Islamic Finance is a shariah-compliant way to manage money that aligns with the principles of Islam. From saving to investing, some fundamentals of principles of Islamic banking are the sharing of profit and loss, and the prohibition of the collection and payment of interest by lenders and investors.
With the demand for such financial services increasing, Elliott Limb, Chief Customer Officer at Mambu shares his thoughts on how millennials are driving the demand for Islamic banking.
Younger generations increasingly want their banks to behave ethically. The emergence of ‘fintech for good’ has seen younger generations flock to adopt purpose-driven banking services that benefit society and the environment.
Often, this means turning to neo and challenger banks that are better able to cater to their ethos, without compromising on digital services or ease of use.
But there’s one important sector that has been overlooked. Islamic finance, which is built on a set of moral and ethical principles aligned to the Islamic faith, is estimated to be worth $2 trillion globally – with this figure set to hit $3.8 trillion by 2023.
Driving this demand is millennial and Gen Z Muslims, who are expected to account for 75% of Islamic banking revenue within the next ten years.
According to Mambu’s Faith & Finance report, more than half of young Muslims want to adopt Islamic banking. But a lack of digital services is holding uptake back among this key demographic.
A more socially aware consumer
Millennials and Gen Z-ers have grown up in a world where access to information has been available at their fingertips. With most people under the age of 35 now owning a mobile device, this important consumer sector has become accustomed to user-friendly services available on demand.
Their tech-savvy nature has also made them more aware of global trends than any other generation before them. And they’re learning about the world around them at a much earlier age.
Our research shows that three in four young Muslims want their banks to make investments that ‘do good in the world’. Specifically, two thirds (62%) are opposed to their bank lending to tobacco companies and 69% would rather their bank not lend to gambling institutions.
As such, younger consumers are gravitating towards banks that align with their principles. So it’s vital that financial institutions recognise this growing demand and adjust their products and lending practices for a more socially aware customer base.
This is especially true for Muslims who want to align their faith with their financial practices.
Demand for digital services
But this isn’t easy. Barriers to adoption are threatening the growth potential for Islamic finance, as more than three quarters (76%) of young Muslims say the availability of online banking services is a dealbreaker.
Specifically, 74% said it’s important they can access their bank’s services via a mobile app and 80% said it’s critical they can access banking services anywhere, at any time. While it’s clear there’s demand from young people for their banks to behave ethically, this can’t be at the expense of the convenience and accessibility they’ve come to expect.
This generation is constantly on the go, with their whole lives now existing on their digital devices. Back in 2015, data from the Office of National Statistics showed that just over half of 16-24-year-olds managed their money online. By 2019, that figure had rocketed to more than 90 per cent.
If Islamic banks want to tap into this digitally savvy user base, they must not only offer like-for-like services as incumbent banks but remain at the forefront of innovation – while also being Sharia-compliant.
That means investing in the latest digital banking solutions to provide young people with services that meet their lifestyle needs – from mobile wallets and split payments to budgeting tools and spending trackers.
Rise of Islamic fintechs
With technology poised to play an integral role in shaping the next generation of Islamic banking services, a new wave of digital challengers has recognised this market opportunity.
In the last few years, there has been a boom in Islamic fintechs – technology providers dedicated to providing Sharia-compliant financial services – beyond Muslim-majority business hubs.
The UK leads the way with 27 Islamic fintechs, catering to the needs of predominantly British Muslims that want to bank with ethical financial institutions. That’s more than the United Arab Emirates which has 15 Sharia-compliant fintechs.
Globally, it’s estimated this industry will be worth around £125 billion by 2025. These market entrants are spearheading innovation within the sector, providing an avenue for young Muslims to bank in a way that satisfies their digital needs, whilst remaining ethical.
The future is ethical
The appeal of Islamic banking will only continue to grow as younger generations drive financial change. It reflects a wider demand for ethical banking services in the wake of Covid-19, as consumers seek to make more socially conscious choices.
Since the start of the pandemic, 60% of consumers reported making more environmentally friendly, sustainable, or ethical purchases. There’s an opportunity for Islamic and conventional banks alike to better serve this growing cohort of socially responsible spenders and savers.
But first they must recognise this demographic is among the most digitally savvy. Only by catering to both their ethical and accessibility needs can Islamic banks attract new customers and realise the potential of a cloud-enabled world.