IFN Correspondent Report: Islamic Fintech

This article was first published in IFN Volume 20 Issue 27 dated 5th July 2023

Shariah compliant and conventional fintech: Legal practitioners central to levelling the playing field

Perhaps due to lawyers' function as identifiers of risk, in days past the notion that lawyers represented blockages to innovation held traction in some corners. However, the shape of Islamic fintech proves otherwise – in reality, legal practitioners in different spheres have assumed a key role in elevating Islamic fintech.

UK fintech marked its latest trailblazing event in May when Nester's Innovative Finance Individual Savings Account (IFISA) made its debut. As a result of this launch, UK investors in Nester's Shariah compliant IFISA and those in conventional ISAs became equally able to earn tax-free returns on peer-to-peer financing and investment opportunities.

Legal practitioners played a central role in enabling this breakthrough – leading in dialogues with the UK tax authorities which led to key legislative amendments around tax treatment. These amendments also ensured the full compliance of the IFISA prior to launch. Necessarily, this key legal support was provided in early 2022 – far in advance of the IFISA's final launch date.

Nester's successful IFISA launch is emblematic of the important role legal practitioners fill in the development of Islamic fintech. Legal support has indeed been consistently key to progress, such as the establishment of UK Islamic digital banking in Islamic fintech over the last decade. However, on top of acknowledging the role of legal practitioners generally, to facilitate further progress the different types of essential value brought by legal practitioners in private practice and in the regulatory sphere require recognition and further discussion.  

Advisors must have a detailed understanding of fintech clients' innovative solutions and growth ambitions. Practically, since it is only with this accumulated understanding that the correct permissions can be appropriately sought, a direct line can be drawn between advisors in private practice and trailblazing events in Islamic fintech.

Like Nester's IFISA, the Islamic Coin (which recently saw its public launch) is another recent illustration of this phenomenon. The involvement of expert legal advisors would be central to making Islamic Coin's innovative revenue re-investment mechanism (into non-profit causes) a reality.

Whilst less closely tied to individual trailblazing events in Islamic fintech, regulatory legal practitioners are just as important. Their role in instituting frameworks that both invite and nurture innovation is undoubtedly key to breaking down barriers.

In Pakistan in particular, regulatory practitioners at the Securities and Exchange Commission of Pakistan (SECP) have been central to designing the perimeters and special permissions associated with SECP's regulatory sandboxes. These have accelerated the growth of fintech ventures such as digital wealth manager Mahaana Wealth (which rolled out Pakistan's first Islamic money market fund in April 2023) and financial management platform Oraan Tech (which confirmed a new partnership with the Dubai-based job matching platform Queros early this year).  

Legal practitioners will continue being a key part of the fabric required to further level the playing field between Shariah compliant and conventional fintech. Encouraging a wider awareness of this truth will only benefit all stakeholders.