islamic fnancial system from the early Islamic period. No doubt that the
objectives of waq f were to contribute to the social welfare through collective
eforts of faithful Muslims along with state run programs and supports. However,
when we look at the waq f estates and administrations in developing Muslim
majority countries nowadays, the weak and inefcient management structures of
waq f properties probably are seen in most of the places which obviously under-
mines its’ glorious past. Bangladesh is a South Asian country with ninety percent
of its population is Muslim (BBS, 2011). The country had a rich story of successful
waq f estates, which once established for humanity and social welfare. However,
the waq f estates seem not fulflling its objectives due to several constraints.
We should note that a couple of issues are needed to be addressed regard-
ing waq fs and management systems of waq fs in Bangladesh. For instance, a
good number of waq fs properties are still not registered at the ‘Ofce of the
Administrator of Waqfs Bangladesh’. The manual process of documentation and
supervision of the registered properties seems unproductive; it requires to reex-
amine the check and balance of the power of administrator in the regulations
to ensure good governance in waq fs properties. Contemporary scholars have
addressed the multiple waq fs issues from East Asian and Middle Eastern countries
context. However, there is a little academic debate and discussion from modern
Bangladesh’s perspective in the contemporary literature. Indeed, the issues that
we have mentioned earlier have not been well tackled in the global literature due

DOI: 10.4324/9781003262169-16
236 A. K. M. Kamrul Hasan

to lack of availability of data and information. Hence, it is urgent to address the

barriers that hinder the maximum utility/welfare of waqf properties, as the ulti-
mate maqasid of those properties is to enhance social welfare. Therefore, the main
objectives of the chapter are to analyze those issues in depth from an academic
point of view and ofer a couple of recommendations to the decision makers
for adopting fntech as a solving instrument. In short, we attempt to analyses
the waq f discourse from the developing Muslim majority countries’ perspective
especially in Bangladesh context in this chapter. We present here a model to
resolve the issues related with waq f administration in Bangladesh with modern
fntech revolution. The structure of the chapter is as follows. Section 2 discusses
the defnitions of waq f, the past and present trends of waq f in Bangladesh and
the defnition of fntech. Section 3 presents a comprehensive discussion on waq f
administration act and governance structure in Bangladesh. Section 4 presents a
critical evaluation on waq f act and administration from two perspectives namely
monitoring cost and governance. Section 5 provides ways for building a digi-
talized and efcient waq f administration to resolve the issues discussed in prior
discussion, whereas Section 6 contains a conclusion.

2 Waqf: defnition, roles, trends in past and present

The word waq f (plural awqaf ), derived from an Arabic word, literally means ‘hold
or stop’ (Ihsan & Ibrahim, 2011). In general, waq f is defned as voluntary and
dedicating fxed type assets to Allah SWT and devoting its income for the ben-
eft of human beings (Ali, 1976; Kamaruddin & Hanefah, 2020). Waq f can be
defned as ‘holding certain property and preserving it for the confned beneft of
philanthropy and prohibiting any use or disposition of it outside its specifc objec-
tive’ (Kahf, 2003). The tradition of waq f is deeply rooted with early Islamic era.
Historians cited two waq f stories (one is religious waq f and other is philanthropic
waq f ) as evidence to describe the importance of waq f in Islamic tradition since
the prophetic era. First, a well-known waq f is the mosque of Quba in Madinah
which was built upon the arrival of the prophet (pbuh) in Madinah from Mecca
in 622 AD (Kahf, 2003). This was an example of ‘religious waq f ’. Second is Bir
Rumah well. During the period of Prophet Muhammad (pbuh), many Muslims
were continued to migrate to Medina from Mecca to save themselves from the
religious prosecutions in Mecca. However, due to high demand and scarcity of
supply of drinking water, the price of drinking water in Medina was so high
and it is quite difcult for the migrant Muslims to aford the price for drinking
water. Seeing this, prophet (pbuh) wishes to buy Bir Rumah well so that all peo-
ple would get the drinking water free of cost and on the request of prophet, one
of his companions, Uthman ibn Afan, purchased the well from the owner and
made it into a waq f property so that all people (both Muslims and non-Muslims)
get water from it. Indeed, this philanthropic waq f saves many lives and money
and created an illustration for next generation Muslims to do waq f for the welfare
of the society. Although this was done to solve a specifc problem faced by the
 Dilemma and challenges for fntech application 237

Muslims, later the concept extended into ‘philanthropic waq f ’ such as supporting
the public utilities, establishment of hospitals, roads, bridges, and dams.
In fact, next generation Muslims follow the footstep of their ancestors and devel-
oped the concept of waq f in broader forms. We have observed a variety of waq f
estates in Umayyad dynasty, Abbasid dynasty, Ayyubid dynasty in Egypt and in
the era of the Ottoman dynasty which controlled most of the Arab region and
Europe. Cizakca (2002) well documented while analyzing the history of waq f
that the waq f institutions have managed to provide social welfare services that
many current states struggle to ofer. Specifcally, during the Ottoman period,
the fnancing of health, education and welfare services were entirely entrusted
to the waq f system (Baskan, 2002). In modern days, many Muslim societies and
several humanitarian projects are operated through the waq f fund. These include
the development of springs to provide water for public consumption, building
houses for the needy, building bridges, helping the poor and the handicapped,
fnancing the marriage of young people in need and fnancing orphanages and
homes for the elderly (Zuki, 2012).
According to Waq f Ordinance 1962 that applicable in Bangladesh,

‘waq f ’ means the permanent dedication by a person professing Islam of any

movable or immovable property for any purpose recognised by Muslim
Law as pious, religious or charitable, and includes any other endowment
or grant for the aforesaid purposes, a waq f by user, and a waq f created by a
non-Muslim.
(Waq f Ordinance 1962, section 2(10))

Waq f can be defned from economic sense, ‘as investment of funds and other
assets in creative properties that provide either usufruct or revenues for future
consumption by individuals or groups of individuals’ (Pirasteh & Abdolmaleki,
2007). In fact, waq f costs nothing to government; rather it supports the govern-
ment to enhance its public services by engaging wealthy citizen in socio-economic
development. Philanthropy-oriented waq f has flled gaps in the socio-economic
system by appealing to the piety of wealthy individuals (Zuki, 2012). Zuki
(2012), while referring to Cizakca (2011), mentioned,

the key role of the waq f sector in providing public services meant signif-
cant reductions in government expenditure and borrowing which led to a
reduction in the tax burden on the public and increased the potential for
savings to be spent on private investment and growth. Waq f also ofered
the opportunity to provide welfare services without involvement of the
state. This resulted in the development of an active civil society, assisting
in redistributing resources and reducing inequality in society.

In South Asia, waq f also played an important role in socio-economic develop-

ment since the establishment of Muslim rule in 12th century in South Asia.
238 A. K. M. Kamrul Hasan

Particularly during the Mughal period family members of Mughals and elite
Muslims made waq f to establish schools (madraas), bridges, ponds, etc. During
the British colonial regime, South Asian Muslims were almost abandoned from
the state’s power and support. Besides, the fnancial conditions of middle-class
Muslim population went down and a few new estates had been added within
the existing waq f properties during the British rule in South Asia. Despite this,
during the British colonial rule, few wealthy Muslims continued to donate
their properties as waq f. Indeed in 1913 ‘The Mussalman Wakf Validating Act
1913’ is a kind of legal acknowledgment by the British ruler to the waq f prop-
erties. Currently the waq f estates in India are administered by Central Waq f
Council under Ministry of Minority Afairs, Governments of India. In case of
Pakistan, awqāf properties belong to religious institutions such as mosques, reli-
gious schools (madaris), shrines (dargahs), and graveyards ( janazagahs) (Abbasi,
2019). After Independence, West Pakistan Waq f Properties Ordinance 1959 and
the West Pakistan Waq f Properties Rules of 1960 considered a breakthrough
to regulate and organize the waq f in Modern Pakistan (Abbasi, 2019). The
history of waq f in Bengal (the present day of Bangladesh and some parts of
Bengali-speaking regions in Indian provinces) has a long tradition. Since the
Bengal Sultanate period (14th to 16th centuries) a lot of waq f estates had been
established. For instance, during the period of Sultan Nasiruddin Mahmud
Shah (1435–1459), there was an endowment to establish mosque at Navagram,
Sirajganj, Bangladesh. Besides, several mosques were established in Sylhet
District of Bangladesh under waq f estate during Sultan Shamsuddin Yousuf
Shah period (reigned from 1474 to 1481). Sultan Alauddin Husain Shah, dur-
ing his reign (1493–1519), allotted many rent-free lands to religious leaders
of Bengal in several parts (Alamgir, 2020). Besides, the ‘Lalbagh’ in Dhaka
(presently known as the Lalbagh Fort) and the ‘Bara Katra’ in Dhaka were
waq f properties of Mughal subadar Shaista Khan and Sultan Shah Shuja respec-
tively who ruled Dhaka in 16th century (Alamgir, 2020). During the British
colonial rule, the waq f properties of Haji Mohammad Mohsin (1732–1812)
and the waq f properties of the Nawabs of Dhaka still exist and serve for the
humanity as a symbol of philanthropic waq f. In the present day, the buildings
of Dhaka University, Dhaka Medical College and Bangladesh University of
Engineering and Technology were built on the land donated by the Nawab
family of Dhaka. However, after independence in 1947, many waq f estates were
acquired by the government due to lack of documents which were at that time
kept in Calcutta, India and could not be retrieved (Alamgir, 2020). Finally,
The Waq f Ordinance, 1962, an exhaustive law regulating waq f, introduced in
Pakistan (including East Pakistan, now Bangladesh) to manage and regulate
the waq f properties. There is a department established under this Ordinance in
which the waq f administrator is appointed as the head of the department and
his ofce named as ‘Ofce of the Waq f Administrator’ under the Ministry of
Religious Afairs. After being independent in 1971, the present-day Bangladesh
has managed all waq f properties under ‘Ofce of the Administrator of Waq fs
 Dilemma and challenges for fntech application 239

Bangladesh’ which is attached with Ministry of Religious Afairs, Govt. of the

People’s Republic of Bangladesh.
On the other hand, the now trendy word fntech was coined by CITI group in
the early 1990s (Arner et al., 2015; Hochstein, 2015a, 2015b). Arner et al. (2015)
rightly noted, ‘[t]he term’s origin can be traced to the early 1990s and referred to
the ‘Financial Services Technology Consortium’, a project initiated by Citigroup
to facilitate technological cooperation eforts’. After conducting a semantic anal-
ysis on defnition of fntech from more than 200 scholarly articles over the last
forty years, Schuefel (2016) mentioned, ‘Fintech is a new fnancial industry that
applies technology to improve fnancial activities’ (p. 45). According to OECD
(2018), ‘Fintech involves not only the application of new digital technologies
to fnancial services but also the development of business models and products
which rely on these technologies and more generally on digital platforms and
processes’. The FSB defnes fntech as ‘technology-enabled innovation in fnan-
cial services that could result in new business models, applications, processes or
products with an associated material efect on the provision of fnancial services’
(FSB, 2019, p. 1). Scholars argue that fntech companies are flling a gap left by
traditional fnancial institutions and companies, including in Silicon Valley, the
United Kingdom and China (IMF, 2020). The reason is

traditional fnancial institutions typically provide services through brick-

and-mortar establishments and rely on legacy technology that are costly
to operate, and even more costly to upgrade and adapt to fast-changing
technology; whereas Fintech companies are often better positioned to use
the latest technology and data analytics to target niche markets, including
lower-income groups, and orient their products to maximize consumer
satisfaction.
(IMF, 2020, p. 13)

To keep our discussion on track, we leave the detailed discussion on fntech here
rather examine how fntech will be helpful in managing waq f administration and
lowering monitoring cost. The following sections are devoted on these issues.

3 Waqf administration act and structure: a case of Bangladesh

In Bangladesh, the waq f administration mainly runs under two major regulations
such as (a) Waq f ordinance 1962 (which is amended in 2013) and (b) Waq f special
(property transfer and development) act 2013 (Hasan and Siraj, 2016). Below, we
summarize the key points of both regulations.

3.1 Waqf ordinance 1962

Waq f ordinance 1962 (hereafter Ordinance) is considered as a key regulation in
waq f administration in Bangladesh. As discussed, the ordinance was frst initiated
240 A. K. M. Kamrul Hasan

TABLE 1 Salient features of Waq f Ordinance 1962

S. no. Chapter No. of Descriptions

sections

1 Preamble 1–6 This chapter discusses the defnition of several

terminologies used in the ordinance, the
scope of the ordinance and the right of
records of the waq f properties.
2 Appointment of 7–26 How to appoint an administrator of waq f,
administrators terms and conditions of appointment,
of waq f, removals and remuneration are briefy
ofcers and discussed in the chapter. Besides,
stafs, and appointment of ofcers and other staf are
constitution of discussed. Most importantly, it highlights
the committee in detail on how several committees are
formed.
3 Powers and 27–46 The chapter briefy explains the
functions administrative power and functions of the
of the administrator and the committee. How
administrators to appoint an ofcial mutawalli is also
and the described here.
committee
4 Enrollment of 47–52 Enrollment, registration of waq f estate is
waq fs discussed in this chapter.
5 Waq fs accounts 53–55 Chapter 5 specifes how to maintain the
accounts of the waq f and conduct audit are
highlighted.
6 Transfer of waq fs 56–58 Regulations on transfer of waq f properties are
properties discussed here.
7 Mutawallis 59–70 Chapter 7 solely discussed on remuneration
and duties of mutawallis.
8 Finance 71–78 How to manage the ‘waq f fund’ is discussed
in Chapter 8.
9 Judicial 79–86 How to deal with the legal issues related with
proceedings waq f properties are well explained in this
chapter.
10 Amendment and 87–94 Amendment and repeal of the ordinance in
repeal Bangladesh is explained here.
11 Miscellaneous 95–103 Several miscellaneous issues such as
procedures of conducting meetings, special
directions to the administrator’s and
ofcers are mentioned in this chapter.
12 Rules and by 104–105 The power to government to make rule and
laws power to the administrator to make by laws
are explained in detail in the fnal chapter
of the ordinance.
 Dilemma and challenges for fntech application 241

in 1962 to manage the waq f estates in the West Pakistan and East Pakistan (now
Bangladesh). After its independence in 1971, Bangladeshi waq f estates were reg-
ulated under this act until 2013 when it was slightly modifed in few sections.
There are 12 chapters and 105 sections in the ordinance. Table 1 shows the key
points of each section.
It is evident from Table 1 that the ordinance briefy discussed on several insti-
tutional settings, powers and provisions related with waq f and waq f properties.
We should note that the amendment in the ordinance that conducted in 2013 is
not so vast; rather, few sections were included in the text and rest of the text is
similar to that was incorporated in 1962.
From the ordinance, it is also clear that there are three parties involved in
supervision and monitoring system that established in waq f properties as per
the ordinance (see Figure 1). First, the ‘Ofce of the Administrator of Waq fs
Bangladesh’ is the supreme authority in waq fs in Bangladesh and another is
Mutawalli-based monitoring and supervision of waq fs at bottom level. As there are
multiple monitoring structures, it presumes that the system is not cost efective
rather crates an expenditure burden on the income on the waq fs fund. Besides,
there is the manual-based report flling system which creates bureaucracy in the
property management system. What is more, it is found that there is no specifc
qualifcation or guidelines on appointment of Mutawalli and the administrator
has empowered with extraordinary power. There is no check and balance, nei-
ther for administrator nor for Mutawalli. Those monitoring and governance issues
are briefy explained in Section 4.
Besides, we observed from the ordinance that the administrative organo-
gram of the ofce of the waq f administrator is quite bureaucratic (see Figure 2)
and there is less automation in the ofce. As a result, it takes much more time
to establish a new waq f or settle any claim of the waq f properties. Finally, it is
found that there is a ‘waq f committee’ in the ordinance for assisting and advising
the administrator in administrating the waq f and their funds and in the exer-
cise and performance of the administrator’s powers and duties (see Waq f ordi-
nance 1962, section 19). We consider this a costly and bureaucratic process in
decision-making (see Figure 3).

Office of the Waqf Administrator Mutawalli

Staff at the office of the Mutawalli

FIGURE 1 Parties involved in waq f estates management.

242 A. K. M. Kamrul Hasan

Waqf Administrator

Deputy Administrator

Assistant Administrator

District level officers and staffs (Inspector,

Auditor, other clerks)

FIGURE 2 Administrative structure of the Ofce of the Waq f Administrator.

Administrator

Chairman (Waqf Administrator)

Waqf Committee member (consisting of ten members appointed by govt.)

FIGURE 3 Decision-making process at the Ofce of Waq f

3.2 Waqf special (property transfer and development) act 2013

‘Waq f special act 2013’ is enacted in 2013 by the government of Bangladesh to
clarify the transfer of waq f properties and development. The act has 26 sections
of which 13 are related to transfer of waq f properties, and the rest are related to
waq f property development, related lawsuits and miscellaneous issues. It clarifes
how waq f properties could be transferred and developed/constructed for further
use under the existing Bangladeshi laws.

4 A critical evaluation of Waqf ordinance 1962: monitoring cost,

governance issues and transaction cost perspective
Monitoring cost and transaction cost are widely discussed by the scholars in
the feld of corporate governance and institutional economics. It is argued to
install a good governance system in the organization so that the agency cost will
be lowered. Traditional agency theory (see Fama, 1980; Jensen, 1986; Jensen
& Meckling, 1976; Jensen & Murphy, 1990) advocates creating a well design
compensation contract between agent and principal to minimize the agency
problem. Hence, it could be imagined that the ofce of the waq f administrator
and mutawalli act as an agent appointed by the waqif (the founder of the waq f )
which we may consider as principal. Based on the argument, the monitoring
 Dilemma and challenges for fntech application 243

cost can be justifed. However, the main issue is that the waq f properties have
diferent features than any other business entity. For instance, muslim scholars
have viewed the ownership of waq f that the property of waq f is owned by Allah
or by its benefciaries, however in any case the benefciaries cannot sell or give
away the waq f, except few exceptions (Zuki, 2012). Besides, waqif should defne
all the conditions in a written document which must be followed as long as they
follow shariah principles (Ibrahim, 1996). In addition, waq f is used for public
utility, it is not a private consumption, but rather we can consider the waq f prop-
erties as a common asset/property to all. In addition, ‘trust’ and ‘traits’ are two
key components in waq f contract framework. ‘Trust’ is important because those
who pay philanthropy cannot examine products physically, evaluate the use of
philanthropic paid and have limited access to information, which shows that
the relationship between philanthropic institutions and philanthropic payers are
having the nature of uncertainty, dependence and risk (Usman et al., 2022, p.
397). In practice, waqif puts his trust on administrator (government/regulating
body) and manager of the property (mutawalli) that they will provide their best
eforts to maintain the waq f estates and maximize its utility to the humanity.
And the personal ‘traits’ (morals) is another key component of waq f contract
and governance (in section fve we have discussed those traits). Although there
is a provision to take punitive action against any dishonest/corrupt mutawallis
by administrator, however if state power supports the former one, it is difcult
to bring discipline in the waq f governance by the administrator alone. A good
number of unregistered waq f properties and illegal occupation and encroachment
of waq f lands are the evidence of our claims (see more in Ahmad & Safullah,
2012; Hasan & Siraj, 2016). Hence, in such a case, there is no way except morals
that could prevent the corruption in management level as waqif is no longer to
monitor the management. Having these unique features, the existing monitoring
system and governance system described in the ordinance are not compatible
with the objectives and mission of waq f properties. In short, we can conclude that
the monitoring costs are important in corporations because there is an existence
of incomplete contract (due to agency problems), whereas monitoring costs of
waq fs properties depend on two T’s such as ‘trust’ and ‘traits’ of the agents instead
of incomplete contract.
We should note that waq f administrator ofce charges fve percent of net
income from the waq f estates and the mutawalli remuneration is fxed at one
tenth (10%) of the income from the estate. Besides, there are other adminis-
trative expenses to be covered from the income of the estates. As a result, the
benefciaries’ proportion is reduced by such kind of structural monitoring cost
approved in the ordinance. Readers could raise question about what the role of
the government is to ensure the welfare from the waq f estates. Unfortunately,
there is no single section in the ordinance that indicates to cover any expendi-
ture by the government, rather all governmental stafs are working in the mon-
itoring level with the cost of waq f estates. This is the major loopholes within
ordinance that state has skipped its fnancial responsibility to maintain waq f
244 A. K. M. Kamrul Hasan

properties. What is more, the ordinance has empowered the administrator as a

super powerful person in waq f estate and controlling the properties. However,
scholars argue that waq f institutions should have a fexible organizational struc-
ture so that the person in charge of administering the waq f (a manager/mut-
awalli) can shape it as he wishes (Ahmed, 2004). It is the mutawalli’s moral
obligation to protect the waq f property and to maximize its proft (Zuki, 2012).
As we discussed, the ordinance rather makes it difcult for the mutawalli to take
any innovative initiative to enhance because it requires a heavy bureaucratic
process to get permission from the Ofce of the Waq f Administration. Indeed,
these increase the overall monitoring cost and in turn reduce the welfare from
the waq f estates.
However, the irony is, although the strict regulations enforce in the country
since 1962, the governance of the waq f estates is very poor and great number
of waq f properties are captured by local musclemen and political elites. We can
presume that weak governance and monitoring could be a reason for this. A pre-
vious study on the tragedy of Bangladeshi waq f supports our claim. For instance,
Chandan (2018) mentioned after his feld visit report at the Ofce of the Waq f
Administrator,

Besides, corruption is also rife in the ofce of the waq f administration and
the waq f administrator himself confessed this. He says our manpower is so
scarce that we could not enforce transparency and accountability in the
ofce. We don’t have any ofcer to cross-check and monitor performance
of the inspectors, other stafs and mutawallis.

The legal and religious scholars also stressed on the weakness of the ordinance.
One of the legal experts of the country commented in this way

The law is outdated and does not describe how the rights of the waq f prop-
erty will be protected. It only describes how the waq f administration will
perform. We need a substantive law which will describe how the cases
under the law can be handled and how crimes are to be charged.
(Chandan, 2018)

Religious scholars still have countless objections against the law and the decaying
system. For instance, one of the shariah researchers explains,

There is no concrete policy of the waq f administration to survey, iden-

tify, enlist, and audit the waq f properties in Bangladesh. Particularly, it has
minimal or no supervision on family waq f property. The most signifcant
issue is there is no sharia board for investigating, regulating, or advising the
administration for its activities. The waq f administration is basically run by
the civil servants who don’t have knowledge about Islamic law.
(see Chandan, 2018)
 Dilemma and challenges for fntech application 245

Therefore, we could presume that one of Bangladesh’s greatest instruments of

social service has completely collapsed due to high monitoring cost within the
legal framework and weak governance within the administration potentially.
The second issue is the high transaction cost of maintaining a waq f property.
The ex-ante cost is registration fees and stamp fees whereas ex post costs are audit
fees, waq f administrator fee (fve percent of net income), mutawalli’s remuner-
ation. We presume that high transaction cost eats up the profts generated from
the property. There is no specifc policy to minimize the transaction cost rather
the ordinance fueling to increase the cost. It seems that the waq f properties in
Bangladesh are facing a ‘tragedy of the commons’ (Hardin, 2009; Ostrom, 1990).
In the next section, we attempt to develop a framework for reducing monitoring
and governance cost by applying using fntech in waq f estates.

5 Toward a digitalized and effcient waqf administration

In fact, academic research provides evidence that waq f is a well-accepted instru-
ment for socio-economic development in Organizations of Islamic Cooperation
countries (see Medias et al., 2022) and there is no doubt that if waq fs are well-
managed and properly monitored, the society will reap more benefts. For
instance, Islamic Development Bank’s (IsDB’s) Awqaf Properties Investment
Fund (APIF), which has 15 investors, could be an example of well-managed
waq fs that have high-level impact on enhancing social welfare in South Asia
to African countries. APIF uses a unique model to manage the fund and it is
reported that, in the APIF portfolio, as of the end of 2018, includes 55 com-
pleted or active projects, totaling US$1.04 billion. Of this, IsDB’s contribution
includes US$161 million from APIF and US$370 million from the IsDB line of
fnancing and the remaining is from the benefciaries (see details in IsDB, 2019,
pp. 33–35). IsDB adopts a modern and transparent administration system using
information technology. In academic circle, scholars argue that fntech could be
used for multiple purposes in the case of waq f to maximize its utility and social
benefts. To illustrate, Yusuf et al. (2021) show how fntech is used to cash waq f
management in Bangladesh, Yoshida (2019) describes a framework of the ‘fntech
enabled cash waq f’ as an efective tool for social fnance. Usman et al. (2022) in an
empirical study found that fntech could convince donors to increase their trust
and attitude toward philanthropic institutions, whereas Hapsari et al. (2022) ofer
a crowdfunding waq f model in providing fnancing resource to develop waq f
lands. In short, it is evident that fntech or digitalization of waqf administration
could enhance the welfare of waq fs properties. However, in our previous discus-
sion, we argue that the governmental executive trusteeship on waq f properties in
Bangladesh contributes to increase monitoring cost and transaction cost. Besides,
there is a room to reform the existence ordinance to improve the waq f govern-
ance structure. We advocate fntech as an efective instrument to resolve those
issues. Below we elaborate on how fntech is a viable alternative to settle two
issues described from Bangladesh context.
246 A. K. M. Kamrul Hasan

5.1 Fintech: a viable solution to reduce monitoring cost and

transaction cost of waqf properties
Bangladesh government has taken several initiatives in recent years to digitalize
the governmental services to maximize the public utility and efciency of the
governmental services (see ICTD, 2021). However, the progress seems to be
too far from the expectation and many services could be provided under digital
system, ‘The Ofce of the Waqfs Administrator’ for an example. As discussed in
Section 2, fntech has a fast-moving trend in the emerging economies; we sug-
gest adopting fntech in waq f administration to increase the welfare from the waq f
properties. The following discussion elaborates the concept.
In case of cash waq f: In case of cash waq f, the waqif can open a bank account and
instructs the bank to remit the proft/interest at the year end to the waq f Fund of
the Ofce of Waq f Administrator. Next, the administrator will allocate the fund
to the eligible heads (as instructed by waqif ). We explain this in Figure 4.
In Figure 4, we observe that there is no need/roles for mutawallis for mainte-
nance of fund and thus can reduce the fees paid to mutawalli.
In case of non-cash Waq f: When the waq f is conducted for fxed assets or other
tangible assets, waqif can use fntech to lower monitoring cost and transaction
cost. For instance, in the case of new waq f, waqif can directly conduct the waq f
registration process in favor of ministry of lands and the property could become
a state property instead of Mutawalli-based system which could cut the transac-
tion cost. However, the utilization of the property could base on the instruction/
wishes of the waqif. In the case of existing waq f estates, fntech could be used to
reduce the traditional reporting systems and monitoring process. For instance,
the mutawalli could remit any fnancial beneft from the estates to the benef-
ciaries through mobile fnancial services and could also remit fve percent of
income to the waq f administrator through mobile fnancial service. In addition,
introducing electronic fling system could help both mutawalli and administrator
to cut administrative cost and transaction cost. Figure 5 describes this theoretical
framework.

Waqif deposit the waqf money into a Bank/FI will invest the
bank/FI fund and remit the
profit/interest to Waqf
fund

Sent the electronic report regarding the

utilization of fund
Waqf fund
Ministry of Religious
(Managed by Waqf administrator)
Affairs

FIGURE 4 Adaptation of fntech in cash waq f

 Dilemma and challenges for fntech application 247

5.2 Improving governance system in waqf administration

by updating the ordinance
Although conventional and Islamic governance are similar in terms of defnition,
objectives and good practices, Kamaruddin and Hanefah (2020) documented
several principles for Islamic waq f governance system which are vital to ensure
good waq f governance in waq f administration. These include tawhid (oneness of
Allah), adalah (justice), mas’uliyyah (accountability), amanah (trust), shura (mutual
consultation), taqwa (Allah-consciousness), hisbah (enjoining virtue and avoiding
evil) and maqasid shariah (objectives of shariah) (Kamaruddin & Hanefah, 2020,
p. 457). We shall note that the waq f governance system difers from countries to
countries. For instance, in Malaysia, waq f governance administered under two
ways such as state level and national level, whereas the waq f administration follows
two guidelines: (i) the guidelines issued by Securities Commission Malaysia in
2014 (see details in SCM, 2014) and (ii) ‘Code of Governance and Transparency
for Waq f Fund’ issued by Islamic Banking and Financial Institutions Malaysia
(AIBIM) in 2017 (see details in AIBIM, 2017). On the other hand, in Kuwait,
a separate ministry named ‘Ministry of Awqaf and Islamic Afairs’ look after
the waq fs-related issues and formulate diferent regulations related with Awqaf.
As we mentioned earlier, the existing ordinance seems to much more bureau-
cratic type and administrator appears as a supreme authority in the ordinance
(in other words, state supervision turns into an executive trusteeship). Hence,
we recommend two suggestions: (i) establishing a central shariah board at the

New Waqf:
Online/e-mutation Ministry of Land
Waqif
Online/e-mutation

Online/ e-reporting, e-auditing

Appoint mutawallis Office of the Waqf
and create waqf fund administrator

Existing Waqfs:

E-filing, e-auditing, and sending

fees through mobile services
Mutawallis
of the Waqf Office of the Waqf administrator

E-filing
Remit financial benefits, if
any, through mobile services

Beneficiaries Ministry of Religious Affairs

FIGURE 5 Adaptation of fntech in non-cash waq f

248 A. K. M. Kamrul Hasan

Ofce of Waq f Administrator replacing the existing committee system in the

ordinance. Eminent Islamic scholars could be member of the board to provide
shariah opinion regarding waq f properties and their revenues. (ii) We suggest
following the Accounting and Auditing Organization for Islamic Financial
Institutions newly adopted Governance Standard 13 namely ‘Waq f Governance’
to ensure good governance in Bangladeshi waq fs and adopt full automation in
waq f administration.

6 Conclusion
In this chapter, we briefy discussed the concept of waq f and the historical
perspective of the evolution of waq f in Muslim majority countries including
Bangladesh. Next, we discuss the salient features of the two Waq f regulations
of Bangladesh. We have proceeded with our discussion to the critical evalua-
tion of the two regulations from monitoring cost and governance issues. Based
on our fndings we provide a couple of theoretical frameworks to apply fntech
in waq f administration to minimize monitoring cost and ensuring transparent
governance. To recap, we have observed that waq f is an important instrument
that is used by early Muslim generations to modern Muslim generations mainly
to enhance social welfare and philanthropic mind set. The wealthy and kind-
hearted Bengal Muslims have a long tradition to create Awaq f from their prop-
erties for creating religious establishments, schools, orphanages, digging ponds,
and so on for the betterment of society. As a result, a huge number of waq f
properties exist in Bangladesh. According to Hasan and Siraj (2016), there are
150,593 waq f estates in Bangladesh of which only 97,046 estates are registered. It
shows that a good number of non-registered waq f properties are in Bangladesh
which are not under the monitoring of the government. We have pointed out
that there is a huge monitoring cost and transaction cost for registered waq fs
which are accumulated at the Ofce of Waq f Administrator and at the ofce of
Mutawalli. We presume that high monitoring cost and transaction cost might
eat up the incomes of the waq fs estates. We suggest that fntech and automation
could minimize the costs. It is long overdue to make the waq fs properties an ef-
cient income generation asset and bring a transparent governance system in those
estates. We also argue that it requires a structural and institutional reform in waq f
ordinance and governance to adopt fntech in waq f properties in Bangladesh. In
fact, we should aware that Awaq f would not be an example of ‘tragedy of the
commons’ in Bangladesh.

References
Abbasi, M. Z. (February 1, 2019). Waq f in Pakistan: Rebirth of a Traditional Institution.
Malaysia: Kalalau. SSRN: https://ssrn.com/abstract=3327092 or http://dx.doi.
org/10.2139/ssrn.3327092
Association of Islamic Banking and Financial Institutions Malaysia (AIBIM) (2017). Code
of Governance and Transparency for Waq f Fund. Malaysia: Kuala Lumpur.
 Dilemma and challenges for fntech application 249

Ahmed, H. (2004). Role of Zakat and Awqaf in Poverty Alleviation. Jeddah, Saudi Arabia:
Islamic Development Bank Group, Islamic Research and Training Institute.
Ahmad, M. M. M., & Safullah, M. (2012). Management of Waqf estates in Bangladesh:
Towards a sustainable policy formation. In Waq f Laws and Management (with Special
Reference to Malaysia) (pp. 229–262). New Delhi: Institute of Objective Studies.
Alamgir, K. (2020). Awqaf properties in Bengal since the period of Muslim Rule. Journal
of the Asiatic Society of Bangladesh (Humanities), 65(2), pp. 103–121.
Ali, S. A. (1976). The Law Relating to Gifts, Wakfs, Wills, Pre-Emption, and Bailment (Vol.
1). Lahore, Delhi: Law Publishing Company.
Arner, D. W., Barberis, J. N., & Buckley, R. P. (2015). The Evolution of Fintech: A New Post-
Crisis Paradigm? (2015/047). Hong Kong: University of Hong Kong, Faculty of Law.
Bangladesh Bureau of Statistics (BBS). (2011). Population and Housing Census (p. xiii).
Dhaka, Bangladesh: Bangladesh Government.
Baskan, B. (2002). Waq f System as a Redistribution Mechanism in the Ottoman Empire. Paper
presented at 17th Middle East History and Theory Conference, May 10–11. Center
for Middle Eastern Studies, University of Chicago.
Chandan, M. S. K. (2018, February 23). Waq f: A forgotten legacy. The Daily Star, Star
Weekend, p. 3.
Cizakca, M. (2002). Latest developments in the Western non-proft sector and the impli-
cations for Islamic Awqaf. In Islamic Economic Institutions and the Elimination of Poverty
(pp. 263–287). Leicester: The Islamic Foundation.
Cizakca, M. (2011). Waq f in history and its implications for modern Islamic economies.
In Kahf, M. and Mahmood, S. M. (Eds.), Essential Readings in Contemporary Waq f Issues
(pp. 43–70). Kuala Lumpur: CERT Publications Sdn. Bhd.
Fama, E. (1980). Agency problems and the theory of the frm. Journal of Political Economy,
80(2), pp. 288–307.
Financial Stability Board (FSB). (2019). FinTech and market structure in fnancial services:
Market developments and potential fnancial stability implications. Accessed on 8 March, 2022.
https://www.fsb.org/2019/02/fntech-and-market-structure-in-fnancial-services-
market-developments-and-potential-fnancial-stability-implications/
Hapsari, M. I., Thaker, M. A. B. M. T., Mohammed, M. O., & Duasa, J. (2022). A qual-
itative investigation into crowdfunding framework as a source of fnancing for waqf
land development. Journal of Islamic Accounting and Business Research, 13(3), pp. 425–443.
Hardin, G. (2009). The tragedy of the commons. Journal of Natural Resources Policy
Research, 1(3), pp. 243–253.
Hasan, R., & Siraj, S. A. (2016). Complexities of Waq f development in Bangladesh.
Journal of Emerging Economies and Islamic Research, 4(3), pp. 17–26.
Hochstein, M. (2015a). Fintech (the Word, That Is) Evolves. Accessed 7 March 2022. https://
www.americanbanker.com/opinion/fntech-the-word-that-is-evolves
Hochstein, M. (2015b). Friday Flashback: Did Citi Coin the Term ‘Fintech’? Gems from
Our Archives. Accessed 7 March 2022. https://www.americanbanker.com/opinion/
friday-fashback-did-citi-coin-the-term-fntech
Ibrahim, M. (1996). The Concept of Waq f (Endowment), Gifts and Wills in Islam. Qatar:
Islamic Book Development and Translation Council.
Ihsan, H., & Ibrahim, S. H. H. M. (2011). WAQF accounting and management in
Indonesian WAQF institutions: The cases of two WAQF foundations. Humanomics,
27(4), pp. 252–269.
IMF. (2020). The Promise of Fintech: Financial Inclusion in the Post COVID-19 Era.
Accessed on 8 March 2022. https://www.imf.org/en/Publications/Departmental-
Papers-Policy-Papers/Issues/2020/06/29/The-Promise-of-Fintech-Financial-
Inclusion-in-the-Post-COVID-19-Era-48623
250 A. K. M. Kamrul Hasan

Information and Communication Technology Division (ICTD), Government of the

People’s Republic of Bangladesh. (2021). Annual Report 2020–21. https://ictd.gov.bd/
site/view/annual_reports/Monthly-Annual-Reports-
Islamic Development Bank (IsDB). (2019). The Development Impact of the Awqaf Properties
Investment Fund A Model for Sustainable Development. Jeddah, Kingdom of Saudi Arabia:
Islamic Development Bank.
Jensen, M. (1986). Agency costs of free cash fow, corporate fnance and takeovers.
American Economic Review, 76(2), pp. 323–329.
Jensen, M., & Meckling, W. (1976). Theory of the frm: Managerial behavior, agency
costs and ownership structure. Journal of Financial Economics, 3(4), pp. 304–360.
Jensen, M., & Murphy, K. (1990). Performance pay and top-management incentives.
Journal of Political Economy, 98(2), 261–262.
Kahf, M. (2003). The Role of waq f in Improving the Ummah Welfare. In Paper presented at
the International Seminar on Waq f as a Private Legal Body, Medan, 6–7 January.
Kamaruddin, M. I. H., & Hanefah, M. (2020). An empirical investigation on waq f gov-
ernance practices in waq f institutions in Malaysia. Journal of Financial Reporting and
Accounting, 19(3), pp. 455–473.
Medias, F., Rahman, A. A., Susamto, A. A., & Pambuko, Z. B. (2022). A systematic
literature review on the socio-economic roles of waqf: Evidence from organization
of the Islamic cooperation (OIC) countries. Journal of Islamic Accounting and Business
Research, 13(1), pp. 177–193.
OECD. (2018). Financial Markets, Insurance and Private Pensions: Digitalisation and Finance.
Accessed on 8 March 2022. https://www.oecd.org/competition/fnancial-markets-
insurance-and-pensions-2018.htm
Ostrom, Elinor. (1990). Governing the Commons: The Evolution of Institutions for Collective
Action. Cambridge: Cambridge University Press.
Pirasteh, H., & Abdolmaleki, H. (2007). Developing Awqaf Properties and Islamic Financial
Engineering: A Conceptual and Empirical Analysis. Paper presented at frst Singapore
International Waq f Conference: Integration of Awqaf (Islamic Endowment) in the
Islamic Financial Sector, 6–7 March. Singapore.
Schuefel, P. (2016). Taming the beast: A scientifc defnition of fntech. Journal of
Innovation Management, 4, pp. 32–54.
Securities Commission Malaysia (SCM). (2014). Waq f Assets: Development, Governance and
the Role of Islamic Capital Market. Malaysia: Kuala Lumpur. https://www.sc.com.my/
api/documentms/download.ashx?id=a0b2d65d-07ac-4932-a956-70004a93650c
Usman, H., Mulia, D., Chairy, C., & Widowati, N. (2022). Integrating trust, religiosity
and image into technology acceptance model: the case of the Islamic philanthropy in
Indonesia. Journal of Islamic Marketing, 13(2), pp. 381–409. https://doi.org/10.1108/
JIMA-01-2020-0020
Yoshida, E. (2019). FinTech-enabled cash waqf: Efective intermediary of social
fnance. In: Ali, K., Hassan, M., and Ali, A. (Eds.), Revitalization of Waq f for
Socio-Economic Development (Vol. I). Cham: Palgrave Macmillan. https://doi.
org/10.1007/978-3-030-18445-2_4
Yusuf, H., Amelia, K. R., & Rahmah, S. (2021). A construction of cash waqf manage-
ment in Bangladesh. Al-Bayyinah, 5(1), pp. 86–97.
Zuki, M. S. M. (2012). Waq f and its role in socio economic development. ISRA
International Journal of Islamic Finance, 4(2), pp. 173–178.
14
BREAKING THE BARRIERS OF ZAKAT
MANAGEMENT SYSTEM THROUGH
ISLAMIC FINTECH
The case of Bangladesh

S. M. Sohrab Uddin and Afroza Sultana

1 Introduction
Zakat (obligatory payment), the third of the fve pillars of Islam, is the most
infuential Islamic tool for reducing poverty and ensuring socio-economic jus-
tice (Ibrahim & Shaharuddin, 2015). Though the ultimate goal of paying zakat
is to achieve the pleasure of Allah, its socio-economic contributions cover a vast
area, from ensuring social security to reducing extreme poverty. Poverty allevi-
ation has become a fundamental concern of governments of all economies, espe-
cially the emerging and low-income ones. 8.6% of the world’s population living
at the extreme poverty level (World Bank, 2018) experienced their worst time
during the worldwide corona pandemic in 2019. Though 2021 was expected
to be the recovery year from the Covid-19 induced new extreme poverty that
afects 97 million people, the developing and low-income countries are yet to
meet the expected goal of poverty reduction (World Bank, 2021). The macro-
economic policies of emerging economies are mainly concentrated on poverty
alleviation and equitable wealth distribution. Complementing the governments’
fscal policies, zakat redistributes the income efciently, reduces poverty, and
increases growth (Ahmed, 2015). It is evident that being a part of the compre-
hensive Islamic economic system, zakat positively afects consumption, poverty
eradication, saving, and economic growth (Wahab & Rahman, 2011). Acting
as a poverty-reducing Islamic tool, zakat eventually creates a positive efect on
increasing the purchasing power of citizens, inducing aggregate consumption,
and ensuring social security.
The heart of the entire zakat management system is the zakat institutions,
which are charged with collecting 2.5% Islamic tax from Muslim individuals
and business owned by Muslims when their wealth reach nisab (zakatable wealth)
and distributing the same to the eight categories of al-mustahiqqin (benefciaries)

DOI: 10.4324/9781003262169-17
252 S. M. Sohrab Uddin and Afroza Sultana

mentioned in surah at-Towba (Verse 60). These eight al-mustahiqqin of zakat are the
poor, the needy, the Muslim zakat administrator, the new converted Muslim, the
enslaved people, the fnancially indebted, Fi sabilillah (those in the way to Allah),
and Innu Sabil (those in the warfare). The institutionalisation of the entire zakat
management has the objectives of better community development, empower-
ment, and fnancial inclusion (Adachi, 2018). Unlike the other Islamic institu-
tions (Islamic banks, Islamic insurance), which concentrate on wealth creation,
zakat institutions focus on wealth distribution. Zakat Institutions complement
the fnancial institutions by promoting the aggregate demand and supply in the
economy (Saad & Farouk, 2019). With increased purchasing power by receiving
the zakat money, the benefciaries demand more goods in the economy. On the
other hand, increased savings and improved health of the benefciaries promote
the aggregate supply of capital and labour.
The efciency and governance of zakat institutions are the concern of
a country’s entire zakat management system to achieve its novel objectives
(Wahab & Rahman, 2011). An efcient zakat management system is needed to
ensure the proper distribution of its collected money. To reach a systematic and
efcient zakat management system, adequate technology is required to collect,
manage, and distribute the zakat money. Though technological integration into
the zakat management system is not new, it gains a new speed in the ongoing
fourth Industrial Revolution. Financial technology (fntech) is now consid-
ered the solution to most previous mismanagement problems in organisations,
including the zakat management system.
World Bank defnes fntech as the fourth Industrial-Revolution–driven
technologies exponentially enhancing and/or disrupting 20th-century fnancial
services, operations, business models, and customer engagement (World Bank,
2020). The efciency of fnancial services and social welfare is the key moto of
the fntech industry worldwide. In the case of Islamic fntech’s adaptation in the
Islamic fnance scenario, it is of the solid opinion of Islamic scholars that if a trans-
action is not related to riba (loan with interest), gharar (speculation), and Islamic
prohibited products (alcohol, pork, gambling, pornography), the fnance plan is
allowed to be included in the Islamic fnance jurisdiction (K. Hasan et al., 2005).
It is expected that a Halal (legitimate) fnancial service will be more efcient,
less costly, and less painstaking with the adaptation of fntech. So, right after its
inception, fntech was appreciated by the Islamic fnance jurisdiction. In this
regard, the expectations of the Muslim world of reducing poverty through the
efcient collection and distribution of Zakat through fntech solutions demand
an exploration of the existing and probable fntech-adopted zakat management
system.
In Bangladesh, due to the Covid-19 efect on macroeconomic aspects, the
poverty rate increased to 18.1% in 2022 from 14.4% in the previous year (World
Bank, 2021). Being one of the fastest-growing economies in the world over
the past decades, from among the tenth lowest per capita GDP in the world
 Breaking the barriers of Zakat management system 253

in its birth year of 1971 to the lower-middle-income country status in 2015,

Bangladesh’s poverty reduction eforts may catch the interest of the worldwide
poverty reduction aspiration of the emerging economies. One critical study
showed that relying only on the macroeconomic policy will never achieve
Bangladesh’s poverty reduction goal; instead, efective zakat management will
complement the spirit (Ahmed, 2015). Another study showed that zakat funds
in Bangladesh could replace the government’s budgetary expenditure by 43%
of the Annual Development Plan (ADP) in 2004/2005 (Hassan & Khan, 2007).
From the religious outlook, Bangladesh is the fourth largest Muslim-populated
country globally, where 90.40% of the population is Muslim, which is 9.2% of
the total world Muslim population (World Population Review, 2022; Wormald,
2013). On the other hand, from technological outlook, mobile phone users
increased by 14% (from 157.54 million in January 2019 to 180.78 million in
January 2022), and individual internet users increased by 33.92% (from 91 mil-
lion in January 2019 to 121.87 million in January 2022) within only four years in
Bangladesh (Bangladesh Telecommunication Regulatory Commission, 2022).
Hence, the full utilisation of the zakat system riding over the fntech solutions
to reduce the poverty rate in Bangladesh also needs an overview of the current
scenario here.
Considering the above aspects, the chapter has attempted to link the barriers
of the entire zakat management system to Shari’ah-compliant Islamic fntech
models, which may have the possibility to overcome the barriers. The study
has considered the current practices worldwide and fntech models proposed
by diferent scholars in this feld of knowledge. Barriers like anti-Islamic senti-
ment (Obaidullah, 2015) and others that fntech models cannot overcome have
been ignored intentionally for the scope of the study. Following the introduc-
tion section, this chapter presents an overview of the existing zakat manage-
ment system, followed by a description of the Islamic fntech used or can be
used in the zakat management system. After exploring fntech models’ scope
to overcome the barriers and the scenario of fntech to the zakat manage-
ment system in Bangladesh, the chapter ended by highlighting the challenges
that fntech might face in full-fedged applications and concluding the whole
discussion.

2 Overview of the existing zakat management system

Zakat means growth, cleanliness, blessing, and praise in the Arabic language.
In Shari’ah, zakah refers to the determined share of wealth prescribed in the Holy
Quran to be distributed among deserving benefciaries. This obligatory payment
is found in Holy Quran in sura (Chapter) : 7:156, 19:31 and 55, 21:72, 23:4, 27:3,
30:39, 31:3, and 41:7. The word zakat is individually traced thirty times, among
which it came in the same ayat (verse) with salah (prayers). Zakat is applicable to
the zakatable amount of cash, assets, livestock, gold, silver, business inventory,
254 S. M. Sohrab Uddin and Afroza Sultana

agriculture products, animal products, minerals, sea products, exploited assets,

and business inventory (Qardawi, 2000).
There are diferences in opinion regarding the payment of zakat directly to
the benefciaries or to the state government. Most Islamic scholars opined that
the best practice is to pay zakat to the state or zakat agency. Still, there will be
no sin in giving zakat directly to the benefciaries (Owoyemi, 2020). An exten-
sive study on Muslim-majority countries showed among the 40 predominantly
Muslim countries, 24 did not legally institutionalise zakat, 10 countries created
laws to establish a voluntary zakat system, and the rest 6 countries enforced
mandatory zakat (Powell, 2010). Though this study did not fnd positive eco-
nomic contributions from the application of compulsory zakat enforcement, it
recommended that the Government should play a promoting role in creating a
voluntary zakat system. There was proof of the reduced quality of functionality
in the entire zakat management system with the involvement of the Government
also (Saad & Farouk, 2019).
Privatisation of zakat institutions is another aspect of zakat management.
Privatisation of zakat institutions in Malaysia ensures using a specifc computer
software system to allocate the appropriate benefciaries into the database and
reduce the bureaucracy that might slow the distribution process of zakat money
(Razimi et al., 2016).
A survey was conducted by the World Zakat Forum from May to July 2020
on its forty member countries’ representatives to overview the zakat adminis-
tration at the time of the Corona pandemic. Among the forty countries’ repre-
sentatives, only twelve submitted their responses. When searching the websites
of the zakat organisations, who were the country representatives, it was found
that publishing annual zakat performances online was not a regular practice.
Still, projects to distribute zakat money were posted on the websites. Only fve
representatives had a yearly report on their websites. But all of them had a digital
zakat payment gateway. The year-by-year zakat collection and disbarment also
showed some inconsistent data (Table 1).
It was found that most of the zakat money collected by the above represent-
ative organisations of its member countries was for providing the education of
poor students, scholarships to brilliant students, fnancial help to the widow,
efective development programmes, and other socio-economic causes (Puskas
Baznas, 2021). These zakat funds were paid in cash, food, and health-related bits
of help.
Zakat innovation at the time of the worldwide pandemic of 2020 was more
signifcant in the collection of zakat rather than the distribution of the same. The
survey of BAZNAS showed among the 14 respondents, 64% of the zakat man-
agement organisations recorded innovations for collecting zakat, while 36% of
them created distribution innovations (Puskas Baznas, 2021).
TABLE 1 Zakat collections and disbursements (rounded in a million) of key representatives of the member countries of the World Zakat Forum

The National Board of Zakat the Republic of Indonesia (BAZNAS)

Year 2021 (Projected) 2020 (Projected) 2019 2018 2017

Collection (Rupiah) 12,338,289.93 (9.35%) 11,283,116.87 (10.32%) 10,227,943.80 (25.99%) 8,117,597.68 (30.41%) 6,224,371.27
Distribution (Rupiah) 10,576,303.33 (9.80%) 9,632,262.28 (10.86%) 8,688,221.23 (27.76%) 6,800,139.13 (39.92%) 4,860,155.32
Center for Zakat Management (CZM) in Bangladesh
Year 2021 2020 2019 2018 2017
Collection (Tk.) – 409.29 (41.36%) 289.54 – –
Distribution (Tk.) 352.84 (29.46%) 272.54
National Zakat Foundation (NZF) in Canada
Year 2021 2020 2019 2018 2017
Zakat collection ($) – – 1.83 (38.89%) 1.32 (85.48%) 709,736
Distribution ($) – – 1.83 (158.82%) 0.70 (25.88%) 0.56
National Zakat Foundation (NZF) in the United Kingdom
Year 2021 2020 2019 2018 2017
Collection (£) – 4.47 (61.80%) 2.76 (–18.02%) 3.37 (4.74%) 3.22
Distribution (£) – 3.80 (27.56%) 2.98 (–5.58%) 3.15 (–10.39%) 3.52
South African National Zakah Fund (SANZAF)
Year 2021 2020 2019 2018 2017
Collection ($) – 110.15 (12.05%) 98.29 (1.95%) 96.41 (–13.58%) 111.56
Distribution ($) – 99.99 (3.85%) 96.28 (6.03%) 90.80 (–14.63%) 106,349,880
Breaking the barriers of Zakat management system

Source: Constructed by the authors based on the annual reports of the respective representative zakat institutions.
255
256 S. M. Sohrab Uddin and Afroza Sultana

3 Fintech and Islamic fntech models for the Zakat

management system
Fintech, which is now used as a noun, refers to the application of computers
and related digital technologies in fnancial services (Sangwan et al., 2020). It
is the technology used to provide fnancial markets with a fnancial product
or service characterised by sophisticated technology relative to existing tech-
nology in that market (Knewtson & Rosenbaum, 2020). In practice, fntech
is an umbrella term that includes innovative methods, technologies, services,
and frms that reshape the landscape of future fnancial benefts. Acting as both
partner and competitor of the traditional banks, fntech frms have ensured
increasing efciency, customer centricity, and transparency in the fnancial
service sector (Gomber et al., 2018). It has been proved that fntech frms
serve the areas which previously were out of the grip of the traditional banks
( Jagtiani & Lemieux, 2018). These fndings hint at a potential Islamic fntech
market for OIC (Organization of Islamic Cooperation) member countries,
where 53.7% of people are unbanked compared to 3% of unbanked people
worldwide (OIC, 2018).
The fntech technologies include artifcial intelligence (AI), blockchain,
robotics, quantum computing, and the Internet of things. In 2019, the top-
ranked United States (US) invested $9.4 billion in fntech industries, followed by
the United Kingdom (2.29 billion) and Singapore (735 million). The investments
mainly were on payments, B2B fntech, security, personal fnance and wealth,
lending, and blockchain (Findexable, 2019). Another investigation of the world-
wide fntech investment showed $210.1 billion in 2021, which was $213.8 billion
in 2019. The US accounted for 80% of the total (Statistica, 2022).
The adaptation of Shari’ah-compliant fntech technologies into Islamic
fnance is also growing signifcantly. It is expected that Shari’ah-compliant fnan-
cial institutions, which are growing to serve the 1.8 billion Muslims worldwide,
will increase their Islamic fnance assets to $3.5 trillion by 2024 (World Bank,
2020). On the other hand, the estimated Islamic fntech market size for OIC
countries in 2020 was $49 billion, which was 0.72% of the current global fntech
market size. In 2020, the Islamic fntech market of top ranker Saudi Arabia was
$17.9 billion, followed by Iran ($9.2 billion) and United Arab Emirates ($3.7
billion) (Global Islamic Fintech Report, 2021). Besides the other Islamic fnance
dimensions, Islamic social fnance as the forms of zakat (obligatory payments),
Sadaqah (voluntary payment), and Waq f (Islamic endowments) possess a signif-
cant place in Islamic fnance as they justify the Islamic principles to help the less
fortunate people of the society by each capable Muslim individual. Zakat can
raise estimated funds between $200 billion and $1 trillion globally, which will
assist in achieving the sustainable development goal of reducing extreme poverty
(Rehman & Pickup, 2018).
An extent literature, reviewing the fntech eco-system, proposed the three
dimensions of fntech; fnancial industry (crowdfunding, P2P platform, digital
 Breaking the barriers of Zakat management system 257

fnance cube, shadow banking), entrepreneurial /innovative (AI, big data, block-
chain, initial coin ofering, initial cryptotoken ofering), and legal (RegTech,
regulatory sandbox) (Sangwan et al., 2020). Incorporating the current and prob-
able practices of the technologies in the zakat management system, some of the
fntech services are discussed here.

3.1 Crowdfunding
Crowdfunding is an innovative, disruptive, and democratising method of raising
funds for a project from a diverse set of audiences called as the crowd (Langley &
Leyshon, 2017). Crowdfunding can take one of the four forms: donation-based
(raise funds without ofering material incentives), royalty-based (Crowdfunder
receives a percentage of revenue from the project they support), equity-based
(Crowdfunder gets the shares of a company and are entitled to the dividend),
and debt-based (Crowdfunder gets the debt instrument with or without interest)
(Nivoix & Ouchrif, 2016). As the platform here is an intermediary one, linking
the fundraiser and Crowdfunder, this model entered into the fntech scenario
through the use of the internet-enabled channel (website or app) for reaching the
Crowdfunder.
The donation-based crowdfunding may be zakat (mandatory donation calcu-
lated on the salary) or sadaqah (voluntary donation). The royalty-based crowd-
funding may be istisna (manufacture contract). Musharaka (proft-loss sharing)
and Mudaraba (proft-sharing) contracts can be used in equity-based crowdfund-
ing. Qard hassan (loans without interest) and ijara (leasing contract) can be used in
debt-based crowdfunding (Nivoix & Ouchrif, 2016).
In the case of zakat, crowdfunding should be donation-based, whereas muzakki
(zakat payer) would not get any incentive. Digital social media can be used to
reach the area uncovered (Ashiq & Mushtaq, 2020; Bin-Nashwan & Al-Daihani,
2020). According to Milli Gazette, an Indian Muslim newspaper, in 2021, a
web-based zakat crowdfunding platform IndiaZakat.com raised Rs. 2 Crore
within ten months of its inception, mostly distributed as Covid-19 pandemic
relief. Between 2013 and 2015, donation-based crowdfunding in Malaysia raised
$4.68 million, which was 92.4% of the total crowdfunding platform’s funding
(Thaker et al., 2019).

3.2 Initial coin offering/initial cryptotoken offering

Cryptocurrency is a digital currency operating on a technology innovation plat-
form that mimics a globally unifed fnancial system without a designated central
bank (Abubakar et al., 2019). Though there are many other cryptocurrencies,
Bitcoin and Ethereum are two of the most infuential cryptocurrencies at the
current time. Though used interchangeably, the term crypto coins are used for
mineable currencies and cryptocurrencies for non-mineable currencies (Yusof
et al., 2021).
258 S. M. Sohrab Uddin and Afroza Sultana

There are diferences in the opinion of Islamic scholars over the Shari’ah
complaints issue of cryptocurrency. As Islamic scholars seek the intrinsic value
attributes of money, crypto in the form of digital money may gain its intrinsic
value backed by two assets, electricity and human resource. Another opinion
indicated that as cryptocurrency is a unit of account, medium of exchange, free
from riba, infation, and debt, it is acceptable in Islam (Abubakar et al., 2019).
Collecting zakat using cryptocurrency and on the nisab amount of crypto-
currency has been a new practice in the Islamic world since 2018 by Blossom
Finance in Indonesia (Muneeza, 2020) and by Masjid Ramadan in Turkey
(Khatiman et al., 2021).
In the case of Blossom fnance, the US-based company acts as an intermedi-
ary to channel cryptocurrencies from crypto-rich individuals on his/her nisab
crypto to zakat-eligible cooperatives and non-proft organisations in Indonesia
that support the poor and needy people, especially widows and orphans. The
cryptocurrencies are converted into Indonesian Rupiah through the zakat wal-
lets controlled by Blossom fnance company on a cryptocurrency exchange in
Indonesia. Shakelwell Lane mosque in London started to accept cryptocurrencies
as zakat and sadaqah in 2018 and exchanged them as fat currency in the crypto
exchange platform LocalBitcoin UK through cryptocurrency hard wallets
(Yusof et al., 2021). Several authors recommended that Bitcoin, Ethereum, and
Tether be used as cryptocurrencies for zakat payment, as they pose less value
fuctuations.

3.3 Blockchain, smart contract, and P2P platform

A blockchain is a distributed ledger system where no single entity has absolute
control over the database. The transaction occurs in a peer-to-peer transmission
system, and the record here is permanent and chronologically ordered (Ozili,
2019). Important requirements in each blockchain step are the smart contract
and P2P platform. Smart contracts are a set of rules, including protocols within
which the parties were secured on a digital platform without the requirement of
a third party (Zulfkri et al., 2021). A P2P platform is an alternative transaction
network between two parties without the involvement of any fnancial and regu-
latory intermediary (Sangwan et al., 2020). Blockchain has made cryptocurrency
channelling a more transparent and easier one. Pseudonymity is maintained, and
records are irreversible (Ozili, 2019).
The defnition of blockchain could be divided as ‘block’ and ‘chain’. Each
block represents digital information (date, time, and transaction information),
the block creator’s digital signature, and a digital cryptographic hash (previ-
ous block data). The chain represents a decentralised database of chronological
blocks, validation by participants and transparency, and auditability by all users
(Alam et al., 2019).
In zakat management, the use of blockchain needs the adoption of a cryp-
tocurrency that will be used as a medium of exchange. A fxed parity system
 Breaking the barriers of Zakat management system 259

of one local currency to one cryptocurrency unit will be fxed to avoid value
fuctuation. The Amil (zakat administrator/institution) must have the prospective
mustahiqqin (benefciary) database, which will be known as a blockchain account.
Amil will collect fat money from muzakki and transfer them as cryptocurrency. It
will also check the nisab amount attainability of muzakki’s fund. The smart con-
tracts between muzakki and amil will ensure amil’s power to cut the funds while
it reaches the nisab. Mustahiqqin will collect the cryptocurrency and convert it
into fat money through an exchange platform (Hamdani, 2020; Rejeb, 2020).
The prospective model can be modifed based on the socio-economic context
of a country.

3.4 Artifcial intelligence

Artifcial Intelligence (AI) refers to the complex machines which substitute
human intelligence with technology (Sangwan et al., 2020). It covers a vast area,
from machine translation and chatbots to self-learning algorithms. It improves
organisational (fnance, marketing, and administration) and process-level perfor-
mance (Wamba-Taguimdje et al., 2020).
A study by Fajar Nurgaha captured the holistic scenario of AI’s application in
zakat management consisting of current practice and possible AI applications in
this feld. The current practice indicated the introduction of Rania Chatbot by
Rumah Zakat Institution in Indonesia, an AI capable of interacting with muz-
zaki and providing zakat education. The study divided the role of amil as katabah
(recorder of zakat), Hasabah (estimator and calculator of zakat), Juba’h (collector
of zakat), Khazanah (maintainer of zakat money), and Qasa’mah (distributors of
zakat). It then highlighted the available AI’s that could replace these Amils in
future or increase efciencies of the existing Amils (Nugraha et al., 2019).

3.5 Big data

Big data refers to the evolution and application of technologies that enable the
right users to receive the correct information at the right time from a mass of data
that has been growing exponentially for a long period. Five characteristics of big
data are volume, veracity, velocity, variety, and value (Paizin, 2021).
As the fntech applied zakat management will mostly concentrate on the gen-
uine profle of the protective muzzaki, the big data management mechanism
should be a major instrument in the entire zakat management system (Paizin,
2021; Taylor et al., 2015).

3.6 Regulatory sandbox

Through the regulatory sandbox, startups maintain a balance between freedom
to innovate in fntech and necessary consumer protections (Sangwan et al., 2020).
Blockchain, AI, and big data analytics need to develop, test, and deliver a vast
260 S. M. Sohrab Uddin and Afroza Sultana

array of innovative fnancial services; these may disrupt the existing fnancing
channel. Regulatory sandbox hedges the systematic risk by reducing the conse-
quence of testing the fnancial innovation on the clients. It approves time lim-
iting licensing exemption to the fntech frm to test the new fntech solutions
and works with public institutions to improve the shape of the sandbox (Alaassar
et al., 2021). In 2019, Bank of Indonesia published a regulatory sandbox for zakat
management that guides a digital zakat transaction to be criteria-based, fair,
transparent, equal, forward-looking, and proportional (Bank Indonesia, 2019).

4 Contribution of fntech for breaking the barriers of Zakat

management system
A review of the existing literature showed some barriers to the current zakat
management system worldwide. The authors have made an attempt to link the
benefts of Islamic fntech to the challenges faced by the zakat management sys-
tem worldwide and to indicate the probable solutions to the problems.

4.1 Unsystematic and ineffcient zakat collection and distribution

Several scholars point out that the current zakat management system sufers from
the unsystematic and inefcient collection and disbursement. These include:

a Absence of organisational structure: Zakat’s request, screening, and distri-

bution procedures are unsystematic and informal (Ibrahim & Shaharuddin,
2015; Widiastuti et al., 2021).
b Lack of publicity and bureaucratic delay: Lack of publicity for collecting
funds keeps the appropriate recipient out of the system. Also, the bureau-
cratic problem makes the disbursement delayed, especially for poor students
(Ab Rahman et al., 2012; Razimi et al., 2016).
c Inefciency in identifying prospective payers: The process of identifying and
approaching future zakat payers is unclear and not well-stated in the entire
system (Ab Rahman et al., 2012; Razimi et al., 2016).
d Lack of priority list: Unequal allocation of zakat money to the prospec-
tive benefciaries considering their preferences of need is detected (Saad &
Farouk, 2019). There is a lack of a priority-based list of real, needy people to
distribute zakat funds (Ashiq & Mushtaq, 2020).

The introduction of a web-based crowdfunding platform recently increased the

collection and distribution of zakat money in Indonesia. It also ensured a better
income distribution (Sonial Manara et al., 2018). The potential of zakat receipts is
positively afected by the digitalisation of zakat payments. It hits at a more formal
systematic zakat system replacing the old informal one (Abidin & Utami, 2020).
Creating smart contract of the Muzzaki (zakat payers) mustahiqqin (benefciar-
ies) at each point of zakat collection might ensure a systematic request, screening,
 Breaking the barriers of Zakat management system 261

and distribution of zakat. The distributed ledger system allows tracking the
destination of the paid zakat money, reducing the fraud and bureaucratic prob-
lems of the entire system.
Reaching the previously uncovered area of cryptocurrency holders’ zakat
payment through blockchain platforms will increase zakat revenue. Also, the
priority-based list of the most desirable zakat recipients would only be made in
the blockchain model. The United Nation’s ‘Building Block’ could be an instru-
mental example of using a blockchain-based pilot programme.

4.2 Human resource management problem

An investigation over the zakat management system found Amil’s (Zakat admin-
istrator) limited number and inability to use technology are great concerns for
optimising the zakat governance. The study also indicated Amil’s inability to
identify Mustahiq’s actual needs and to detect the potential Muzakki (Widiastuti
et al., 2021). It is recommended that zakat institutions’ human resource manage-
ment practice corresponds to the goal of efcient collection and disbursement of
zakat (A. Hasan et al., 2019).
AI automates repetitive, monotonous tasks by discovering patterns of massive
data and helps in quantitative decision-making by suggesting actionable endeav-
ours. So better work outcomes and enhanced employee–customer interactions
are achieved (Ramachandran et al., 2022).
The new fntech platform will concentrate more on searching for eligible
recipients than the conventional collection, fund management, and disbursement
activities of zakat. These will reduce the human resource’s eforts. There will be
more time for gaining training on new technologies, and comparatively fewer
human resources might serve the regular activities. AI technology may take most
of the duties of Amil (Nugraha et al., 2019).

4.3 Lack of coordination between zakat institutions

There is a lack of coordination among several zakat institutions to collect and dis-
tribute zakat. Lack of uniformity in zakat management has a massive loss in zakat
revenue (Saad & Farouk, 2019; Widiastuti et al., 2021). Through blockchain,
integrated data management is ensured that all the institutions, even the inter-
national ones, can participate in a better-coordinated manner. Uniform zakat
management could be built in this process.

4.4 Lack of trust of the zakat payers

The lack of trust of zakat payers derives from the following three reasons:

a Undistributed funds: A signifcant amount of undistributed zakat funds

(RM288 million in 2008 and RM176.1 million in 2007) in Nigeria
262 S. M. Sohrab Uddin and Afroza Sultana

questioned the accountability of the zakat institutions (Saad et al., 2014).

A conference in 2019 revealed that though the zakat collection is increasing,
26% of collected zakat money by the zakat institutions remains undistributed
each year in Malaysia (Thaker et al., 2019).
b Lack of transparency of the zakat institutions: A study identifed the mindset
of zakat payers as considering zakat as an individual, not collective duty.
It creates non-cooperation with zakat institutions, but zakat payers hint at
a transparent zakat system publishing the collection and distribution fairly
could improve the cooperation and trust (Ibrahim & Shaharuddin, 2015).
c Lack of information on the zakat institutions: Lack of information on the
available zakat institutions in a particular jurisdiction drives the zakat payers’
trust. Institutions’ disclosure of their own identity and formation rules is a
must (Ahmad, 2019; Widiastuti et al., 2021).

So, an internet-enabled crowdfunding platform would ensure transparency in

the zakat fund distribution. As in crowdfunding, the information on uses of
the zakat funds is better documented and has access to everyone; it proves a
positive correlation with accountability and channelling funds to crowdfunding
projects (Rahmah, 2021). Building trust was one of the other positive and signif-
icant motivation variables among the millennial Muslim population of Indonesia
who pays zakat in a crowdfunding channel through kitabisa.com, a popular
and efcient crowdfunding platform there (Dzulfkar et al., 2022; Knewtson &
Rosenbaum, 2020). But there was also an exception of the thinking as one study
showed the insignifcant efect of trust on the overall use of this digital platform
(Rahmah, 2021).
On the other hand, the zakat blockchain technique records a transaction in
near real-time, and the Muzzaki may trace the channelising of the funds at each
point. So, transparency is fully ensured in the zakat blockchain through crypto
proof (Khatiman et al., 2021; Santoso et al., 2020).

4.5 Lack of capacity building

Some studies necessitated the role of zakat as building the capacity of the recip-
ient rather than giving a sum of money for buying their regular necessity (Ab
Rahman et al., 2012; Razimi et al., 2016).
Donation-based crowdfunding platforms can reshape the zakat system from
the consumption-based zakat to the development of zakat projects.

4.6 Lack of zakat education

There is a lack of zakat education in the rural area regarding zakat calculation and
nisab amount. Paying zakat only during Ramadan and not at reaching the point
of nisab amount is a misconception that well prevailed (Ahmad, 2019).
 Breaking the barriers of Zakat management system 263

The barrier could be reversed by creating awareness and serving education

about zakat. A study showed that a crowdfunding platform is not merely a fund-
raising tool; instead, it could be used to create awareness ( Junge et al., 2022). The
use of AI in calculating zakat on nisab amount may also be the best solution to the
ignorance of zakat payers (Nugraha et al., 2019).

4.7 Low Shari’ah compliance

The study indicated the leftover zakat money to be carried over to the next
year in an inefficient conventional zakat distribution system, which is against the
shari’ah compliance (Muneeza, 2020).
As the owner of the blockchain platform has to affiliate with a regulatory
authority that will deal with zakat money, there will be an instant distribution of
the zakat money to the recipient and no carry forward of the same to the follow-
ing year. The regulatory sandbox of the zakat management may also ensure that
the zakat principles are better served.

5 Zakat management in Bangladesh

The Asian Development Bank (ADB) statistics showed that in 2019 the population
living below the poverty line in Bangladesh was 20.5%. Besides the government’s
social safety net programmes, indigenous non-government organisations (NGOs)
like BRAC, Grameen Bank’s collateral-free micro-credit and other programmes
made a magnificent improvement in solving multidimensional and multifaceted
problems of poverty in Bangladesh. Dr. Yunus’s new ‘Social Business’ concept
after the worldwide acclaimed micro-credit and the Government’s ongoing
financial inclusion programmes are in the experimental stage of reducing pov-
erty in Bangladesh. But the potentiality of alternative Islamic tools like zakat and
Wakf is overlooked in practice here (Ali & Hatta, 2014).
In Bangladesh, zakat is regulated by Government, but the contribution is not
mandatory by the state law. On June 5, 1982, the ministry of religious affairs,
under the supervision of the Islamic Foundation, formed the zakat board through
Zakat Fund Ordinance 1982. The Ministry of Religion regulates the total sys-
tem with the help of the zakat board. As the socio-political scenario does not
approve of the government collecting zakat on a compulsory basis, dependency
on the private sector becomes a practice here. Social enterprise and voluntary
organisations (VO) collect and distribute zakat in Bangladesh within the organ-
isational structure. Islamic commercial banks create their own zakat funds here.
Islamic NGOs also serve the endeavour here but ignore the term zakat instead
use donation for collecting overall funds. The expected benefits of giving zakat
through these institutional channels are building capacity rather than distribut-
ing daily necessities, less effort from the payers’ side and reaching the best-suited
beneficiaries.
264 S. M. Sohrab Uddin and Afroza Sultana

In 2020–2021, the government’s zakat funds operated by Bangladesh Islamic

Foundation collected Tk.35.3 million, which was a meagre one compared to its
operating jurisdiction. Though the major cause cited was peoples’ will to pay
zakat to the near and dear ones, other causes were lack of manpower, peoples’
trust in privately run entities, and absence of efcient digital mechanism (The
Financial Express, 2021).
Commercial banks are the most infuential fnancial institutions in Bangladesh.
With strong public demand and continued robust growth, Islamic banks in
Bangladesh are becoming the frontliners here. There are ten full-fedged Islamic
banks in Bangladesh. Nine of the conventional commercial banks have 41 Islamic
banking branches. Also, 13 conventional commercial banks have 368 Islamic
banking windows. After the inception in 1983, with strong policy support from
central banks like lower statutory liquidity ratio and higher loan–deposit ratio,
Islamic banks in Bangladesh now capture 27.89% in terms of deposits and 27.88%
in terms of investments at the end of December 2021 of total market share of the
banking industry (Bangladesh Bank, 2020) (Table 2).
Besides commercial banks, NGOs are also trying to solve the poverty-driven
social problems in Bangladesh. According to the NGOs afairs bureau under the
prime minister’s ofce, by February 2022, there are 2,516 NGOs in Bangladesh,
among which 260 were foreign, and 2,256 were local NGOs. The actual number
of faith-based NGOs is not recorded in the list. Renowned International Islamic
NGOs, Islamic Relief Bangladesh and Muslim Aid Bangladesh have been work-
ing in the jurisdiction of Bangladesh for a long. Besides, some local Islamic
NGOs like Al Markazul Islam Bangladesh, Allama Fazlullah Foundation, Islamic
Aid Bangladesh, Social Agency for Welfare and Advancement in Bangladesh
(SAWAB), etc., are working to solve several socio-economic problems. These
Islamic NGOs serve the ultra-poor in diferent ways and grant interest-free loans
(S. R. Chowdhury et al., 2020). Though they collect zakat funds, the amount
received is recorded as foreign and local grants or donations in their annual fnan-
cial statements. So, the actual zakat fund could not be detected.
A giant leap in zakat management was the foundation of the social enter-
prise ‘Center for Zakat Management’ in 2008. The entity is now working with
‘Bidyanondo’, another giant voluntary enterprise that serves the poor, to institu-
tionalise zakat management for efcient zakat collections and distributions.
The previously detected barriers were also the reality of the zakat manage-
ment system in Bangladesh. Scholars found unsystematic and inefcient zakat
collection and distribution (Islam, 2016; Obaidullah, 2015), human resource
management problems (The Financial Express, 2021), lack of trust of the zakat
payers (Uddin, 2016), lack of capacity building instead distributing piecemeal
single cloths (Hossain et al., 2020), lack of zakat educations like paying zakat only
based on conjecture (Obaidullah, 2015; Rony & Karim, 2021) and only at the
time of Ramadan (Hossain et al., 2020) in the context of Bangladesh also.
It is common to distribute some specifc cheap clothes (Sharee, lungi) on a
particular declared date by the afuent segment of society for zakat purposes.
TABLE 2 Contributions of Islamic banks of Bangladesh to the zakat funds for the last ten years (fgures are rounded to a million)

Islamic Bank Bangladesh Limited (IBBL)

Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Zakat expenses (Taka) 262.93 324.77 385.750 425.98 421.31 494.97 519.57 601.56 719.19 817.49
Total operating expenses (Taka) 7,268.44 8,724.64 11,039.14 12,074.13 13,466.17 17,687.22 18,751.44 19,357.24 21,276.17 24,908.15
Percentage of total operating expenses (%) 3.61 3.7 3.49 3.52 3.12 2.79 2.77 3.10 3.38 3.28
Shahjalal Islami Bank Limited (SJIBL)
Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Zakat expenses (Taka) 59.22 60.65 76.55 92.99 93.31 101.96 113.71 124.66 140.73 160.82
Total operating expenses (Taka) 1,632.45 1,822.08 2,337.59 2,683.05 2,778.20 2,998.95 3,541.88 4,076.43 4,640.85 4,710.67
Percentage of total operating expenses (%) 3.62 3.32 3.27 3.46 3.35 3.40 3.21 3.05 3.03 3.41
Social Islamic Bank Limited (SIBL)
Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Zakat expenses (Taka) 50.48 63.58 71.84 89.79 111.42 129.66 149.52 165.69
Total operating expenses (Taka) 557.93 515.94 3,400.07 3,931.91 4,686.22 5,408.41 2,065.92 2,029.75
Percentage of total operating expenses (%) 9.04 12.32 2.11 2.28 2.37 2.39 7.23 8.16
First Security Islamic Bank Limited (FSIBL)
Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Zakat expenses (Taka) 12.50 18.80 28.08 36.49 42.175 50.24 71.58 88.14 98.34 126.54
Total operating expenses (Taka) 1,146.19 1,792.72 2,434.13 2,989.69 3,696.36 4,298.82 5,038.14 5,777.78 6,301.79 6,130.71
Percentage of total operating expenses (%) 1.09 1.04 1.15 1.22 1.14 1.16 1.42 1.52 1.56 2.06
Union Bank Limited
Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Zakat expenses (Taka) 3.00 4.62 6.00 15.00 20.00 26.50 36.00 44.00
Breaking the barriers of Zakat management system

Total operating expenses (Taka) 155.27 526.88 1,016.47 1,403.83 1,738.30 2,110.02 2,499.98 2,740.69
Percentage of total operating expenses (%) 1.93 0.87 0.59 1.06 1.15 1.25 1.44 1.60
265

Source: Constructed by the authors based on the annual reports of the respective banks.
266 S. M. Sohrab Uddin and Afroza Sultana

The practice contradicts the Shari’ah compliance, which urges to pay zakat
without declaration on reaching the nisab amount of resource. It also does not
follow the capacity building moto of the zakat objective. The zakat seekers’
crowd also resulted in unwanted death.
Handling zakat through commercial banks, Islamic NGOs, VO, and social
enterprises at a time creates a coordination problem between the institutions as
these organisations are running under diferent ministries. One extra contextual
barrier of ignoring rural area for zakat collection and distribution was found in
the context of Bangladesh (Hassan & Khan, 2007; Obaidullah, 2015).
A holistic efort to bring individual donors, government, banks, and non-proft
zakat institutions has introduced an internet-enabled crowdfunding fntech prod-
uct named ‘EkDesh’. It is an online crowdfunding platform where an individual
may pay and receive zakat money through banking channels or mobile fnancial
services (bKash, Nagad, Rocket, etc.). The voluntary enterprise, Bidyanondo,
is currently running several internet-enabled zakat crowdfunding campaigns.
The website-based Islamic crowdfunding fntech platforms have the capacity to
reach the unserved rural areas of Bangladesh as they can link cross-geographical
stakeholders into the system (Hendratmi et al., 2020). The mobile wallet, Bkash,
has made the channelling of funds much easier in Bangladesh.
Blockchain is in a nascent stage in Bangladesh. The use of blockchain tech-
nology has been achieved in the banking sectors of Bangladesh through HSBC
bank’s cross-border blockchain letter of credit (L/C) for importing 20,000 MT
of fuel oil by United Mymensingh Power Limited, Bangladesh from Singapore,
for their power plant. Later, HSBC made an inter-bank blockchain contract with
Prime bank limited with Contour’s technical support, the global trade fnance
blockchain network. The benefciary was AnantaGroup to import raw mate-
rials for the ready-made garments industry from Tamishna Group, a customer
of HSBC Bangladesh. The Information Communication Technology Division
of Bangladesh has published the National Blockchain Strategy highlighting the
regulatory and strategic aspects of applying blockchain to the organisations of
Bangladesh (ICT Division, 2020). The division also published a draft law for
using AI in several areas of industries in Bangladesh (Digital Bangladesh, Cabinet
Division, A2i, USAID, 2019).
Cryptocurrency is not yet allowed in Bangladesh as it is too decentralised,
which is against the fnancial regulation of Bangladesh. Several big data ana-
lytics companies in Bangladesh, like MicrodreamIT, Light Castle, Professional
Scrapper, etc., work in Bangladesh’s healthcare, retail, insurance, entertainment,
and business sectors.
As most of the fntech solutions are still in the initial stage in Bangladesh, it
needs campaigns like seminars, advertisements, conferences, and workshops to
develop the platform. In the future, the adaptation of the fntech solutions in the
zakat management system would be inevitable to keep pace with other sectors
of the economy.
 Breaking the barriers of Zakat management system 267

6 The challenges ahead

The positive results of adopting fntech into the zakat management system
are yet to see as it is still under construction in several countries. A study over
the front-runner of fntech adopters National Board of Zakat the Republic of
Indonesia (BAZNAS) showed that digitalisation of the zakat payment system has
a 55% potential of increasing the zakat money. But the realisation of the potential
is still low there (Abidin & Utami, 2020).
Crowdfunding application into Islamic fnance jurisdiction needs a shari’ah
board consisting of high-profle Islamic fnance erudite (Hendratmi et al., 2020;
Nivoix & Ouchrif, 2016). It also requires regular surveys of the users to check
whether the projects are Shari’ah compliant or not (Nivoix & Ouchrif, 2016). The
remuneration of the board members and review process are of-course costly, and
they should not eat up the zakat proportion of the poor population.
Blockchain applications are also characterised as relying solely on computer
codes and the absence of human-controlled institutions. The regulators may ask
for full authority to set blockchain rules, the right to veto unfavourable principles
and the power to enforce, update and change the rules for its full approval (Ozili,
2019). The pseudonymity of users may promote illegal trading and laundering
activities (Alam et al., 2019).
In Bangladesh, though the number of mobile phone users and internet
users have been increased signifcantly, comparative data showed that in 2020
the percentage of the total population using the internet was much lower
(25%) than in other Muslim majority countries like Indonesia (54%), India
(43%), and Pakistan (25%); the percentage was even lower than in Nigeria
(36%), which is just below Bangladesh on the list of Muslim majority coun-
tries (World Bank Data, 2022;World Population Review, 2022). The scenario
hints a challenge for the development of fntech as the total system relies on
the internet.
Also, the fntech adaptation into the zakat management system in Bangladesh
needs the collaboration of the Ministry of Religion with the Ministry of Finance
(Raquib, 2011) and the ICT division of the Ministry of Information. The
recently introduced EkDesh app has some complaints of slow working from the
users’ reviews.
An application of the technology acceptance model (TAM) for identifying the
behavioural aspect of both zakat payers and benefciaries is needed for the best
use of fntech platforms. A TAM model application in Bangladesh’s adaptation of
fntech shows that it needs more time and efort from the government and fntech
providers to educate the low-income and uneducated users of the technology
(N.H. Chowdhury & Nida Ussain, 2022). It creates a challenge for blockchain
and P2P platforms in zakat management as the poor mustahiqqin also need to use
an internet-enabled device to get the beneft. So, the internet cost should be
reduced in this respect.
268 S. M. Sohrab Uddin and Afroza Sultana

7 Conclusion
The entire zakat management system worldwide has been experiencing a digital
transformation. Though some countries like Indonesia and Malaysia have adopted
the most sophisticated fntech technologies into their zakat management, coun-
tries like Bangladesh have yet to progress. It is also evident that the entire system
has been sufering from the perennial problem of unsystematic and inefciency,
lack of coordination, lack of trust, dependency on consumption-centred zakat,
high administrative costs, and low compliance issues. The barriers to ensuring
vibrant zakat management are expected to be solved by adopting the fntech
solutions available in the current business arena with regulatory support from the
government. Blockchain, crypto platforms, AI, and crowdfunding may apply to
the whole process of zakat management to reduce the age-old documentation
complexities and ensure efciency. But the users’ awareness and regulators’ policy
formulation to monitoring the entire process are the challenges that should be
better checked before introducing the fntech solutions to the existing one.

References
Abidin, A., & Utami, P. (2020). The regulation of Zakat digital technology in creating
community welfare impact on economic development. Journal of Legal, Ethical and
Regulatory Issues, 23(5), 1–9.
Ab Rahman, A., Alias, M. H., & Omar, S. M. N. S. (2012). Zakat institution in Malaysia:
Problems and issues. Global Journal Al-Thaqafah, 2(1), 35–41. https://doi.org/10.7187/
GJAT122012.02.01
Abubakar, M., Hassan, M. K., & Haruna, M. A. (2019). Cryptocurrency tide and Islamic
fnance development: Any issue? International Finance Review, 20(October), 189–200.
https://doi.org/10.1108/S1569-376720190000020019
Adachi, M. (2018). Discourses of institutionalization of Zakat management system in
contemporary Indonesia: Efect of the revitalization of Islamic economics. International
Journal of Zakat, 3(1), 25–35. https://doi.org/10.37706/ijaz.v3i1.71
Ahmad, M. (2019). An empirical study of the challenges facing zakat and waqf institu-
tions in Northern Nigeria. ISRA International Journal of Islamic Finance, 11(2), 338–356.
https://doi.org/10.1108/IJIF-04-2018-0044
Ahmed, H. (2015). Zakah, macroeconomic policies, and poverty alleviation: Lessons
from simulations on Bangladesh. Journal of Islamic Economics, Banking and Finance, 4(2),
81–105.
Alaassar, A., Mention, A. L., & Aas, T. H. (2021). Exploring a new incubation model
for FinTechs: Regulatory sandboxes. Technovation, 103. https://doi.org/10.1016/j.
technovation.2021.102237
Alam, N., Gupta, L., & Zameni, A. (2019). Fintech and Islamic Finance: Digitalization
and Disruption in the Financial Sector. Palgrave Macmillan. https://doi.
org/10.1007/978-3-030-24666-2_1
Ali, I., & Hatta, Z. A. (2014). Zakat as a poverty reduction mechanism among the Muslim
community: Case study of Bangladesh, Malaysia, and Indonesia. Asian Social Work and
Policy Review, 8(1), 59–70. https://doi.org/10.1111/aswp.12025
 Breaking the barriers of Zakat management system 269

Ashiq, M., & Mushtaq, U. (2020). The convergence of crowd funding and Zakat system
in India: An integrated approach for human welfare. Ihtifaz: Journal of Islamic Economics,
Finance, and Banking, 3(1), 27. https://doi.org/10.12928/ijief b.v3i1.1879
Bangladesh Bank. (2020). Developments of Islamic Banking in Bangladesh (October–December
2020). December, 14. https://www.bb.org.bd/pub/quaterly/islamic_banking/jul_
sep_2019.pdf
Bank Indonesia. (2019). Zakat Development in the Era of Industrial Revolution 4.0.
Bangladesh Telecommunication Regulatory Commission. (2022). Information and
Statistics. http://www.btrc.gov.bd
Bin-Nashwan, S. A., & Al-Daihani, M. (2020). Fundraising campaigns via social media
platforms for mitigating the impacts of the COVID-19 epidemic. Journal of Islamic
Marketing, 12(3), 576–597. https://doi.org/10.1108/JIMA-07-2020-0200
Chowdhury, N. H., & Ussain, N. (2022). Using technology acceptance model for
acceptance of FinTech in Bangladesh. International Journal of Internet Technology and
Secured Transactions, 12(3), 250–264. https://doi.org/https://dx.doi.org/10.1504/
IJITST.2022.122104
Chowdhury, S. R., Islam, M. R., & Wahab, H. A. (2020). Challenges of faith-based
NGO intervention in community development: A case study in Bangladesh. Global
Social Welfare, 301–313. https://doi.org/10.1007/s40609-020-00176-2
Digital Bangladesh, Cabinet Division, A2i, USAID, U. (2019). Draft version 3:0 national
strategy for artifcial intelligence of Bangladesh (pp. 1–53)
Dzulfkar, M. Z., Santosa, P. B., & Gunanto, E. Y. A. (2022). Analysis of millennial
Muslim preferences on the crowdfunding platform. Indonesian Interdisciplinary Journal
of Sharia Economics, 5(1), 24–47
Findexable. (2019). The Global Fintech Index 2020. December 2019, 120.
Global Islamic Fintech Report. (2021). Global Islamic Fintech Report. Cdn.Salaamgateway.
com, 56. https://cdn.salaamgateway.com/special-coverage/islamic-fntech-2021/
Global-Islamic-Fintech-Report-2021-Executive-Summary.pdf
Gomber, P., Kaufman, R. J., Parker, C., & Weber, B. W. (2018). On the fntech revolu-
tion: Interpreting the forces of innovation, disruption, and transformation in fnancial
services. Journal of Management Information Systems, 35(1), 220–265. https://doi.org/10.
1080/07421222.2018.1440766
Hamdani, L. (2020). Zakat blockchain: A descriptive qualitative approach. EkBis: Journal
Ekanomi Dan Bisnis, December 2020, 492–502
Hasan, A., Hassan, R., Engku Ali, E. R. A., Engku Ali, E. M. T., Abduh, M., & Noordin,
N. H. (2019). A proposed human resource management model for zakat institutions
in Malaysia. ISRA International Journal of Islamic Finance, 11(1), 98–109. https://doi.
org/10.1108/IJIF-10-2017-0036
Hasan, K., Kayed, N. R., & Oseni, U. A. (2005). Introduction to Islamic banking & fnance
principles and practice.
Hassan, M. K., & Khan, J. M. (2007). Zakat, external debt and poverty reduction strategy
in Bangladesh. The Muslim World, 4, 1–37
Hendratmi, A., Ryandono, M. N. H., & Sukmaningrum, P. S. (2020). Developing an
Islamic crowdfunding website platform for startup companies in Indonesia. Journal
of Islamic Marketing, 11(5), 1041–1053. https://doi.org/10.1108/JIMA-02-2019-0022
Hossain, M. S., Hasan, K. M., & Khan, S. M. (2020). Factors infuencing proper Zakah
payment in Dighalia Upazila of Khulna District, Bangladesh. European Journal of Business
and Management Research, 5(2), 1–6. https://doi.org/10.24018/ejbmr.2020.5.2.292
270 S. M. Sohrab Uddin and Afroza Sultana

Ibrahim, S., & Shaharuddin, A. (2015). In search of an Efective Zakat distribution system
in Kano State, Nigeria. Journal for Studies in Management and Planning, 1(7), 259–285.
http://edupediapublications.org/journals/index.php/JSMaP/article/view/2579
ICT Division. (2020). National blockchain strategy: Bangladesh Information and
Communication Technology Division. ResearchGate,January.https://www.researchgate.
net/publication/343574573_National_Blockchain_Strategy_Bangladesh
Islam, M. S. (2016). Towards an establishment of Zakat Institution in Bangladesh based
on Malaysian experience: A juristic and analytical study. The Muktamar Waq f Iqlimi III
2016 (IQLIMI2016), 2016(October), 13–14
Jagtiani, J., & Lemieux, C. (2018). Do fntech lenders penetrate areas that are underserved
by traditional banks? Journal of Economics and Business, 100(April 2018), 43–54. https://
doi.org/10.1016/j.jeconbus.2018.03.001
Junge, L. B., Laursen, I. C., & Nielsen, K. R. (2022). Choosing crowdfunding: Why do
entrepreneurs choose to engage in crowdfunding? Technovation, 111( June), 102385.
https://doi.org/10.1016/j.technovation.2021.102385
Khatiman, N. A. B., Ismail, M. S. B., Muhammad, & Yahya, N. (2021). Blockchain-
based Zakat collection to overcome the trust issues of Zakat payers. International
Journal on Perceptive and Cognitive Computing (IJPCC), 7(1), 1
Knewtson, H. S., & Rosenbaum, Z. A. (2020). Toward understanding FinTech
and its industry. Managerial Finance, 46(8), 1043–1060. https://doi.org/10.1108/
MF-01-2020-0024
Langley, P., & Leyshon, A. (2017). Capitalising on the crowd: The monetary and fnan-
cial ecologies of the crowdfunding. Environment and Planning A: Economy and Space,
49(5), 1019–1039.
Muneeza, A. (2020). Pandemic innovation for Zakat: The potential of Crypto Zakat.
INCEIF, 19–25. https://ikr.inceif.org/handle/INCEIF/3537
Nivoix, S., & Ouchrif, F. Z. (2016). Is crowdfunding sharia compliant? International Perspectives
on Crowdfunding, 185–198. https://doi.org/10.1108/978-1-78560-315-020151011
Nugraha, F., Permadia, S., Gunawan, A. R., & Saeful, E. (2019). Artifcial intelligence
usage in Zakat optimization. International Conference of Zakat, 14–24. https://doi.
org/10.37706/iconz.2019.144
Obaidullah, M. (2015). Zakah management in rural areas of Bangladesh: The Maqasid
al-Shari ’ ah (Objectives of Islamic Law) perspective. Middle East Journal of Scientifc
Research, 23(1), 45–54. https://doi.org/10.5829/idosi.mejsr.2015.23.01.22032
OIC. (2018). OIC Economic Outlook 2018 challenges and opportunities towards.
Owoyemi, M. Y. (2020). Zakat management: The crisis of confdence in zakat agencies
and the legality of giving zakat directly to the poor. Journal of Islamic Accounting and
Business Research, 11(2), 498–510. https://doi.org/10.1108/JIABR-07-2017-0097
Ozili, P. K. (2019). Blockchain fnance: Questions regulators ask. International Finance
Review, 20, 123–129. https://doi.org/10.1108/S1569-376720190000020014
Paizin, M. N. (2021). Big data analytics for Zakat administration: A proposed method.
ZISWAF: Jurnal Zakat Dan Wakaf, 8(2), 104–121.
Powell, R. (2010). Seattle University School of Law Digital Commons Zakat: Drawing
insights for legal theory and economic policy from Islamic jurisprudence economic
policy from Islamic jurisprudence. Pittsburgh Tax Review, 7(1), 43.
Puskas Baznas. (2021). Indonesia Zakat Outlook 2021 Center of Strategic Studies the National
Board of Zakat. www.baznas.go.id.
Qardawi, Y. Al. (2000). Fiqh Al Zakah: A comparative study of Zakah, regulations and
philosophy in the light of Qur’an and Sunnah. Fiqh Al Zakah (Vol. I), 1–351.
 Breaking the barriers of Zakat management system 271

Rahmah, F. (2021). Factors Afecting the Society’s Preference Using Zakat, Infaq and Alms Based
Crowdfunding Platform, 4(1). https://doi.org/10.21093/bijis.v4i1.4162
Ramachandran, K. K., Apsara Saleth Mary, A., Hawladar, S., Asokk, D., Bhaskar, B., &
Pitroda, J. R. (2022). Machine learning and the role of artifcial intelligence in opti-
mising work performance and employee behaviour. Materials Today: Proceedings, 51,
2327–2331. https://doi.org/10.1016/J.MATPR.2021.11.544
Raquib, A. (2011). Islamic Banking & Zakat: An alternative approach to poverty reduc-
tion in Bangladesh. Journal of Islamic Economics, Banking and Finance, 7(2), 11–26.
Razimi, M. S. A., Romle, A. R., & Erdris, M. (2016). Zakat management in Malaysia:
A review. Journal of Scientifc Research, 11(6), 453–457. https://doi.org/10.5829/idosi.
aejsr.2016.453.457
Rehman, A. A., & Pickup, F. (2018). Zakat for SDGs. United Nations Development Program.
Rejeb, D. (2020). 4th International Conference of Zakat Proceedings Blockchain and Smart
Contract’s Contributions to Zakat Management System.
Rony, J. H., & Karim, N. (2021). E-Zakat: An approach for Zakat management to erad-
icate poverty. International Journal of Islamic Banking and Finance Research, 8(1), 29–40.
https://doi.org/10.46281/ijibfr.v8i1.1521
Saad, R. A. J., Aziz, N. M. A., & Sawandi, N. (2014). Islamic accountability framework
in the Zakat funds management. Procedia - Social and Behavioral Sciences, 164(August),
508–515. https://doi.org/10.1016/j.sbspro.2014.11.139
Saad, R. A. J., & Farouk, A. U. (2019). A comprehensive review of barriers to a functional
Zakat system in Nigeria: What needs to be done? International Journal of Ethics and
Systems, 35(1), 24–42. https://doi.org/10.1108/IJOES-06-2018-0090
Sangwan, V., Harshita, Prakash, P., & Singh, S. (2020). Financial technology: a review
of extant literature. Studies in Economics and Finance, 37(1), 71–88. https://doi.
org/10.1108/SEF-07-2019-0270
Santoso, B., Amilahaq, F., Ahmad, S., & Nasir, N. (2020). Study on Block-Chain
Implementation in Zakat Management (Case Study in Indonesia). https://doi.org/10.4108/
eai.27-8-2020.2303244
Sonial Manara, A., Rachman Eka Permata, A., & Heru Pranjoto, R. G. (2018). Strategy
model for increasing the potential of Zakat through the crowdfunding-Zakat system
to overcome poverty in Indonesia. International Journal of Zakat, 3(4), 17–31. https://
doi.org/10.37706/ijaz.v3i4.104
Statistica. (2022). Investments into fntech companies globally 2010–2021.
Taylor, K., Woodcock, R., Cuddy, S., Thew, P., & Lemon, D. (2015). A provenance
maturity model. IFIP Advances in Information and Communication Technology, 448,
61–66. https://doi.org/10.1007/978-3-319-15994-2_1
Thaker, M. A., Thaker, H., A.Pitchay, A., & Khaliq, A. (2019). A proposed Integrated
Zakat-Crowdfunding Model (IZCM) for efective collection and distribution of
Zakat fund in Malaysia. International Journal of Zakat and Islamic Philanthropy, 1(2), 1–12.
The Financial Express. (2021). Bangladesh; s Zakat Fund couldn’t mobilise even 1.0pc of the
potential charity amount. https://doi.org/https://doi.org/10.1108/FS-06-2020-0058
Uddin, A. E. (2016). Through Islamic Banks’ Zakat House (IBZH): Investment of
Zakah funds in microfnance to remove poverty in Bangladesh: A new model.
International Journal of Islamic Economics and Finance Studies, 2(1), 1–25. https://doi.
org/10.12816/0036592
Wahab, N. A., & Rahman, A. R. A. (2011). A framework to analyse the efciency and
governance of zakat institutions. Journal of Islamic Accounting and Business Research, 2(1),
43–62. https://doi.org/10.1108/17590811111129508
272 S. M. Sohrab Uddin and Afroza Sultana

Wamba-Taguimdje, S. L., Fosso Wamba, S., Kala Kamdjoug, J. R., & Tchatchouang
Wanko, C. E. (2020). Infuence of artifcial intelligence (AI) on frm performance:
The business value of AI-based transformation projects. Business Process Management
Journal, 26(7), 1893–1924. https://doi.org/10.1108/BPMJ-10-2019-0411
Widiastuti, T., Cahyono, E. F., Zulaikha, S., Mawardi, I., & Al Mustofa, M. U. (2021).
Optimising zakat governance in East Java using analytical network process (ANP):
The role of zakat technology (ZakaTech). Journal of Islamic Accounting and Business
Research, 12(3), 301–319. https://doi.org/10.1108/JIABR-09-2020-0307
World Bank. (2018). Poverty and Inequality Platform.
World Bank. (2020). Leveraging Islamic fntech to improve fnancial inclusion. In
Leveraging Islamic Fintech to Improve Financial Inclusion. https://doi.org/10.1596/34520
World Bank. (2021). The World Bank in Bangladesh overview.
World Population Review. (2022). Muslim Population by country 2022. https://
worldpopulationreview.com/country-rankings/muslim-population-by-country
World Bank Data. (2022). Individuals using the Internet. https://data.worldbank.org/
indicator/IT.NET.USER.ZS?
Wormald, B. (2013). The World’s Muslims: Religion, politics and society. Pew Research
Center.
Yusof, M. F., Ab. Rasid, L., & Masri, R. (2021). Implementation of Zakat payment
platform for cryptocurrencies. AZKA International Journal of Zakat & Social Finance,
2(1), 17–31. https://doi.org/10.51377/azjaf.vol2no1.41
Zulfkri, Z., Hj Kassim, S., & Hawariyuni, W. (2021). Proposing blockchain
technology-based Zakat management model to enhance Muzakki’s trust in Zakat
agencies: A conceptual study. Journal of Accounting Research, Organization and Economics,
4(2), 153–163. https://doi.org/10.24815/jaroe.v4i2.20467
15
AN INQUIRY INTO THE APPLICATION
OF ARTIFICIAL INTELLIGENCE ON
FATWA
Ali Polat, Shoaib Khan and Usman Bashir

1 Introduction
The unprecedented developments in technology in the last few decades are
radically changing corporate life as well as individual life. Innovative technol-
ogies such as Artifcial Intelligence (AI), Smart Contracts (SC), and Blockchain
(BC) will have a huge impact in the fnancial industry as much as in other indus-
tries (Mat Rahim et al., 2018). The mentioned innovative technologies can help
the evolution of any feld and such blend, i.e., the merge of any applied business
feld and technology, will create a new way of looking at the matters, solving the
problems, require being more creative to reach the necessary knowledge. AI-
and SC-related technologies are shaping all over the business and even coining
new terms as the existing terms are not enough to convey the intended change
of these emerging concepts, ideas, technologies, and activities. That is why some
relevant neologisms, such as “FinTech” in fnance, “InsurTech” in insurance,
“RegTech” in regulation, “LegalTech” in legal afairs, and so on, help us to keep
up with digital innovation. For instance, Fintech is considered as the marriage
of technological innovation and fnance which can be a disruptive technology
for conventional operations as much as it may be cooperative (Zavolokina et al.,
2016, Hasan et al., 2020). LegalTech refers to the adoption of innovative technol-
ogy and software which streamlines and enhances legal services (Corrales et al.,
2019).
The innovative technology including AI can change the way of the practice
with immense changes which sometimes can cause a paradigm shift, perhaps, in
Islamic fnance and business (IFIs), too. Increasing awareness on the AI approach
and asking the question that “AI is getting ready for IFIs but are they ready for
AI?” needs to be answered. This chapter aims to trace the existing debate on how
the adoption of digital transformation including AI is expected to help facilitate

DOI: 10.4324/9781003262169-18
274 Ali Polat et al.

accurate and timely fatwa delivery. Fatwa is considered one of the sensitive areas
of Islamic fnance. In Shari’ah-based commercial transactions (muamalat), there
are certain issues that require scholarly interpretation regarding their compliance
with Shari’ah, because Qur’an and Hadith do not always clearly and directly
articulate about them. Only qualifed Islamic scholars can assess the compliance
or non-compliance of a particular fnancial transaction with Shari’ah. This is
known as fatwa.
Fatwa process is inherently a human activity, and its nature does not require
mufti to provide a pinpoint accuracy but to stick with the primary and second-
ary sources of Islamic law and provide a formal rule or interpretation on a spe-
cifc case. Mufti, as a domain professional, should provide his best efort with
his available knowledge and depending on prior sources and cases he should
provide an opinion. Without a scholarly opinion, fatwa, modern IFI’s products,
instrument, or applications will be suspicious whether they are Shari’ah com-
pliant or Shari’ah-based. There are methods of providing a fatwa for an IFI and
depending on the jurisdiction either individual fatwa, a committee decision, or
fatwa council, as a higher authority, can provide an opinion. These decisions
need to be integrated with the corporate governance structure of IB. Going
through the literature and the developments of the key technologies including
AI, Machine Learning (ML), and Natural Language Processing (NLP), Fintech
or LegalTech does not replace the scholar or the auditor but leads to disruptive
change of the profession.
In the book The 4th Revolution: How the Infosphere is Reshaping Human Reality,
Luciano Floridi (2014) suggests that interpretations of the politics of technology’s
in-betweenness may swing between two extremes. At one extreme, one may
interpret technology’s in-betweenness as a deleterious kind of detachment and a
loss of pristine contact with the natural and the authentic. On the other extreme,
there is the enthusiastic and optimistic support for the liberation provided by
technology’s in-betweenness. The idea of technological in-betweenness is not
seen as a dangerous path toward the exercise of power by some people, systems,
or even machines over humans, but as an empowering and enabling form of
control. “Clearly, neither extreme position is worth taking seriously. However,
various combination of these two single ingredients dominates our current dis-
cussion of the politics of technology” (Floridi, 2014, pp. 39–40). In the context
of IFIs, we should discuss on how AI is expected to be used for enhancing the
Shari’ah Governance upon fatwa in accordance with maqasid al-Shari’ah. For this
purpose, this chapter aims to trace how the current discussion on fatwa and AI is
going between the extreme positions in the academic literature.
This chapter has four parts. After the introduction, we look at the available
research which is related to Islamic corpus and AI. Shari’ah Governance and AI
section traces how the current discussion is expecting AI to contribute to not
only helping fatwa issuance but also enhancing the whole Shari’ah governance.
The subsequent section looks at the current discussion on AI- and fatwa-related
issues from several perspectives. The last part puts concluding comments.
 Application of artifcial intelligence on Fatwa 275

2 Research in fatwa and AI

In the mid-1980s, legal expert systems were available as early forms of AI
software. They incorporated the knowledge and expertise into software to rep-
licate them. But in the 1990s, they were considered as a failure as they seem
to work only if (a) the legal rules are straightforward enough, (b) there is no
ambiguity or vagueness regarding the inputs, and (c) there is clarity about which
rule applies in each situation (Bues & Matthaei, 2017). The 1990s also saw the
developments of formalizations of domain conceptualizations and ontologies.
They can be used to create a common gateway for information retrieval. This
important spadework contributed a lot to the development of legal reasoning
which needs to produce accurate, appropriate, helpful, and useful results which
could be considered intelligent.
Muhammad and Muhammad (2003) is one of the early studies to show how
Information and Communication Technologies (ICT) are benefcial in dissem-
inating the understanding of Islamic jurisprudence and juridical opinions. Of
course, such discussions are on a diferent level of ICT at an introductory level.
A lot of platforms, websites, and software are created to serve the purpose of dis-
seminating Islamic knowledge. In Islamic jurisprudence, fqh has central impor-
tance. Imam Abu Hanifah defnes fqh as “the ability of oneself to know what he
must possess and what is required from him” (Zuhayli, 1997). So, such knowl-
edge should be rapidly and clearly available to all Muslims. That was the help of
ICT, and it is still needed perhaps with another vision again. However, using AI
and advancing computer learning to a level that does some functions of humans
is another level that we want to discuss more.
AI and law will help a new type of computer applications that can make legal
arguments. It also can be used to predict the outcomes of legal disputes. A com-
putational model for a legal argument may analyze a situation and answer a legal
question, predict the outcome meaning making a legal argument. If that is ef-
ciently possible many complex tasks of human intellect can be done with the help
of AI-led technologies (Ashley, 2017). Of course, in the IFIs context, we need to
add that muftis, Shari’ah scholars, or audit personnel should have the training and
capacity to utilize AI-led tools to decide. Even they need to make these tools avail-
able to use. Therefore, it is essential for them to be ready for such technologies.
An important strand of AI- and IFIs-related literature discusses develop-
ing case-based reasoning (CBR) system where a system comes up with a fatwa
which is based on earlier fatwas for similar questions. CBR can have two dif-
ferent approaches: problem-solving and interpretative (Nouaouria et al., 2006).
Therefore, CBR learns to fnd similar fatwas for the same questions. The follow-
ing research is to be noted in this regard:
Nouaouria et al. (2006) implemented an AI model specifc to the domain of
drinking (alcohol) and smoking. Such a system requires indexing, extraction,
adaptation, validation, and storage modules. When the situation is described, as
input, the architecture will provide an answer with its arguments as output.
276 Ali Polat et al.

Mutawa and Al-Terkait (2011) implement a knowledge-based expert system

to automate the process under restricted constraints by applying the origins of
the Islamic jurisprudence domain (Usoul al-fqh) to verses in the Qur’an alone.
Their system was correct in 96% of its judgment when compared to human
experts in the feld.
Elhalwany et al. (2015) investigate the possibility of a question-answering sys-
tem based on CBR where an intelligent system responds to a natural language
question that was already answered before for the Egyptian Dar al-Ifta Fatwa
system. As the model they used for question-answering system does not require
the domain knowledge and allows automatic discovery, it provides a scalable
ground and language independence. Their modeling shows that AI can be used
for Islamic fatawa (pl of fatwa).
For AI to learn easier applying the best AI technique is crucial but not enough
as the close to perfect application will be available depending on the abundantly
obtainable number of the former cases in the system, fatwa in diferent languages,
better root extraction algorithms and removing word’s prefx or sufxes depend-
ing on the syntax of the language (Elhalwany et al., 2015).
Marir et al. (2019, 2020), inspired by the blockchain-like structure of the
Qur’an, presented a recursive co-occurrence text mining algorithm to mine the
Holy Qur’an to build a corpus that can be further processed to develop IB busi-
ness processes complying with Shari’ah. Compliance with Shari’ah law has not
been researched or explored from a business process management perspective and
the current literature lacks a well-defned methodology for integrating Shari’ah
compliance controls into Islamic Shari’ah business processes.
Sa’ad et al. (2020) provide a detailed discussion of the potential of integrating
a robo-advisory mechanism for Islamic fnancial institutions. The legal require-
ments and the future of AI as a disruptive technology are also discussed.
Fitri (2020) designed an android-based fqh consultation application. Based on
their survey, many Muslims have experienced problems in understanding fqh
knowledge and many of them stated that fnding a solution to their problem is
important.
Khan et al. (2021) propose an AI-based Fintech model to provide a solution
for the afected SMEs and individuals to fght the economic consequences of this
pandemic and survive. The fndings suggest that Qardh-Al-Hasan must be used
in combination with Fintech like AI to save the poor and afected SMEs from
this pandemic. Similar topic is also discussed by Syed et al. (2020).
Gazali et al. (2020) examine AI applications for Islamic Investments. In their
conceptual discussion, they discussed text mining, algorithmic trading, stock
pick and robo in Investment (robo advisor, robo Islamic advisor and robo fnan-
cial advisor).
Ahmed (2021) discusses whether AI will fulfll the conditions of Ijtihad and,
in case of so, will it be allowed as a legitimate mujtahid, interpreter of Islamic law,
simply mufti. As Islam considers that all things are permissible unless otherwise
 Application of artifcial intelligence on Fatwa 277

clearly indicated; that rule can be extended for AI too. AI should not be seen
as an invention but an extension of the intelligence of man given by Allah to
us. The discussion of Ahmed (2021) is more on the applicability of AI for fatwa
processes and needs to be highlighted. He considers that human-made technol-
ogies are a part of human knowledge and intellect. Therefore, as long as there
is no clear disagreement with Islamic principles, the default principle is their
permissibility.
Munshi (2021) presents a system using AI and deep learning NLP methods
to build an automated fatwa system. The system performs topic/intent classif-
cation and question-answer retrieval. Khazani et al. (2021) also show semantic
knowledge representation by using Surah Al-Imran by setting rules to build a
semantic graph, a graph that represents semantic relationships between concepts.
Bendjamaa and Talep (2017) analyze the ontologies of Islamic legislative sources
which help scholars to provide a fatwa. NLP is a specifc domain of AI and apply-
ing this to Arabic language to extract knowledge is another problem. As Farghaly
(2004) indicates, average ambiguity of a token in many languages is 2.3, but in
modern standard Arabic, it reaches 19.2 which makes a big challenge for NLP
systems. Sheker et al. (2016) propose an ontology-based QA for fatwa delivery.
They reached approximately 90% of the F-measure.
The knowledge of the Qur’an is represented by conforming to an ontology
within a system framework. A comprehensive review of concepts in the Qur’an
is interrelated with each other and is essential for information extraction, AI,
NLP, and knowledge management (Rusli et al., 2018). Therefore, gathering all
the existing ontologies to build an ontology representing Islamic knowledge is
a prerequisite for creating an argument extraction system. Without a framework
and ontological approach to Fintech, generated knowledge and suitability of all
products and tools will create an additional burden. Rather than working on a
diferent language, frst English and then Arabic should be the default languages
on which all these NLP activities work.
Alsabban et al. (2021) attempt to tackle the problem of automatic categoriza-
tion of Islamic jurisprudential legal questions using deep learning techniques.
It is a reasonable logic to say that Muslims represent 25% of the earth’s pop-
ulation in 51 countries, and while there is a scarcity of muftis, on one hand,
there is an explosion of social media channels on the other hand. Such a gap
creates a supply-demand problem which calls for automation solutions including
AI. Therefore, the potential of AI for automated Q&A systems, Chatbots, and
Question topic classifcation is huge.
While we concentrate on the use of AI for fatwa, Singer (2021) discusses the
fatwas on Robotics and AI technologies that were given by scholars. Her research
shows that there needs to be more discussion and scholarly gatherings to under-
stand the position of AI from the point of Islamic scholars. The literature review
shows that there are many pieces of research that each one is trying to cover a
specifc problem for the application of AI to IFIs.
278 Ali Polat et al.

3 Shari’ah Governance and AI

Shari’ah Governance is the framework to reach Shari’ah compliance. Lack of it
will create reputational problems and Shari’ah Compliance Risk which is unique
to IFIs. Yasini and Yasini (2019) mention that most Fintech solutions in IFIs do
not sufciently provide Shari’ah assurance to their clients. They may feel not
obligated to provide such assurance and expose themselves to reputational risk
in the current environment where absence of a proper regulatory regime and
governance standards.
The convergence of AI and BC will be inevitable, and they create both new
challenges and opportunities for IFIs. Both technologies deal with data and
value. Employing AI will generate insights from data and will generate value
(Shrof, 2020). ML models can be improved on blockchains by collaboration
and AI models can create new fnancial instruments over a blockchain. Such
developments will make IFIs stakeholder’s job harder in terms of Shari’ah
compliance.
Corporate governance and prudent compliance are prerequisites of fnancial
stability and customer satisfaction for both the conventional banks and Islamic
Banks (IB). The Islamic Financial Services Board (IFSB) and the Accounting and
Auditing Organization for Islamic Financial Institutions (AAOIFI) have specifc
concerns on the issues which focus on compliance with Shari’ah of the corporate
governance. A robust Shari’ah governance will build trust and confdence of
stakeholders of IB. This will impact the stability, capacity, and performance of IB
at the bank level. Increasing the knowledge of the stakeholders is also important
for them to make informed decisions. Therefore, Shari’ah compliance should
also have a dimension of a disclosure of information that is timely, accurate, and
adequate for all parties. Non-availability of proper governance mechanisms will
lead to Shari’ah risk which can create additional risks like credit, legal and com-
pliance, reputational risk, and market risk (Ginena & Hamid, 2015).
Lahsasna (2014) classifes the tools which can help identify the incongru-
ences in Shari’ah compliance. These are (i) Accounting and Financial Reporting
Techniques, (ii) Legal Technique, and (iii) Shari’ah Technique. There are also
techniques like observation, sampling, interview, or testing which are used to
capture risky points for non-compliance risk too. All these tools and techniques
are necessary; however, we have to suggest that it is becoming difcult to capture
the full control of Shari’ah compliance as the number of transactions, the num-
ber of documents, and the total amount of digitized transactions are increasing
beyond human computational capacity. Setting principles and giving fatwa is a
necessary condition, however, we must always monitor if it is enough to have
a healthy development of IFIs. Under our bounded rationality, AI should help
us to facilitate the growth and to improve the quality of IFIs in several dimen-
sions. Ginena (2014) clarifes internal (arising from people, processes and systems)
and external causes of possible Shari’ah risks and many of these causes can be
minimized with Fintech, specifcally AI and other means.
 Application of artifcial intelligence on Fatwa 279

Hilb (2020) discusses the possibility of artifcial governance where the role of
AI in shaping the future of corporate governance is discussed. There are diferent
lenses to analyze the issue, the business, technology, and society lenses. The arti-
cle also proposes fve scenarios of artifcial governance, i.e., assisted, augmented,
amplifed, autonomous, and autopoietic intelligence. Without improving digital
and data capabilities, the beneft of AI will be limited for IFIs. To reach that
level, rather than individual Islamic banks, a workgroup can be created under the
legitimate international organizations for IFIs (like AAOIFI or Fatwa-Related
Bodies) and set up both frameworks, prerequisites, and other requirements.
For instance, Islamic Development Bank prepared a report specifcally on AI
and IFIs, for how to use it for fnancial inclusion within IFIs context. Accessing
fnance as a goal of the UN is related to the fnancial sector (IsDB, 2021). A part
of this might be related to fatwa but what we see is that in these specifc prod-
uct or technology developments, Shari’ah conformity, audit, etc. are usually
disregarded.
Shari’ah-Tech can automate some processes that required once signifcant
human error. This will provide an incremental value to scholars. But it might
sometimes innovate the way that the task is done. Although many of the solutions
available today are in the category of increasing efciency with higher quality
and fewer costs compared to performing these tasks manually, the technological
advancement will provide a shift to more innovative solutions very soon.
We can create a simple framework where Shari’ah conformity is the sum of
transaction conformity and technology conformity. Although it is hypothetic,
a technology can be non-conform to Shari’ah because of its underlying design
principles (Table 1).
A fatwa is not only a technical or legal tool but also a social tool that has a
relation with society and human behavior. By sticking with Shari’ah principles,
the development and deployment of technology-driven fatwa solutions are nec-
essary for the future of IFIs. It will be an essential requirement to understand
human-machine and human-contract interactions for a mufti as machine code
(as a clause of a contract or a condition of a contract) needs to be either approved
or analyzed from a Shari’ah conformity basis. The conventional way of contracts
is human-made, and AI can be approximate rather than certain. Therefore, a
Shari’ah scholar or audit will be in the loop who will check things and provide a
second-level review. Such a system will minimize the Shari’ah risks and perhaps

TABLE 1 Shari’ah conformity matrix

Transaction conformity Technology conformity Shari’ah conformity

Yes Yes Yes

Yes No No
No Yes No
No No No
280 Ali Polat et al.

minimize the time and cost variables during the processes by accelerating fatwa/
audit lifecycle. All the discussion leads us to somewhere that AI on fatwa will not
bring any end to mufti but will enrich fatwa processes.
Shari’ah compliance assessment should include the procedural processes
from the beginning until the end of the product lifecycle. Before launching any
product, it should be scrutinized as per fqh guidelines of Shari’ah Committees.
Shari’ah scholars need to be adept with technological developments to adequately
assess Shari’ah compliance. A multidisciplinary approach is also required to reach
a sound Shari’ah Governance practice (Mohamed, 2020). For Shari’ah assurance
the platforms may appoint a Shari’ah Supervisory Board (SSB) (Yasini & Yasini,
2019).

4 Looking forward: AI and Fatwa-related processes

The literature and application on AI are going forward increasingly both in con-
ventional Fintech and I-Fintech felds. To understand the capability of AI, strong
and weak AI should be clarifed. Strong AI is diferent from weak or narrow AI.
The frst has the ability “to reason, represent knowledge, plan, learn, commu-
nicate in natural language and integrate all these skills toward a common goal”.
There is no such system yet and AI tools used in LegalTech are far away from
such target. Weak AI cannot perform autonomous reduction while strong AI
can understand a problem domain. On the other hand, the human brain uses
deductive or inductive reasoning while computers have a data-driven approach
to describe information processing that cannot be articulated as a mere series
of logical steps. These inductive rules are in the form of statistical equations,
estimated or trained with samples of historical cases, that model the relationship
between the information inputs and the processed output (Bues & Matthaei,
2017).
Shari’ah scholar has a highly complex work that requires processing convo-
luted sets of circumstances. A scholar must consider all rights and obligations in
the domain and render reasoned opinions and provide guidance depending on
this information. Understanding the background and context, having a general
information, keeping relevant, and fltering the irrelevant noise are also part
of the duty. A weak form of AI cannot handle all these duties even some of
the scholars cannot have enough background to provide a fatwa for complicated
cases. Still, we should look at this matter from another perspective. If the IFIs
ecosystem gets the bias that (Susskind & Susskind, 2015) refers to as “techno-
logical myopia” which is the tendency to underestimate the potential of tomor-
row’s applications by evaluating them in terms of today’s enabling technologies,
it will not be easy to update the changes if they come sooner than expected. In
this regard, Moore’s law states about CPU processing power, the power that is
required for AI engines, the technological progress is not going linear but expo-
nential. IFIs should not underestimate the potential of tomorrow’s applications.
 Application of artifcial intelligence on Fatwa 281

There might be limitations today but that does not mean these limitations, (a)
will exist in a decade, (b) will not have any efciency or beneft on today’s fatwa
production.
As evidence, we can mention about a new generation AI tool promise to help
anyone to prepare, review, and monitor both contracts and legal documents.
A San Francisco-based company, Open AI, has a state-of-the-art language model
called GPT-3, Generative Pre-trained Transformer 3, released in May 2020,
using deep learning to produce human-like text with a capacity of 175 billion
ML parameters (Corrales Compagnucci et al., 2021). As Heaven (2020) indicates
the quality of GPT-3 generated text is so high that cannot be easily distinguished
from a text written by a human being. GPT-3 opened a new era in general
in AI-powered solutions. Meanwhile, using AI also brought opportunities and
challenges for the legal community and profession in general. For instance, a
requirement of a new professional, as Cummins and Clack (2022) call, comput-
able contract designer, will emerge to help this task.
Muhammad and Muhammad (2003) indicate that if many systems availa-
ble now can mimic doctors, fnancial analysts, engineers, lawyers, etc. why an
expert system cannot imitate the expounder of Islamic law (mufti), mujtahid,
jurist, or Muslim judge (qadhi)? At the time of discussing this topic, CBR was
available. Past experiences of human specialists are represented as cases. When a
user encounters a new case with similar parameters of the earlier one which was
stored in a database for later retrieval, the user searches for the stored cases with
question attributes similar to the new one, fnds the neighboring ft, and applies
the solutions of the old case to the new case. Users can tag the successful solutions
to the new case, and both are stored together with the others in the database.
A case conficting with another one is also important, and they are also appended
to the case database with explanations as to why the solutions did not work.
Muslim software developers need to be proactive in developing such AI-based
tools. However, a working AI model needs really a big investment in terms of
labeling in supervised learning and a huge cost of processing power. AI research
is currently either academic or market driven due to its nature of monetary
benefts. A system which mutually agreed upon by ulama, AI specialists, and
perhaps linguists can create additional systems which can go beyond CBR-type
applications.
Ashley (2017) asks the question if there will be a software service for
“generation of explanations and arguments in law: assists in structuring expla-
nations of answers and supportive legal arguments?” such service has not hap-
pened yet though research on how to extract semantic information necessary for
AR (argument retrieval) and research on applying this information to cognitive
computing to answer the question is still going on.
Alkhamees (2017) refers to inconsistency in SSB rulings which occur in the
same bank over time and among diferent SSBs in one country which leads us
to the problem of lack of consistency among fatwas. Therefore, IFIs having a
282 Ali Polat et al.

standard framework for fatwa is essential to refect the potential of IFIs activities.
We are using “standard framework” not to indicate the juristic diferences which
are inevitable due to many reasons from variable Quranic recitation to diferent
interpretations of the meanings of the words to lack of knowledge of a Hadith or
diferent requirements for adopting Hadith. Disregarding Maslahah or adopting
or not adopting some principles are also efective in these diferences. In addition
to these, the structure of the Fatwa question is also important to have a unifed,
standard framework. The diferences among fatwas can still be available but at
least making sure of two things. (1) The stakeholders can diferentiate and justify
the reasons behind it. (2) The same mufti is not conficting with its own verdict
over time or over the country.1
Legal design thinking is a trending term that combines legal expertise, design,
and visual thinking to solve a legal problem with a human-centered approach
(Neota Logic, 2019). Such innovation in approach can create additional infor-
mation for fatwa processes and beneft for Shari’ah scholars which is currently
lacking. Such an approach will not only help identifcation of the problem but
how an overall process works.
From AI perspective, fatwa texts are unstructured data, NLP and some addi-
tional tools can help fnd, extract, and present key data in fatwa documents. Once
the approach changes, additional tools can be used as google Contract Doc AI
does (Artifcial Lawyer, 2021). By using decision tree algorithm, an expiry date
can be extracted depending on other data in the contract although an explicit
expiry date is not mentioned in a contract. In IFIs, a contract is not valid after the
expiry date, and therefore, it is a part of the Shari’ah audit.
Any development in deep learning and language modeling for general and
specifc domains, AI will serve better. Still, highly complex, high-risk con-
tracts require humans in the loop. Therefore, AI in current technology still
needs humans for the foreseeable future. LegalTech leads to disruptive change
in the Shari’ah scholar’s profession though it does not replace it. ML and NLP
can be used to provide services related to E-Discovery/Forensic Investigation,
Legal Search, Automated Document Assembly and Analytics, Online Dispute
Resolution/Mass Procedures, Standardized Claim Management, and Legal
Predictive Analytics.
Regulatory Technology (RegTech) is a fundamental value addition that
can enhance both Fintech and LegalTech developments. Developing and re-
conceptualizing of existing regulations by regulators will pave the way for further
speed up in both Fintech and LegalTech. Meanwhile, in most of the countries,
the regulatory framework is still evolving and conficts with some of the existing
regulations (Rabbani et al., 2020).
As Alam et al. (2019) indicate, RegTech is not a buzzword and its most signif-
icant role is to disrupt the regulatory landscape of the fnancial sector by provid-
ing solutions that are technologically advanced. Such fulfllment will help to the
ever-increasing demands of compliance within the fnancial industry, particu-
larly after the 2008 global fnancial crisis.
 Application of artifcial intelligence on Fatwa 283

5 Conclusion
This chapter shows that there are some introductory studies which are trying
to explain a specifc part of the AI-related tools or trying to solve some prob-
lems in Shari’ah-related domains. By combining both perspectives of Fintech
and LegalTech, we looked how Shari’ah compliance in broader terms can beneft
from these technologies and how fatwa production can be efciently made. What
we suggest here is that the whole fatwa process and Shari’ah compliance can be
changed in a way that Shari’ah compliance can be a 360-degree solution provid-
ing help to each stakeholder – including capital owners, Islamic banks, employ-
ees, government, customers, external stakeholders, regulators, rating agencies,
international organizations, takaful operators, and lawyers – depending on their
needs. One of the advantages of dealing with technology is that it is expected
to extract more data from already available data by employing AI, big data ana-
lytics, and new tools for virtualizations. Therefore, connecting fatwa process and
Shari’ah compliance with internal and external Shari’ah audit and analyzing the
document for consistency are expected to provide speed, accuracy, and transpar-
ency in the Shari’ah compliance process.
We look at the fatwa creation process where there is a fatwa supply (internal or
external, requested or unrequested as fatwa can be issued in any way) and fatwa
demand. AI can be used before and during the fatwa supply and AI can be used
after the issuance of the fatwa on the demand side. Once a fatwa is issued, its con-
trol, audit, and corporate governance aspects are also related with the demanding
party. In its simplest form what we can expect from AI is that

• AI can analyze the past cases from available fatwas and generate a new fatwa
depending on earlier ones. In this case, AI infers an answer based on the
earlier cases.
• AI can also be used to back up a mufti to make the cases available for an easy
and fast decision-making or retrieval of fatwa.

AI promises many features for corporate governance of Islamic fnancial institu-

tions although the developing literature covers more on individual fatwa demand.
For instance, AI can be used for due diligence of the contracts to make sure the
appropriateness of the contracts to Islamic rules and principles. Another beneft can
be for the specifc questions about which there is a consensus of the muftis. A sim-
ilarity map created by AI can be benefcial to extract specifc answers for specifc
questions. A fatwa as a ruling need to be issued by a legitimate scholar but still, this
scholar can make a mistake. As long as the mufti intends to provide a solution to a
specifc problem depending on principal resources, AI can help to fnd if there is
any conficting fatwa for the same problem. Finally, in standard application, a fatwa
provided by a mufti can be written on diferent media whether internal or external
to the corporation. Still, the originality of the question and the answer needs to be
authentic. Such originality can be obtained by blockchain-based AI technologies.
284 Ali Polat et al.

If we see the examples of Bitcoin or altcoins, many scholars are rejecting

them on diferent grounds. Similarly, any AI solution can be accepted or rejected
depending on the understanding of the scholar. If there is no framework or R&D
on this issue, how the scholar is going to decide? Therefore, certain issues are still
inconclusive like the evolution of technology. But in this study, we reviewed the
use of technology to overcome certain issues related to the use of AI for fatwa.
It can be concluded that the use of AI and ML can be very helpful to save the
time and speed up the transactions by retracting fatwa from the already issued
and stored databases for similar or related cases. The storage and retrieval of case-
based fatwa using these technologies and keeping the track of rule-based laws
can contribute to the development of IFIs. Moreover, the use of technology by
religious scholars can help them to address the gray areas in Shari’ah compliance
practices. Moreover, we further assume that the use of AI, ML, and Fintech will
further revolutionize the relevant felds and can evolve the ways of accomplishing
new frontiers in the future, like the revolutions we have seen recently.

Note
1 The fexibility of Shari’ah comes here with the principle, “It is undeniable that the
rules change with the change of time.” Therefore, a conficting verdict of a mufti is a
matter of discussion but we can simply say that if the premise or reason of a situation
is almost same for two diferent cases, it should create the same conclusion. If there
is a diference in conclusion, it means they are not exactly same and the diference is
justifable.

References
Ahmed, B. (2021). The status of the use of artifcial intelligence in Ijtihad. Journal of Socio-
Economic and Religious Studies, 1(1), 1–15.
Alam, N., Gupta, L., & Zameni, A. (2019). Fintech and Islamic fnance: Digitalization,
development and disruption. In Fintech and Islamic Finance: Digitalization,
Development and Disruption. Springer International Publishing. https://doi.
org/10.1007/978-3-030-24666-2
Alkhamees, A. (2017). Standardisation of Fatwās to Reduce Creative Sharī’ah
Compliance. In A Critique of Creative Shari’ah Compliance in the Islamic Finance Industry
(pp. 87–116). Brill | Nijhof. https://doi.org/10.1163/9789004344433_006
Alsabban, W. H., Alotaibi, S. S., Farag, A. T., Rakha, O. E., Sallab, A. A. Al, & Alotaibi,
M. (2021). Automatic categorization of Islamic jurisprudential legal questions using
hierarchical deep learning text classifer. International Journal of Computer Science and
Network Security, 21(9), 281–292.
Artifcial Lawyer. (2021). Google Tells Artifcial Lawyer about Its Contract DocAI Strategy.
https://www.artif iciallawyer.com/2021/11/18/google-tells-artif icial-lawyer-
about-its-contract-docai-strategy/
Ashley, K. D. (2017). Artifcial intelligence and legal analytics. In Artifcial Intelligence and
Legal Analytics. https://doi.org/10.1017/9781316761380
Bendjamaa, F., & Taleb, N. (2017). Decision making approach using ontologies:
Application on sacred texts. 2017 Computing Conference, 2018-Janua, pp. 1043–1047.
https://doi.org/10.1109/SAI.2017.8252220
 Application of artifcial intelligence on Fatwa 285

Bues, M.-M., & Matthaei, E. (2017). LegalTech on the Rise: Technology Changes
Legal Work Behaviours, But Does Not Replace Its Profession. https://doi.
org/10.1007/978-3-319-45868-7_7
Corrales, M., Jurcys, P., & Kousiouris, G. (2019). Legal tech, smart contracts and block-
chain. In Legal Tech, Smart Contracts and Blockchain, Perspectives in Law, Business and
Innovation (Vol. 4, Issue 2015).
Corrales Compagnucci, M., Fenwick, M., & Haapio, H. (2021). Digital technology,
future lawyers and the computable contract designer of tomorrow. SSRN Electronic
Journal. https://doi.org/10.2139/ssrn.3908370
Cummins, J., & Clack, C. D. (2022). Transforming commercial contracts through com-
putable contracting. Journal of Strategic Contracting and Negotiation, 6(1), 3–25.
Elhalwany, I., Mohammed, A., Wassif, K., & Hefny, H. (2015). Using textual case-based
reasoning in intelligent Fatawa QA system. International Arab Journal of Information
Technology, 12(5), 503–509.
Farghaly, A. (2004). Computer processing of Arabic script-based languages: Current state
and future directions. Proceedings of the Workshop on Computational Approaches to Arabic
Script-Based Languages, 1.
Fitri, N. M. G., Andreswari, R., & Hasibuan, M. A. (2020). Android-based fqh con-
sultation application development. In Digital Economy for Customer Beneft and Business
Fairness. https://doi.org/10.1201/9781003036173-1
Floridi, L. (2014). The 4th Revolution—How the Infosphere is Reshaping Human Reality
Oxford: University Press.
Gazali, H. M., Jumadi, J., Ramlan, N. R., Rahmat, N. A., Uzair, S. N. H. M., & Mohid,
A. N. (2020). Application of artifcial intelligence (AI) in Islamic investments. Journal
of Islamic Finance, 9(2), 70–78.
Ginena, K. (2014). Sharī‘ah risk and corporate governance of Islamic banks. Corporate
Governance (Bingley), 14(1). https://doi.org/10.1108/CG-03-2013-0038
Ginena, K., & Hamid, A. (2015). Foundations of Sharī‘ah Governance of Islamic
Banks. In Foundations of Sharī‘ah Governance of Islamic Banks. https://doi.
org/10.1002/9781119053507
Hasan, R., Hassan, M. K., & Aliyu, S. (2020). Fintech and Islamic fnance: Literature
review and research agenda. International Journal of Islamic Economics and Finance (IJIEF),
3(1). https://doi.org/10.18196/ijief.2122
Heaven, W. D. (2020). #OpenAI’s new language generator GPT-3 is shockingly good —
and completely mindless. MIT Technology Review.
Hilb, M. (2020). Toward artifcial governance? The role of artifcial intelligence in
shaping the future of corporate governance. Journal of Management and Governance,
24(4). https://doi.org/10.1007/s10997-020-09519-9
IsDB. (2021). Artifcial Intelligence and Islamic Finance: A Catalyst for Financial Inclusion.
https://isdbinstitute.org/product/artifcial-intelligence-and-islamic-fnance/
Khan, S., Hassan, M. K., & Rabbani, M. R. (2021). An Artifcial Intelligence-based
Islamic FinTech model on Qardh-Al-Hasan for COVID 19 afected SMEs. Islamic
Perspective for Sustainable Financial System, February.
Khazani, M. M. M., Mohamed, H., Yusop, N. M. M., Sembok, T. M. T., Wani, S., Halip,
M. H. M., Marzukhi, S., & Yunos, Z. (2021). A Framework for Semantic Knowledge
Representation of Al-Quran Based on Word Dependencies. https://doi.org/10.1109/
camp51653.2021.9497925
Lahsasna, A. (2014). Shari’ah non-compliance risk management and legal documen-
tations in Islamic fnance. In Shari’ah Non-compliance Risk Management and Legal
Documentations in Islamic Finance. https://doi.org/10.1002/9781118809181
286 Ali Polat et al.

Marir, F., Tlemsani, I., & Majdalwieh, M. (2019). A Recursive Co-occurrence Text Mining of
the Quran to Build Corpora for Islamic Banking Business Processes In International Conference
on Intelligent Human Systems Integration (pp. 306–312). Springer, Cham. https://doi.
org/10.1007/978-3-030-11051-2_47
Marir, F., Tlemsani, I., & Majdalwieh, M. (2020). Correction to: A Recursive Co-occurrence
Text Mining of the Quran to Build Corpora for Islamic Banking Business Processes. https://
doi.org/10.1007/978-3-030-11051-2_141
Mat Rahim, S. R., Mohamad, Z. Z., Abu Bakar, J., Mohsin, F. H., & Md Isa, N. (2018).
Artifcial intelligence, smart contract and Islamic fnance. Asian Social Science, 14(2),
145. https://doi.org/10.5539/ass.v14n2p145
Mohamed, H. (2020). Beyond fntech: Technology applications for the islamic
economy. In Beyond Fintech: Technology Applications for the Islamic Economy. https://doi.
org/10.1142/11885
Muhammad, M. R., & Muhammad, M. (2003). Using information and communication
technology (ICT) to disseminate the understanding of Islamic jurisprudence (Fiqh)
and juridical opinion (Fatwa): A view of a technologist. Seminar on Understanding Islam
through Techno-Da’ei, 1–28.
Munshi, A. A., AlSabban, W. H., Farag, A. T., Rakha, O. E., Al Sallab, A. A., &
Alotaibi, M. (2021). Towards an automated Islamic Fatwa system: Survey, dataset
and benchmarks. International Journal of Computer Science and Mobile Computing, 10(4).
https://doi.org/10.47760/ijcsmc.2021.v10i04.017
Mutawa, A. M., & Al-Terkait, S. M. (2011). Al Usouly: An expert system in the origins of
Islamic jurisprudence domain. Kuwait Journal of Science and Engineering, 38(1B).
Neota Logic. (2019). Legal Design Thinking Demystifed. https://www.artifciallawyer.
com/2019/11/19/legal-design-thinking-demystifed-downloadable-white-paper/
Nouaouria, N., Atil, F., Laskri, M. T., Bouyaya, D., & Amari, A. H. (2006). A case based
tool as intelligent assistance to Mufti. Arabian Journal for Science and Engineering, 31(1B).
Rabbani, M. R., Khan, S., & Thalassinos, E. I. (2020). FinTech, blockchain and Islamic
fnance: An extensive literature review. International Journal of Economics and Business
Administration, 8(2). https://doi.org/10.35808/ijeba/444
Rusli, A. S. M., Ridzuan, F., Zaki, Z. M., Sayuti, M. N. S. M., & Salam, R. A. (2018).
A systematic review on semantic-based ontology for Quranic knowledge. International
Journal of Engineering and Technology(UAE), 7(4). https://doi.org/10.14419/ijet.
v7i4.15.21376
Sa’ad, A. A., Alhabshi, S. M., bin Mohd Noor, A., & Hassan, R. (2020). Robo-advisory
for Islamic fnancial institutions: Shari’Ah and regulatory issues. European Journal of
Islamic Finance. https://doi.org/10.13135/2421-2172/3992
Sheker, M., Saad, S., Abood, R., & Shakir, M. (2016). Domain-specifc ontology-based
approach for Arabic question answering. Journal of Theoretical and Applied Information
Technology, 83(1), 43.
Shrof, R. (2020). When Blockchain Meets Artifcial Intelligence. Medium.com.
Singer, J. (2021). Fatwas from Islamweb.Net on Robotics and Artifcial Intelligence.
In Artifcial Intelligence in the Gulf (pp. 279–301). Singapore: Springer. https://doi.
org/10.1007/978-981-16-0771-4_12
Susskind, R., & Susskind, D. (2015). The Future of the Professions How Technology Will
Transform the Work of Human Experts. Oxford University Press.
 Application of artifcial intelligence on Fatwa 287

Syed, M. H., Khan, S., Rabbani, M. R., & Thalassinos, Y. E. (2020). An artifcial intel-
ligence and NLP based Islamic FinTech model combining zakat and Qardh-Al-Hasan
for countering the adverse impact of COVID 19 on SMEs and individuals. International
Journal of Economics and Business Administration, 8(2). https://doi.org/10.35808/
IJEBA/466
Yasini, S., & Yasini, M. (2019). Current trends and future impacts of fntech in Islamic
fnance. In Fintech In Islamic Finance. https://doi.org/10.4324/9781351025584-20
Zavolokina, L., Mateusz, D., & Schwabe, G. (2016). Fintech What’s in a name ? Thirty
Seventh International Conference on Information Systems, December 2016.
Zuhayli, W. (1997). al-Fiqh al-Islami wa Adillatuhu. In Damascus: Dar Al-Fikr (Vol. 57).
CONCLUSION
Yasushi Suzuki and Mohammad Dulal Miah

Digital transformation (DX) is believed to change the course in which fnancial

services are provided historically. The nascent pace of fntech growth around
the world bears the testimony that technology has a lot to ofer to harness the
efciency and performance of fnancial institutions. The use of artifcial intelli-
gence (AI) and big data for credit screening and monitoring, robo-advising for
wealth management, crowdfunding, and peer-to-peer lending to support exist-
ing and potential startups, blockchain technologies for recording and archiving
information, and digital currency for facilitating quick and easy payments are
set to change the future course of fnance. This has an important implication
for fnancial service providers. The existing literature makes a laudable attempt
to investigate the impacts of technology on fnancial institutions. However, the
focus remains mostly on conventional fnancial institutions with an emphasis on
conventional banking sector, although the DX can have an equal, if not more,
disrupting efect on Islamic fnance. The Shariah-compliant fnance occupies
a sizable market share in Muslim majority countries and expanding rapidly in
advanced economies. It is, thus, imperative to assess how the disrupting technol-
ogy afects Islamic fnance and Shariah compliance.
From Shariah perspective, technology can be perceived neutral because it
simply is an enabler. However, certain fntech innovations for Islamic fnan-
cial services must comply with Shariah regulations. In general, fntech solutions
that need to be adjusted to comply with Shariah are fnancing and investments,
including investment advisory services. From the user’s perspective, fntech
innovation provides alternatives that are suitable for individual needs. With more
choices, users of fnancial services enjoy competitive service cost. The integra-
tion of internet, mobile devices, and social media make fnancial services more
efcient, resulting in greater customer experience. Hence, fntech is likely to

DOI: 10.4324/9781003262169-19
 Conclusion 289

positively contribute to the growth and innovation of Islamic fnancial products

and services. As customers increasingly conduct business online, the sunk cost
of Islamic fnancial institutions (IFIs) may turn burdensome, which can have a
devastating impact on traditional fnancial service providers. Moreover, fltering
fntech through the prism of Shariah compliance is a key question that needs to
be answered. In the future, competition from small boutique-type tech-based
service providers would be heightened, which implies that the fnancial market is
likely to be dynamic and riskier. This book has made a novel attempt to examine
how fntech afects IFIs including banks and insurance companies.
Major contribution of the book can be summarized into four broader points.
The frst line of argument focuses on the theoretical issues as well as conceptualiz-
ing fntech. Fintech embodies a vast scope, where diferent narratives are possible.
Hence, the book frst focuses on conceptualizing the typology of business models
clustering into retail facing – those which focus on consumers, households, and
micro, small, and medium enterprises (MSMEs) – and market provisioning, those
which enable or support the infrastructure or key functionalities of fntech. In
addition, major stakeholders such as commercial and investment banking units are
identifed as responsible units for each fntech business model. For each of these
clusters, opportunities and threats stemming from the adoption of technology
are explored. The book relies on traditional theories of fnancial intermediaries,
including asymmetry of information, and transaction costs theories. In light of
these theories, it is argued that technology would facilitate fnancial institutions
to reduce transaction cost and mitigate information problem by materializing
benefts of AI and big data. However, there is a risk of fnancial disintermedia-
tion as technology would enable tech-based and shadow fnancial institutions to
emerge and share the pie currently belonged to the formal fnancial sector.
Financial disintermediation would be an issue to ponder from the context of
IFIs. Islamic mode of fnance (basically Islamic banks) must comply with Shariah,
for which an additional Shariah compliance cost is to be incurred vis-à-vis their
conventional counterparts. Hence, Islamic banks must earn a ‘rent’, known as
bank rent. It is argued that technology-enabled direct fnance providers are
likely to erode this rent. Hence, it would be difcult for Islamic banks to realize
the required rent for strictly complying with Shariah. In addition, expansion of
direct fnance facilitated by technology would increase wealth distribution but
hamper wealth creation, one of the essential roles of fnancial intermediation.
Given the short history of Islamic fnance, a focus on wealth creation must be
emphasized. From this vantage point, the book argues that instead of blanket
adoption of technology, regulatory authorities must consider the efect of fntech
on wealth creation. If appropriate regulatory institutions are carefully crafted,
fntech would turn into an efective tool for customers’ value creation.
The second major contribution of the book underlies its general assessment
on the adoption of technologies by fnancial institutions in the Islamic jurisdic-
tions. Based on survey data, it is illustrated that the adoption of technologies
290 Yasushi Suzuki and Mohammad Dulal Miah

is not uniform across the jurisdictions; rather, IFIs are in diferent stages of
development and implementation of digital Islamic banking. Digital wallets and
the use of biometric authentication are the most adopted technologies observed
so far. Social distancing rule during the COVID-19 pandemic accelerated the use
of mobile-based technologies including digital payment and related transactions,
process automation, etc. Some Islamic banks have deployed, limitedly though,
more sophisticated technologies including robotics, process automation, machine
learning, AI, big data, and cloud computing. Implementation of these technol-
ogies helped fnancial inclusion among the diferent jurisdictions. However, the
penetration of technology is slower in insurance companies compared to their
banking counterparts. It is, thus, recommended that Islamic insurance compa-
nies can materialize beneft by adopting technologies in premium determination,
smart contracting, damage assessment, and fraud detection.
This part of the analysis also points out some obstacles in adopting technolo-
gies by fnancial service providers. Skilled manpower is identifed as a primary
obstacle that hinders the smooth and quick adoption of technologies. In addition,
it is uncertain under the current environmental setting as to how adoption of
technology may afect Shariah compliance. For instance, if application of some
technologies is not explicitly cleared by Shariah norms, a conventional bank
which has Shariah windows struggles to implement such technologies. Similarly,
conventional insurance companies which have takaful operation face difculty in
integrating reporting standards between these two clusters of services. This has
prompted IFIs (and conventional banks with Islamic banking windows) toward
‘wait and see’ strategy in adopting fntech. In addition, customers of Islamic
banks are worried about security and privacy of their information. This has
been attributed to customers’ inadequate understanding about the functioning
of underlying technology. Mitigation of such obstacles requires the regulatory
authority to designing appropriate institutional environment that is complemen-
tary to other sectors of an economy and conducive for adoption of technologies
by fnancial institutions.
The third strand of argument brings applications of fntech that are prac-
ticed on the ground. One of the cases reveals that data inadequacy of MSMEs
acts as hindrance for lending institutes in many developing countries. To over-
come such obstacle, P2P lenders can integrate value chain in which all players
in the business ecosystem have mutual relationship and contribute to economic
value creation. Technology eases the process of connection between parties and
ensures the smooth fow of information for the lenders to keep track of bor-
rowers’ activities. This, in turn, helps slashing lending risk. Another case shows
the potential of blockchain technologies for cost-efective and timely transfer
of remittance. Pakistan and Malaysia have already adopted blockchain-based
transfer payment to avail the embedded benefts. Other countries can follow
the suit for the greater interest of fnancial service users. In a similar fashion,
another empirical study examines the experience and feasibly of crowdfunding
in a Muslim country, Bangladesh. Although the initial experience does not draw
 Conclusion 291

a rosy picture for Islamic crowdfunding in Bangladesh, participants’ enthusiasm

is gradually gaining a momentum. However, in the absence of a practicing and
appropriate rule of laws, such as property right, investors may shun away from
such endeavor, resulting in the failure of materializing the benefts ofered by a
thriving crowdfunding sector. Another case critically assesses how the central
bank digital currency (CBDC) can afect the balance sheet of Islamic banks. It
is argued that the fuctuation of digital currency may fall into the category of
gharar (uncertainty), which Islamic banks are prohibited to be part with. In such
a circumstance, a central bank of an Islamic jurisdiction must take uncertainty
issue of IFIs stemming from CBDC into account before it aims to develop and
circulate CBDC.
The fnal part of the contribution concentrates on management issues such
as Waqf and Zakat management and fatwa-related matters. Waqf ofers a great
potential to contribute to social welfare through collective eforts along with
state-run programs and supports. In explaining the status of Waqf management,
it is argued that currently practiced Waqf management in most Muslim coun-
tries is inefcient. Assets, under the disposal of Waqf, are not properly managed.
Technology can revolutionize modernizing the existing system such as register-
ing, record keeping, monitoring, and managing Waqf assets. Moreover, fntech-
enabled cash Waqf management can turn into an efective tool to enhance social
welfare. Similarly, Zakat embodies a greater potential to eradicate poverty
through its proper collection and distribution. However, this specifc tool has
failed, so far, to meet the expectations. Analysis shows that Zakat management
across Islamic jurisdictions is obsolete and inefective. Centralized Zakat collec-
tion is an absolute meager compared to its potential, which indicates the inability
of mobilizing Zakat fund. One of the critical elements of Zakat, highlighted
in this book, is trust. Efcient Zakat management enhances the trust of Zakat
payers. Technology can function marvelously in this context. Using technology
for automation of Zakat collection and distribution would increase trust toward
Zakat system by boosting transparency. Like Waqf and Zakat, technology can
also remarkably impact fatwa. It is mentioned that the use of AI can overcome
the shortage of skilled Fiqh scholar to issue fatwa. AI can be used to ascertain the
compliance of a particular Islamic fnancial product with Shariah. Hence, the
book recommends that the accuracy and speed of fatwa issue can be enhanced by
using sophisticated algorithm, deep learning, and natural language processing.

Future issues

Ethical considerations
In our four major arguments summarized above, the need for a strong legal
and regulatory environment has been emphasized. However, regulation is
not the panacea against all odds resulting from adopting technologies by IFIs.
Technology has its own limitations. The world is so much dynamic and complex
292 Yasushi Suzuki and Mohammad Dulal Miah

that it is impassable to incorporate all aspects of human behavior into legal codes.
History shows that laws more often than not lag behind technical advances.
It is more so when we talk about deep and machine learning, algorithm, AI,
cloud computing, etc. Predicting ex-ante any odd those technologies may bring
is infeasible. Hence, remedies to cure those adversaries by enacting appropriate
laws are hard to come by. In addition, the letters of any law do not mean a lot if
we ignore the spirit, which underlies ethics. This suggests that we must recourse
to ethics where law reaches its boundaries.
No doubt, ethics is going to be the major concern in the post-industrial
society brought about the fourth industrial revolution. In this book, we have
pointed out some existential threats such as persistent wars, food shortage, and
famine in third world countries, increasing carbon emission in the atmosphere
that constantly poses increasing threat to our living, etc. Data suggests that the
benefts of fntech will be lopsided and tilted toward wealthy individuals as
well as institutions. Therefore, the divide between the rich and poor is likely to
increase as fntech increasingly penetrates businesses. Oxfam recently published
a report showing that the world’s top eight billionaires are as rich as the world’s
poorest half. Accumulated assets of these eight billionaires are equivalent to the
accumulated wealth of 3.6 billion people who make up the bottom half. Of the
top eight billionaires, majority are the owners of tech-based frms.
This inequality will spread in the society through continuous fnancialization
enabled by technology. In the 1950s, proft earned by the US fnancial corpora-
tions as proportion to national income averaged 9.5% which rose to 45% in 2002.
In 2013, profts earned by fnance and insurance industries accounted for 37%
of the proft all other sectors combined. It means that more than one-third of a
dollar earned in the US economy goes to the fnancial sector. Including fnancial
activities of non-fnancial frms would make the estimation unbelievably high.
The unprecedented fnancial crisis of 2007–2009 reveals a scary picture about
the increased fnancialization. Following the internet bubble-bust in the early
2000s until the crisis erupted in 2007, top executives and rentier class had pock-
eted exorbitant pay checks as bonuses, salaries, and dividends. Most of them
resulted from the trades of toxic fnancial assets including derivatives, which
were not only risky but also fctitious. As the crisis engulfed fnancial sectors,
veteran fnancial frms started collapsing. Government rescued them by inject-
ing taxpayers’ money. This entails, under the current fnancial world order, that
proft is privatized, whereas loss is socialized. It is absolutely feasible that the
fnance world comes up with some exotic fnancial products in the future with
the help of AI, big data, and algorithm to create another fnancial bubble. Laws
and regulations alone cannot eliminate this trend unless ethics is put ahead of
everything.
Second, the mining and use of cryptocurrency involve with environmen-
tal and security concerns. According to the Cambridge Centre for Alternative
 Conclusion 293

Finance, Bitcoin alone consumes about 110 terawatt hours of electricity each
year, which is about 0.55% of the world’s total electricity generation. Simply
put, this use of electricity is equivalent to the annual use of small countries like
Malaysia or Sweden. Much of Bitcoin has already been mined, but mining of
other cryptocurrencies continues and is likely to grow further in the future.
Moreover, the amount of power required to validate a transaction in blockchain
technology is largely unknown because large-scale transactions using crypto-
currency remain unaccomplished until now. It is, of course, a moral and ethical
concern if the world can environmentally support such an expensive power-
consuming technology at a time when climate change has turned into an exis-
tential threat to humanity. Another concern raised by cryptocurrency is related
to monitoring. Traditional banking system is highly regulated. Anti-money-
laundering and anti-terrorist-fnancing acts prevent banks from entertaining sus-
picious customers. In contrast, the origin of crypto-based transactions remains
anonymous. This may pave the way for illegal and terrorist fnancing worldwide.
Formal regulations may not be so efective in such cases. Only ethics can have a
discernible impact.
Third, fnancial institutions collect enormous data about their customers.
There is a growing tendency that those confdential data to be sold without the
knowledge and consent of the owners to third parties who analyze them and
fgure out consumers’ preference and choices using a sophisticated algorithm.
In 2018, The New York Times and the Guardian reported a huge quantity of
Facebook users’ data leak by Cambridge Analytics which used the data to make
users’ psychological profle helpful for the US presidential campaign. As men-
tioned earlier, the beneft of crypto mining goes to the miners, but the burden
of resulting emission is shared by all. Even if fnancial institutions intend to care
about people and society, their interest might not coalesce into social interest.
Google failed to sustain its ethics council which aimed to monitor the develop-
ment of AI. Such a failure is not only shocking but also rings an alarm bell that
tech frms are not ready to embrace the spirit of ethics. Even if we assume that
when human beings code AI maintaining an ethical standard, the same cannot
be expected when algorithm itself codes another algorithm. We should at the
same time note that artifcial stupidity may rise along with the rise of AI. Only
ethical practice can limit such trend.
There is no denying that fntech ushers a new dawn for fnancial institutions
to revolutionize their services. Benefts that can be derived from the ongoing
digital disruption are progressive which are well-articulated in this book. At the
same time, the urge for a conducive regulatory environment has been empha-
sized for fostering fnancial inclusion and development. However, the book has
made a point that formal regulation is not the last thing society needs to harvest
the maximum benefts from the DX. Regulations should be backed by morality
and ethics for a better fntech world.
294 Yasushi Suzuki and Mohammad Dulal Miah

Toward the political economy of DX Islamic fnance

Since the 1970s, Islamic monetary economics and its initiatives to establish
Islamic fnancial institutions, particularly in the Muslim majority nations, have
been developed. The idea of Islamization of economics initially manifested in the
form of various publishing activities, conference centers, and the establishment
of Islamic economics at diferent universities in the Islamic community. These
strategic eforts did not end at the stage of conceptual ideas; the movement of the
Islamization of economics also implemented real projects in the form of experi-
ments to establish IFIs based on the principles of Islam. One of the salient features
of Islamic fnance that distinguishes it from the conventional mode of fnance
is that the former complies, in objectives and operations, with Shariah. There
is little doubt that the role of the board members and advisors in the Shariah
Supervisory Board (SSB) or the Shariah Committee, called in general ‘Shariah
Board’ is inevitable in Islamic fnance. IFIs are usually governed by two boards:
Board of Directors and SSB. The SSB has a unique role of ensuring that all the
IFIs are Shariah-compliant; therefore, the SSB members should be Shariah schol-
ars with experience in Islamic banking and fnancial transactions.
How is the trend of DX going to afect the Islamic mechanism of ensuring
the Shariah compliance? This book does not have room enough to answer the
question. More or less, as Floridi (2014) points out, the ‘democratization’ brought
about by information and communication technologies (ICTs) is generating a
new tension between power and force, where power is informational, and exer-
cised through the elaboration and dissemination of norms, whereas force is phys-
ical, and exercised when power fails to orient the behavior of the relevant agents
and norms need to be enforced. The trend of DX may undermine the Shariah-
compliant mechanism of SSBs and their members because of ICTs’ ‘data super-
conductivity’ which may further facilitate the frictionless fow of information
related to Islamic legal cases to be smoothly shared among the Islamic fnancial
players. To some extent, the SSBs may end by undermining its own future as the
only Shariah information agent. On the other hand, we should note that data
superconductivity may bring a steady increase in agents’ responsibilities.

The more any bit of information is just and easy click away, the less we shall
be forgiven for not checking it. ICTs are making humanity increasingly
responsible, morally speaking, for the way the world is, will be, and should
be. This is a bit paradoxical since ICTs are also part of a wider phenomenon
that is making the clear attribution of responsibility to specifc individual
agents more difcult and ambiguous.
(Floridi, 2014, pp. 42–43)

Perhaps, the democratization of the Shariah-compliant mechanism upon SSBs

and their members into a new mechanism upon the frictionless fows of infor-
mation will be unavoidable. ICTs and DX are supposed to facilitate a more
 Conclusion 295

fragmented mechanism while enhancing a just and coherent legal judgment

and reasoning for disputing cases in the Islamic commerce and fnance, conse-
quently lowering the transaction cost of Shariah compliance in individual IFI
levels. The democratization may contribute to intensifying and standardizing the
way of complying Shariah within the Muslim community. Simultaneously, ICTs
and DX are going to bring the exponential increase in common knowledge of
comparing the Islamic mode with the conventional mode of fnancial interme-
diation, in which more people are helped to make rational analyses, enquiries,
and evaluations to consider a harmonious and complementary or supplementary
co-existence of both modes. In parallel, more people are supposed to review
upon rational analysis, enquiry, and evaluation on how the Muslim community
could expect the economically efective beneft from the Islamic mode. This
trend is going to expose more IFIs to a severer competition in global fnancial
markets.
ICTs and DX may contribute to transforming the Muslim community per se as
an information society, which makes it possible to intensify and standardize the
way of Shariah compliance within the community. Simultaneously ICTs and DX
may help shift the balance against a centralized mechanism upon SSBs and their
members, to respond to the economic demand from the customers and users of
IFIs under the global competition. To some extent, ICTs and DX are making
the outer economic border of each community porous. The Muslim community
may face complicated tensions both from the internal force as well as from the
external one under the trend of DX. Analyzing these forces – the political econ-
omy of DX in Islamic fnance – should be a direction of future research in this
feld.

Reference
Floridi, L. (2014). The fourth revolution: How the infosphere is reshaping human reality. Oxford
University Press, Oxford.
INDEX

Note: Bold page numbers refer to tables; italic page numbers refer to figures and page
numbers followed by “n” denote endnotes.

Aba, F. 69 275–277; Shari’ah Governance

ABCBDC see asset-backed CBDC 278–280, 279
(ABCBDC) Ashley, K.D. 281
Abdullah,A. 176, 195 Asian Development Bank (ADB) 263
Abubakar, M. 195 asset-backed CBDC (ABCBDC) 198,
acceptable gharar 194 198–199
accessibility 154, 155, 174 asset-backed sukuk 198
agent banking 51, 58 asset-based sukuk 198
Ahmad, S.M. 177 Association for Digital Financial
Ahmed, B. 276, 277 Innovations players in Indonesia
Ahmed, D. 21 (AFTECH) 85, 86
Ahmed, M.U. 151 Auditing Organization for Islamic Financial
Ahmed, N. 145, 149 Institutions (AAOIFI) 227, 278
Ajouz, M. 197 Auer, R. 193
Alam, N. 282 Ayoungman, F.Z. 145, 150
Aliyu, A. 197
Alkhamees, A. 281 Bakar, M.A. 176
Al-Saati,A.R. 193, 194 Bakar, M.D. 5, 17
Alsabban, W.H. 277 Bakr, A.M. 176
Al-Terkait, S.M. 276 Bangladesh 101; awareness about
altruism 36 fntech 148–149; during COVID-19
Alvia, D.D. 194 pandemic 146; digital services 146;
Alzubaidi, I.B. 176 economic growth 145–146; economic
Amil 259 infrastructures comparison 107–108;
Annual Development Plan (ADP) 253 Islamic banks in 146, 149; Islamic
Anwar, M. 176 crowdfunding opportunities 108–110,
API 125, 126 109, 110; Islamic fnance 177–179;
Appiah-Otoo, I. 69 literature review 143–145; mobile
Arner, D.W. 239 banking 146; research design and
artifcial intelligence (AI) 119, 151, 259, respondents 147, 147; thematic content
273; application 280–282; research analysis 148; see also crowdfunding
298 Index

Bangladesh Government Islamic Investment climate crisis 74–75

Bond (BGIIB) 196 cloud computing 127, 128
Bangladeshi banks 33 commercial banks 22; opportunity for
Bank for International Settlement 57–60
(BIS) 191 commercial capital buys 32
Bank Indonesia (BI) 181 competitive advantage 66, 89
banking 17, 88–89 conficts 72–74
Banking as a Service (BaaS) 51, 61n2 consistency 155
Bank Negara Malaysia 181–182 Contractual Service Margin (CSM)
Barclays Bank 1 227–228
Bell, D. 64 conventional banks 35
Bendjamaa, F. 277 conventional fnancial model 25
big data 259 conventional insurance industry 230
BigTechs 134 copy trading see social trading
biometric authentication 126–127 COVID-19 pandemic 2, 123, 167, 168, 219
‘Bir Rumah’ 236 credit creation 19, 41n2
Bitcoin 2, 197 Crosby, M. 176
bKash 148 cross-border payments 174–175
blockchain 145, 151, 172, 174, crowdfunding 4, 50, 101–102, 257; in
258–259, 273 Bangladesh 112, 113, 114; concept of
blockchain-based remittance transfer: 103; convenient framework of 110–114,
challenges 186–187; contribution 111, 112, 113; defned 102; donation-
185, 186; defned 174–175; loopholes based 102–103; economic infrastructures
184–185 107–108; global volume of 102; history
blockchain-powered remittance and current situation of 105–107, 106;
technology 183 implementation 114–115; opportunities
Böhme, R. 193 108–110, 109, 110; research
Bottiglia, R. 102 methodology 104–105
Bowles 36 crowd-led microfnance 49
Bukhari, S. 217n1 cryptocurrency 4, 8, 9, 73, 176,
business ethics 31 257–258, 266
business risk mitigation 84, 92–94, 94; custody 53, 54, 55
demand risk data 95; supply-chain customer confdence 159
variable 95; supply risk data 95–97, customer satisfaction operational
96, 96 efciency 122
Bussche, A. 158 cybersecurity 155, 164; risk 129

capitalist economy 32 Darussalam,A.Z. 143, 147, 149

case-based reasoning (CBR) system 275 data governance 155
cashless transactions 2 Data processing and Notifcation
Central Bank Digital Currency (CBDC) Requirement Act (WGCM) 164
9, 190–191; ABCBDC 198, 198–199; data protection principles 158–159
architecture 193; defnition 191; features data quality 154–155
and trends 191, 192; gharar 193–197, 196; data security 155; risk 130
precious-metal–backed cryptocurrency decentralized exchange (DEX) 61n4
197; Shariah-compliant 197 demand risk data 95
Central Bank of Nigeria (CBN) 193 De Nederlandsche Bank (DNB) 156
Central Bank of the Republic of Turkey digital assets exchange 53, 54
(CBRT) 190 digital banking 51, 51, 154, 155; age 161,
CFP see crowdfunding 162; banking system 156, 157, 158;
Chandan, M.S.K. 244 COVID-19 pandemic 167; development
Chinn, D. 158 challenges 163–165; digital banking
Chowdhury, N.H. 148 patronage 156, 159–163, 160–163;
Citibank 154 gender 160–161, 161; technical
Cizakca, M. 237 knowledge 162–163, 163
 Index 299

digital capital raising 50, 50 fnancial contracts 4, 6, 46

digital currency 176 fnancial crisis 173
digital disruption 88–89 fnancial disintermediation 5, 17–22, 19, 20
digitalization 1, 4, 22 fnancial inclusion 20, 65
digital lending 19, 47–49, 49 fnancial institutions 1, 15
digital micro saving solutions 52 fnancial intermediaries 37
digital money market/fund see digital fnancial technology (Fintech) 5, 15,
savings 16, 142–143, 173–174; afect the
digital payments 52–53, 53 performance of Islamic banks 22–25;
digital revolution 1 costs 25; development in Indonesia
digital savings 51, 52, 52 84–88, 86, 87; diversify risks 22; in
digital transformation 118; challenges 132– merchant fnancing 30–35; for poverty
134, 133; COVID-19 123; current status alleviation 69; trend 36–39; value
123–125, 124; defned 1, 44; implication proposition 65–67; waqf 246, 246;
135–137; important issues in 125–128, working taxonomy and classifcation
126; insurance industry in Indonesia 45–46; Zakat management system
221–222, 222, 223, 224–225; perception 256–257
120; prudential risks 129–132, 130; Fintech business model 6, 44, 46, 47, 53
rationale 120–123, 121, 122; regulation Fiqh scholar 10, 291
134–135, 135; technology 128–129, 129 Firmansyah, E.A. 176
‘direct’ CBDC 193 Fitri, N.M.G. 276
disruptive technology 2, 8, 273 Floridi, L. 4, 274
Distributed Ledger Technology (DLT) 190 Fu, J. 2
division of work 35
dominant principles 59 Gao,Y. 175, 176
doomsday prediction 68 Gassner, M. 31
drone 210, 211–212 Gazali, H.M. 276
Dutch banking sector 156, 157, 158 General Data Protection Regulation
Dutch Data Protection Authority 155 (GDPR) 158–159
gharar (uncertainty) 193–197, 196
economics 5 Ginena, K. 278
economies of scale 25 The Global Covid-19 FinTech Market Rapid
EkDesh 106, 266 Assessment Study 15
El Amri, M.C. 37, 176 global fnancial crisis 2
Elhalwany, I. 276 globalization 3
Emara, N. 69
emerging market and developing Hadith 10
economies (EMDEs) 198 Halal 252
eMoney 51 Hanefah, M. 247
empirical assessment: digitalisation (see Hanifah, I.A. 275
digitalisation); research method 119–120 Hanif, M. 197
epidemics/pandemics 71–72 Hannigan, R. 158
equity-based crowdfunding (ECF) 103, Hapsari, M.I. 245
111–112 hardware wallet 54
equity-based fnance 4, 18, 34 Hassan, M.K. 24
ethics 5 Hawking, S. 68
‘e-Tunairakyat’ 182 Hilb, M. 279
European Union 158–159 hilm 37, 38
eWallet 51 Holdstock, D. 67
Hussain, N. 148
Farghaly, A. 277 hybrid CBDC 193
Farooq, U. 34
fatwa 38, 274; application 280–282; research ‘idle’ money 33
275–277 ijma 38
fat money 2 Ijtihad 37
300 Index

Inaba, K. 69 Jobs, S. 67, 203

Indonesia: business risk mitigation 92–94,
94; digital disruption and banking Kafala 220
industry 88–89; fntech development Kamali, M.H. 37
84–88, 86, 87; insurance and shari’ah Kamaruddin, M.I.H. 247
insurance contract 228–230, 229; Kaur, B. 154
insurance industry in 221–222, 222, khair 37
223, 224–225; Islamic fnance 180–181; Khan, M.T.A. 115
Islamic P2P Lending and MSMEs 89–92, Khan, S. 175, 276
90, 90 Khazani, M.M.M. 277
Indonesian Islamic fnance industry 221 Kissinger, H. 145
industrial capital 33
inequality 70–71 Lahsasna, A. 278
Information and Communication Lalbagh Fort 238
Technologies (ICT) 275 Lawrence, J. 31
information & communication technology legal design thinking 282
(ICT) 3–4 LegalTech 273
infrastructure-as-a-Service (IaaS) 128 Lendingclub 31
insurance contract 225 Levy, S. 67
insurance industry 9; in Indonesia 221–222, liability 191
222, 223, 224–225 Li, C. 44
insurtech 1, 10, 44, 55, 55–56, 224 Linardy, D. 69
integrating technology 6 London, S. 158
interest-bearing capital 32, 33 loopholes 184–185
interest-bearing CBDC 191 low Shari’ah compliance 263
intermediated CBDC 193
International Banker 20 mal 37
International Financial Reporting Standard Malaysia, Islamic fnance 181–182
(IFRS) 10, 232 Malaysian Accounting Standards Board
International Islamic Liquidity (MASB) 226
Management 196 Malaysian Islamic banks 21
internet-based services 154 Mamun, A.A. 177
Internet of Things (IoT) 56 mandatory gharar 194
invoice trading 48 maqasid 16
Irfan, H. 21 maqasid al-Shari’ah’ 16, 204–205; to protect
Islamic banking assets 20–21 and preserve intellect 207; to protect and
Islamic banks: bringing and promoting preserve life 206, 206; to protect and
149; challenges 150–151; innovating and preserve progeny 206–207; to protect
launching 149–150; innovations 144; and preserve religion 205; to protect and
opportunities 150 preserve wealth 207
Islamic crowdfunding website (ICFW) maqasid shari’ah 5
111, 112 Marir, F. 276
Islamic Development Bank’s (IsDB’s) 245 market provisioning 15, 46
Islamic fnancial institutions (IFIs) 3, Marxian tradition 33
195, 196 Marx’s treatment of capital 32
Islamic Financial Services Board (IFSB) maslahah 38
185, 278 Mawdudi, S.A.A. 38
Islamic FinTech 16, 173–174; M-cash 148
classifcation 175 McEvoy, M.J. 93
Islamic P2P Lending 89–92, 90, 90 merchants’ capital 31, 33
Islam, K.M. 145, 148 Miah, M.D. 26, 33
Islam, M.T. 115 micro, small, and medium enterprises
Islam, N. 145, 148 (MSMEs) 84, 89–92, 90, 90
Izutsu,T. 37, 38 Milosavljevic, N. 155
 Index 301

Mishra, M. 2 Oporajoy.org 105

mobile banking 146 Optimism Level on Overall Insurance
mode of fnancial intermediation 4 Industry 219
modern technology 69, 172 ‘Order-book’ 61n3
Mohammed, M.O. 176 Ord, T. 67
Mohieldin, M. 69 Oseni, U.A. 16
Mohsin, H.M. 238 over-the-counter (OTC) 61n5
money as capital 32
money as money 32 Pakistan 179–180
money supply 9, 19 PasarPolis 224
moral values 5 peer-to-peer (P2P) lending 19, 20, 39,
mu’amalat 4 47–48
mudarabah 17 performance, Islamic banks 22–25
Mudharabah 104 permissible gharar 194
Muhamat, A.A. 210 Pichler, F. 102
Muhammad, M 275, 281 Picketty, T. 70
Muhammad, M.R. 275, 281 PLS contract 34
mukallaf 16 PMBC see precious-metal–backed
Muneeza, A. 176 cryptocurrency (PMBC)
Munshi, A.A. 277 Point of access (PoS) 53
Murabahah 104 policyholders 226
murabaha syndrome 27, 30 ‘Post-Keynesian’ 30
Murinde,V. 144 poverty 68–70
musharakah 17 poverty alleviation 251
‘The Mussalman Wakf Validating Act precious-metal–backed cryptocurrency
1913’ 238 (PMBC) 197
Mustafa, O.M. 37 ‘Private Banking’ 22
Mustapha, Z. 176 proft and loss sharing (PLS) contract 34
Mutawa, A.M. 276 proft on sales 26
Muzzaki 260–261 prohibited gharar 194
mWallet 51 Project Greenback 2.0 181
MyCash Online 182
Qardh-Al-Hasan 276
Nagel, T. 36 Qazwa 84, 92–93, 97
Nahar, H.S. 219 Qiu,T. 175, 176
Najaf, K. 143 Quran 10, 277
Naqvi, S.N.H. 38
Nations Bank 154 Rabbani, M.R. 175
Natural Language Processing (NLP) 277 Rahman, B. 144
Nazim Ali, S. 16 real estate crowdfunding 50
near-feld communication (NFC) Regulatory and Supervisory Authorities
technology 125 (RSAs) 118–119, 135
Netherlands see digital banking regulatory sandbox 259–260
Network and Information Systems Act Regulatory Technology (RegTech) 282
(WBNI) 164 Rella, L. 176
‘New-Keynesian’ 30 remittance 34, 174–175
new normal 2 rent 22–23
Nisar, S. 34 respondents, from Bangladesh Bank 147
Njagojevié, S. 155 Retail Facing 15
North Korea 73 retail facing 46
Nouaouria, N. 275 revenue/proft share crowdfunding 50
reward-based crowdfunding platform
Omar, M.A. 69 111, 111
online platform 19 riba 25
302 Index

Ripple system 175 Suzuki,Y. 23, 26, 28, 33, 193

‘risk fund’ 34 Szymanski, J. 1, 44
risk premium 23
Rizkiah, S.K. 195 ta’awun 220
robo-advisors 56, 61n8 Taher, S.A. 150
Robo services 151 takaful industry 218, 219; accounting
Rochemont, S. 195 challenges 225–228, 227; challenges 213;
Rocket 148 compound growth rate 204; concept
Ryan, D. 67 of 220–221; contract models 220–221;
fnancial commitment 214; IFRS 17
Sa’ad, A.A. 276 230–232; importance 203; in Indonesia
Sankaran, A. 64 221–222, 222, 223, 224–225; ‘Love–hate’
Satoshi Nakamoto 2 relationship 207–209; Maqasid al-Shariah
Savings-as-a-service (SaaS) 52 204–207, 206; participants 207, 215;
Schuefel, P. 239 takafultech empowers 209–213, 211–212;
Secure Socket Layer (SSL) encryption 165 total global assets 204; vs. conventional
security threat 8 insurance contracts 225–228, 227
sells commodities 32 takaful models 220–221
shadow banking 31, 136 takafultech 209–210; benefts 214–215;
Shariah Accounting Standard Board drone 210, 211–212; to Maqasid Shariah
(DSAS) 229, 231 215, 216; smart contract 210, 212–213
Shari’ah-compliant 25–30; CBDC 197, 198; Taleb, N. 277
fnancial disintermediation 17–22, 19, Tarique, K.M. 151
20; Fintech 16 technical knowledge 162–163, 163
Shari’ah Governance 278–280, 279 “technological myopia” 280
shariah insurance 226 technology 67, 68
Shari’ah Supervisory Board (SSB) 185, technology acceptance model (TAM)
280, 294 159, 267
Shari’ah-Tech 279 technology-enabled fnancial transactions 1,
Sheker, M. 277 41n1, 44
Siddiqi, M.N. 26 technology-savvy customers 66
Simon, A. 65 technomania 67–68
Singer, J. 277 Telenor Microfnance Bank 180
small and medium enterprises 24 temporary solution approach 5, 17, 18, 21
smart contracts (SC) 210, 212–213, Thalassinos, E.I. 175
258–259, 273 Theory of Innovation Difusion 159
social insurance 56 traditional remittance transfer 182–184,
social justice 5, 28, 38 183, 184
social trading 56, 61n7 traits 243
Society for Worldwide Interbank transaction cost 20, 23, 40, 48, 176–177
Financial Telecommunications (SWIFT) transfer payments 174–175
175, 182 Trotter, R.T.II. 147
socio-civilizational 68 trust 243
software wallet 54 Tsuji, M. 150
Solis, B. 1, 44
Song, N. 69 Uddin, M. 155
South Asia 177, 178 Uddin, S.M.S. 23, 33
Southeast Asia 180–182 unmanned aerial vehicle (UAV) see drone
specialization 35 Upay 148
stagnant money 18 Usman, H. 245
stakeholders 6, 47 usury 26
Strengths,Weaknesses, Opportunities and
Threats (SWOT) 176 “value-chain integrated” fnancing 93, 94
supply-chain variable 95 vendor lock-in risk 131
supply risk data 95–97, 96 Voigt, P. 158
 Index 303

wakalah model 221 Yoshida, E. 245

waqf 10, 35, 235; administration 239; Younus, M. 105
defnition 236; digitalized and efcient YukTakaful 224
245; fntech 246, 246; governance system Yusuf, H. 245
247, 247–248; roles 236; trends 237–239
waqf ordinance 1962 239, 240, 241, 241, Zaher, T.S. 24
242; monitoring cost and transaction zakat management system 10, 35,
cost 242–245 251; artifcial intelligence 259; in
waqf special act 2013 242 Bangladesh 263–264, 265, 266;
war 72–74 big data 259; blockchain 258–259;
Ward, O. 195 challenges 267; collections and
wealth creation 37 disbursements 255; crowdfunding 257;
wealthtech 56–57, 57 defnition 253–254; efciency and
web wallet 54 governance 252; fntech and islamic
Wilson, R. 24, 25, 28–29 fntech models 256–257; human
working taxonomy 45–46; analyses 46–47; resource management problem 261;
custody 53, 54, 55; digital assets exchange initial coin ofering/initial cryptotoken
53, 54; digital banking 51, 51; digital ofering 257–258; innovation 254;
capital raising 50, 50; digital lending lack of capacity building 262; lack of
47–49, 49; digital payments 52–53, 53; coordination between 261; lack of
digital savings 51, 52, 52; insurtech 55, trust 261–262; lack of zakat education
55–56; wealthtech 56–57, 57 262–263; privatisation 254; regulatory
World Bank 252 sandbox 259–260; unsystematic and
World Bank study 69–70 inefcient collection and disbursement
260–261
Yasini, M. 278 Zhang, R. 175, 176
Yasini, S. 278 Zuki, M.S.M. 237