A $4 trillion Islamic banking market to be driven by FinTech, study shows

By Puja Sharma

GCC, MENA, and Southeast Asia Lead the Charge in Islamic Finance Innovation

Islamic banking is undergoing a historic transformation propelled by groundbreaking fintech advancements. In the last four years, assets in Islamic banking have surged from $1.8 trillion to $2.8 trillion, with a projected leap to an astounding $4 trillion by 2026, primarily driven by the GCC nations. The new exclusive report by red_mad_robot, titled “State of FinTech: The Islamic Banking Industry,” provides an in-depth exploration of this financial evolution.

Islamic finance is an integral part of the Islamic economic system, encompassing economic relations adhering to Islamic law regarding fund distribution and utilization. Originally emerging in rural and agricultural economies, Islamic banking has evolved into a coherent system of financial services, products, and principles.

The report delves into the variation in banking systems across countries, where some are entirely based on Sharia principles, while others incorporate Islamic financial services within conventional banks. For a detailed analysis and more information on these differences, refer to the report.

Digital transformation and fintech in Islamic banking present many opportunities. Islamic financial institutions seek to differentiate their business while ensuring competitive prices to capture new market space and generate economic demand.

The UK is one of the main financial centers of the world, including Islamic finance — it is a leader in the development of Islamic banking  in non-Muslim countries. In the UK, the assets of Islamic banks (there are four of them) reach $7.5 bn. At the same time, if we extrapolate the figures to the whole of  Europe, it is 85% of all the assets of European Islamic banks. The UK is considerably ahead of the second-most country, Bosnia, which had $860 mn of Islamic banking assets in 2021 In terms of other major Western countries, the U.S. only had $636 mn of Islamic banking assets in 2021.

The global Islamic fintech market is estimated to reach around $79 billion in transactions in 2021, with an expected average annual growth of 18%, reaching $179 billion by 2026. The largest fintech markets are in Saudi Arabia, Iran, Turkey, UAE, Malaysia, and Indonesia, with Indonesia leading in the number of Islamic Fintechs. Crowdfunding, investment platforms, robo-advisors, payment services, digital banks, smart contracts, blockchain, cryptocurrencies, information security in the financial sector, and insurtech are promising directions for the digital transformation of Islamic banking.

• Islamic banking accounts for 70% of Islamic finance assets.
• Islamic banking is growing rapidly: assets have increased from $1.8 tn to $2.8 tn (or +55%) in four years. And the industry is expected to grow to $4 tn by 2026.
• The leading role in the development of Islamic banking belongs to the GCC countries.
• The world’s largest Islamic banks are in Malaysia, Indonesia, Bangladesh, and Bahrain. Malaysia also had the largest share of total assets.
• 42 of 100 Islamic banks are located in Asia. These banks held 29% of the total assets of the top 100 Islamic banks but generated only 16% of the net profits.
• Saudi Arabia-based Al Rajhi Bank topped the ranking of the largest Islamic banks in the world.