Elevating the Digital Experience of Islamic Banking

Islamic Banking Blog2

Consumers from both traditional and Islamic financial institutions want direct and immediate access to their finances without having to visit a physical branch. Mobile wallets and digital banking apps are the preferred mode of applying for financial products and conducting financial transactions for users globally today.

With digital banking and data-driven personalisation technology, Islamic banks are empowered to drive the conversation and meet the expectations of their users for modern Shariah-compliant financial products and tools designed to improve their finances in a differentiated manner and at scale.

What is Islamic banking?

Islamic banking (also known as Islamic finance) is a financial management system created in compliance with Shariah (Islamic law). Traditional banks function on the premise of borrowing to lend; money is borrowed from users in the form of deposits then loaned out to other users, thus earning interest on it. On the contrary, Shariah forbids certain elements of traditional finance like interest (Riba’), risk/uncertainty (Gharar) and speculation (Maisir), which sets it in direct conflict with fundamental tenets of traditional banking.

In accordance with Shariah, Islamic banks and financial products are based upon specific guiding principles and contracts. These principles allow for economic activities without going against key Shariah principles as some traditional banks or products might. Islamic finance explicitly prohibits the collection or payment of, as well as transactions that allow for monetary speculation or ambiguity.

The challenge that Islamic banks face is the ability to meet the financial needs of users while staying within the parameters of the Shariah. Most banks today subscribe to a financial management system that successfully navigates the needs of users and requirements of the law, by establishing Shariah compliant contracts for a variety of transactions that are commonly made.

Shariah compliant contracts that are derived from the framework which Islamic banking is based upon cannot involve the payment or reception of interest, should not result in debt and most importantly, must enable equal partnership and a shared risk and responsibility between all involved parties. For ease of understanding, we will classify the contracts into three categories: Contracts of Sale, Contracts of Partnership and Contracts of Security.

Contracts of Sale allow for the exchange of goods for other goods, the exchange of goods for capital, or the exchange of capital for capital. In this category, there are four common contracts:

  • Cost plus (Murabaha): a contract where the financial institution sells goods to a buyer for a fixed cost plus a profit, which both parties agree upon in advance. The buyer then makes a deferred or a lump sum payment.
  • Tawarruq: a contract where a buyer purchases a commodity from a seller on credit on a cost plus profit (Murabaha) basis. This contract is used by many Islamic banks for liquidity management and as a mode of financing, particularly for credit cards and personal financial requirements.
  • Salam: a contract where the full payment for goods is paid in advance, but the delivery of said goods is made in the future on a mutually agreed upon date.
  • Trust certificate (Sukuk): a contract which represents aggregate and undivided shares of ownership for tangible assets or investment. Investors do not own a debt obligation by the issuer, but rather a piece of the asset linked to the investment. While bond investors receive periodic interest payments, sukuk investors receive profits generated by the assets linked to their investment.

Contracts of Partnership allow for two (or more) parties to make money by sharing the risk and the profits. In this category, there are three common contracts:

  • Profit and loss sharing (Mudarabah): a contract between two parties in which one supplies the capital (rab ul maal) and the other invests in the commercial enterprise (mudarib). Any profit made from the investment will be shared based on a ratio agreed upon in advance.
  • Joint venture (Musharakah): a contract which establishes a commercial entity based on capital and labour, with the profit and loss shared equally or based on a ration which both parties agree upon in advance.
  • Mutual guarantee (Takaful): a contract based on principles of mutual guarantee and co-operation, thus resulting in shared responsibility, solidarity and joint indemnity. Takaful provides protection in the event of unforeseen change in circumstances, and is also widely known as “Islamic insurance”.

Contracts of Security are used to enable businesses and individuals to retain and manage their wealth, and in some cases debt. In this category, there are several common contracts:

  • Leasing (Ijarah): a contract where one party transfers the right to use an item they own to another party for a specific period of time in exchange for a mutually agreed upon payment. While Ijarah is often referred to as “Islamic leasing”, this definition is misleading as it can also be used in other circumstances like employment as well.
  • Collateral (Rahn): a contract in which possession is offered as a security for a debt, and in the case that the debtor is unable to pay back the due money, the debt will be taken from it.
  • Safekeeping (Wadiah): a contract in which possession of assets or property is given to another for safekeeping, with the guarantee of a full return of the deposited assets. In Islamic banking, deposit and savings accounts are based on this contract.
  • Transfer (Hawala): a contract in which a transfer of financial liability from one debtor to another takes place, freeing the initial debtor from any obligations of debt. In Islamic banking, this is the method used for the transfer of funds between two users, as it takes place without any physical money actually moving.
  • Responsibility (Kafala): a contract in which a third party accepts an existing obligation and takes on the responsibility of fulfilling someone else’s liability. It is used predominantly for risk mitigation, and the third party is known as a guarantor.

Technology as an enabler of financial inclusion

Going digital while adapting to demands that consumers today have in many regions enabled Islamic banks to respond to the immediate requirements and needs of customers, improve retention levels and reduce the overall cost of serving them in the long run, thus enabling sustainable growth.

Technology applied to digital financial services also allows for more inclusive banking. While financial inclusion is on the rise, research done by UK based digital banking platform Algbra found that 800 million out of the 1.7 billion unbanked adults globally are Muslims. Going digital, coupled with low-cost internet and mobile phones available in the market today allows Islamic banks to serve a larger segment of the global Muslim population, especially those in remote areas and offer innovative and seamless digital solutions to the Muslim world easily and consistently.

The global Islamic financial landscape is currently valued at $2.2 trillion and expected to continue growing 10% to 12% in the next year. The rapid digitisation of financial services, especially during the Covid-19 pandemic contributes to this. Islamic financial institutions should ride this wave and embrace digital channels as they will enable not just the opportunity to reach new customers, but also allow for the ability to operate on par with other traditional and platform- based financial technology companies globally.

Financial wellbeing for Islamic banking customers

Financial wellbeing is becoming an increasingly important theme for users and financial institutions alike, as we now understand how it plays a key role in maintaining positive physical, emotional and overall wellbeing.

Islamic banks can help consumers adopt better financial habits by personalising their digital services and presenting their users with valuable insights into their finances. This will enable users to receive a steady stream of contextual information about the transactions taking place and allow them to develop a deeper understanding of the state of their financial affairs. In turn, it will also reduce uncertainty (Gharar), as customers become more confident of how much money they have and how much they can spend or will be required to save.

Such personalised recommendations and nudges gradually help consumers know their finances intimately, and present them with useful knowledge or actionable steps they can take to achieve financial wellbeing while staying Shariah-compliant.

Hajj savings goals

Performing Hajj, the Islamic pilgrimage to Mecca, at least once in a lifetime is an obligation for any Muslim, and the fifth of the five fundamental pillars of Islam. From Singapore to Bangladesh and Nigeria among other countries, there are banks providing Hajj saving schemes that are specifically created to help users save, with a target end date in mind to perform their Hajj. These saving schemes are typically Mudarabah (profit loss sharing) savings accounts which users credit a monthly instalment payment to until they reach their goal.

Islamic banks can improve on this service by firstly providing a digital experience for users in their banking app that will allow them to manage their Hajj savings goal. Additionally, a great way to ensure consumers stay on track with achieving their goal is by displaying the progress to their target with visual indicators to keep them motivated and going. For users who might be forgetful, a nudge or notification as a reminder to credit the necessary amount into their Hajj savings goal either at the beginning of the month when they get paid, and even mid-month if they haven’t done so will be useful. This way, banks can form a deeper, more personal relationship with users by helping them achieve their aspirations of performing their pilgrimage.

Zakat planner and calculator

Zakat (alms giving) is the third of the five pillars of Islam, and is another foundational facet of the faith. It is a form of obligatory charity for Muslims and is regarded as a form of worship. Every individual of sound mind who possesses wealth over a certain threshold (Nisab) should donate a certain proportion of their wealth to the less fortunate.

Muslims often find themselves guessing how much Zakat they are required to pay. This is especially a pain point for users who have to manage multiple bank accounts and assets. Incorporating a Zakat calculator in the banks’ digital app can be a really beneficial tool for users of an Islamic financial institution. In the case of users who hold multiple bank accounts across several financial institutions, Open Banking and aggregated account information will be highly useful to help with getting a full overview of how much Zakat should be paid.

A Zakat calculator can analyse transactional data and take into consideration the fluctuation and flow of funds in their accounts within the financial year. Users can then be presented with an accurate amount of how much Zakat they are meant to pay in real time based off the current Nisab, against the assets and funds they have.

Additionally, for users who have Sukuk or other related assets that they need to pay Zakat for, but might not have lots of expendable funds in their bank accounts, providing them with timely reminders about their upcoming Zakat contributions will be helpful to ensure that they can plan in advance or set aside some funds for when it is due.


The Islamic finance sector is expanding rapidly, and is certainly expected to continue growing as the global economy recovers from the pandemic. With this acceleration, Islamic financial institutions need to be proactive and keep innovating, as the continued expansion of the industry also depends on keeping up with current consumer needs and demands.

The development of robust digital banking services should be a priority for Islamic banks to ensure continued growth. Such digital platforms also allow banks to, gather insights, anticipate the needs of their customers and understand of what kind of digitally enhanced Sharia compliant tools and products users require for their current and future Islamic banking needs.

How can Moneythor help?

Moneythor offers an orchestration engine sitting between the financial institutions’ systems of record and their digital channels to power engaging and tailored experiences for end users.

With the Moneythor solution, Islamic banks can upgrade their services with personalised insights, actionable recommendations and contextual nudges to elevate the digital experience offered to customers of their Shariah-compliant products & services.

In the deployment of their digital banking services, the Moneythor solution can help:

  • Reduce Gharar (uncertainty) to support customers on their financial wellness journey, while also educating them with financial literacy tips.
  • Understand their specific savings objectives and ensure customers stay on track with their goals impacting their finances such as the Hajj.
  • Give customers an overview of their finances across all their assets and liabilities to track how much Zakat is payable for the year, optionally leveraging Open Banking to do so.
  • And more!
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