Islamic Finance Redefined: The Significance for Hong Kong’s Fintech Ecosystem Development

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Hong Kong recently hosted its eighth annual FinTech Week, drawing 500 speakers, 650 exhibitors, and attendees from over 90 economies. Under the theme “Fintech Redefined,” the event explored opportunities for fintech businesses to grow and thrive, particularly in the context of Asia’s robust economic activity, which the International Monetary Fund (IMF) predicts will contribute to two-thirds of global growth in 2023.

The growth of any successful financial hub is closely linked to an environment that encourages financial inclusion. In this context, the significance of Islamic finance, catering to approximately 70% of the world’s 1.2 billion Muslims, is becoming increasingly important, especially in Asia. While Islamic finance currently represents a small fraction (1-10%) of the total financial universe, it holds significant growth prospects, particularly in the Gulf Cooperation Council (GCC) markets, the Middle East, and Southeast Asia.

The Islamic finance industry, similar to the broader fintech sector, is relatively new compared to conventional finance. However, its potential applications are vast. A notable milestone in this space occurred on October 30 when Fusang Exchange digitally issued and listed the world’s first tokenized sukuk, backed by the International Islamic Liquidity Management Corporation (ILLM).

Islamic finance, governed by Shariah law, emphasizes ethical practices in managing money and financial strategies. It prohibits activities related to tobacco, drugs, alcohol, pork products, gambling, speculation, pornography, and armaments, and condemns “riba” or usury. The industry has been an early adopter of Environmental, Social, and Governance (ESG) principles, limiting investments in certain areas. ESG sukuk outstanding globally rose by 66% year-on-year to $33.3 billion by the end of Q3 2023.

Fintechs play a crucial role in addressing challenges in the Islamic finance space. They are seen as enablers that can bring speed, efficiency, and greater reach, albeit with new forms of operational and reputational risks. There’s a call for Islamic entrepreneurs to create products that are not just “Shariah-compliant” but “Shariah by design,” fostering an ecosystem that better serves Islamic finance needs.

Collaboration between start-ups, venture capitalists, accelerators, innovators, and established market regulators is essential to adapt and create new regulatory norms. Transparency in Islamic finance can be enhanced through technology, such as blockchain-based products that track the full supply chain, ensuring transparency from donations to end-use.

As Islamic finance aims to extend access to financial services to unbanked populations and emphasizes responsible financial practices, the developments in Islamic fintech present significant potential for shaping the next phase of fintech in Asia.