Islamic Finance and Digital Transformation

29 Sep, 2022 | Articles

By Dr.Azima Khan

Digitalization is considered an enabler for its ability to add value and to make life easier for individuals, businesses, and economies. This is done by making existing processes more efficient with customization and innovation. The world is being digitalized at a rapid pace making the process inevitable to a great extent. Governments and regulatory authorities are actively pursuing and encouraging strategies for digitalization. For example, the European Commission announced its “Strategy for Europe Fit for the Digital Age” in 2020 which plans to make digital transformation work for people and businesses while also having a target to make the EU climate neutral by 2020 [1].

Starting in the 1960s with the introduction of credit cards, the use of financial technology (Fintech) is becoming indispensable to financial institutions. Defined as “a new financial industry that applies technology to improve financial activities” it encompasses not only digitalization but innovation in financial products and services as well. The term is now “associated with start-ups and companies that are providing highly innovative and pioneering financial services or products with the combination of information technology (IT) enabling ventures or by using the latest available technology.”[2]

There are challenges that any organization looking to join the digital transformation will encounter. For example, people are reluctant to adopt new technologies, specially after reaching a certain age. There is a lack of understanding of new technologies and digital literacy, specially in developing countries. Individuals also have a distrust of digital financial solutions and options. Overcoming this lack of trust is even more crucial for Islamic finance organizations. Another issue the existence of sporadic and obsolete infrastructure in most economies. Organizations in the fintech space will have to work on building awareness and trust, ensuring data security, and managing redundancies in technologies. There is a cost involved in every aspect when converting processes from traditional to digital. Not many businesses and organizations are able to pay these costs.

In Pakistan, there has also been a push towards digitalization. The government launched the Digital Pakistan Policy in 2018 with aims such as the digital transformation of government processes and services, their integration and standardization, their efficiency and transparency. The plans also include increasing connectivity, developing human resources, increasing financial inclusion and cyber-security and more. [3]

Looking at the Pakistani financial sector, the State Bank of Pakistan (SBP) has urged commercial banks and technology firms to join hands to accelerate the adoption of digital mode of payments. This is being done to reduce the size of informal economy, increase tax collection and support economic growth. The introduction of RAAST– a mode of fast-track digital payments – and Roshan Digital Account (RDA) for overseas Pakistanis are two examples of digitalization of Pakistan’s economy.[4]

Islamic Finance is differentiated from conventional finance by its unique characteristics. All Islamic finance transactions must follow Shariah principles. For Muslims, Shariah compliance has a wider purview. It encompasses all individuals’ actions, where religion and the concepts of ethics, morality and justice must be applied in every aspects of their lives. Fiqh Muamulat or Islamic Jurisprudence provides the set of rulings that govern all commercial transactions including financial structures and contracts. 

Shariah compliance being key, the general rule to understand is that all transactions are permissible unless there is a clear text that prohibits it. The same needs to be followed for all fintech related transactions or Muamulat. As a leading Islamic Finance and Shariah expert explains;

…fintech application(s) and practices, as in traditional Islamic finance, should follow the principles of the Shariah by avoiding the prohibited elements in the transactions such as interest (Riba), gambling (Maysir), uncertainty (Gharar), harms (Darar), cheating (Tadlis), etc. It must be transparent with no hidden cost, irresponsible or unethical financing. Likewise, the practice of transactions in fintech application(s) should follow the rules of contract (Aqd) used in the transaction by observing the pillars (Rukn) and conditions (Shart) in the contract. In addition, fintech application should aim at achieving the objectives of the Shariah, namely to realize the benefits (Maslahah) and to avoid the harms and difficulties (Mafsadah and Mashaqqah).[5]

A very organic and promising application of fintech in Islamic finance is in Islamic Social Finance which is rooted in Islamic concepts of ethics, economic growth for the benefit of society, circulation of wealth and poverty alleviation. The digitalization of Zakat & Ushr, Waqf and Sadaqah would be a great way to use digital technologies for the benefit of society. Digitalization can help in collection of funds and also determine the ways in which the funds are utilized and where they are donated. For example, crowdfunding platforms for specific projects and missions, using blockchain platforms for collection and disbursement of Zakat and other charitable donations. The use of Blockchain enables the tracking of funds through the entire process lifecycle. [6] Transparency and traceability are characteristics that are most important in collection and disbursement of charitable funds and fintech can become a facilitator in this regard.

To elaborate further on the socio-economic benefits, take the case of Zakat. The many potential applications of digitalization of Zakat (and other donations) can be wide-ranging and impactful. These include i) online registration of Zakat applicants, ii) cross-verification of applicants via chat-bots, iii) introducing disbursal of staple foods to recipients through ATMs (Rice disbursement ATMs already in use in Malaysia and Indonesia), iv) measuring household poverty levels using Internet of Things (IoT) which would eventually enable Zakat giver to send funds directly to recipients without using an intermediary, v) introduction of crypto Zakat platforms, vi) using big data to collect, analyze and extract information on Zakat stakeholders and improve the administration process. [7]

As already mentioned, Blockchain technology enables individual transactions to be recorded in a specific manner making them impossible to steal, manipulate, alter or erase. This makes the technology capable of ensuring end to end Shariah compliance in transactions and can be considered “a boon to the Shariah requirements of transparency and disclosure”[8]. Cryptocurrencies are based on Blockchain and can allow decentralization and deregulation of transactions as they are considered digital mediums of exchange and a store of value. While cryptocurrencies have advantages (such as being a cheaper, direct, secure, anonymous, and minimal way of making transactions), there are several disadvantages. The deregulated and anonymous and speculative nature of cryptocurrencies is a cause of concern.  In Islamic finance, the permissibility, use and trading of cryptocurrency has been met with different considerations by Shariah scholars. 

The article “Crypto Mania: The Shariah Verdicts” [8] provides a very comprehensive summary of the current views held by different regions/scholars (see box below).

Figure 1. Crypto-Mania-The-Shariah-Verdicts

Ranging from permissible to prohibited these verdicts show the need and importance of a deeper understanding of  cryptocurrencies and the Blockchain technology that they originate from. This would also mean that the current opinions may change with the aforementioned deeper understanding and also with the wider acceptance and regulation of Cryptocurrencies.

Financial innovations based in the Metaverse and NFTs are another area that provides a set of challenges and opportunities for Islamic finance. Although in a nascent stage, there has been an increased interest and flow of funds into assets these emerging financial spaces have to offer.  Warba Bank, a Kuwait based Islamic Bank is the first Islamic lender to own two sites in the metaverse, one on Sandbox and one on Decentraland. This initiative is aimed to attract and cater to the younger, tech savvy individuals that form a large target market for the bank. [9]

Emerging technologies are also being used to create social & educational interactive spaces for Muslim users. For example, creation of a Shariah compliant metaverse by IBF net [10] and MetaKawn, a NFT project inspired by Islamic beliefs and social morals designed for the future of contemporary Muslims[11].

In conclusion, the digital transformation of Islamic finance is becoming necessary and from the examples mentioned earlier, it can be said that the process is already underway. There is a demand for Fintech solutions by Shariah-complaint financial investors and participants. A digital economy rooted in Islamic finance can provide an opportunity for Muslims and non-Muslims in helping regaining trust and confidence in the financial system. The lack of understanding, regulation and solutions are prevalent challenges and need to be overcome if we are to achieve the digital transformation of Islamic finance.


[1]“A Europe fit for the digital age | European Commission.” (accessed Sep. 21, 2022).

[2]H. Mohamed and H. Ali, Blockchain, fintech, and Islamic finance: Building the future in the new Islamic digital economy. De Gruyter, 2018. doi: 10.1515/9781547400966/HTML.

[3]“Ministry of Information Technology & Telecommunication.” (accessed Sep. 21, 2022).

[4] “State Bank advocates fast-paced digitalisation.” (accessed Sep. 21, 2022).

[5]M. A. Laldin, “Fintech and Shariah Governance – Fintech for Islamic Finance,” IFN Correspondence Reports, 2017. Accessed: Sep. 21, 2022. [Online]. Available:

[6]“I-FIKR – Islamic Finance Knowledge Repository – Islamic Finance News.” (accessed Sep. 21, 2022).

[7]A. Muneeza, “Digitalization of Zakat in the Midst of the Pandemic to Enhance Zakat Distribution. – Maldives News Network,” Maldives News Network, 2021. (accessed Sep. 21, 2022).

[8]Z. Mahomed and S. Mohamad, “Crypto-Mania-The-Shariah-Verdicts,” CIAWM, 2017. (accessed Sep. 21, 2022).

[9]“Warba Bank Becomes 1st Islamic Lender To Enter The Metaverse |” (accessed Sep. 21, 2022).

[10]“World’s First Shariah-Compliant Metaverse | by IBF Net Group | Medium.” (accessed Sep. 28, 2022).

[11]“metakawn.” (accessed Sep. 28, 2022).

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