Islamic fintech has become the fastest growing segment of financial technology among the Organization of Islamic Cooperation (OIC) countries. According to one report, Islamic fintech in OIC countries accounted for $49 billion in transaction volumes in 2020. To put this into perspective, we can see that the full potential of Islamic fintech is far from being realized—this figure accounted for only 0.7% of global fintech transactions in the same year.
The Global Islamic Fintech Report projects the volume of transactions within the Islamic fintech sector of OIC countries to grow at a compound annual growth rate of 21%, or $128 billion per year.
Again, when compared to the mainstream fintech market, we see why markets are becoming excited about the future growth potential—conventional fintechs are anticipating 15% compound annual growth over the same period. In a fast-paced, high-growth sector, Islamic fintech is very much leading the charge.
The application of fintech not only ensures access to Sharia-compliant products and services: We are also seeing companies use technology to address issues relevant to Islamic populations, which naturally require adherence to Sharia principles. If we look to Central Asia where Alif Bank is based, one of the core financial challenges faced concerns cross-border remittance payments. The traditional process of facilitating such transactions is long, expensive and complicated.
Technology has a natural role to play here, and through the creative deployment of Islamic fintech services, remittance payments in Central Asia can be streamlined through fintech applications.
Understanding the Tax Issues Relating to Islamic Finance
As awareness of Islamic finance rises, questions will naturally arise on how to tax financial transactions that have been structured to comply with Sharia. While the majority of transactions are domestic, the ongoing development of the sector will naturally lead to more cross-border transactions between and within Islamic and non-Islamic jurisdictions.
As noted by the Institute of Chartered Accountants in England and Wales, there is no global approach to taxation regulations surrounding Islamic finance. Yet with the ongoing rise of the digital economy, a global approach is warranted.
This is an issue that affects not only Islamic finance but also the global banking sector. Recent proposals by the G-7 to implement a global corporation tax are gaining momentum, as are talks about more cross-border regulation. This is a developing space, and any attempt to implement future global frameworks should also take into account issues concerning Islamic finance.
Another important aspect is the double taxation of the Islamic financing structure murabaha in countries where Sharia instruments are not treated equally to their traditional counterparts. Traditionally, interest payments are generally not subject to value-added tax (VAT). However, a murabaha transaction, which is essentially a purchase of an asset and resale with a mark-up, could be subject to VAT and other taxes.
To overcome this issue, regulation needs to be in place that addresses this specific point. Murabaha financing is one of the most common Islamic banking instruments, typically constituting more than 90% of total assets of Islamic banks. Put simply, failing to address the double taxation issue can seriously hinder the progress of Islamic banking in that jurisdiction.
Technology is Part of Islamic Finance’s Evolution
Taking into account the tax issues surrounding Islamic finance, technology has a natural role to play in supporting its rise. The fact is that technological innovations are empowering more people to take better control of their finances.
The first wave of fintech companies demonstrated how the application of existing software solutions could drastically enhance all aspects of the finance sector, from personal finance to retail investment. Over time, these innovations have been refined to cater to the specific needs of different communities and groups.
Islamic finance is no exception—the rise of fintech will promote market awareness beyond Islamic jurisdictions, encouraging people of the Islamic faith to use technology to their advantage. As the sector continues to grow, this will generate questions around taxation and regulation. It is an evolving space that will require developing expertise and knowledge in the future.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Abdullo Kurbanov and Zuhursho Rahmatulloev are co-founders of Alif.
Content and picture are from https://news.bloombergtax.com/.