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Tech and ethics: how Islamic finance attracts new customers

“Is it halal to buy Tesla shares ?” “, Asks a young Muslim on Twitter. To attract investment from this growing and increasingly connected population, the Islamic finance sector is betting on technology and their ethical requirements. On the Zoya application, we learn that the action of the American electric car manufacturer Tesla is 96% sharia-compatible, according to the criteria of the Accounting and Auditing Organization for Islamic financial institutions.

The Wahed Invest online platform uses the same criteria to invest “  ethically”  the savings of tens of thousands of clients in 130 countries. After launching in the United States, it is within the accelerator of fintechs -startups that combine finance and technology- from the financial center of Dubai that Wahed settled to target the markets of the Middle East. Before the coronavirus control measures pushed them to telework, it was in a brand new open-space of the Emirati accelerator that entrepreneurs and entrepreneurs met, dressed in traditional dresses and abayas, in jeans and open shirts or simple t-shirt.

“Contribute positively to the world”

According to interpretations of religious texts, Islamic finance prohibits or limits the use of interest rates and excludes investment in sectors such as alcohol, tobacco, weapons, pork or even pornography. ”  Two things emerge from the texts: investment must have a real economic impact, not linked to speculation, and it must contribute positively to the world” , adds Mehdi Benslimane, in charge of international expansion at Wahed Invest. In a report published before the pandemic, the agency Standard & Poor’s noted that the Islamic finance sector weighed around 1,900 billion euros and predicted “slow” growth.

But the collapse of the markets due to the Covid-19 already has repercussions likely to plunge the sector: the issue of Sharia-compatible bonds by the Dubai Islamic bank has, for example, been delayed, according to local media. In the S&P report, the new technologies were however presented as an opportunity to accelerate the sector thanks to the securing and democratization of access to Islamic services, all the more so since these “have common points with the environmental considerations ” .

Deemed low risk and based on the sharing of profits but also losses in the event of a crisis, Islamic financial products already attracted beyond the Muslim sphere and are now presented by the think-tank Responsible Finance & Investment (RFI) Foundation as adequate products to respond to the coronavirus crisis due to their anchoring in the real economy. “  I am a farmer, I want to sell milk but I need cows. In traditional finance, an investor lends me money to buy them and I repay it with interest, “ sums up Talal Tabbaa, founder of a platform which notably makes it possible to secure transactions between investors and startups.

To circumvent the ban on interest rates in Islamic finance, the investor buys the cows, rents them to the farmer who pays him rent from the profits from the sale of milk and eventually buys the cows. This is the principle of a sukuk, a loan or an Islamic obligation: the investment is material and the risks shared. As part of the coronavirus crisis, the profits from investments made in industries such as that of protective equipment could be donated to associations, adds the think tank RFI Foundation. But the issuance of a sukuk remains poorly automated, according to Mr. Tabbaa, a brake in times of crisis.

Double barrier 

For a long time, the priority has been to ”  make the market grow” , today the ”  lack of innovation and optimization”  of Islamic financial services is blatant, adds the young Saudi Arabian Mohammed Alsehli, CEO of Wethaq Capital, installed fintech in the Dubai hub. Startups are “put in contact with the Center for the Development of the Islamic Economy in Dubai, religious experts, Islamic banks and financial regulators” , explains the director of the accelerator – the most important in the region – Raja al-Mazrouei.

Covered in an elegant black veil, this former computer scientist and alumna from Harvard explains that she personally uses an investment application that does not comply with Sharia law: “I am flexible (…) but in markets where demand is high, such as in Malaysia or in Saudi Arabia, you have to be able to offer these services. ” “  Traditional fintechs can present their idea anywhere in the world. The challenge for Islamic fintechs is to have access to regulators, like here in Dubai, and to pass the religious test, ”she adds, citing a double barrier. This test, in the absence of international standards, also limits the automation of Islamic transactions. Tabbaa says functioning of religious expert boards approving financial products“Is nothing technological, it’s very manual and, in my opinion, subjective” . 

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