The past decade has seen significant growth in Islamic banking across the world, with the Asia-Pacific (APAC) region emerging as an important hub for Islamic finance due to rising customer demand and the introduction of modern technology.
A new paper produced by Systems Limited, a Pakistan-listed technology company, in collaboration with Temenos. explore The rapid development of Islamic banking, particularly in Indonesia and Malaysia, and the increasing role of technologies such as open banking, digital banking and artificial intelligence (AI) in shaping this sector.
Islamic finance, also known as Islamic finance, refers to a banking system that complies with Islamic law, also known as Sharia law. The fundamental principles governing Islamic banking are mutual risk and benefit sharing between parties, ensuring fairness for all, and that transactions are based on the underlying business activities or assets.
These principles are at the core of Islamic banking, where activities that foster entrepreneurship, trade, and commerce, and that bring about social development and profit, are encouraged, while activities that involve interest, gambling, and speculative transactions are prohibited. It is supported by our values.
According to Islamic banks, entrusted to the Islamic Private Sector Development Corporation (ICD), have shown impressive growth since their inception in the 1970s, with assets under management (AUM) reaching USD 2.88 trillion in 2019, registering an annual growth of 14% did.
Malaysia and Indonesia are the largest Islamic banking hubs in Southeast Asia
In Southeast Asia, Malaysia and Indonesia are emerging as major hubs for Islamic banking. Malaysia, in particular, is recognized as one of the most advanced and diversified Islamic banking sectors in the world, offering a wide range of financial products across deposits, loans, treasury and trade finance.
In the deposit sector, Malaysia mainly offers Wadia accounts (custodial) and mudarabah options (profit sharing), according to a report by Systems Limited. In the financial sector, tawarruq is strongly preferred for monetization, along with murabaha and diminished musharakah for financing automobiles and housing.
The treasury sector is vibrant, featuring a wide range of innovative financial market products and sophisticated derivatives markets, and in the trade finance area, Malaysia adheres to the Uniform Customs Practice (UCP) guidelines and has robust letter of credit processing and guarantee management. Guaranteed.
According to ICD, as of 2019, Malaysia had total Islamic assets under management of USD 570 billion, accounting for 20% of the global total, making it the world’s second largest Islamic banking market.
In contrast, Indonesia’s Islamic banking sector, although rapidly growing, has a more conservative and emerging profile across various product categories.
Systems Limited’s report points out that mudarabah is dominant in the deposit sector, and acceptance of wadias is growing.
Financing products follow a traditional structure, prioritizing ijarah (lease) and musharakah for vehicle and home financing. The treasury department is functional but less developed than in Malaysia, offering basic mudarabah products and limited securities trading. Finally, Indonesia’s trade finance operations follow UCP standards, ensuring consistency with international practices.
According to Indonesia is the ninth largest Islamic banking market by total assets, ahead of countries such as Pakistan, Egypt and Oman, according to data from Fitch Ratings and the Islamic Financial Services Board. However, favorable regulations introduced over the past year are poised to foster growth in this sector.
Indonesia Financial Services Authority (OJK) in November 2023 launched Roadmap for the development and strengthening of Indonesian Islamic banks from 2023 to 2027. This roadmap aims to build a resilient and competitive Islamic banking sector, with a focus on accelerating the digitalization of the Islamic banking sector and increasing the contribution of Islamic banks to the national economy.
Technology: A driver of Islamic banking growth
Systems Limited’s report highlights technology as a key force supporting the growth of Islamic banking in Southeast Asia. This trend is being driven by the rising expectations of Millennials and Gen Z, coupled with the rise of digital channels, the report said.
One of the most important trends in Islamic banking is open banking and the growing integration of Islamic banks with fintech application programming interfaces (APIs). The integration will enable the bank to offer enhanced services directly to customers, including the Sukuk investment platform, Jamiyaa (a rotating ‘savings pot’) and Takaful (Islamic insurance) products, the report said.
Another important trend is the rise of digital banking amidst regulatory changes. Malaysian Bank Negara granted Digital banking licenses will be granted to five consortiums in April 2022. Three licenses have been awarded to a consortium of Boost Holdings and RHB Bank. A consortium led by Grab’s GXS Bank and Kuok Brothers. A consortium led by Sea-YTL Digital. A consortium of Aeon Financial Service, Aeon Credit Service (M), and Money Lion. A consortium led by KAF.
Digital banking is experiencing explosive growth in Indonesia. According to According to Bank Indonesia and Surakarta Muhammadiyah University, the value of digital banking transactions in 2023 reached IDR 58,478 trillion (US$ 3.9 trillion), an increase of 13.48% from the previous year. According to Contin, as of 2023, Jenius Bank had 5.2 million users, Blu BCA had about 1.7 million customers, and Bank Jago had 10.2 million users.
AI is another technology trend outlined by Systems Limited. This technology is used by Islamic banks and other financial service providers to improve operational efficiency, streamline processes, and provide a personalized customer experience.
For example, Mashreq Al-Islam Bank We have partnered We worked with Kore.ai to develop the Bank Assist virtual assistant. This AI-powered assistant provides personalized self-service and quickly resolves customer questions in both Arabic and English.
AI is also used in robo-advisor services that provide sharia-compliant investment advice tailored to customer needs. For example, Wahed Investment teeth A Shariah-compliant robo-advisor that uses AI to offer a diversified investment portfolio. Other notable AI-powered robo-advice platforms include: salwa and Fina Maze Both are from the United Arab Emirates (UAE).
Featured image credit: Edited from freepic
