How to Digitize Islamic Banking in Pakistan

As the Fourth Industrial Revolution unfurls, bringing about groundbreaking advancements in artificial intelligence and technology, the broad inclusivity and scale of these breakthroughs within the business sphere are astonishing.

Predictive data from the Pew Research Center’s Forum on Religion & Public Life suggests a 35% surge in the Muslim population by 2030, culminating in a staggering 2.2 billion individuals, accounting for 26.4% of the world’s entire populace.

A recent study by UK’s digital banking service, Algebra, unveiled that out of 1.7 billion adults without banking access globally, about 800 million are Muslims.

These twin realities—a burgeoning Muslim demographic and a significant population without bank services—advocate a case that surpasses the mere digitization of Islamic finance. It underscores the necessity of incorporating Islamic digital finance as a transformative force, not just a compliant entity.

Islamic banks, by investing significantly in this sphere, can harness the power of technology to offer innovative and frictionless digital solutions to an enormous potential customer base worldwide. Such a strategic move could potentially bolster exports, fortify the Islamic finance sector’s global position, and position Pakistan as a principal hub for Islamic digital finance ventures.

In 2022, Islamic Finance News (IFN), a division of Malaysia’s RED money Group, named the State Bank of Pakistan (SBP) as the premier Central Bank worldwide for promoting Islamic Finance. This accolade from the respected IFN Best Banks Poll underscores the active endorsement and advancement of Islamic conversion by Pakistan’s regulator, the SBP, which aims for a more extensive and more influential Islamic banking sphere by 2028.

Embracing digitization along with affordable internet access and mobile phone penetration can extend the Islamic banks’ reach to a broader segment of the global Muslim population, including those in remote locations. This strategy ensures the consistent provision of innovative and seamless digital solutions across the Muslim world.

While Islamic banking has seen robust growth in countries like Indonesia, Malaysia, and the UK, traditional banking avenues remain vibrant. Pakistan, though, is uniquely positioned to wholeheartedly adopt Islamic banking and assert itself as a pioneer in Islamic banking digitization. The secret to success resides in adopting an inclusive model that stresses collaboration, stakeholder engagement, and strategic planning over a mere lending focus.

Illustrative cases like Indonesia’s Bank Syariah Mandiri (BSM) and Berlin-based Mambu stand as shining examples. BSM’s inception, closely mirroring Pakistan’s current situation, followed an economic and political crisis in Indonesia in 1999. Guided by a mix of business idealism and spiritual values, BSM has thrived.

Mambu, a software house specializing in Software-as-a-Service (SaaS) platforms, is now valued at over $5 billion. The company recently debuted its Sharia-compliant SaaS platform, employing automation, blockchain technology, and electronic contracts to streamline operations and bolster efficiency.

In the pursuit of digitalization, the smartphone emerges as an essential instrument. Ensuring affordable and accessible smartphones must be integral to this strategy. A consensus was reached at the recent ‘Leaders in Islamabad Business Summit 2023’ that connectivity is essential to tackle Pakistan’s myriad issues.

Equipping every citizen with a smartphone, extending network coverage, and crafting economic, educational, and social applications for Pakistan’s 240 million citizens could expedite progress in various areas. While educational and social shifts require time, financial inclusion can be achieved rapidly, creating a documented economy that benefits everyone.

While several apps currently exist, the emphasis should transcend simple transactions or debit/credit operations. The goal should be to provide a comprehensive banking experience where individuals have access to expert advice. As we traverse the Metaverse and navigate virtual orbits for sustenance and entertainment, the average person should feel confident that pressing the ‘X’ button on their screen secures a better and financially stable future.

Islamic digital finance offers precisely that security, especially considering over 1.7 billion people globally lack bank account access. It has the potential to revolutionize the financial scene for more than 1.8 billion underserved Muslims seeking Sharia-compliant solutions for their financial needs.

The restricted market size for Sharia-compliant financial products has impeded banks’ capability to cater to a tech-savvy new generation. As a result, Islamic financial institutions worldwide are actively exploring ways to leverage cloud-native solutions and API-driven architectures to establish an open banking ecosystem.

With five dedicated Islamic banks and 17 additional institutions offering standalone Islamic services, Islamic finance is already extending its footprint in Pakistan’s banking sector. This presents a perfect opportunity to not only support Islamic banking services but also disrupt the field by embracing Islamic digital finance with a global perspective.

Although challenges may seem daunting, significant accomplishments often emerge from discomfort. These challenges, though considerable, offer the potential for substantial benefits through digital disruption in the realm of Islamic finance.